Trade The Journey

Trade The Journey

Mixed Economic Performance

Good Afternoon Traders, I hope everyone is enjoying their weekend and preparing for the week ahead. This past week, most of the focus was on the GDP second estimate and PCE which would provide further clarity on the path of rates. Still attempting to regain my focus, I haphazardly put a bull call vertical spread on, thinking I could manage the position. Unfortunately, I had neither the focus nor the patience to watch the position and ended up losing the entire premium.

Although I was eager to resume trading, clearly, I wasn’t ready.  Next time, I won’t begin trading until I am sure that I am ready to trade. Luckily, I only opened one contract, so my losses were limited although somewhat sizeable.

On to the markets, volatility spiked up towards the end of the week as the markets awaited the PCE report. The VIX has been in a sideways trend between 12.71 and 15.56 since November of last year. The VIX has been unable to break above 15.56 and stay above this level for long before breaking back below 14.33, which has also served as resistance. The VIX broke above the 14.33 level but quickly returned to the 12.71 level as the PCE report was in line with expectations.

To make reading the trend easier to read, the ADX and DMI were added. The ADX is at 15, which signals the trend isn’t strong and the +di which shows if there is a positive trend if above 25, is now at 22. The 50-sma acted as resistance towards the end of the week, at 14.42.

Yields moved lower towards the end of the week, with the 10-year yield ending the week at 4.510% after reaching a high of the week of 4.607%. The year high for the 10-year is 4.709%. The 2-year yield ended the week at 4.890% after coming close to breaking the 5% barrier. The year high for the 2-year yield high is 5.04%. The 30-year yield tells the same story, retreating at the end of the week to 4.650% after reaching a yearly high of 4.82%.

The yield curve seems to be flattening with the 30-year yield close to breaking above the 2-year yield indicating indecision in the market. The economic data recently released maintains a mixed picture of the economy with higher rates neither producing a recession nor continuing to spur significant economic growth.

Gold reached a high of $2,454 last week but has since retreated to its 50-sma. Gold ended the week at $2,347. The dollar ended the week at $104.63, using the 200-sma as support and the 50-sma as resistance. The dollar has mostly remained within a sideways trend and could move lower soon. The dollar has been unable to stay above the $105 level. Crude has been in a sideways trend since the beginning of April, using the 50-sma as resistance.

Crude has been unable to break or stay above the $80 level. Crude ended the week at $77.18 and looks to be breaking below the $77.09 support level as OPEC is set to meet this week. OPEC is expected to maintain its supply cuts. Copper has not returned near its recent high of $5.199 made in early May. Copper ended the week at $4.63.

If the dollar moves lower, it could spur commodities to resume their move higher and vice versa if the dollar rises. Of course, that’s not all that contributes to commodities movement, geopolitical tensions, economic events, demand/supply and the flight safety also influence commodities prices.

Around the world, China released its industrial profits and profits were unchanged at 4.3% over the past year but rose 4% in April.  Profits grew for the private sector which included sectors like computer, communications, metal smelting, heat productions, cars, textile, chemicals, general equipment, and oil/natural gas. Profits fell sharply for non-metallic minerals, and coal mining. China also released its NBS figures this past week.

Its NBS manufacturing PMI exited expansionary territory, falling from 50.4 to 49.5. New orders and foreign sales both fell as employment remained in contractionary territory.  Input cost inflation rose sharply as sentiment remains solid. NBS non-manufacturing PMI was virtually unchanged as new orders, foreign sales, and employment remained weak. NBS composite PMI was also unchanged as China struggles to regain traction in its economy.

In the Euro Area, talks by officials to issue the first rate cut in June have grown louder as inflation continues to moderate. The May CPI fell from 0.6% to 0.4%, as inflation rose to 2.6% over the past year, higher than forecasted. Core inflation over the past year rose from 2.7% to 2.9%. Economic sentiment improved as did consumer inflation expectations and industrial sentiment. The unemployment rate edged lower.

Loans to companies edged lower while loans to households were unchanged over the past year. While the June ECB meeting is the target for the first rate cut, further cuts in rates remain uncertain.

Short glimpse into Retail Earnings:
Best Buy

Best Buy had a solid quarter with earnings of $1.20 per share, which beat the forecasted $1.08. They made $8.85 billion in revenue, although this was 6.5% less than last year. The drop was mainly because fewer people bought appliances, home theater systems, computers, and phones. However, gaming products saw an increase in sales. Overall, same-store sales in the U.S. went down by 6.3%, and internationally by 5.4%.

