Trade The Journey

Trade The Journey

Is the Bull Run losing Momentum?

Good Afternoon Fellow Traders, I hope you’re all making the most of your weekend as you gear up for the upcoming week. This weekend signifies a new chapter in the Middle Eastern conflict, marked by Iran initiating drone strikes on Israel following the killing of several Iranian officials in an Israeli airstrike in Syria. This incident follows escalating tensions due to a prior attack by Hamas months earlier.

The likelihood of this regional conflict widening has become a reality, heightening the potential for broader conflict across the Middle East. Both crude and Brent oil prices have reacted accordingly, though it appears much of this Middle Eastern conflict had already been factored into the market as oil prices continue their ascent amid OPEC+’s commitment to supply cuts.

The OPEC+ basket, consisting of thirteen crude oil nations including Algeria, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of the Congo, Saudi Arabia, the United Arab Emirates, and Venezuela, had a basket price at March’s end of $89.81. Crude Futures stand at $85.45, having breached the $84.10 resistance which now serves as support. This past week witnessed the 50 sma crossing above the 200 sma, signaling bullish momentum.

Concerns are mounting that rising crude prices may keep inflation higher than anticipated. It’s not just crude that’s climbing; commodity prices overall have surged, with copper breaking past the $4 resistance. Copper, mostly stable throughout the year, has recently seen significant movement, now priced at $4.316 and approaching a pivot high of $4.34. The economic rebound in China has also spurred this upward trend.

The CPI will be thoroughly discussed in the economic data insights section, suggesting sustained higher rates. This release triggered a sharp rise in the dollar, leveraging the 50 sma as support and surging past resistance to $106.013, with recent peaks at $107.348. Gold, too, hit new highs before retracting slightly last week, ending on a daily low at $2360.2.

Bond yields have gradually increased, with a sharp rise post-CPI report, pushing the two-year close to 5% and the ten-year to 4.5%. Although the spread between 2/10 had been narrowing, it recently widened. The week concluded with the two-year yield at 4.88% and the ten-year at 4.5%, with the thirty-year finishing at 4.61%.

Market volatility is on the rise due to escalating monetary policy uncertainties, geopolitical tensions, and the overextension fears of the markets. The VIX reached a recent peak of 19.2 this past Friday, settling at 17.31. Prior to this month, the VIX had been relatively low, fluctuating between 12.56 and 15.56 as the indices reached new highs, but this has now shifted.

The Fed’s March meeting minutes revealed steps toward reducing the balance sheet runoff, with a key focus on reserve levels determining the runoff pace and endpoint. The minutes emphasized the Fed’s preference for retaining a treasury security inventory as redemptions of agency debt and mortgage-backed securities remain below the monthly cap.

By 2026, the Fed anticipates both total and core PCE inflation nearing the 2% target as labor and product markets stabilize. Inflation risks remain heightened, paralleling concerns about potential economic slowdowns if rate adjustments are necessary. The Fed is intently monitoring inflation trends, acknowledging the uneven path back to 2%, particularly as housing services inflation decelerates and the labor market stabilizes. Most officials support the notion of a rate cut sometime this year.

The Fed plans to manage its treasury securities’ redemption and reinvestment within a $60 billion monthly cap and apply the same approach to agency debt and mortgage-backed securities with a $35 billion cap. It will also conduct overnight repurchase and reverse repurchase agreement operations at minimum bid rates of 5.5% and 5.3% with respective operational limits of $500 billion and a per-counterparty limit of $160 billion per day.

In global news, China appears to be in the initial stages of recovery, reaffirming gold purchases as its foreign exchange reserves exceed the consensus of $3.21 trillion, reaching $3.246 trillion. However, its inflation rate has slowed from February’s year-over-year growth of 0.7% to 0.1%. Its year-over-year PPI dropped by 2.8%, aligning with forecasts as demand continues to lag. Over the past year, its exports declined by 7.5% while its imports contracted more slowly. Its money supply and outstanding loan growth have both decreased yet remain positive. The ECB has held rates steady at 4.5%, with discussions of a possible rate cut by summer.

