Trade The Journey

Trade The Journey

The Rally Stalls, will the Run up Continue?

Good Afternoon Traders,

I trust you’re all doing well and gearing up for the coming week. The recent trading sessions were marked by significant swings, primarily influenced by Federal Reserve officials who largely quashed expectations for three rate cuts that markets had anticipated. Multiple Fed board members addressed a range of economic topics, with the economic forecast being the focal point.

Chairman Powell discussed recent figures showing an unexpected rise in inflation, as indicated by the CPI & PPI. Nevertheless, he noted that the overall landscape—characterized by sustained economic growth, a balancing job market, and inflation gauged by the PCE—remains aligned with the Fed’s projection for a rate reduction sometime this year. As the presidential election approaches, the pressure on Powell and the Fed to lower rates intensifies.

While Powell maintained a consistent narrative, other Fed speakers presented varying viewpoints. Fed member Goolsbee adopted a more cautious stance, advocating for rate reductions amid foreseen obstacles. He concurred with Powell on economic and job market growth but highlighted persistent inflation concerns. Goolsbee pinpointed housing services inflation, including rent and homeowners’ equivalent rent, as the primary risk.

Fed President Bostic is currently predicting a single cut, whereas non-voting Fed President Neel Kashkari expressed even greater caution than Goolsbee. With most members anticipating at least one cut, Kashkari suggested that, should inflation plateau, a rate decrease might be unnecessary. He argued that the current economic momentum justifies maintaining the existing rate.

The Fed members’ differing tones and the uncertain path of inflation unnerved the markets, leading to a unified drop in indices. Caught by surprise, I witnessed a significant loss in my options positions as the market absorbed the latest Fed commentary. Although there was a modest recovery on Friday, it failed to offset the losses, particularly following a jobs report that exceeded expectations.

The PCE, the Fed’s preferred inflation gauge, has been gradually declining, now standing at 2.78%. Unlike the CPI, which is heavily influenced by housing costs, the PCE offers a broader inflation perspective. Near-term prospects face potential challenges, such as rising commodity prices.

Crude oil has exited its previous sideways trajectory, surpassing the $84.10 benchmark to reach $86.77. Factors such as Middle Eastern tensions, Ukrainian attacks on Russian refineries, and OPEC+ supply reductions have propelled crude prices upward. As a significant factor in business and consumer costs, crude’s price surge could influence inflation’s direction.

Gold closed the week at a record high, driven by its perceived safety amid turmoil, the anticipation of lower rates, and increased central bank purchases. Copper overcame short-term resistance, concluding the week at $4.2, buoyed by China’s economic rebound, supply disruptions, and a weaker dollar.

The dollar has been fluctuating within a certain range, given the unpredictability of inflation and interest rates. Following a recent peak at $105.80, the ten-year yield has been ascending since its December 2023 nadir. Both short-term and long-term yields have risen, reflecting the ongoing uncertainty in monetary policy.

Globally, the economic outlook is varied. China’s latest figures suggest a gradual recovery, with positive surprises in services and manufacturing data for both private and state-owned sectors. In Japan, manufacturing shows mixed results, while services are improving. Both stock and bond foreign investments saw declines over the past month.

The yen’s depreciation against the dollar continues, with speculation about possible intervention should it reach the $155 mark. In Europe, discussions of rate cuts by summer are growing as consumer inflation expectations decrease. Despite a year-over-year decrease in inflation and a stable unemployment rate at 6.5%, retail sales dropped in February but at a decelerating rate compared to the previous year.

Upcoming week:

  • Tuesday: NFIB Small Business Optimism
  • Wednesday: CPI, MBA Weekly Index, FOMC Minutes
  • Thursday: Initial Claims, PPI
  • Friday: Import/Export Prices, University of Michigan Consumer Sentiment – Preliminary

Fed Speakers:

Monday: Fed Minneapolis President – Kashkari

Wednesday: Fed Chicago President – Goolsbe

Thursday: Fed Atlanta President – Bostic

Friday: Fed Atlanta President – Bostic & Fed San Francisco President – Daly

Economic Insights:

The Manufacturing PMI stood at 50.3 percent, a noteworthy increase of 2.5 percentage points from February’s 47.8 percent. This growth signals the overall economy’s expansion for the 47th consecutive month, aside from a brief contraction in April 2020. Notably, the New Orders Index rose to 51.4 percent, climbing back into expansion territory and marking a 2.2 percentage point rise from February. Production also surged to 54.6 percent in March, significantly up from February’s 48.4 percent. Similarly, the Prices Index ascended to 55.8 percent, indicating a rise in commodity-driven costs, despite a stable Backlog of Orders Index at 46.3 percent and a slight increase in the Employment Index to 47.4 percent.