Costco

Costco had a great quarter, with earnings of $3.43 per share, up from $3.04 last year. They made $53.65 billion, which is a 9% increase from the previous year. Membership fees, a key part of their revenue, went up by 6%, showing that customers remain loyal. They saw strong sales in fresh foods and non-food items, and their online sales grew by 11%.

Foot Locker

Foot Locker had a tough quarter, earning just $0.70 per share compared to $1.60 last year. Their revenue dropped to $1.93 billion from $2.17 billion the previous year. They are facing stiff competition and people are spending less on non-essential items. Sales in stores open at least a year fell by 6.4%.

Dollar General

Dollar General earned $2.34 per share this quarter, down from $2.62 last year. Revenue was up 3.5% to $9.34 billion. However, sales in stores open at least a year dropped because higher prices are making people cut back on spending. They plan to open 1,050 new stores this year to keep growing.

Dick’s Sporting Goods

Dick’s Sporting Goods had a good quarter, earning $2.82 per share, beating the $2.48 expected. They made $2.84 billion, up from $2.70 billion last year. They saw strong sales of sports clothes and shoes, as more people are getting into fitness and sports. Their online sales also went up by 14%.

Advance Auto Parts

Advance Auto Parts had earnings of $3.57 per share, down from $3.82 last year. They made $3.37 billion in revenue, slightly more than $3.29 billion last year. They faced supply chain issues and higher costs but benefited from strong demand for car parts as people are keeping their cars longer.

Upcoming Week in US markets:

Monday: ISM manufacturing, Construction Spending

Tuesday: JOLTS Job Openings, Factory Orders

Wednesday: ISM Services, MBA Weekly Index

Thursday: Imports/Exports, Initial Claims, Productivity report

Friday: Employment Situation Report, Consumer Credit change, Fed Speaker: Cook

Fed Speakers this Past Week:

Fed speaker Mester

By reducing uncertainty about the future path of policy, forward guidance can help lower interest rates by reducing the premiums investors demand to compensate them for interest-rate uncertainty.

In addition, in theory, if the central bank indicates that the future path of short-term interest rates will be held lower and for longer than would be consistent with the central bank’s past behavior, this can put downward pressure on longer-term interest rates, thereby adding accommodation.

Forward guidance helps influence public expectations and reduce interest rates by providing clarity about the future policy path, which can stimulate economic activity. However, for it to be effective, the public must understand and trust the central bank’s commitment to a different policy approach. The Federal Reserve has utilized forward guidance during the global financial crisis and the pandemic. Despite its usefulness, forward guidance poses challenges, such as the need for policymakers to commit to a different policy path and ensuring the public comprehends this deviation.

To improve communication, Mester recommended that the FOMC provide more detailed policy statements and link economic projections with policy paths in the Summary of Economic Projections (SEP). These improvements would make monetary policy more effective in normal times and increase the effectiveness of unconventional tools like forward guidance during crises.

Fed Speaker Cook:

The global pandemic caused economies around the world to shut down, putting a strain on supply as strong demand emerged as economies lifted their restrictions. Many questions arose about inflation and the long-time scarring to the economy due to the Pandemic. The path of inflation has been bumpy as housing services inflation has receded slowly as core services which includes restaurant meals, car insurance, health care, hotel rooms and airfares.

Inflation expectations have continued to moderate as long-term inflation remains anchored. Labor supply has improved due to increased immigration, and labor force participation. The labor market has continued to normalize as hiring and wage growth have slowed. Questions still exist on why growth has remained resilient in the face of higher rates, and if the relationship between monetary policy and the economy has changed. However, consumer spending growth is expected to slow as savings have dwindled and credit card balances have increased above pandemic levels.

When considering appropriate monetary policy, I now see two-sided risks. I am now weighing the possibility of easing policy too soon and letting inflation stay persistently high versus easing policy too late and causing unnecessary harm to the economy.

Fed Speaker Williams:

Williams discussed the progress made in balancing supply and demand and reducing inflation. The labor market remains strong, with high levels of participation and a low unemployment rate, though job openings and wage growth are still elevated. Inflation has significantly decreased since mid-2022.

