Trade The Journey

Trade The Journey

Markets Stall!

Good afternoon, Traders. I hope everyone is enjoying their weekend and preparing for the week ahead. This upcoming week will be a short trading week due to the July 4th holiday. However, a lot of job data will be released this week in addition to the weekly initial claims. The table below highlights the data and Fed speakers scheduled for this week.

Trading during holiday-shortened weeks can be tricky as most participants are on vacation, which can make the market a little more volatile than usual. Although the GDP and PCE data were in line with expectations, the presidential debate proved to be more of a market mover than the actual data. Regardless of your political affiliation, the two candidates proposed by both parties for election didn’t inspire much confidence.

Like most, I tuned into the presidential debate expecting a repeat of the debate held four years ago. A presidential debate shouldn’t be entertaining as much as informative, but one candidate has made it entirely so. Watching two candidates, both practically in their eighties, left me wondering about the future of this country. It also left me wondering why the candidates don’t represent the changing demographics of this country.

There was really no clarification on future policies, and I, like most, wonder how each candidate is prepared to manage a U.S. economy with a high level of debt, rising geopolitical tensions, and an inflation level that seems unlikely to return to 2% in the near future. Unfortunately, I didn’t anticipate the market’s reaction to the presidential debate, and the economic data did little to change the fate of my options position.

Volatility Picture

Volatility increased at the start of the week due to the final GDP estimate, PCE data, and the Presidential debate but returned to its range by week’s end. The VIX began the week at 13, gradually declined to 12, and rose to 12.44 on Friday. Bond market volatility has been elevated, peaking near 200 in March 2023. The Move index hit a low of 83.23 in June but climbed to 98.59 by the end of last week.

Examining the VXX, iPath Series B S&P 500 VIX Short-Term Futures ETN, call volume rose with most positions opened on the buy side out-of-the-money (OTM). Puts were both bought and sold, mostly in-the-money (ITM). Volatility is expected to increase with the upcoming week of job data.

Gold remains near its recent high of $2,454 but is trending sideways, just below its 50 SMA, which acts as resistance, with support at $2,306. The dollar is in a solid uptrend after breaking through the 200 SMA in late May. Initially, the 50 SMA was resistance, but the dollar broke through in early June, surpassing $106. The dollar is at $105.85, facing resistance at $106.49.

Crude has been trending sideways after rising above its 50 and 200 SMA, currently at $81.46. It reached a high of $82.84 on Friday but closed lower. Crude faces resistance at $84.35. Bond yields edged higher towards the week’s end, with the two-year yield up one basis point to 4.71%, the ten-year yield up seven basis points to 4.36%, and the thirty-year yield rising eight basis points to 4.51%.

Bank Stress Test

Large banks in the US have maintained sufficient capital levels to withstand severe economic downturns and to absorb nearly $685 billion in losses while continuing to loan to households and businesses. The stress test involved 31 banks. the common equity tier 1 (CET1) capital ratio compared to last year, dropping from 12.7% to a minimum of 9.9% before rebounding to 10.4% by the end of the projection horizon.

 The increase in projected losses is largely attributed to higher credit card balances and delinquencies, riskier corporate credit portfolios, and lower noninterest income coupled with higher noninterest expenses.

The stress test also highlighted the ongoing resilience of the banking sector, despite a challenging economic environment characterized by a severe global recession scenario, heightened stress in real estate and corporate debt markets, and increased credit card and corporate loan losses.

Banks’ aggregate capital ratios remained above regulatory minimum levels throughout the stress test period, showcasing the robustness of their financial positions. Additionally, the test results underscored the impact of recent economic trends, such as the depletion of pandemic-era savings and rising credit card delinquencies, on banks’ financial stability and stress resilience

Around the world….

In Japan, the coincident index rose in April while the leading economic index fell. Retail sales rose from 2% to 3% over the past year. Retail sales rose from a low of 1.1% in March. Retail sales rose for most industries but declined for automobiles and textile, clothing & personal goods. Both bond and stock investment rose in June.  The unemployment rate was unchanged at 2.6%.

CPI rose over the past year from 2.2% to 2.3% and core CPI rose from 1.2% to 1.4% over the past year. Currently, there are talks among officials on normalizing monetary policy and possible raising rates at the next JGB meeting.  Industrial production rose from contractionary territory of 0.9% to 2.8% over the past month. Housing starts fell from 13.9% this past month to contractionary territory. Construction orders over the past year fell from 26.4% to 2.1%.

In China, industrial profits fell from 4.3% to 3.4% over the past year. Profits fell for non-metallic minerals, coal mining, special equipment manufacturing and machinery & equipment. The latest manufacturing from NBS fell for both nonmanufacturing and general PMI. Manufacturing PMI was unchanged from the previous level.

In the Euro Area, loans to companies were unchanged while loans to households rose from 0.2% to 0.3%. Economic Sentiment edged lower, as consumer confidence improved slightly. Industrial sentiment weakened.  Services sentiment also edged lower. Consumer inflation expectations edged higher but remained close to previous levels. While there have been talks of another rate cut but nothing has been set in stone as the ECB remains data dependent.

