Trade The Journey

Trade The Journey

Are we in the midst of a Recovery?

Top of the Morning! I hope everyone is enjoying their weekend and preparing for the trading week ahead. If you have time, please check out the short articles I wrote in the trading psychology section. This past week, the market held its breath, waiting not just on the rate announcement but the Fed’s press conference after the announcement.

At the last meeting, the rate announcement spurred a short rally before the Fed chairman took the podium and dampened the excitement. This time, the announcement and the press conference provided the market with the hope that the FED may cease the rate hikes in the immediate future. However, the economic reports released last week showed that there is a divergence in the economy.

Some parts of the economy are slowing in response to the rate hikes while other parts of the economy remain resilient like the jobs market.

Earnings info from CNBC

Meanwhile, earnings continued this past week with a large list of companies reporting. McDonald’s reported an earnings and revenues beat, with consumers moving to cheaper food alternatives. In 2023, McDonald’s plans to open 1900 restaurants with 400 of them being in the United States. Domestically, McDonald’s exceeded expectations with same-store sales growth totaling 10.3%. Cited higher food and energy costs pressuring margins and cash flow.

Caterpillar beat on revenue but missed expectations on earnings. On the earnings call, Caterpillar reported that their backlog grew by $400 million in the quarter. They cited supply chain challenges related to energy & transportation and resource industries.

Nonresidential represents approximately 75% of sales in construction industries. They saw continued weakness in China, particularly in the excavator industry. The level of sales and costs is close to 9% higher in this inflationary environment. At CAT Financial they set aside cash for provision for credit losses.

Google missed on forecast of earnings, revenue, traffic acquisition costs, and YouTube advertising revenue. They beat on google cloud revenue. There has been a notable decrease in online ad spending from insurance, loans, mortgage, and cryptocurrencies. Google pledged to lay off some of its workers to help bring down their operating expenses and will slow hiring in 2023. Google Play revenues were down due to user engagement and gaming.

Amazon beat revenue estimates and reported earnings of 3 cents per share. They beat the forecast on advertising but missed on web services. Inflation and higher rates are affecting consumer spending, with its online stores’ division falling 2% from the past year. To improve its margins, they will continue to lay off workers, with a report stating they will be laying off 18,000 corporate workers. They have put a freeze on hiring. Their advertising revenue outpaced their competitors.

Economy:

Employment costs rose by 1% in December, falling slightly from the September total of 1.2%. The goods-producing industries were flat from September at 0.9%. Private Industry workers’ cost also rose by 1% in December, falling slightly from the September total of 1.1%.

Costs were mainly flat among the industries. However, a few industries saw higher employment costs such as financial activities (0.5%), Information (0.1%), Credit intermediation and related activities (1.9%). State and local government workers’ employment costs fell by 0.9%. Employment costs are still decisively higher than the costs measured from a year ago. Benefits costs are also higher than measured a year prior.

The employment situation covering January was released on Friday and showed more jobs added than expected. The forecast according to briefing.com was for 200,000 jobs to be added but instead, the total came to 517,000. Job gains were reported in the leisure & hospitality, professional & business services, and health care industries. Unemployment remained at 3.4%, little changed from the previous month. The labor force participation rate was unchanged at 62.4%.

Leisure & hospitality added 128,000 jobs, professional & business services added 82,000 jobs, healthcare added 58,000 jobs, retail added 30,000 jobs and construction added 25,000 jobs. These industries came in far above the January levels. Little change in employment was found in mining, quarrying, oil & gas extraction, wholesale trade, information, financial activities, and other services.

Payrolls rose by 10 cents to $33.03 and private sector production & nonsupervisory employees rose by 7 cents to $28.26. The average workweek rose by 0.3 hours to 34.7 hours, while the manufacturing workweek rose by 0.4 hours to 40.5 hours. December changes to the previous two months, November, and December, showed that jobs added rose by an additional 34,000 and 37,000 in the two prior months.

The job openings report showed an increase in December much to the chagrin of those hoping for moderation in the number of job openings. Hires and total separations were little changed as were quits, layoffs, and discharges. The largest job openings were reported in accommodation & food services, retail trade, and construction. Job openings rose for smaller businesses (50 to 249 employees) but fell for larger companies.

Initial claims came far below forecasts of 201,000, at 183,000. This is the lowest since April 2022. Continuing claims also fell from the prior week. The four-week moving average of initial claims followed suit by falling from the previous week.

The labor market remains tight, but will this discourage the Fed from its path toward continued tightening? During the press conference of the Fed rate announcement, Chairman Powell acknowledged that higher rates are having the intended effects of slowing the economy. The Fed raised rates by 25 basis points, bringing the target range to 4.50-4.75%. He acknowledged that ongoing increases will be appropriate to bring the inflation back in line with the Fed’s goal of 2%.

He also acknowledged that “Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions.” One part of the press conference I found interesting in when Chairman Powell mentioned that the disinflationary process is at an early stage.

There’s an obvious lag in the effects of the rate hikes on some parts of the economy while it’s having its intended effects on other parts of the economy.