Williams also addressed the current stance of monetary policy, noting that the Federal Open Market Committee (FOMC) has kept the federal funds rate unchanged and will continue to reduce its holdings of Treasury securities and agency debt. He expects GDP growth to moderate and inflation to approach the 2 percent target in the coming years.

Williams acknowledged the uncertainty in the economic outlook, citing geopolitical events and China’s growth as key risks. He emphasized the importance of monitoring economic data to ensure price stability while maintaining a strong labor market, expressing confidence in the Fed’s ability to achieve its goals and restore sustained economic prosperity.

Economic Insights:

The Fed released its beige book for May which showed that economic activity growth continued, however the growth varied among industries districts. Retail spending remained flat or slightly up, reflecting lower discretionary spending and higher price sensitivity among consumers. Auto sales were generally flat, with some manufacturers offering incentives.

Travel and tourism were strong due to increased leisure and business travel, but hospitality outlooks were mixed. Nonfinancial services demand rose, and transportation services varied in activity. Manufacturing was stable to slightly up, while lending growth was constrained by tight credit and high interest rates. Housing demand and single-family construction rose modestly, despite rising rates affecting sales. The commercial real estate sector softened, and agricultural conditions were mixed. Overall outlooks grew more pessimistic amid rising uncertainty and downside risks.

Labor markets saw slight overall employment growth as wage growth was moderate.

Prices increased modestly, as consumers resisted additional price hikes, leading to smaller profit margins amid rising input costs. Retailers offered discounts to attract customers. Price growth is expected to remain modest in the near term.

In the first quarter of 2024, the real gross domestic product (GDP) increased at an annual rate of 1.3 percent, down from 3.4 percent in the fourth quarter of 2023. This “second” estimate of GDP showed a 1.6 percent increase. Real GDP adjusts for the rate of inflation.

 The growth in GDP was driven by rises in consumer spending, residential and nonresidential fixed investment, and state and local government spending, although private inventory investment decreased. Imports, which reduce GDP calculations, also increased. The deceleration in GDP from the previous quarter was primarily due to slower consumer spending, exports, and government spending, despite an uptick in residential fixed investment.

The PCE report in April 2024 showed that personal income increased by 0.3 percent, while disposable personal income (DPI) rose by 0.2 percent. Personal consumption expenditures (PCE) also grew 0.2 percent. The PCE price index, which measures inflation, increased by 0.3 percent, with the core PCE price index, excluding food and energy, rising by 0.2 percent. Real DPI and real PCE, adjusted for inflation, both decreased by 0.1 percent, reflecting a 0.4 percent decline in spending on goods and a 0.1 percent increase in spending on services.

The personal saving rate stood at 3.6 percent. Despite the increase in overall personal income, the growth rates for real DPI and PCE showed a slight decline. Price increases were observed across various sectors, with the overall PCE price index rising 2.7% over the past year. Goods prices increased slightly, while service prices saw a rise of 3.9 percent.

The advanced retail inventory report in April showed that wholesale inventories rose by 0.2% and retail inventories rose by 0.7%. International trade: goods deficit rose by 7.7% as exports rose noticeably less than imports. Increased imports were seen automotive vehicles, capital goods and industrial supplies.

The MBA weekly index showed that mortgage application volume decreased 5.7% as the refinance index fell 14% and the purchase index slowed by 1% from the week prior. The share of applications for refinancing fell from 34% to 31.3% out of the total applications. The average rate for a thirty-year fixed conforming loan rose by four basis points to 7.05%. The average rate for a thirty-year fixed jumbo loan also increased by four basis points to 7.22%. The median payment for applicants increased by $56 to $2,256 in March.

Pending homes sales fell 7.4% over the past year as higher rates and constrained inventory continue to affect the housing market.

Initial claims were in-line with the forecast of 219,000. The four-week moving average for initial claims rose to 222,500. The moving average has steadily risen for the past month. Continuing claims rose to 1.786 million last week, slightly higher than the previous week.

Technical Story: 

This past week’s cash flow in Review:

My spending nightmare continues as I have unable or better yet unwilling to curb my spending. Unfortunately, I’ve been unable to use my savings account to supplement some of my spending. This coming week, I hope to finally make the needed change and return to my spending plan. Currently, my savings account is 20% lower than it was six months ago.

Grade: D-

Reason: Reckless spending

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