Trade The Journey

Trade The Journey

Are the Bulls back?

Greetings fellow traders! I hope everyone is enjoying their weekend and preparing for the week ahead. This past week the markets saw heightened volatility with big tech earnings and economic data. Now is the time to be vigilant in maintaining stops and possibly lowering trading sizes. It can be quite challenging to know when the market changes but indicators & technical patterns can help.

Last week’s tech earnings, which featured earnings from Meta, Google and Microsoft were mixed. Meta offered cautious guidance. Meta’s investment in its Reality Labs Unit, which is its hardware and software division working on its own metaverse, has accumulated $45 billion in losses since 2020. Apple and Amazon reported earnings this past week.

Upcoming Week:

  • Monday: Fed Speakers Williams & Barkin, Loan Officer Survey
  • Tuesday: Consumer Credit Change. Earnings: Walt Disney, Reddit
  • Wednesday: ECB policy meeting, MBA Weekly Index
  • Thursday: Initial Claims
  • Friday: University of Michigan, Consumer Sentiment

Short-term Market Technical Question: Can the indices rise above their 50 sma?

Earnings: Apple and Amazon

In the Q2 2024 earnings call, Apple Inc. reported a quarterly revenue of $90.8 billion, marking a 4% decrease from the previous year, yet surpassing earnings expectations with an EPS of $1.53 against a forecasted $1.50. The company experienced a downturn in iPhone revenues by 10% year-over-year, attributed to a challenging comparison with the previous year’s figures which had been significantly bolstered by replenished inventories and pent-up demand.

However, there were revenue records in several regions including Latin America, the Middle East, Canada, India, Spain, Turkey, and Indonesia. Apple also noted a remarkable 14% growth in its services sector, achieving a new revenue peak of $23.9 billion. The introduction of Apple Vision Pro and investments in Generative AI were highlighted as pivotal elements of Apple’s forward-looking strategy, underscoring a focus on integrating cutting-edge technologies.

Looking ahead, Apple’s management provided guidance for low-single-digit revenue growth in the June quarter, despite expected foreign exchange headwinds. They forecast continued robust growth in the services sector and anticipate a significant rebound in iPad revenue. Gross margin is expected to lie between 45.5% and 46.5%, with operational expenses projected between $14.3 billion and $14.5 billion.

The firm also increased its share repurchase authorization to $110 billion and raised its dividend by 4%, reflecting confidence in its ongoing financial health and future prospects.

Amazon’s Q1 2024 financial results highlight significant growth and innovation across its diverse business segments. Revenue increased to $143.3 billion, marking a 13% year-over-year rise, driven by strong performance in both their online stores and AWS. Notably, operating income saw a remarkable boost of 221%, reflecting improved efficiencies and cost management strategies.

The company’s focus on enhancing customer experiences through faster delivery services and broadening product selections, including partnerships with popular brands, has fortified its market position. The integration of generative AI tools for sellers and advancements in AWS, particularly in generative AI capabilities, underscore Amazon’s commitment to maintaining technological leadership and meeting evolving consumer and business needs.

On the strategic front, Amazon is leveraging its technological prowess to optimize operations and explore new revenue streams. AWS experienced an accelerated growth rate of 17.2%, thanks in part to increased demand for cloud and AI services, indicating a robust future trajectory for Amazon’s high-margin business. The company also highlighted efforts in streamlining their logistics and fulfillment processes to improve cost efficiencies, which are expected to contribute positively to future profit margins.

The introduction of innovative AI applications and a continued push into international markets are pivotal elements of Amazon’s strategy. These initiatives, coupled with a strong emphasis on customer-centric solutions such as expanded grocery delivery options and enhanced Prime benefits, are poised to sustain Amazon’s growth momentum while navigating the dynamic retail and technology landscapes.

Fed Minutes

During the press conference on May 1, 2024, Powell noted that inflation remains above the Fed’s 2% target and has not declined as expected. As a result, the Federal Open Market Committee (FOMC) decided to maintain the current federal funds rate target range of 5-1/4 to 5-1/2 percent and slow the pace of its securities holdings reduction to address these concerns without exacerbating economic conditions.

Powell expressed caution regarding the economic outlook and inflation risks, reaffirming the Fed’s readiness to adjust policies as necessary to ensure inflation moves sustainably towards the 2% goal. The decision to slow the reduction of the Fed’s securities holdings is aimed at ensuring a smooth financial market transition, supporting the broader goal of price stability and sustained economic health.

In the press conference, Chair Powell reiterated the challenges posed by inflation, which, despite easing, continues at levels above the Fed’s target. This situation has prompted the Fed to maintain a restrictive policy stance to ensure inflation returns to its 2% objective.

During the Q&A session, Powell faced several inquiries about the potential need for further rate hikes and the timing of rate cuts. He emphasized that the Fed is not considering rate increases at the moment, suggesting that current policy settings are appropriate given the lack of sufficient evidence that inflation pressures are reaccelerating significantly. He noted that any future adjustments would be data-driven, contingent on inflation trends and other economic indicators.

