Trade The Journey

Trade The Journey

A Resilient Economy signals further tightening!

Top of the Morning! I hope all is well and everyone is enjoying their weekend. This past week I was out of touch with the markets preparing for new employment and new opportunities. While I wasn’t able to follow the markets as closely as I would have wanted, I did see the headlines showing that the economy is resilient, which all but guaranteed a hike in July. 

Currently, there’s over a ninety percent probability of a rate hike at the next Fed meeting in July. The September meeting shows a seventy percent probability of a pause and a twenty-four percent chance of a rate hike.

Yields gapped up on most maturities on the surprise ADP employment report but pulled back a bit once the employment situations report was released. The two-year yield is close to the high made in January at 5.07%. The one-year yield is 0.25% higher than it was a month ago, now at 5.41%, factoring in almost two additional rate hikes within the year. 

The yield spread between the 2-10 treasury yield was seventy-seven basis points one month ago and now stands at eighty-eight basis points, widening by eleven basis points. Just one year ago the spread was inverted by only two basis points compared to the eighty-eight-basis point spread now. Market participants seem to be expecting rate hikes in the short-term to combat inflation pressures with a possible slowdown in the future.

Next week the CPI, PPI and the University of Michigan Consumer sentiment report take center stage.



Employment Situation Report

Nonfarm payrolls rose by 209,000 while the unemployment rate was unchanged in June. The graph below shows that both private and public nonfarm payrolls have rebounded from the 2020 levels and surpassed the levels in 2019 before the Pandemic. The graph below shows the jobs added for various industries. The labor force participation was unchanged at 62.6 for the fourth straight month.

The leaders in jobs added or created were state government & local government (63,000), health care (41,000), social assistance (18,000) and construction (23,000). Leisure & hospitality, retail, transportation and warehousing were little changed.

Wages rose 0.4%, higher than forecasted and perhaps an indicator of further tightening. Consumers are still insulated somewhat from inflation, as wages have risen 4.4% in the past year. With the current CPI year-over-year at 4%, consumer spending still have spending power although consumer sentiment is still cautious. The average workweek trended up slightly by 0.1 hours to 34.4 hours. Manufacturing hours worked were virtually unchanged at 40.1 hours as were the hours worked in overtime.


ADP employment report

The ADP employment report surprised the markets by adding 497,000 jobs in June. 124,000 jobs were added in the goods sector led by the construction and natural resources/mining industries, falling only for manufacturing. The service sector added 373,000 jobs. The bulk of jobs in services were added in the leisure/hospitality sector with 232,000 jobs added. Transportation/trade/utilities added 90,000 jobs and education/health services added 74,000 jobs.

Information, financial services, and professional/business services saw a contraction in the number of jobs added, with information leading. Jobs were added largely in the small establishment size with 299,000 jobs added. Medium establishments added 183,000 jobs while large establishments contracted in the jobs added.

While the pace of pay gains slowed for job stayers, job changers saw pay gains fall the entire year.

Job Openings and Labor Turnover Summary (Jolts)

Job openings decelerated to 9.8 million in May. Hires and total separations were virtually unchanged. Separations and quits rose a bit while layoffs and discharges were unchanged. Job openings were flat between this month and the previous month. Job openings fell sharply in healthcare & social assistance but also fell in finance & insurance, and other services. Job openings rose in educational services, state & local government, and the federal government. The job market is still tight, as the quits rate increased, meaning people are still confident, they can find a job.

Initial claims

Initial claims rose slightly more than forecasted, rising to 248,000 this past week. Continuing claims fell by 13,000 to 1.270 million. The four-week moving average remained around the 250,000 level.Initial claims consistently above 300,000 level signal a recession and we still seem to be quite a ways away from this level.

Housing and Construction

Construction spending report

Total construction spending rose 0.9% in May with private construction spending rising by 1.1% and public construction spending rising by 0.1%. Public residential spending rose by 2.14% while nonresidential spending fell by 0.15%. Private residential spending rose by 2.10% in total rising for single family and falling for new multifamily housing, rising 1.70% and falling 0.05% respectively.

MBA weekly index

Mortgage applications fell 4.4% from the prior week. The refinance index and the purchase index both declined by 4% and 5% respectively. The average rate for a 30-year fixed rate for a conforming loan rose by 0.10% to 6.85%. The average rate for a 30-year fixed rate for jumbo loans rose by 0.04% to 6.95%. Rates are increasing as the expectations for future rate hikes increase. The average rate for a 30-year fixed FHA mortgage rose 0.05% to 6.68%.

