Trade The Journey

Trade The Journey

Good Morning! I hope you’re all enjoying your weekend and gearing up for the upcoming shortened week. The recent inflation data caught the market off guard, rising unexpectedly and causing a reassessment of potential rate cuts. Amidst this, the Federal Reserve has been actively emphasizing the unpredictability of the inflation trajectory to temper market enthusiasm.

The job market continues to show resilience, with stable unemployment claims suggesting that consumers are maintaining their jobs. Employers are cautious about layoffs, given the difficulty in finding skilled replacements. Despite this, some sectors, particularly technology and finance, are downsizing to cut costs. A LinkedIn survey indicates a significant concern among workers, with 85% fearing job loss in 2024.

Initial unemployment claims have been consistent at approximately 200,000, not reaching levels typically indicative of an impending recession. This suggests the possibility of a ‘soft landing,’ though this is threatened by potential government shutdowns, rising costs for consumers and businesses, and global geopolitical tensions. Interest rates are expected to stay in the 3-4% range, moving away from the near-zero rates previously seen.

A government shutdown looms as a possibility due to divisions within the Republican party. Key issues include disagreements over spending cuts, the spending cap, border security, immigration policy, and financial support for Ukraine. Internationally, ongoing conflicts in two regions are expected to continue, with the risk of the Israel-Palestine conflict escalating into a regional war.

In the Middle East, the situation is escalating with the Houthis from Yemen attacking ships in the Red Sea linked to Israel, disrupting supply chains. There are allegations of Iran’s involvement in supporting Hamas’s attacks on Israel. In response, the U.S. and Britain have conducted airstrikes on Houthi targets. Companies are beginning to feel the impact, with shipping rates increasing due to the need to bypass the Suez Canal.

The journey through the Suez Canal, previously about 26 days, now extends to 36 days, influencing crude oil demand. Major companies like Tesla and Volvo have suspended production in Europe, and others are warning of delays. Increasing tensions between the United States and China, especially after Taiwan’s election of a U.S.-leaning President, could further strain relations as a cold war between these global powers intensifies.

In the commodities market, crude oil has been trading within a narrow range since last January. The volatility in crude oil prices has increased, suggesting continued instability due to the Middle East conflict and potential supply disruptions. Copper remains in a sideways trend, reflecting the sluggish recovery in China.

In financial markets, gold and the dollar closed the week unchanged. Treasury yields, particularly at the shorter end of the curve, ended the week lower. The flattening yield curve signals market uncertainty. The corporate/treasury spread narrowed, while short-term commercial paper rates increased.

The SEC’s approval of Bitcoin ETFs marks a significant development in the cryptocurrency space.

Upcoming Week:

  • Tuesday: New York Manufacturing Index
  • Wednesday: Retail Sales, Import/Export Prices, Industrial Production/Capacity Utilization, Business Inventories, Fed Beige Book, Business Inventories, NAHB Housing Market Index
  • Thursday: Initial Claims, Housing Starts/Building Permits, Philly Manufacturing Index
  • Friday: Existing Homes Sales, and University of Michigan Consumer Sentiment – Preliminary

Earnings

The earnings season kicked off with major banks in the spotlight, but not all news was rosy. JP Morgan fell short of earnings and revenue expectations, missing its earnings target by just over fifteen percent. However, it wasn’t all gloom for them, as they saw gains from their acquisition of First Republic, along with unexpected revenue boosts from net interest income and credit quality. CEO Jamie Dimon advised caution, pointing to persistent inflation and potentially higher interest rates for an extended period.

Wells Fargo, on the other hand, surpassed both earnings and revenue forecasts. Their effective cost-cutting strategies improved profit margins, benefitting from the higher interest rates and a sturdy economy. However, a decrease in deposit and loan balances suggests a potential reduction in net interest income. The bank also faced a significant increase in provisions for credit losses, and concerns linger over commercial real estate loans and consumer credit card debt.