One key theme Powell addressed was the impact of Fed policies on the labor market. He acknowledged that the strong labor market and wage growth are indicators of economic resilience, but also sources of inflationary pressure. He expressed satisfaction with the progress in moderating wage increases, which are essential to controlling inflation without triggering a significant slowdown in employment growth.

Key Indicators for possible rate cut: Unexpected weakening of the labor market & Inflation is closer to 2%

Powell also discussed the Fed’s balance sheet policies, explaining the decision to slow the pace of securities holdings reduction. This approach aims to manage market reactions and avoid undue stress in money markets, which could complicate the broader goals of monetary policy.

Powell’s tone: One of cautious optimism, acknowledging the progress made in managing inflation and employment but recognizing the uncertainties and challenges ahead.

The markets initially rallied on the news but quickly sold off towards the end of the day. After reaching a high of $106.49 in the post market, the dollar fell several points, ultimately closing at $105.076 at the end of the week. Gold’s price action has been mixed, initially rallying towards the end of the day on the day of the Fed’s meeting. However, Gold hit a low for the week before rising into the close, ending the week at $2,310.10.

Gold is not far off from its most recent all-time high. Copper has continued its upward ascent, spurred by China’s mixed recovery and supply crunch. After rallying above the pivot high of $4.5771, copper was unable to hold above this level and closed the week slightly lower at $4.5680.

Crude’s recent rally was halted due to the calming tension in the middle east and inventory levels. After breaking above the $84.10 reference level, it was unable to hold above this level and proceeded lower. Crude retested this level but fell and crashed through its 50 and 200 sma, ending the week at $77.99.

Bond yields were volatile this past week due to the mixed data. Yields initially rose on the hotter than expected Employment Cost Index. The two-year yield rose above 5% and the ten-year yield rose several basis points nearing the 4.70% level. However, after the Fed press conference and cooler employment situation report, yield fell across maturities.

Two-year yield: 4.810%

Ten-year yield: 4.50%

Third-year yield: 4.660%

Economic Data Insights

Both the ISM manufacturing and nonmanufacturing reports were released this past week. ISM Manufacturing in April edged back into contractionary territory after having its first month of expansion in several months. The average twelve-month PMI is 47.7. 34% of the Manufacturing GDP contracted, up from 30% in March, however none of the top six industries that contribute to manufacturing GDP had a PMI below 45.

New Orders contracted by 2.3% to 49.1% as respondents reported that conditions were mostly the same. However, less respondents commented that conditions had softened, which is a good sign. Production also edged lower by 3.3% to 51.3% but remained in expansionary territory. Employment registered 48.6%, slightly higher than the May levels, as companies continued to moderate their levels of employment through layoffs, attrition and hiring freezes. Suppliers have reduced lead time and improved the delivery pace as the suppliers’ deliveries index fell 1% to 48.9%.

Inventories were unchanged at 48.2% as manufacturers remained cautious, while customer inventories rose 3.8% to 47.8% as customers inventories are moving into the “too low” category.  Customers reported that inventories at their current levels are sufficient. The backlog of orders index contracted by 0.9% to 45.4% as new orders and production moderated. Prices for inputs rose noticeably, increasing by 5.1% to 60.9% as commodities prices rose. The share of companies reporting higher prices also rose. New export orders fell by 2.9% to 48.7%, while new import orders remained in expansion territory but fell 1.1% to 51.9%.

Respondents Comments:

Business conditions across various sectors are mixed. Chemical products see recovering demand, but high costs remain a challenge. Transportation equipment is performing well, though supplier bankruptcies are rising. Food, beverage, and tobacco report stable orders. In technology sectors like computers and electronics, recovery is slow with persistent economic uncertainties in the U.S. and abroad.

 Machinery benefits from strong demand for automation due to labor shortages. Meanwhile, fabricated metal products and electrical equipment face declining sales and volatility. Construction is robust in the Southeast U.S. Interest rate uncertainties affect the plastics and rubber sector. Overall, business stability varies, with some sectors thriving while others navigate significant challenges.

The ISM services fell 2% in April to 49.4% in April as Business Activity and New Orders indexes both ended the month in expansionary territory. Business Activity fell 6.5% to 50.9%, as a higher number of respondents reported lowered activity. New orders decreased by 2.2% to 52.2%. Employment contracted by 2.6% to 45.9% as respondents reported that conditions were about the same. Supplier deliveries slowed by 3.1% as the index increased to 48.5% as the impact from Panama Canal, Red Sea conflict and the collapse of Baltimore’s Key Bridge continue to be felt.

Inventories rose 8.1% to 53.7% as inventory sentiment rose sharply by 7.2% to 62.9%. Respondents indicated that inventories are too high compared to business activity levels. The backlog of Orders increased 6.3%, rising to 51.1%. Prices rose 5.8% to 59.2% as respondents indicated that conditions are about the same or slightly improved. New export orders fell 4.8% to 47.9%, and new import orders rose 1.2% to 53.6%.

