Trade The Journey

Trade The Journey

A light week of Economic Data…

Top of the Morning! Not much in terms of economic data releases occurred this past week. Chairman Powell took the stand answering questions regarding monetary policy from both congress and the senate. Fortunately, I was able to listen to some of the questioning when Powell sat before congress and most of the questioning centered around rates and their effect on the American citizens.

Some of the questions regarding equality and climate change were outside of the Fed’s ability to directly address but the recent challenges to community banking and the tighter credit conditions beginning to take affect could be answered by Powell. He answered the questions mostly restating what he did during the press conference, giving neither an affirmation nor an inclination of when they might cease to hike rates and what the terminal rate might land.

The economy remains resilient and there are still more workers needed to fulfill positions. Most likely the Fed will probably continue to raise rates until something breaks, which is what the markets are indicating. The US is the only country hiking rates to combat stubborn inflation, the Bank of England raised rates fifty basis points surprising market partipants that orignally forecasted a twenty-five basis point hike. Most central banks have policy rates still below the inflation rate and likely will have to keep raising rates to quell inflation. This leaves Japan as the lone dove.

Below is a graph from Reuters of the US & its policy rate and the central banks rates for several countries:

As most countries proceed to raise rates further, China is cutting rates to help spur its economy. Their youth unemployment rate ticked to a new high of 20.8% as college students are preparing to leave college and enter the workforce. Its retail sales and industrial production also weakened. To combat the slowing growth, China cut rates for its one-year loan prime rate and five year rate by ten basis points. The one-year rate dictates the cost of lending to its banks. Analyst forecast that more might have to be done. China is the number one exporter of commodities and the second largest importer of commodities according to 2021 statistic.

Next week features several economic data releases that could move the market:

Consumer Confidence and New home sales (Tuesday), GDP: third estimate (Thursday), and PCE & June Univ. of Michigan Consumer Sentiment – Prelim (Friday).

Economy

Housing

Building Permits & Housing Starts

Building Permits were 5.2% above the April level. Single-family building permits were 4.8% above the April level. Permits for apartments and muti-housing units were 10.3% below the April level. Housing Starts were 21.7% above the April level but only 5.7% above the May 2022 level. Single-family housing starts were 18.5% above the April level. Starts for multi units 28.1% above the April Level.

Housing Completions were 9.5% and single-family housing completions were 3.9% above the level the previous level. Completions for multi units housing was 24.2$ above the April Level. Housing units under construction for single units were down 0.6% while rising 1.8% for the multi-unit housing.

Permits and starts are down a little over 25% from a year ago. While home building is starting to pick up, recovery in the housing sector is still in process.

Existing Home Sales

Existing homes sales rose slightly in May, as homeowners are remaining in their homes due to a still limited supply and existing homeowners that have lower rates. New home sales are returning to pre-pandemic levels. Single-family homes sales fell 0.3% from the previous month. Existing home sales are down over 20% from a year ago. Inventory of unsold existing homes rose 3.8% and there are currently three months of supply at the current sales pace.

The median existing home price was $396,100. Homes remain on the market for typically eighteen days, two days longer than last month. First-time buyers were responsible for 28% of the sales, which is down 1% from the previous month but 1% higher than last year.

MBA Weekly Applications

Mortgage applications rose 0.5% from the previous week. The refinance index fell 2% and the seasonally adjusted purchase index rose 2% from the week prior. First-time home buyers represented a higher share of the FHA purchase loans. The average fixed rate for a 30-year confirming loan fell 0.04% to 6.73%. The average fixed rate for a 30-year jumbo loan rose 0.01% to 6.80%.

Share of Mortgage loans in forbearance fell 0.02% to 0.49%. 96% of current homeowners are current on their mortgages. Half of the forbearance is in forbearance extension, 34.9% of the loans are in the initial forbearance plan stage and 12.5% are in forbearance re-entries.

Earnings

KB Homes

KB homes beat on both earnings and revenue forecasts. KB homes has continued to push through its backlog, shorten the building times from slab to finish by 40 days and fund 80% of the mortgages through its loan unit. The building time is still above the four-five month target but is improving. Demand is picking up and certain regions like the west coast are still facing a supply change for afforable and available units. Buyers were also said to be picking up activity as rate stablize and potential buyers get use to the idea of higher mortgage rates. Net orders jumped 0.6% from the previous year and forward guidance was optimistic as a tight resale market remains.

Volatility in the supply chain continued in the later stages of the construction process. KB homes repurchased 15% of its shares this past year, while they held off on purchasing additional land contracts, choosing instead to continue to build on land already owned. Although demand is beginning to return, KB homes resale inventory is at 2.6 months supply and new homes inventory remains strained. KB homes lowered its prices in several regions to help spur sales in some of its communities. The average sales price of homes delivered declined from $494,000 to $480,000. Their primary market is first-time home buyers and afforable first move up segments.

US Leading Indicators

The Leading Economic Index (LEI) declined by 0.7% in May, and has continued to fall, marking the fourteenth consecutive month of declining. The LEI signals a high probability of a recession occurring in the next twelve months. The coincident economic index rose 0.2%, indicating a resilient economic environment. The lagging economic index rose 0.1%.

Current Account Balance

The current-account deficit widened by 1.5% and 3.3% of the current-dollar gross domestic product. Drilling down into the deficit, there was a surplus in primary income & services (Import and Export) and a deficit in goods and secondary income. The export of goods increased mostly due to consumer goods, mostly medicinal, dental, pharmaceutical products and other general merchandise.  The import of goods fell, decreasing for industrial supplies & materials which included mainly petroleum and products and chemicals. Imports rose for most of the auto industry.

The increase in both exports and import of services rose due to personal travel. The increase in primary income was due mostly to higher short-term interest rates and tighter monetary policy. Secondary income decreased in receipts but increased for payments.

Primary income is the earnings from investments, such as dividends, interest and profits. Secondary income is the remittances, foreign aid, and transfers between individuals or organizations.

Fed Ex earnings:

Fed Ex beat on earnings but missed on revenue forecasts. Revenue declined 10% year-over-year as Fed Ex cited softening demand across markets. Fedex recorded a 2% decline in revenue year-over-year and a 13% decline in revenue for Fedex express. Fedex reduced its flight over by 12% year-over-year, retiring 18 aircrafts and planning to retire an additional 29 aircrafts by 2024. Customer demand rebalanced between priority and economy services with capacity availability. This is most notable on the Asian markets. Freight volume also softened.

Here is an excerpt summarizing their outlook moving forward:

We do expect external business conditions to remain challenging near-term and they remains significant uncertainty with respect to the timing of demand recovery, particularly in the back half of our fiscal year. 

Technical Picture:

This Past week’s cash-flow:

This past week as I saw some moderation in my disctretionary purchases. With the money I saved, I was able to treat my father and family to a nice Father’s day breakfast which everyone enjoyed. I’m finally gaining some breathing room from some of the expenses that were causing cash-flow hemorraghes. This upcoming week I expect to see further improvement

Grade: C+

Reason: Moderate Improvement

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