The report highlighted divergent trends in supply and demand dynamics. Supplier Deliveries slowed marginally to 49.9 percent, while Inventories edged up to 48.2 percent, suggesting a cautious build-up. The consistency of New Export Orders at 51.6 percent and Imports at 53 percent since February underscores a cautious optimism in international trade amidst rising commodity prices and geopolitical tensions.

Fiore pointed out the U.S. manufacturing sector’s pivot into expansion, driven by improved demand, stronger output, and accommodative input dynamics, despite ongoing layoffs and supply chain pressures. Notably, key industries like Food, Beverage & Tobacco Products; Fabricated Metal Products; Chemical Products; and Transportation Equipment reported growth.

The shifting landscape offers a mixed outlook, with 30 percent of manufacturing GDP contracting in March, a slight improvement from February’s 40 percent. Yet, signs of early recovery in demand and production, coupled with challenges in supplier capacity and raw material supply chains, paint a picture of cautious optimism for the sector’s future.

Respondents echoed this sentiment, highlighting ongoing strength in orders and production, anticipation for lower costs, and a robust pipeline for orders. However, concerns over energy pricing, the upcoming presidential election’s impact, and selective supplier behavior suggest a complex environment as companies navigate the uncertain terrains of manufacturing and global trade.

The Services PMI Report revealed the services sector experienced its 15th consecutive month of expansion in March, with a Services PMI of 51.4 percent. This represents a slight decrease from February’s 52.6 percent but continues the sector’s growth trend observed in 45 of the last 46 months, barring a single contraction in December 2022.

March’s Business Activity Index did see a slight increase to 57.4 percent, and while the Employment Index showed contraction at 48.5 percent, it was an improvement over February’s reading. The Supplier Deliveries Index decreased to 45.4 percent, indicating faster performance, and the Prices Index dropped significantly to 53.4 percent, suggesting some stabilization in prices despite ongoing inflation concerns.

The sector’s expansion is supported by growth in twelve industries, including Accommodation & Food Services and Professional, Scientific & Technical Services, among others. However, industries like Mining and Transportation & Warehousing reported decreases. Comments from respondents highlighted various challenges and opportunities, including monitoring potential supply disruptions due to global unrest, adapting to the post-COVID-19 market normalization, and navigating ongoing labor shortages.

Moving to housing which didn’t feature much in terms of releases, featured construction spending and the MBA index. Total construction spending rose 0.3% in February and increased 10.7% over the past year. Private construction spending was unchanged, however residential construction spending rose 0.7%. New single-family construction rose slightly but is down 13.5% over the past year.

New multi-family construction spending fell over the past month but is up 20% over the past year.  Public construction spending fell 1.2% as education construction spending and highway construction both fell as well. Residential construction spending fell over the past month but is up 9.2% over the past year. Although residential construction has picked up, supply is still coming onto the market as rates and prices remain high.

MBA weekly applications fell 0.6% from the previous week. The refinance index fell 2% and the purchase index fell 0.1%. The average rate for a 30-year fixed conforming loan moved lower by two basis points to 6.91%. The average rate for a 30-year fixed jumbo loan declined by eight basis points to 7.06%. Even with rates edging lower, mortgage activity remained subdued.

The market spent the week searching for direction as it awaited the job data releases that could perhaps provide a clearer picture of where monetary policy might be heading. The February JOLTS report showed that job openings were little changed at 8.8 million. Openings increased in finance & insurance, state and local government, and arts, entertainment & recreation. Openings fell in information and the federal government.

Hires were little changed, as were separations. The quits rate was virtually unchanged at 2.2% for the fourth straight month. January’s job openings number was revised down to 8.7 million.