Consumer confidence fell in January by two points. The present situation and the expectations index both fell in December. Consumer expectations for inflation rose by two points to 6.8 points over the past year. Business conditions and labor market assessment by consumers improved in January. Consumers’ short-term expectations for business conditions, and the labor market fell in January. Income prospects for the short term were unchanged.

Labor productivity rose by 3%, output increased by 3.5% and hours worked rose by 0.5% in the fourth quarter. Unit labor costs in the nonfarm business sector rose 1.1%. Manufacturing labor productivity fell by 1.5%, output decreased by 2.6%, and hours worked declined by 1.1%. Nondurable manufacturing sector productivity fell by 1.4%, output fell by 2.3% and hours worked declined by 0.9%. Unit costs for manufacturing fell by 4.8%.

From a year ago, nonfarm business and business unit labor costs fell decisively. Manufacturing unit costs came in at about the same level. Nonfarm business unit labor cost has risen by 3.8% from five years ago.

Factory Orders rose by 1.8% In December after falling by 1.9% in November. Durable goods new orders rose by 5.6%. Primary metals fell for the third consecutive month. Machinery fell for the second consecutive month. Nondurable goods industries fell for a second consecutive month. Shipments for durable goods remained unchanged and nondurable goods industries fell for the second consecutive month.

Unfilled Orders rose by 1.3% for durable goods industries. Inventories rose by 0.5% for durable goods industries and were unchanged for nondurable goods industries. Inventories to shipments rose by 0.01 points to 1.78 for durable goods industries. Nondurable goods rose by 0.02 points to 1.18 points.

Capital goods shipments rose by 0.8% in December, falling by 0.2%. New orders for capital goods rose by nearly 20%. Unfilled orders rose by 1.8% in December for capital goods. Total inventories for capital goods rose by 0.8% in December. Consumer goods fell in inventories, shipments, and new orders but rose slightly for unfilled orders.

The ISM manufacturing index contracted for the third straight month coming in at 47.4%, below the 50% level which signals expansion. New Orders fell by 2.6 points and remain in contractionary territory. The production index fell 0.6 points and has also contracted. Production expanded in computer & electronic products.

The prices index rose from the December level of 5.1 points bringing the total to 44.5%. The backlog of orders decreased by 2 points. The employment index expanded above the 50% level indicating a recovery from the contractionary period in November. Supplier deliveries improved as the supply chain pressures continued to ease. The inventories index expanded in November. Inventories expanded in transportation equipment, food, beverage & tobacco, and computer & electronic products. Customer inventories remain low.

Miscellaneous manufacturing and transportation equipment are the two manufacturing industries that showed growth in January. According to the panelists, sales are softening as is demand. Lower sales are expected to continue through the first half and one respondent mentioned concerns about a recession.

Overall, the manufacturing sector is contracting at a faster pace, as the higher rates begin to take their intended effects. The manufacturing PMI reached its high of 58.4% last year in February.

The ISM Non-manufacturing index expanded for the thirty consecutive months. Services expanded 6 points to 55.2%, somewhat above the expansionary level of 50%. Business activity expanded by 6.9 points to 60.4%. The only industries reporting a contraction in business activity were transportation & warehousing, mining, retail trade, and information.

A Services PMI® above 49.9 percent, over time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding; below 49.9 percent, it is generally declining. The distance from 50 percent or 49.9 percent is indicative of the strength of the expansion or decline.

 New Orders increased by 15.2 points to 60.4%. Supplier deliveries were unchanged for the month of January. The prices index fell by 0.3 points to 67.8% and continued to moderate after months of rising. Inventories contracted for the eight straight month while inventory sentiment expanded. Respondents still feel their inventory levels are too high for moderation in business activity.

Most of the industries grew in January with only Transportation & Warehousing, retail trade, arts, entertainment& recreation, mining, construction, information, finance & insurance, and wholesale trade. Panelists expressed satisfaction in consumer demand, improving supply chains, and strong business demand.

Services expanded after contracting in December. The service’s PMI remains near the highs of the year.

Total Construction spending fell 0.8% in December. Private construction spending fell by 0.4%. Residential private construction spending fell by 0.3%. Private construction spending for single-family fell by 2.3% while rising for multi-family by 3.2%. Nonresidential private construction spending fell by 0.5%. Public construction spending fell by 0.4%. Public construction spending for education fell by 0.3%, while highway construction spending rose by 1.1% in December.

Below is a graph showing the trend in private residential construction for the past few months:

Continuing with housing, mortgage applications fell 9% from the previous week. The refinance and purchase index both declined by 7% from the prior week. Mortgage rates have declined from the previous month although they remain higher than treasury yields. Further moderation in mortgage rates should be expected.

The 30-year fixed-rate conforming loans fell by 0.01% bringing the rate to 6.19%. The 30-year fixed rate for jumbo loans fell by 0.07%, bringing the rate to 5.99%.

A new chart showing the reference levels touched this past week.

This past week’s cash flow in review:

This past week continued the trend of poor spending. I hope this coming week will be different. Lately, the amount of money I’m spending on bills has risen sharply in part to inflation and covering costs with my credit card. I regressed from the positive spending behavior last month as my credit card balance rose.  

Grade: D+

Review: Poor spending plan

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