Trade The Journey

Trade The Journey

Insight post from last week!

Top of the Morning

Has the economic growth slowed enough for the Fed to reconsider the size of its rate hikes moving forward? We’ll find out next week. The only reliable evidence we have so far is the economic data that’s been released. The main focus so for the market so far has been on the inflation data which will be covered later in the post.

However, we can surmise from other reports the effects of the rate hikes and where the economy is headed from the other reports released. One story I found interesting this week is of China’s president Xi visiting Saudi Arabia. Earlier this year, Biden visited the Saudis hoping to convince them to cut their production to bring down soaring gas prices. The Saudis denied his request and instead increased production which assisted Russia in a way.

This didn’t go over well in the White House and kept a lid on Biden’s hope to ease the price pressures and improve his low approval rating. President Xi visiting the Saudis sends another message to the World besides strengthening relations between the countries. It signals the possibility that China may be making a move to usurp the dollar’s dominance by having crude oil priced in another currency besides the dollar.

The dollar’s dominance is central to the United States’ stance in the world as the top global power and a weakening in the currency could spell major problems moving forward. Right now it’s only a meeting but it’s worth keeping an eye on the developments between the two countries as China aims to digitalize its currency.

With the exception of the Dow and Nasdaq, which never broke their 200-day moving average, the Russell 2000 and the S&P both broke through their 200-day moving average to the downside. Volatility edged up on each of the indices. The VIX briefed dipped below twenty but edged back up above twenty at the end of the week.

Treasury yields have dipped from their previous highs, as the ten-year treasury yield is below 4%, pushing down mortgage rates in the process. Just one month ago, the ten-year yield was above 4% as were five-year and thirty-year yields. The most accurate yield curve indicator has been said to be the 3-month treasury and the ten-year bond which is still inverted.

The commitment of Traders report is a new tool that I am adding to my trading analysis, as it reports the amount of open interest in the asset, currency, or commodity by dealers on the sell side and traders, asset managers & leveraged funds on the buy side. The report comes out once a week and although it’s lagging, it gives you a sense of where the market might be headed.

For the last several weeks, asset managers have been net long 10-year treasuries, and short the 30-day fed funds. By subtracting 100 from the 30-day fed-funds rate, you can get the rate the market anticipates. The heaviest volume and open interest in the March 2023 contracts for the 10-year treasuries. They also net long in the indices contract except for the Russell 2000 where they are net short.

The factory report showed that new Orders for manufactured goods rose by 1% for October after two months of some growth. Shipments increased by 0.7% and unfilled orders rose by 0.6%. Inventories rose by 0.5%. The inventories-to-shipments ratio was unchanged at 1.45.

New orders for manufactured durable and nondurable goods rose by 1.1% and 1% respectively. New Orders were notably strong in construction machinery, power transmission equipment, and transportation equipment. Shipments of durable goods rose by 0.4% led by machinery, and shipments of nondurable goods rose by 1% led by petroleum and coal products. Shipments of farm machinery have been noticeably weak for the last few months. Computer shipments have also been on the decline.

Unfilled orders increase was led by transportation equipment but was also a bit higher in household appliances.

Inventories increase was led by machinery in the durable goods sector and petroleum & coal products in the nondurable goods sector. Inventory fell noticeably in light trucks and utility vehicles but increased sharply in automobiles. Shipments of capital goods recovered from the previous month and remains strong for new orders.

The trade balance tilted in favor of imports, as exports fell. The deficit increased by 5.4% but is up nearly 20% from a year ago. Exports fell in industrial supplies, and consumer goods but rose for foods, feeds & beverages, led by an increase in exports of soybeans and crude oil. Exports fell noticeably in Natural Gas, other petroleum products, and in fertilizer.

Exports of services rose led by travel. Imports rose in industrial supplies and materials, other goods, and automotive vehicles, parts & engines but fell in consumer goods. Imports of services fell across the board led by transport.

Goods and services quarterly surpluses were led by South and Central America, the Netherlands, Singapore, Brazil, and Australia. Deficits decreased with the European Union, Canada, and Mexico.

The PPI for final demand rose 0.3% in November and increased by the same amount for prices. Most of the increase is attributed to services as the final demand for goods inched up by 0.1%. Excluding foods, energy, and trade services, the PPI for final demand rose by 0.3%. For the past twelve months, the total PPI rose by 7.4%, and excluding foods and energy, it rose by 4.9%.

Final demand for services edged up by 0.4% led by a noticeable increase in securities brokerage, dealing, investment advice, and related services. The final demand for goods was led by fresh and dry vegetables. Gasoline fell by 6% and diesel fuel, residential natural gas, and primary basic organic chemicals declined. Prices for intermediate demand fell by 0.9% for processed goods and declined by 3.2% for unprocessed goods.  Leading the decline for processed goods was energy goods and leading the decline for unprocessed goods was energy materials.

Services for intermediate demand rose by 0.6% led by securities brokerage, dealing, and investment advice.

Labor productivity increased by 0.8% in the third quarter led by an increase in output and hours worked. As a reminder, labor productivity is calculated by dividing an index of real output by hours worked. Labor costs increased by 2.4%, led by an increase in hourly compensation and productivity. Unit labor costs increased by 5.3% in the last year. An interesting note found in the report said that hourly compensation tend to increase unit labor cost and increases in productivity reduces them.

Manufacturing labor productivity decreased by 2.9%. Durable manufacturing productivity fell by 5% and nondurable manufacturing productivity rose by 1.3%. Unit labor costs in total manufacturing increased by 5.8% in the third quarter.

Initial claims increased slightly and came in within expectations while continuing claims increased for the past week. The labor market remains strong. Consumer credit demands remain strong as well even though credit card rates continue to rise.

Mortgage applications fell 1.9% from a week earlier as loan applications declined. The refinance index rose 5% from a week earlier while purchasing applications declined. The thirty-year fixed rate declined for both conforming and jumbo loans, falling to 6.41 and 6.08 for rates.

This past week’s cash flow in review:

I am really disappointed in myself for the way in which I managed my cash flow. I made some ill-advised discretionary purchases which will haunt me for weeks to come. My credit took a hit and so did my savings accounts. I’ll have to give myself the lowest grade since this site has been in existence.

Grade: F

Reason: Terrible purchasing decisions.

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