Trade The Journey

Trade The Journey

S&P 500 and Nasdaq reach New highs!

Good Afternoon Traders! I hope all is well and everyone enjoyed their fourth of July Holiday. In my neighborhood fireworks are still allowed, and everyone took full advantage of this by continuing to set off fireworks until the wee hours of the night. Holiday shortened trading weeks usually are more volatile than typical weeks due to the volume thinning out. However, this past week a lot of job data was scheduled to be released.

The S&P 500 and Nasdaq made new highs while the Russell and the Dow have trended sideways for the last several weeks. With the recent job data in-line with expectations and the unemployment rate rising, markets took this as an indication that rate cuts will occur at some point this year. The July 31st Fed meeting holds a 92.2% probability of rates remaining unchanged. Current probabilities for the September meeting have held steady at twenty-five basis rates cut.

The probabilities for a rate cut have steadily increased from the June levels. The November meeting shows that probabilities have increased for a fifty-basis point cut while decreasing for a twenty-five-basis point cut. If the first cut occurs at the September meeting would the Fed be likely to cut again at the November meeting?

The economy has remained resilient as rates have remained higher than anyone forecasted, including Fed officials. There’s always a risk that leaving rates high could cause something to break which grows more likely as consumers are paying higher rates on homes, consumer and auto loans. Commercial properties, a particularly troubled sector, has nearly 30% of its outstanding debt expected to mature from 2024 to 2026 according to Trepp estimates. Commercial real estate was valued at $22.5 trillion according to recent numbers gathered from the fourth quarter of 2023.

An excerpt from the St. Louis Fed on Commercial real estate:

Unlike residential real estate, which has longer maturities and payments that amortize over the life of the loan, CRE loans typically have shorter maturities and balloon payments. At maturity, the borrower normally refinances the remaining balance rather than paying off the lump sum. 

Bond yields have responded to the data, falling several basis points across maturities. Although yields have fallen, they remain near the levels reached last month. The two-year yield fell eleven basis points, followed by the ten-year yield and thirty-year yield, falling eight and six basis points, respectively. Bond volatility remains elevated according to the move index. It’s still advantageous to place your money in money market funds.

According to the latest reports, total money market fund assets increased $51.23 billion to $6.15 trillion as of July 2nd.  Commodities ended the week higher as the dollar and yields fell.  Gold broke through its 50 SMA and a short-term resistance level of $2,374. Gold could make its way towards the recent high of $2,454 this upcoming week.

The dollar broke through its 50 SMA to the downside after reaching the $106 level this past week. The 200 SMA is near the dollar’s current level. The 200 SMA is at $104.52 with the dollar currently at $104.875. The dollar has been unable to maintain any action above $106 before heading back towards its moving averages.

Crude has spent the last month rising from its most recent low of $72.59. It broke through its 50 and 200 SMA recently as the moving averages seem to be converging. OPEC+ has maintained its production cuts of 2.2 million barrels per day. Crude is just below the well-tested reference level of $84.35 and is poised to test this level in the upcoming week as it failed to break above this level this past week.

There was a resurgence in copper as there have been supply concerns recently along with the dollar falling. Copper ended the week at $4.668, pulling back slightly after testing the recent pivot high of $4.6895. Copper’s recent high of $5.199 has not been retested.

Around the world….

This past week China released its manufacturing data which wasn’t too encouraging. Its Caixin Manufacturing PMI rose 0.1 to 51.8, its highest level this year. Firms’ Workforce was relatively unchanged as backlogs rose. Delivery times slowed as buying levels noticeably increased. Input prices rose sharply as selling prices also rose. Sentiment is at its lowest level in the last 4.5 years.

Its Services PMI also declined several points to 51.2, coming in below forecast of 53.4. New orders and export growth slowed, as employment was unchanged. Cost increases for inputs due to higher material, labor and transport costs. Business sentiment also weakened. The composite PMI also weakened to 52.8, which was in-line with the previous levels seen throughout the year except for May. Further policy action by China may be needed to help improve sentiment and economic recovery.

In Japan, the second quarter Tankan Large Manufacturing outlook improved while the non-manufacturing index edged lower but were in-line with forecasts. The small manufacturers index was unchanged at -1. The Large All Industry capex improved sharply, rising 11.1%, meaning that firms are increasing their capital investments.

The Jibun Bank PMI highlights the economic health of the manufacturing and service sectors. The Tankan index highlights business sentiment among large, medium and small enterprises across various sectors.