Trade Balance

The deficit fell by 7.3% with exports and imports both declining, 0.8% and 2.3% respectively. For exports, goods declined 1.51%, with foods, feeds & beverages, and industrial supplies & materials both declining while automotive vehicles, parts & engines increasing. Services exports increased slightly. Imports of goods declined nearly 3%, declining for both consumer goods and industrial supplies & materials. Capital goods imports increased slightly.

Manufacturers and Factory Orders

Factory Orders

New orders rose 0.3%, essentially unchanged from the previous level in April. New orders for durable goods rose 1.8% and rose for a second consecutive month. Nondurable goods new orders fell 1.2%. Shipments rose 0.3%, after a 0.6% decline in the previous month. Shipments for durable goods continued to rise for a second consecutive month, with may registering a 1.8% increase. Nondurable goods shipments continued to decline, falling 1.2%. Unfilled orders remained in positive territory, rising 0.8% in May.

Unfilled durable goods orders rose 0.2%. Inventories rose 0.2%, up five out of the last six months. Durable goods inventories rose 0.2% and nondurable goods inventories fell 0.9%. Materials and supplies for durable goods rose 0.3% but fell 0.9% for nondurable goods. The work in process stage registered 0.4% decline in durable goods and 1.9% decline in nondurable goods. For the finished goods stage, inventories rose 0.9% for durable goods and fell 0.5% in nondurable goods.

ISM Manufacturing

Manufacturing contracted for a eighth consecutive month, falling below forecast to 46% in June. New orders remained below the expansion level of 50, registering a 45.6 which was higher than the previous month. The production index fell 4.4% to 46.7%, remaining in contractionary territory. The prices index fell to 41.8% and the backlog of orders index rose slightly to 38.7%. The employment index also contracted, registering 48.1% in June.

Suppliers deliveries pace has continually improved registering its lowest levels since early March 2009, with a 45.7% reading. Inventories came in at 44%. As customers inventories drifted into the “too low” levels, and supplier deliveries times improves and prices retreat, demand has the potential return. Transportation equipment was the sole sector registering growth in June of the six largest manufacturers.

Respondents listed mixed sentiments, with some feeling the effects of slowing customer demand, while other industries like machinery have steady business and new orders with a manageable backlog. Input and materials cost continue to retreat. Capital expenditures lead times rose three days to 175 days, production materials lead times were above the same and maintenance, repair and operating supplies lead times rose two days to 47 days.

ISM Non-manufacturing

Services surprised to the upside, rising above forecast to 53.9% in June which is near the year’s average. The services sector has continued to maintain its strength, expanding for 36 out of the last 37 months. This reports surprise to the upside and the ADP employment report caused treasury yields to gap up, as the Fed is more likely to continue to raise rates.

Business activity rose sharply, rising by 7.7 points to 59.2% in June. A higher percentage of respondents reported that business activity expanded, while fewer listed that conditions were about the same or lower. New orders rose for the sixth consecutive months rising to 55.5%. A higher percentage reported that new orders were higher, while those reporting that condition were about the same decreased and a slightly higher amount reports lower new orders.

Supplier deliveries improved slightly, falling to 47.6%. The prices index fell 2.1% to 54.1% and the inventories sentiment index rose for a second straight month although sentiment fell 7% to 54% from May’s reading. The backlog of orders index rose by 3% to 43.9%, which is the lowest reading since May 2009. Most of the industries registered growth with the exceptions being Agriculture/Forestry/Fishing/Hunting, Mining, and Information. The employment activity services sector expanded 3.9% to 53.1% with a higher amount of respondents reporting that were conditions  about the same.

 Respondents overall indicated the business conditions and supply chain lead times are stable with inflation and the economy as the major concern. A respondent from the construction industry listed China’s espionage act as potential headwind to cross border projects and information sharing. Skilled labor for industries remains a challenge, especially for the construction industry.

Technical Story

This past week’s cash flow review:

This past week was about the same in terms of adherence to my spending plan, in fact, I was able to contribute a bit more to my savings account. I also received and accepted a new employment offer that will double my salary. To date, it will be the highest amount of income I received and will bump me into the high earnings category.

This offer was completely unexpected and has the potential to transform my life moving forward. With the added income, I will build my trading account to enable myself the opportunity to day trade options. Although luck and fate is the common terms I’ve heard to describe the opportunity bestowed upon me, I tend to think that positive thinking and goals propelled me to this opportunity. For the last several years, I’ve been writing my goals down in my goal book to commit them to memory and imprint my goals upon my subconscious.

I think that having my goals written down and committed to memory help direct my energies to the right path. My lasting impression from this experience is don’t underestimate the power of your mind and its ability to create your reality and guide you towards your future.

Grade: B

Reason: Continued improvement

1 thought on “A Resilient Economy signals further tightening!”

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