Upcoming Week:

  • Monday: Retail Sales, New York Manufacturing Index, Business Inventories, Fed Daly speech
  • Tuesday: Building Permits/Housing Starts, Industrial Production/Capacity Utilization
  • Wednesday: MBA weekly Applications, Fed Mester Speech
  • Thursday: Initial claims, Fed Bostic Speech
  • Friday: Fed Goolsbee Speech

Earnings Season Begins

JP Morgan: Beat on Earnings and Revenue Forecasts

In the first quarter of 2024, JPMorgan Chase reported strong financial results with a net income of $13.4 billion and earnings per share of $4.44, driven by revenues of $42.5 billion and a 21% return on tangible common equity. The results included a $725 million increase in FDIC assessments due to losses expected from the failures of Silicon Valley Bank and Signature Bank.

 The firm highlighted strong performance in Investment Banking fees, up 18% year-over-year, and robust net inflows in both Asset & Wealth Management and Consumer & Community Banking. The inclusion of First Republic Bank, recently integrated into JPMorgan, contributed $1.7 billion in revenue. Operational expenses rose to $22 billion, up 9% due to increased compensation and the FDIC assessment, while credit costs were reported at $1.9 billion. Despite the positive results, the firm maintains a cautious outlook due to potential economic and regulatory uncertainties.

Wells Fargo: Beat on Earnings and Revenue Forecasts

Wells Fargo reported net income of $4.6 billion. The financial results included an additional charge of $284 million or $0.06 per share due to the FDIC’s special assessment related to regional bank failures from the previous year. Net interest income for the quarter declined by $1.1 billion, or 8% compared to the same period last year, mainly due to higher interest rates impacting funding costs and lower loan balances, despite partially being offset by higher asset yields

. Noninterest income showed significant growth, benefiting from higher equity markets, which favorably impacted the Wealth and Investment Management business. The bank also reported increased expenses, mainly due to higher operating losses, the FDIC assessment, and revenue-related compensation, partly offset by ongoing efficiency initiatives, including headcount reduction.

Citigroup: Beat on Earnings and Revenue Forecasts

Citigroup reported a net income of approximately $3.4 billion for the first quarter of 2024, translating to earnings per share of $1.58. This financial performance was supported by revenues of over $21 billion, which represented a growth of over 3% year-over-year when excluding divestitures. This revenue growth was primarily driven by a $1 billion gain from the sale of Citigroup’s India consumer business in the previous year.

On the expense front, expenses slightly decreased quarter over quarter, excluding the FDIC special assessments. Citigroup’s focus has been on organizational simplification, which concluded last month, resulting in a cleaner and simpler management structure aligned with strategic goals. This restructuring led to the elimination of approximately 7,000 positions, expected to generate $1.5 billion of annualized run rate expense savings.

Regarding specific sectors, services continued to perform well, generating attractive returns with an 8% revenue increase for the quarter. Investment Banking revenue grew by 35%, driven by strong activity in debt and equity capital markets. However, M&A revenues remained low, consistent with industry trends.

Citigroup remains optimistic about the medium-term.

Economic Data Insights

The University of Michigan’s Consumer Sentiment Index experienced a slight drop of 1.5 points, settling at 77.9. The component that assesses current economic conditions fell by 3.2 points to 79.3, whereas the expectations index remained virtually unchanged from the previous month at 77. This stability suggests that consumers’ views on future economic conditions are holding steady. Notably, both the one-year and long-term inflation expectations increased slightly, to 3.1% and 3% respectively.

Meanwhile, the NFIB Small Business Optimism Index hit its lowest point since 2012, recording a figure of 88.5, which is significantly below the 50-year average of 98. Inflation remains a primary concern among small business owners, particularly with rising labor costs and more expensive materials impacting their operations. The labor market showed signs of improvement as fewer owners planned to fill open positions, yet there was a slight increase in plans to raise compensation.

Regarding capital investments, 56% of owners reported making capital outlays, with 38% investing in new equipment, 24% in vehicles, and 17% in facility improvements or expansions. There was a positive shift in owners expecting higher nominal sales, although those anticipating real sales volume increases declined. Despite average selling prices being raised, inventory accumulation slowed and profit trends remained subdued.