Consumer confidence was relatively unchanged at 36.4. The Jibun Bank Services and Composite PMI both fell into contraction territory. While input costs are rising, selling prices are falling as foreign sales eased. Foreign and stock investment both improved for the week ending June 29th. Household spending declined over the past month and year as it currency continues to weaken. Its leading and coincident index for May both edged up slightly.

In the Euro Area, its manufacturing PMI edged further into contraction territory as input prices rose and output contracted. The Euro Area construction PMI edged lower as did its services and composite PMI. Its CPI was unchanged over the past month and year, 0.2% and 2.5% respectively. The core inflation rate over the past year was unchanged at 2.9%. It PPI over the past month and year edged lower. Retail sales improved over the past month but edged lower for the past year.

Economic Data Insights

The FOMC meeting minutes from June 11-12, 2024, provided several key insights. Economic activity has been expanding at a solid pace, with the labor market remaining strong despite a slight increase in the unemployment rate to 4.0%. Inflation has eased but remains above the 2% target, with total PCE inflation at 2.7% and core PCE inflation at 2.8%. Recent data showed lower month-over-month inflation readings, suggesting slower progress toward the inflation goal.

Financial conditions eased modestly due to higher equity prices and a reduction in perceived recession risks. The consensus is that the federal funds rate has peaked, contributing to lower nominal Treasury yields. The market expects one and a half rate cuts of 25 basis points each by year-end, though this reflects changes in perceived risks rather than base-case expectations.

Internationally, the ECB and BOC have started rate-cutting cycles amid easing inflation. The U.S. economic outlook remains uncertain, with downside risks including a sharper-than-expected slowdown in demand and financial strains on lower- and moderate-income households. The Committee emphasized that future policy decisions would be data-dependent and that the current policy stance is restrictive, aimed at moderating economic activity and inflation pressures.

 There is uncertainty about the degree of restrictiveness and how long it will be necessary. Some participants noted that inflation could persist above target due to various risks, including geopolitical developments and fiscal policy changes.

Overall, the FOMC remains cautious, emphasizing the need for additional favorable data before considering rate cuts.

The latest Manufacturing ISM for June showed that economic activity in the manufacturing sector contracted in June for the third consecutive month and the 19th time in the last 20 months. The Manufacturing PMI registered 48.5 percent, down 0.2 percentage points from May’s 48.7 percent. New orders and backlogs are contracting, with the New Orders Index at 49.3 percent, up from 45.4 percent in May, and the Backlog of Orders Index at 41.7 percent, down from 42.4 percent.

 Production and employment are also contracting, with the Production Index at 48.5 percent, down from 50.2 percent, and the Employment Index at 49.3 percent, down from 51.1 percent. Supplier deliveries are faster, as indicated by the Supplier Deliveries Index at 49.8 percent, up from 48.9 percent. Both raw materials inventories and customers’ inventories are too low, with the Inventories Index at 45.4 percent, down from 47.9 percent, and the Customers’ Inventories Index at 47.4 percent, down from 48.3 percent.

Prices are increasing, with the Prices Index at 52.1 percent, down from 57 percent. Exports and imports are contracting, with the New Export Orders Index at 48.8 percent, down from 50.6 percent, and the Imports Index at 48.5 percent, down from 51.1 percent.

According to the chair, companies reduced production levels, and inputs continued to accommodate future demand growth. Current monetary policy and economic conditions are causing companies to demonstrate an unwillingness to invest in capital and inventory, leading to revenue declines and profitability pressures. The report also noted that while suppliers continue to have capacity, the share of manufacturing GDP contracting increased to 62 percent in June, up from 55 percent in May.

The ISM Services PMI for June registered 48.8 percent, indicating contraction for the third time in 49 months. The Business Activity Index was at 49.6 percent, showing a decline for the first time since May 2020. The New Orders Index fell to 47.3 percent, marking its first contraction since December 2022. The Employment Index also contracted at 46.1 percent, continuing its downward trend for the sixth time in seven months.

The Supplier Deliveries Index remained in expansion territory at 52.2 percent, indicating slower delivery performance, while the Prices Index decreased to 56.3 percent. Inventories contracted with a reading of 42.9 percent, and the Backlog of Orders Index fell to 44 percent. Despite these contractions, eight industries reported growth, including Management of Companies & Support Services and Health Care & Social Assistance, reflecting some areas of resilience amidst broader sector challenges.

The Factory Orders report for May showed that new orders for manufactured goods saw a decrease of 0.5%, breaking a three-month streak of increases. Shipments also fell by 0.7% following a prior increase of 0.8% in April. Unfilled orders rose for the forty-sixth consecutive month by 0.2%, with the unfilled orders-to-shipments ratio climbing to 7.18 from 7.11 in April. Inventories saw an uptick, rising by 0.2%, marking increases in five of the last six months. The inventories-to-shipments ratio edged up to 1.47 from 1.46 in April.

