Trade The Journey

Trade The Journey

Calm before the Storm

Top of the Morning! I hope everyone’s week went as planned. This past week didn’t feature a breadth of economic reports like the previous week, however next week is a different story. When there’s no major news event or earnings release scheduled, the market looks at other events as potential movers of market action.

This past week, I thought most of the week would be sideways action due to the lack of reports, but I was wrong. The ETF I was trading, QQQ, which covers the Nasdaq 100 was on its way up to make new highs and then Canada announced a surprise rate hike which roiled the markets. Bonds sold off as participants grew fearful that a rate hike by the Fed be even more likely.

QQQ dropped on Canada’s rate hike and never recovered that day. Unfortunately, I had a butterfly option I placed on QQQ with a two-day expiration. That day, QQQ had sunk almost ten dollars and by the market close, my butterfly option was worth nearly nothing. QQQ briefly tested the $356 reference level and went as high as $357 before retreating.

QQQ never recovered. So goes the saying there’s no free lunches.

With the Fed rate announcement occurring next week, market expectations are varied as there is a lack of consensus on the swap contracts linked to future fed meetings. Treasury Bill rates remain above 5% although the Treasury is set to sale $206 billion to replenish its funds after coming close to breaching the debt limit. The five-year yield rose while the thirty-yield steepened. The July swap contracts have nearly priced in a quarter point rate increase, while the June contracts indicate a pause in rate hikes. Keep a close eye on bond yields.

In other news, China’s growth continues to slow much more than analyst originally forecasted. China is now amid providing some stimulus to help spur the economy. China’s biggest banks cut yuan-denominated demand deposit rates and according to CNBC, China is setting the stage for its central bank to reduce other interest rates.

By cutting deposit rates and making it more expensive for depositors to save, China is hoping it will spur spending.

Upcoming Week: Tuesday (CPI, NFIB small business optimism), Wednesday (PPI, rate decision), Thursday (Retail Sales, Manufacturing, Industrial Production/Capacity, Export/Import Prices, Business Inventory), Friday (University of Michigan Consumer Sentiment- Prelim)

Economy:

Manufacturing

Factory Orders

New orders for manufactured goods rose 0.4% in April, after rising 0.6% in March. New orders for manufactured durable goods rose 1.1% and rose 0.1% for manufactured nondurable goods. For durable goods, machinery new orders recovered after falling for two consecutive months. Construction machinery new orders slowed from the sharp rise in March. Transportation Equipment fell a bit but was relatively strong.

Shipments for manufactured durable goods fell 0.7% and were unchanged from the previous month. Nondurable goods shipments also fell 0.1%, falling for a consecutive month. Unfilled orders for durable goods rose 0.8%. Unfilled orders for construction machinery (1.7%) and transportation equipment (1.8%) led the increase. Inventories for manufactured durable goods rose 1% and fell 0.3% for manufactured nondurable goods.

Capital goods and consumer goods:

Nondefense Capital goods includes machinery, computers & computer equipment, appliances, supplies, vending, and communications equipment to a name few industries this category covers. Shipments for nondefense capital goods fell by 1.8% after rising the previous month. Shipments have varied falling, rising, and falling again. After rising close to 10% in March, new orders for nondefense capital goods fell 0.6%. Inventories rose by 2.3% and unfilled orders rose by 0.6%.

Shipments for consumer goods fell 0.1%, falling 1% for consumer durable goods and rising 0.1% for consumer nondurable goods. New orders for consumer goods declined by the same amount as shipments. Shipments for consumer durable goods fell by 0.8% and rose by 0.1% for consumer nondurable goods. Unfilled orders for consumers goods rose by 0.4%. Inventories for consumer goods fell 0.4%, declining for the third consecutive month.

Inventories for consumer durable goods rose by 0.3% and fell 0.5% for consumer nondurable goods. Its important to keep in mind that this report is lagging, reporting factory orders for April and we are now in June.

ISM Nonmanufacturing Index (Services PMI)

The services PMI reported a level of 50.3%, which is slightly above the 50-level indicating an expansion. However, it’s about 1.6% below the April level and new the twelve-month low of 49.2%. Business activity fell 0.5% in April, bringing the reading to 51.5% with most respondents saying activity is about the same. New orders registered a reading of 52.9%, 3.2% below the level of last month.

