Trade The Journey

Trade The Journey

A mixed Economic Picture!

Good Afternoon Traders, I hope everyone is enjoying their weekend and preparing for the week ahead. This past week the market awaited the jobs report due last Friday for further clarity on the path of monetary policy. Unfortunately, the path became muddier as the job report not only topped forecasts but blasted through them. It is becoming clear that the economy will remain resilient for the foreseeable future and that the Fed will have to be nimble.

The market is projecting the first rate cut in November with a probability of 47.4% of a twenty-five-basis point cut. The probability of the first cut has risen from the previous month. The December meeting shows a 40% probability of a twenty-five-basis point cut and 35.3% probability of a fifty-basis point cut. The treasury watch tool is based on thirty-day fed funds contracts where the rate is implied. For example, 100 minus 97.50 indicates 2.50% interest rate.

Interest rate swaps, where two parties exchange cash flows, can also be used to forecast the path of rates. Usually, one party pays the floating rate which is tied to a benchmark like Libor and the other pays a fixed rate. The fixed rate is influenced by long-term expectations and the economy while the floating rate is influenced by short-term expectations and central bank actions.

Treasury yields rose throughout the week. The two-year yield hit resistance at 5% and pulled back slightly. The two-year yield ended the week at 4.870% as the two-year looks poised to test the 5% level. Support can be found at 4.203% and was made back in January. The ten-year yield ended the week at 4.430% after pulling back from the 4.708% level made in early May.

The ten-year yield hit a of 5% back in November 2023 and hit a recent low of 3.794% back in December. The thirty-year yield ended the week at 4.550% after making a recent high of 4.819%.

The Vix ended the week at 12.22 after reaching a high of 14 at the beginning of the week. The ADX for the Vix is at 13 while the -di and +di are close to the same levels, both below 20 indicating the trend is weak. While volatility for the Dow edged lower, volatility for the Nasdaq fell sharply. With yields rising, the dollar rose sharply, breaking the 200 sma and is now nearing the 50 sma. The dollar ended the week at $104.94.

Gold dropped sharply on Friday, breaking through the 50 sma ending the week at $2311. Gold has been trading in a tight range, using the 50 sma as support. Copper also fell sharply on Friday, ending the week at $4.447 as there is an oversupply of the metal. Crude spent the early part of the week falling to the support level of $72.55. The support level held, and crude preceded to rise and ended the week at $75.38.

Upcoming Week:

Around the world, China’s Caixin manufacturing PMI came in slightly above the forecasts at 51.7. Input cost inflation rose, as new export orders showed some signs of slowing. Exports over the past year rose past forecasts to 7.6% while imports fell sharply below forecasts of 4.2% and the previous level to 8.4% to 1.8%.  Foreign exchange reserves were in-line with forecasts. The ECB cut rates by twenty-five basis points after telegraphing the cut the last few months.

Future cuts to the rate are uncertain as to when they might occur. HCOB manufacturing PMI were basically in-line with forecasts at 47.3. Production is stabilizing while the other metrics like new orders, purchasing activity, and input costs eased. Sentiment is positive. The services PMI were also in-line with forecasts and virtually unchanged from last month’s levels. PPI fell 1% over the past month and is down 5.7% over the past year.

Energy prices led the decline and excluding energy, the PPI rose 0.2%. Nondurable goods prices edged lower while durable goods rose slightly. Construction PMI edged up while retail sales drifted into negative territory and is flat over the past year. The third estimate for GDP growth was unchanged at 0.3% as was the employment change over the last quarter.

Japan’s capital spending came in far below forecasts and last month’s level. Foreign investments in stocks and bonds rose over the past month. Household spending fell 1.2% over the past month but rose 0.5% over the past year. The preliminary leading economic index fell slightly while the coincident index edged up. Japan’s services PMI remains in expansionary territory and is virtually unchanged from last month’s levels.

Economic Insights

The Manufacturing ISM Report for May 2024 reveals a continued contraction in the manufacturing sector, with a Manufacturing PMI of 48.7%, down from 49.2% in April. Key indices show New Orders at 45.4% and Backlogs at 42.4%, both in contraction territory. Conversely, the Production Index is slightly up at 50.2%, and Employment has improved to 51.1%, indicating growth. Supplier Deliveries remained steady at 48.9%, signaling faster deliveries. Meanwhile, inventories of raw materials contracted to 47.9%, and customers’ inventories are still too low at 48.3%.

Prices continue to rise, although at a slower rate, with the Prices Index at 57%. Both exports and imports show growth, with New Export Orders at 50.6% and Imports at 51.1%. The overall economic outlook remains mixed, with demand being soft and companies cautious about investments due to current monetary policies and economic conditions. Despite the contraction, the sector shows some stability in production and employment, with supplier deliveries and inventories indicating potential for future demand growth.

The May 2024 Services ISM Report indicated significant growth in the services sector, with the Services PMI rising to 53.8%, up from April’s 49.4%. This marks the sector’s expansion for the 46th time in 48 months. Notably, the Business Activity Index surged to 61.2%, a substantial 10.3 percentage point increase from April’s 50.9%, reflecting robust growth.

The New Orders Index also rose to 54.1%, up 1.9 percentage points from April, indicating continued strong demand. However, the Employment Index remained in contraction territory at 47.1%, though it improved slightly from April’s 45.9%, suggesting ongoing challenges in staffing. The Supplier Deliveries Index moved into expansion at 52.7%, indicating slower deliveries, which is typical as the economy improves and customer demand increases.