The ADP employment report, which represents private employers, surprised to the upside, adding 184,000 jobs in March. The goods producing sector added jobs in each industry, with construction adding the bulk of the jobs at 33,000. Total goods-producing jobs added were 42,000. The services-providing sectors added 142,000 jobs.  The addition in jobs were led by leisure/hospitality at 63,000 jobs and trade/transportation/utilities at 29,000 jobs.

Small establishments added 16,000 jobs, with establishments of 20-49 employees seeing a 8,000 decrease in the number of jobs added. Medium establishments added 93,000 jobs, and large establishments added 87,000 jobs. Pay for job-stayers rose 5.1% and job-changers rose 10% over the past year. The latest pay changes surprised to the upside after decelerating for the past few months.

Initial claims came in higher than forecast of 214,000, registering 221,000 claims filed this past week.  The four-week moving average seems to be trending higher at 214,000, after the last two weeks held steady at 212,000. Continuing claims decreased by 19,000 to 1.791 million, as the job market remains strong.

In March, the employment situation report showed a U.S. job market that continued its upward trajectory, adding 303,000 nonfarm payroll jobs, maintaining the unemployment rate at a stable 3.8 percent. Most analysts forecasted an addition of just 200,000 jobs. The unemployment rate has been remarkably stable, ranging from 3.7 to 3.9 percent since August 2023, with 6.4 million people currently unemployed.

Job growth spanned various sectors, notably in health care, government, and construction. However, certain sectors like retail trade and other major industries showed little change, indicating a nuanced job market landscape. The scenario for long-term unemployment remains unchanged, with 1.2 million individuals jobless for 27 weeks or more, making up 19.5 percent of the unemployed.

Wage growth continues, with average hourly earnings rising by 0.3 percent to $34.69, reflecting a 4.1 percent increase over the past year. The average workweek was virtually unchanged, edging up by 0.1 hours to 34.4 hours. For manufacturing, the average workweek was also unchanged at 40 hours, with overtime edging lower by 0.1 hours to 2.9 hours.

January’s employment was revised up to 256,000 from 229,000 jobs added and February employment numbers were revised lower from 275,000 to 270,000.

In February, the manufacturing sector demonstrated a significant rebound, with new orders for manufactured goods rising by 1.4 percent, a notable recovery following two consecutive months of declines. This uptick was accompanied by an increase in shipments, up by the same percentage.

 Despite a virtually unchanged scenario in unfilled orders, the stability in this segment underscores a consistent demand backlog. Moreover, inventories saw a modest rise of 0.3 percent, suggesting a careful balance between production output and inventory levels to meet the market demand.

Diving deeper into the details, durable goods orders also reflected positive momentum, increasing by 1.3 percent, primarily driven by a significant uptick in transportation equipment orders. Non-durable goods weren’t left behind, seeing a1.6 percent increase. On the shipments front, durable goods rose by 1.2 percent, while non-durable goods shipments also increased by 1.6%.

Unfilled orders for durable goods remained steady, with a slight increase, emphasizing a sustained production schedule to meet ongoing demand, especially in transportation equipment. Capital goods new orders improved as did shipments while inventories and unfilled orders were virtually unchanged.

Consumer credit increased 3.4% over the past year with revolving credit rising 10.2% and nonrevolving credit rising 0.9%. Total outstanding credit rose in total, rising for both revolving and nonrevolving credit.  Rates are consumer, personal and auto loans continue to rise.  The new car loan rate for five years rose seven basis points to 8.22%. For six years, the rate fell twenty-six basis points to 8.41%.

Personal loans rates rose fourteen basis points to 12.49%, and credit card rates rose twelve basis points to 12.49%.

Technical Story:

This Past week’s Cash flow in Review:

This past week saw a slight increase in discretionary spending. Unfortunately, I ended up eating out more than I should have, even though I had food at home. I’m noticing that I tend to have sudden urges to spend money when I have more than I anticipated in my checking account towards the end of the week. Although I am saving money, had I reined in my spending I could have saved a lot more money.

This coming week, I plan to seriously reexamine my spending and budget to accelerate the pace at which I am decreasing my credit card balances.

Grade: D+

Reason: No real improvement

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