Citigroup had a mixed performance, beating earnings predictions but falling short on revenue. The bank announced workforce reductions in the wake of $1.8 billion in fourth-quarter charges. Despite improvements in personal and investment banking revenues, the CEO expressed dissatisfaction with their overall performance. Bank of America experienced a notable shortfall in earnings, partly due to a $1.6 billion charge related to moving away from Libor. A $2.1 billion FDIC fee for Silicon Valley Bank and Signature Bank added to their challenges, alongside increased provisions for credit losses. The bank also reported lower customer deposits and a dip in net interest income, although its sales and trading revenue saw a rise.

Blackrock managed to exceed earnings expectations and just edged past its revenue forecast, rounding off a mixed bag of results for these financial giants.

Economic Overview

Inflation Trends Consumer Price Index (CPI) – December

In December, the CPI saw a 0.3% increase and a 3.4% rise year-over-year, marking a 0.3% higher rate than November’s year-over-year figures. The core CPI remained steady, with a 3.9% annual increase. In terms of housing, the ‘shelter’ category contributed to the CPI’s rise, from 0.1% to 0.5%, and saw a 6.2% year-over-year increase. Owners’ equivalent rent increased by 0.5%, while the rent index and lodging away from home both saw a 0.4% rise.

Food prices remained relatively stable, with a marginal 0.1% rise for food at home and 0.3% for food away from home. Year-over-year, food at home and food away from home rose by 1.35% and 5.2%, respectively. The energy index saw a 0.4% increase, with rises in electricity and gasoline, although the natural gas index decreased. Fuel oil prices continued their downward trend. New vehicle prices increased by 0.3% following two months of decline. Used cars and trucks saw their second consecutive month of growth, albeit at a slower pace than before, increasing by 0.5%. Services, excluding energy services, experienced a modest decline from 0.1% to 0.4%.

Producer Price Index (PPI) – December

December’s PPI for final demand dipped slightly by 0.1%, but the year-over-year final demand increased by 1%. The core PPI went up by 0.2%, with an annual increase of 4.7%. The final demand for goods fell by 0.4%, primarily due to a 1.2% decrease in energy demand prices. The final demand for services rose by 0.4%, largely attributed to a 3.3% increase in securities brokerage, dealing, and investment advice.

Intermediate processed goods demand dropped by 0.6%. Prices for energy goods and processed foods and feeds both fell by 3.8%. Diesel fuel prices saw a significant 12.4% decrease. The demand for unprocessed goods fell by 4.4%, with energy materials and foodstuffs & feedstuffs declining by 9.1% and 2.5%, respectively. Crude petroleum prices decreased by 13.2%.

The demand for intermediate services rose by 0.4%, mainly due to a 0.5% increase in securities brokerage and investment advice services. Construction demand edged up by 0.1%, following two months of decline, with private capital investment construction rising by 0.1% and government construction remaining steady.

Stage 4 intermediate demand increased by 0.2%, following a rise in November. Total service inputs rose by 0.4%, while total goods inputs remained unchanged. Stage 3 demand saw a 0.4% decline, with goods inputs decreasing by the same margin and services inputs falling by 1.4%. Stage 2 demand decreased by 1.6%, with goods inputs dropping by 4.1% and services inputs increasing slightly by 0.2%. Stage 1 demand fell by 0.2%, with goods inputs declining by 0.9% and services inputs rising by 0.4%.

Consumer Financial Health Consumer Credit – November

In November, the annual rate of change in consumer credit escalated from 4.3% to 5.7%. There was a sharp increase in revolving credit, while nonrevolving credit saw a slight rise. The overall flow of credit surged, particularly in revolving credit. Total outstanding credit experienced a marginal increase. Interest rates for new car loans rose by twenty-seven basis points for a 60-month loan and fifty-five basis points for a 72-month loan. Credit card rates increased by twenty-eight basis points, and personal loan rates climbed eighteen basis points to 12.35%.

Initial Claims

Initial unemployment claims remained low, with a slight increase of 1,000 claims, reaching 202,000. The anticipated number of claims was 209,000. Continuing claims dropped by 34,000 to 1.8434 million. This metric serves as an indicator of the job market’s health, reflecting the speed at which people are finding or retaining jobs. The four-week average for initial claims remained stable at 208,000.