Price pressures eased slightly with the Prices Index at 58.1%, down from April’s 59.2%, yet still indicating rising costs. Inventories continued to grow for the second consecutive month, with the Inventories Index at 52.1%, although this was a slight decrease from April’s 53.7%. The Backlog of Orders Index registered a minor decline to 50.8%, down from 51.1% in April, reflecting a slower rate of growth.

Overall, the services sector displayed robust growth driven by increased business activity and new orders, despite ongoing employment challenges and inflationary pressures. Respondents noted stability in business conditions, concerns over inflation and interest rates, and challenges in hiring and retaining staff, impacting overall business performance.

Total Construction spending fell 0.1% in April but rose over 10% this past year as builders continued to build amid higher rates. Private construction spending fell 0.1% and public construction spending fell 0.2%. Private construction spending rose for single-family homes but fell for multifamily housing. Spending on the construction of single-family homes is up 20.4% over the past year. Public construction spending on residential housing edged lower.

The MBA weekly report showed that mortgage applications fell 5.2% from the week prior. The refinance index fell 7% and the purchased index fell 4%. The average rate for a thirty-year conforming loan rose two basis points to 7.07%. The average rate for a thirty-year jumbo loan fell one basis point to 7.21%.

Moving to employment, which was the central theme for the week, initial claims rose above forecasts to 229,000. The four-week moving average for initial claims was virtually unchanged at 222,000. Continuing claims for the week ending May 25, were also unchanged at 1.792 million.

The April 2024 JOLT report showed that job openings remained steady at 8.1 million. However, job openings decreased significantly over the year by 1.8 million, particularly in health care and social assistance (-204,000) and state and local government education (-59,000). In contrast, private educational services saw an increase in job openings (+50,000). The number of hires also remained unchanged at 5.6 million, with notable increases in durable goods manufacturing (+52,000) and decreases in arts, entertainment, and recreation (-45,000).

Total separations were stable at 5.4 million, with a separations rate of 3.4%. Quits, a measure of workers’ willingness to leave jobs, remained unchanged at 3.5 million, maintaining a rate of 2.2% for the sixth month in a row. Layoffs and discharges also held steady at 1.5 million, with a rate of 1.0%. Increases in quits were seen in other services (+67,000), durable goods manufacturing (+39,000), and state and local government education (+32,000). Businesses with 1 to 9 employees saw little change in their job openings, hires, and separations rates, while larger businesses with 5,000 or more employees experienced an increase in their hires rate.

The ADP Employment Report for May 2024 reveals a modest increase in private sector employment, with 152,000 new jobs added. This growth was slower compared to previous months, primarily due to a significant decline in manufacturing jobs and weaker hiring in the leisure and hospitality sector. The goods-producing sector saw a minor gain of 3,000 jobs, with construction adding 32,000 jobs but manufacturing losing 20,000 jobs.

The service-providing sector added 149,000 jobs, with notable increases in trade/transportation/utilities (55,000), education/health services (46,000), and financial activities (28,000). Annual pay continued to grow, but at a slower pace. Year-over-year pay for job-changers rose by 7.8%, a decrease for the second consecutive month, while pay for job-stayers held steady at a 5% increase.

In May 2024, total nonfarm payroll employment increased by 272,000, surprising to the upside. The unemployment rate remained relatively stable at 4.0%. Significant job gains were observed in the health care (+68,000), government (+43,000), leisure and hospitality (+42,000), and professional, scientific, and technical services (+32,000) sectors. The household survey indicated that the number of unemployed people remained largely unchanged at 6.6 million, while the labor force participation rate held steady at 62.5%.

Wages also saw growth, with average hourly earnings for all employees   increasing by 14 cents to $34.91, marking a 4.1% increase over the past year. The average workweek for employees remained at 34.3 hours. Despite these gains, some industries like manufacturing and retail trade saw minimal changes in employment levels. Additionally, the number of long-term unemployed remained steady at 1.4 million, accounting for 20.7% of all unemployed individuals.

New orders for manufactured goods rose 0.7% in April, unchanged from the revised March level.  New orders for durable goods fell to 0.6% and mark the third consecutive decline although still in positive territory. New orders for nondurable goods rose by 0.8%. Shipments rose 1%, inventories rose 0.1% and unfilled orders rose 0.2%. The unfilled orders to shipment ratio edged lower to 7.10.

In the first quarter of 2024, nonfarm business sector labor productivity increased by 0.2%, with output rising by 0.9% and hours worked by 0.6%. This sector saw a year-over-year productivity increase of 2.9%, the largest since Q1 2021. Unit labor costs grew by 4.0% due to a 4.2% rise in hourly compensation, while real hourly compensation rose by 0.4% for the quarter and 0.6% over the past year.

The manufacturing sector experienced no change in labor productivity, with both output and hours worked decreasing by 0.2%. Durable manufacturing saw a 1.0% productivity increase, while nondurable manufacturing productivity fell by 1.4%. Unit labor costs in manufacturing increased by 3.1%.

Technical Story:

Cash Flow in Review:

This past week was abysmal in terms of cash flow management. I was unable to rein in my spending and unfortunately it cost me. This upcoming week I plan to only spend on the necessities.

Grade: D+

Reason: Poor Effort

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