The financial markets were focused on the March CPI report for insights into future monetary policy directions. However, the CPI report was somewhat disappointing, registering a slight increase above expectations with a 0.4% rise over the previous month and a 3.5% increase year-over-year. Shelter and gasoline were the primary drivers of this increase, with shelter costs holding steady at a 0.4% rise and energy costs increasing by 1.1%, a decrease from the previous 2.3% rise. Over the past year, shelter costs have climbed by 5.7%. Food prices saw a modest increase of 0.1%, with no change in home food prices and a 0.3% rise in prices for food away from home.

Following January and February, inflation edged higher, attributed partially to seasonal factors. The Core CPI aligned closely with forecasts, rising 0.4% over the month and 3.8% over the year. A silver lining was noted in the declining price trends for used cars and trucks, along with new vehicles, though motor vehicle insurance and maintenance costs rose, pushing transportation services up by 1.5% in March.

The March 2024 Producer Price Index (PPI) report shows a nuanced picture of the economic landscape, with variations across different sectors. The PPI for final demand goods dipped slightly by 0.1 percent, largely due to a significant 1.6 percent drop in the final demand energy index, which was influenced by a notable 3.6 percent fall in gasoline prices. Meanwhile, final demand food prices bucked the trend by increasing 0.8 percent, suggesting some areas of the goods sector remain resilient.

In contrast, the services sector displayed continued growth, with final demand services prices rising by 0.3 percent. This consistent rise, especially notable in trade services and transportation and warehousing (up 0.3 percent and 0.8 percent, respectively), reflects ongoing inflationary pressures within the service industry. This sector’s resilience is pivotal in understanding broader economic trends, especially as services comprise a large part of the economy.

Intermediate demand data reveal that businesses are facing lower costs for goods used in production, particularly processed and unprocessed goods, which saw declines of 0.5 percent and 1.9 percent, respectively. This reduction is mainly driven by decreases in energy prices, highlighting the volatile nature of energy markets. However, services prices at the intermediate level edged up by 0.2 percent, again underscoring the strength in the services sector.

Stages of Production:

  • Stage 4: Prices for stage 4 intermediate demand, which involves goods and services consumed as final demand, increased by 0.2 percent.
  • Stage 3: Prices at this stage remained unchanged in March after a 1.0 percent increase in February.
  • Stage 2: Experienced the largest decline among the stages, with a 1.3 percent decrease in March.
  • Stage 1: Prices edged down by 0.1 percent, showing minimal change compared to Stage 2.

The Import/Export Price Index for March showed the prices of imports rising 0.4% and its third consecutive month of rising import prices. Over the past year, import prices rose 0.4% its first expansionary month in a year.  Fuel import prices rose 4.7% marking the highest price advance since September of last year as petroleum prices rose 6%. Excluding Fuel, prices rose 0.1% as foods, feeds and beverages rose 1.6%, nonfuel industrial supplies and materials rose 0.6%, and finished goods were mixed.

Export prices rose 0.3% and is also the third consecutive month of rising export prices. However, over the past year, export prices declined 1.4%. Agricultural export prices declined 0.7%, as soybeans, corn and wheat prices declined. Nonagricultural export prices rose 0.6% with industrial supplies and materials increasing 0.6%, and finished goods mostly rising.  Capital goods import prices declined 0.3% while export capital good prices rose 0.2%.

Initial Claims declined to 211,000 claims this past week, below forecasts of 218,000.  The four-week moving average remained close to last week’s level.  Continuing claims edged up by 28,000 to 1.817 million, which was higher than the revised 1.789 million from the previous week.

The MBA released its credit availability report for March this past week showing that Mortgage Credit Availability Index (MCAI), rose 1.1% indicating that lending standards loosened. Credit supply increased but remains lower than the levels seen a year ago. Mortgage applications edged up 0.1% from the week prior. The refinance index rose 10% and the purchase index fell 5%. The average rate for a 30-year fixed conforming loan edged ten basis points to 7.01%. The average rate for a 30-year fixed jumbo loan edged up seven basis points to 7.13%.

Technical Story:

This Past Week’s Cash Flow Management in Review:

This past week went okay as I was able to pay down some of my credit card balances. This past month I saw my credit rating rise by over twenty-three points, which is encouraging. By summer, I think I might be able to reach a credit score of 700 which will be the first time I’ve ever reached this score. A few years ago, my credit score was below 500. This upcoming week, barring any surprises should see a further moderation in my spending.

Grade: C

Reason: Some Improvement

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