Mortgage Application Trends – The Mortgage Bankers Association

(MBA) reported a 9.9% increase in mortgage application volume from the previous week. The refinance index rose by 19%, and the purchase index went up by 6%. The refinance application share increased by 2% to 38.3%. The average interest rate for a thirty-year fixed-rate conforming loan ascended by five basis points to 6.81%, while the rate for a thirty-year jumbo loan increased by twelve basis points to 6.98%.

Small Business Outlook The NFIB’s

Small Business Optimism Index climbed 1.3 points to 91.9, still below the fifty-year average of 98. Inflation remains the primary concern, followed by the quality of labor. Inflation concerns rose by one point from the previous month, now at 23%. Price increases were noted across finance, retail, construction, services, and professional services sectors.

Small business owners are generally pessimistic about the current year’s outlook. 40% reported having unfilled job openings, highlighting the ongoing challenge in finding skilled labor, particularly in construction and transportation. Capital outlays decreased slightly, while plans for near-term capital investments edged up marginally. Inventory levels saw a slight improvement. Average selling prices for small businesses remained unchanged, with 32% planning to increase prices soon.

The proportion of owners planning to increase compensation remained unchanged, emphasizing ongoing concerns about labor costs. Profitability showed a slight improvement. Among those reporting lower profits, 31% attributed this to weaker sales, 17% to material costs, 16% to lower prices, and 9% to higher labor costs. Those reporting higher profits credited 48% to increased sales volumes, 19% to seasonal changes, and 14% to higher profit margins.

Regarding borrowing needs, only 25% of owners reported their needs were met, while 61% expressed no interest in loans. This is an excerpt from the index commentary:

2023 is in the rear-view mirror now, but it will weigh heavily on the 2024 economy. Government spending will continue to grow faster than the overall economy. New business construction in favored segments of the economy will continue to surge, buoyed by generous subsidies and tax breaks. President Biden will continue to promise student loan forgiveness that is unlikely to be delivered, all while the budget deficit grows.

 The need to refinance trillions of our $34 trillion in debt will keep interest rates high. Consumer spending will be slowed due to excess debt and a slowing job market. And prices will remain elevated, the Consumer Price Index is 20% higher than it was in 2020. Incomes did not rise as much, so real incomes fell. Used car prices are 30% higher, new cars up 20%, etc. The Fed will start cutting its policy rate, a stimulus for financial markets and mortgage rates but not much help for most consumers. Overall, the growth rate will most likely be lower than last year, the economy will slow down, possibly delivering that long predicted recession by year end.

Reflection

So, we’re seeing inflation still making waves, with the Consumer Price Index (CPI) ticking up. This usually gets the Fed’s attention, and as they might keep rates higher for longer to keep things in check. It’s a tricky balance, though, because higher rates can tighten everyone’s belts – from how much we borrow to what businesses can invest. Meanwhile, job markets are doing well with low unemployment claims, but there’s a twist. People are leaning more on credit cards, maybe because everything’s getting pricier. This could mean we’ll all be a bit more cautious with our spending, which makes sense, right?

Now, about the housing market – it’s still buzzing with activity, even with the interest rates climbing up. This is super important because a lot of our economy’s health is tied to how the housing sector performs. On another front, small businesses are feeling the pinch too. They’re worried about rising costs and finding good help. This cautious vibe from them could slow down their growth plans, which affects jobs and the broader economy.

Technical Story

This past week Cash flow in Review:

Last week, I realized I had strayed a bit from my financial plan. I found myself making several small purchases, thinking they were manageable, but they accumulated more than I anticipated. Thankfully, I didn’t need to tap into my savings, but it was a wake-up call to be more mindful of my spending habits. On a positive note, I successfully reduced my credit card balance during this pay period, and I’m aiming to continue this trend with my next paycheck.

My primary financial objective for the year is to completely pay off my personal credit card debt. By the end of 2024, I’m setting my sights on tackling my student loan. Staying committed to these goals will put me on a solid path towards greater financial stability and peace of mind.

Grade: C-

Reason: Some improvement

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