 New orders were about the same with a larger number of respondents reporting lower numbers and fewer respondents reporting higher numbers. Supplier deliveries improved by 0.9%, registering a 47.7% reading after averaging 48% over the last six months. Supplier deliveries were about the same with fewer respondents reporting that deliveries were faster or slower. Prices were 3.4% below the April level, registering 56.2%.

The inventory sentiment index rose 12.1% to 61% with a high number reporting that inventory levels are higher. The backlog of orders index fell 8.8%, registering 40.9% with more respondents reporting that their backlog of orders was lower.

Eleven industries grew in May led by accommodation & food services, management of companies & support services, and professional, scientific, & technical services. Respondents reported that supply chains are returning to pre-pandemic levels for some industries while growth seems to be slowing for several industries. Employments needs are starting to balance out, with few industries reporting challenges.

Employment is now in contractionary territory, with respondents reporting that keeping staffing at the same levels will help since margins have fallen and the economic outlook has remained uncertain. The employment index registered 49.2%.

Wholesale Inventories

Wholesale inventories fell a second consecutive month, falling in April by 0.1%. Inventories for durable goods, after an unchanged reading in March, rose in April by 0.6%. Inventories for nondurable goods fell for a second consecutive month, falling 1.2% in April.

Sales for merchant wholesalers, except manufacturers’ sales branches and offices rose by 0.2%.  Sales for durable goods improved a bit although falling for a second consecutive month. The April level shows a decline of 0.5. Sales for nondurable goods rose 0.8% after falling 2.7% in March. The inventory-sales ratio was 1.40. The inventory-sales ratio was virtually unchanged for durable and nondurable goods.

Consumer Health

Consumer Credit

Consumer credit rose 5.7% at a seasonally adjusted annual rate. Revolving credit rose 13.1% and nonrevolving credit rose 3.2% at an annual rate. The flow data, which represents changes in the level of credit due to economic and financial activity, rose in April. Consumer credit outstanding levels increased in April, marking a third consecutive increase in outstanding credit. Both revolving and nonrevolving outstanding credit increased.

Consumer credit outstanding flows rose sharply in April, rising sharply for revolving and nonrevolving credit.  This data shows that consumers are turning to credit to cover expenses as higher prices and higher rates are steadily affecting consumer purchasing power.

Initial and Continuing Claims

Initial claims rose by 28,000 to 261,000, rising above forecast of 237,000 signaling a resilient labor market. Claims above 300,000 indicate a recessionary period but of course the trend would need to be steadily at or above this level over several weeks. Continuing claims fell 37,000 to 1.757 million. With prices spurring on the inflationary period and labor market displaying continued resilience, another rate hike is totally plausible. The four-week moving average rose by 7,500 to 237,250.

MBA mortgage applications weekly report

Mortgage application fell 1.4% this prior week. The refinance index fell 1% and the purchase index fell 2% from the week prior. The average rate for a 30-year fixed conforming loan fell 0.10% to 6.81%. The average rate for a 30-year fixed jumbo loan fell 1.15% to 6.73%. Although the average rate for thirty-year mortgages is below 7%, in many areas the rate is above 7%. Some say that time of rates near zero won’t return for some time if ever. Current inventory levels, especially of existing homes, remain low.

Trade Balance

The deficit rose by 23%, with exports falling 2.3% and imports rising 1.5% in April. Exports were $9.2 billion less than March exports and imports were $4.8 billion more than March imports. For exports, industrial supplies & materials, and consumer goods both decreased while exports of services increased slightly, rising for travel, other business services, financial services, and government goods & services.

For imports, both automotive vehicles, parts & engines, industrial supplies & materials, and consumer goods all rose. For imports of services, travel and transports both fell.

Techinical Picture:

This past week’s cash flow in review:

Maintaining a cash-flow level sufficient to meet emergencies remains a challenge although I have rebuilt my savings account to previous levels. My goal is and has always been to live a life not constrained by my income level but so far that has occurred. So far, I’m still counting and saving my change from each purchase which has helped me weather incoming storms. My only hope is that as time progresses my current situation will continue to improve.

Grade: D+

Reason: Some improvement but not much.

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