Overall, while there were declines in new orders and shipments, unfilled orders and inventories continued to rise, indicating ongoing demand and production adjustments within the manufacturing sector.

Moving to housing and construction, mortgage applications fell 2.6% from the prior week. The refinance index declined by 2% and the purchase index fell 2% as mortgage rates moved higher. The average rate for a fixed 30-year conforming loan is back above 7%, rising ten basis points to 7.03%. The average rate for a fixed 30-year jumbo loan rose seven basis points to 7.11%.

Total Construction spending fell 0.1% in May. However, construction spending is 6.4% higher over the past year.  Total residential spending on residential fell 0.2%. Total private construction fell 0.3%, with new single-family construction falling 0.7% and new multifamily construction unchanged. Nonresidential spending fell 0.3%, falling sharply for religious and amusement & recreation. Spending rose noticeably on transportation and manufacturing.

Total public construction rose 0.5% with residential construction rising 2.6%. Nonresidential construction spending rose 0.4%. Spending fell for conservation & development, power and highway & street.

Jobs Data…

The JOLTS report for May the number of job openings remained steady at 8.1 million, down by 1.2 million over the year. Hires also held constant at 5.8 million, with a hires rate of 3.6 percent. Separations, including quits, layoffs, and discharges, were little changed at 5.4 million. Quits, which can indicate workers’ willingness to leave jobs, were unchanged at 3.5 million. Layoffs and discharges stayed at 1.7 million, with no significant change in the rate at 1.0 percent. Notably, job openings increased in state and local government (excluding education), durable goods manufacturing, and federal government, while decreasing in accommodation and food services and private educational services.

Regarding establishment size, small establishments (1-9 employees) saw little change in job openings, hires, and separations rates. In larger establishments (5,000+ employees), layoffs and discharges rates increased, but other metrics remained stable. Revisions for April 2024 show job openings were adjusted down to 7.9 million, hires to 5.6 million, and separations to 5.3 million.

The ADP employment report showed that private sector employment increased by 150,000 jobs in June, with annual pay rising by 4.9 percent year-over-year. Job creation slowed for the third straight month. The goods-producing sector added 14,000 jobs, with gains in construction but losses in natural resources/mining and manufacturing. The service-providing sector added 136,000 jobs, led by leisure and hospitality with 63,000 new positions. Job gains were also seen in trade/transportation/utilities, financial activities, and professional/business services.

Small establishments saw minimal growth with 5,000 jobs added, medium establishments added 88,000 jobs, and large establishments added 58,000 jobs. Pay gains for job-stayers slowed to 4.9 percent, the slowest pace since August 2021, while job-changers saw pay increases slow to 7.7 percent. The May total was revised up from 152,000 to 157,000 jobs added.

The Jobs report for June showed Total nonfarm payroll employment rose by 206,000 in June, with the unemployment rate holding steady at 4.1 percent. Job gains were notable in government, health care, social assistance, and construction. Government employment increased by 70,000, driven by local and state government hires. Health care added 49,000 jobs, primarily in ambulatory services and hospitals. Social assistance saw an increase of 34,000 jobs, mainly in individual and family services. Construction employment rose by 27,000, surpassing the average monthly gain over the past year.

The household survey data showed little change in the unemployment rate, which remained at 4.1 percent, with 6.8 million unemployed individuals.. The labor force participation rate remained at 62.6 percent, and the employment-population ratio held at 60.1 percent. Average hourly earnings for all private nonfarm payroll employees increased by 10 cents to $35.00, reflecting a 3.9 percent increase over the past year. The average workweek for all employees was stable at 34.3 hours. Revisions for April and May brought total nonfarm payroll employment down by 111,000 compared to previous reports.

Technical Story

This past week’s cash flow review:

This past week went well, although I did splurge on fish to BBQ for the Fourth of July holiday. As my spending remains in line with my budget, I’ve been able to save more and pay down my credit card balances. My score continues to hover around 720, which I am extremely proud of. Not too long ago, I had a credit score of 520, as I mostly relied on payday loan offices.

By the end of the year, my plan is to pay off my car and personal credit card balances. By saving and working overtime when available, I am optimistic that this goal will be accomplished. My ultimate goal is to spend only on necessities, splurging only on designated days, but I still have a ways to go before reaching this mindset.

Grade: C+

Reason: Some improvement

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