Economic Data Insights

The Conference Board Consumer confidence index weaked in June. The present situation index edged higher, while the expectations index edged lower. The index remained below 80, which usually signals a recession. Consumers felt mixed; they viewed the current labor market positively, but their outlook on future income and business conditions weakened. Notably, confidence declined primarily among those aged 35-54, while younger and older consumers showed improved confidence.

Consumers’ worries about recession edged lower and they were more optimistic about their financial situation. Inflation expectations edged lower from 5.4% to 5.3%. Plans to make vacations improved but plans to purchase homes remain near historic lows. Big ticket items edged lower but plans to purchase a laptop or a PC improved. Consumers remained concerned about the future, but overall confidence improved slightly.

The University of Michigan Consumer Sentiment final reading showed that consumer sentiment actually rose from 65.6 to 68.2 The current economic conditions index rose from a reading of 62.5 to 65.9. The consumer expectations index also rose from 67.6 to 69.6.  Year-ahead inflation expectations fell from 3.3% to 3% in the final reading. Long-run inflation expectation also edged lower from 3.1% to 3%.

Real gross domestic product (GDP) in the first quarter of 2024 increased at an annual rate of 1.4%, revised from the previous 1.3% estimate. This growth was driven by upward revisions in nonresidential fixed investment and government spending, despite a downward revision in consumer spending. Compared to the fourth quarter of 2023, where GDP increased by 3.4%, the deceleration was due to slower consumer spending, exports, and state and local government spending, offset by an acceleration in residential fixed investment. The price index for gross domestic purchases increased by 3.1%, while personal consumption expenditures (PCE) price index rose by 3.4%.

Current-dollar GDP rose by 4.5% in the first quarter, with disposable personal income increasing by $240.2 billion, though this was a downward revision from previous estimates. Real disposable personal income grew by 1.3%. The personal saving rate stood at 3.8%. Corporate profits saw a significant decrease, particularly among domestic nonfinancial corporations, which fell by $114.5 billion. The report also highlighted contributions from various industry sectors, noting a decrease in private goods-producing industries and an increase in private services-producing industries and government activities.

The May PCE report showed that personal income in the U.S. increased by a 0.5% rise, while disposable personal income (DPI) grew by $94.0 billion. Personal consumption expenditures (PCE) also saw a moderate increase of 0.2%. The PCE price index saw a negligible decrease of less than 0.1%, with the core PCE price index, excluding food and energy, increasing by 0.1%. Real DPI and real PCE rose by 0.5% and 0.3%, respectively, indicating modest growth in spending, particularly in goods and services sectors such as health care, housing, and transportation. The personal saving rate remained stable at 3.9%.

Over the past year, the PCE price index rose by 2.6%, reflecting higher costs for services and modest changes in food and energy prices. The increase in current-dollar PCE was driven by significant spending on services and nondurable goods, particularly in health care and prescription drugs. Personal outlays, including PCE, interest payments, and transfer payments, increased by $56.4 billion. The report also highlighted revisions to previous estimates, showing slight adjustments in personal income and expenditure figures for prior months.

Retail Inventories rose 0.1% in May. Inventories were flat excluding motor vehicles & parts but rose for motor vehicles & parts dealers by 2%. Merchant wholesale inventories rose 0.6%, rising for durable goods by 0.5% and nondurable goods by 0.6%. International trade in goods fell for exports by 2.7% and imports by 0.7%. Exports only rose for other goods. Imports rose for industrials supplies, capital goods and other goods.

In May 2024, new orders for durable goods increased slightly by 0.1%, driven by growth in the transportation equipment sector, which saw a 0.6% rise. However, shipments of durable goods decreased by 0.3% to $284.7 billion. Total inventories for durable goods rose by 0.3% to $530.1 billion, with significant increases observed in the transportation equipment and electrical equipment sectors. Unfilled orders for durable goods increased by 0.2%.

 Excluding transportation, new orders and shipments remained relatively flat, indicating a mixed performance across different manufacturing sectors.

Moving to housing, New homes sales fell 11.3% from April levels. The median sales price of new homes was $417,400 and the average sales price was $520,000. At the current sales rate, the supply is 9.3 months. New homes sales varied across price ranges, rising for new homes under $300,000. New home sales sold during the period fell this past month but rose for new homes sale at the end of the period.

The weekly MBA application index rose 0.8% from the week prior. The refinance index rose 26% and the purchase index rose 1%. The average rate for a 30-year conforming loan is below 7% and fell one basis point to 6.93%. The average rate for a 30-year jumbo loan fell eight basis points to 7.04%. Mortgage median payment fell from $2,256 to $2,219 in April as rates fell.

Initial claims came in close to expectations at 233,000. The four-week moving average rose slightly to 236,000. Continuing claims from the week ending June 15 rose to the highest level from a few years ago to 1.831 million.

Technical Picture

Past Week Cash Flow in Review:

This past week went well as I was able to rein in my reckless spending. By purchasing a vape pack instead of the more expensive ones sold at 7-Eleven, I saved a lot of money. I also cut back on some discretionary spending, which helped further. This coming week, I hope to continue maintaining my spending plan.

Grade: B

Reason: Improved effort in reining in spending.




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