Respondents Comments:

Business conditions vary across sectors: Food services see potential cost hikes due to avian flu affecting poultry prices, while the arts expect a recovery in movie production later in 2024. Construction observes market softening but notes instability in electrical equipment. Public administration and healthcare are dealing with inflation pressures, with healthcare trying to find cost savings.

 Information services report soft business conditions, and management services face supply chain issues and rising costs. Retail maintains stable demand and pricing but struggles with staffing, whereas utilities see high demand for technical labor with long material lead times. Wholesale trade experiences a market slowdown but is gaining market share through new customers.

The March Factory order report showed new orders for manufactured goods rose for the second consecutive month, increasing by 1.6%. Notably, all manufacturing industries experienced a marginal year-over-year increase in shipments, rising by 0.7%. Excluding transportation, this increase was slightly higher at 0.8%.  The durable goods industries saw a 1.2% year-over-year increase in shipments, indicating a steady demand in this sector.

 However, primary metals and their products experienced a slight decline in both shipments and new orders, with iron and steel mills facing the largest declines, suggesting some industry-specific challenges. Unfilled orders in the manufacturing sector increased by 0.4% month-over-month, pointing to an ongoing demand that could not be immediately met . Inventory levels were unchanged in total, remaining at the same level for durable goods industries but rising 0.2% for nondurable goods industries.

In the first quarter of 2024, the nonfarm business sector witnessed a slight increase in labor productivity by 0.3%, with a year-over-year growth of 2.9%. This growth is attributed to a 1.3% increase in output and a 1.0% rise in hours worked. Simultaneously, unit labor costs in this sector rose by 4.7%, driven by a 5.0% increase in hourly compensation paired with the modest productivity gains. Over the past year, these costs have increased by 1.8%, reflecting sustained upward pressure on wages relative to productivity enhancements.

In the manufacturing sector, the situation varied between sub-sectors. Overall manufacturing productivity edged up by 0.2%, despite output remaining stagnant and a 0.2% decline in hours worked. Notably, durable manufacturing showed more robust growth, with productivity up by 1.2% as output increased slightly and hours worked decreased. In contrast, nondurable manufacturing faced challenges with a 1.3% decline in productivity, as output slightly decreased, and hours worked increased. This resulted in varied cost dynamics, where durable manufacturing saw a notable increase in unit labor costs by 4.3%, and nondurable manufacturing witnessed a more modest rise.

The Labor Picture

The March employment cost index surprised to the upside. Wages rose by 1.2% over the three-month period ending in March 2024, with a year-over-year increase of 4.2%. Wages and salaries for the same group saw a 4.4% rise year-over-year. Private industry workers experienced a 4.1% annual increase in compensation costs, with wages and salaries growing by 4.3%. The inflation-adjusted compensation for private industry workers went up by 0.6% over the year.

Union workers saw a 5.3% increase in compensation costs, significantly higher compared to the 3.9% for nonunion workers. State and local government workers’ compensation costs increased by 4.8% over the year, with wages and salaries rising by 5.0%. Overall, the data shows a trend of rising employment costs across various sectors, reflecting ongoing economic adjustments and labor market conditions.

Job Openings were little changed in March at 8.5 million. Openings increased in State and Local government. Hires were little changed at 5.5 million, while separations decreased. Layoffs and discharges were also little changed. The quits rates were unchanged at 2.1%. The Job Openings level for February were revised up 57,000 to 8.8 million.

The April ADP employment report showed that 192,000 jobs were added in private industry. Job gains have accelerated in the last three months. The goods-producing sector added 47,000 jobs with most in the construction sector. The service-providing sector added 145,000 jobs with most of the jobs added in leisure/hospitality and a equal increase in education/health services & trade/transportation/utilities. Each establishment size added jobs this past month except for businesses with 20-49 employees which saw a decrease. Pay gains for job stayers were little changed, while they decreased for job changers over the past year.

The April Employment Situation report came in below expectations, showing that 175,000 jobs were added in April. Job gains occurred in Health care, social assistance, and transportation & warehousing. The retail sector added 20,000 jobs, far above the twelve-month average of 7,000. Construction employment was little changed. The unemployment rate remained at 3.9% as the labor force participation rate was unchanged at 52.7%.

Average hourly earnings rose 0.2% and over the past year earnings increased by 3.9%, showing some moderation in earnings growth. The average workweek edged lower by 0.1 hours to 34.3 hours. The manufacturing workweek and overtime were unchanged at 40 hours and 2,9 hours, respectively.

Technical Story

This Past Week’s Cash Flow Review:

This past week didn’t go as planned as made a lot of discretionary purchases that weren’t needed. However, I received my tax refund and was able to save nearly 75% of the refund, adding most to my savings accounts and the remainder was spent on decreasing my credit balance. My credit score continues to improve.

Grade: C

Reason: Some Improvement

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