Trade The Journey

Trade The Journey

Choppy Markets

Good afternoon, fellow traders! I hope you’re all making the most of your weekend and setting the stage for a productive week ahead. This week, we witnessed some unexpected twists in the markets, sparked by a surprising CPI report and followed by an unexpectedly high PPI report. This situation leads to speculation that the Federal Reserve might maintain higher interest rates for a longer period than we initially thought. It raises an important question: How long can our economy keep running without showing signs of slowing down?

The ten-year yields have a broad impact, influencing mortgage rates, consumer, auto, and personal loans, as well as business loans, the stock market, government spending, retirement accounts, currency values, and the overall economy. When we examine the current market predictions, it seems that an initial rate cut might be anticipated at the June meeting. The latest probabilities indicate a 53.7% chance of a twenty-five-basis-point cut, a 25.7% chance of a fifty-basis-point cut, and an 18.4% chance that rates will stay the same. Interestingly, just a month ago, the market was leaning towards a rate cut with a 53.8% probability, showcasing how quickly market sentiments can shift.

Moreover, the ISM Services PMI exceeded expectations, climbing to 53.4% against a forecast of 50.5%, which brought services prices to heights not seen since the upward trend that began in 2021. This led to a significant response from treasury yields, which saw an increase across the board. Previously, we observed the curve flattening, but it has since widened, with the 2/10 spread increasing from twenty basis points to thirty-four. In contrast, foreign bond investment saw a notable decline in December. Currently, the TIPS rate for a ten-year stands at 1.95%, and the ten-year yield at 4.295%. Gold, which had been moving sideways since the year’s start, finished the week on a high note, climbing from $2,000 to $2,025. The dollar has strengthened, surpassing its medium and long-term simple moving averages, now positioned in a short-term uptrend at $104.28, with the next significant pivot at $105.82. Copper and crude oil prices also reflected these market dynamics, with crude surpassing the 200 SMA and nearing a recent high of $79.17.

Globally, the economic landscape is diverse. Japan’s market remains robust, underpinned by accommodating monetary policies, despite speculation of policy reversals. Japan’s PPI and GDP growth rates show signs of improvement, yet the economy still faces challenges. Meanwhile, China has kept its short- and medium-term rates unchanged, and the Euro area has seen a slight uptick in employment and GDP growth rates. Industrial production in the Euro area has seen a significant rise. As we turn back to the US, the flood of economic reports continues to shape our understanding and strategies for navigating these turbulent financial waters.

This week, we’re anticipating several key economic data releases that could sway the markets:

  • On Wednesday, we’re looking out for the FOMC minutes, MBA Mortgage applications, and a speech by Fed Bostic.
  • Thursday will bring us Initial Claims, Existing Home Sales, and a series of Fed speeches by Harker, Cook, Kashkari, and Waller.

In economic news, the NFIB Small Business Optimism Index took a dip in January 2024, dropping two points to 89.9, a noticeable deviation from the 50-year average of 98. Despite a slight decrease in inflation, it remains a significant hurdle for small businesses, closely followed by challenges in labor quality. The outlook seems to be darkening, with a 16% net decrease in the expectation for real sales. Over recent months, this concern has been persistent among small business owners, who are now more cautious about expanding their workforce and hesitant in making capital investments. Yet, there’s been a modest uptick in capital expenditures, and a few owners are considering investing in inventory, despite a minority reporting difficulties in securing loans.

Financially, small business owners are keeping a wary eye on monetary policy, inflation, and the general business climate. Although financial costs have slightly decreased, consumer costs continue to climb, reflecting rising producer prices. January saw the CPI rate increase by 0.3%, up from December’s 0.2%. Over the last year, the CPI rate has risen by 3.1%. Housing played a significant role in this increase, with the shelter index jumping by 0.6% and marking a 6% rise over the past year. Food costs also saw an uptick, while energy prices dipped, with a notable decline in energy commodities. The Core CPI, which excludes volatile food and energy prices, increased by 0.4%, indicating stable inflation in other sectors.

The Producer Price Index (PPI) also rose by 0.3% in January, with a year-over-year increase of 0.9%. The demand for services saw a 0.6% increase, largely driven by a 2.2% rise in hospital outpatient care. However, the demand for goods experienced its fourth consecutive decline, primarily due to falling gasoline prices. The intermediate demand landscape varied, with processed goods declining and unprocessed goods rising, notably due to a surge in crude petroleum prices. Service prices continued their upward trend, bolstered by increases in nonresidential real estate rents.

Looking at the production flow, we see variations across different stages of intermediate demand, reflecting a dynamic economic environment where the services sector thrives as prices for goods, especially in energy and food, decrease. This scenario poses questions about consumer resilience amidst rising prices. January’s retail sales report, showing a more significant than forecasted contraction, adds to the concern, despite a year-over-year growth.

Meanwhile, consumer sentiment has improved, buoyed by strong job market confidence and expectations of receding inflation. Manufacturing in New York and Philadelphia shows signs of recovery, marking a potential positive shift in the industrial sector. These developments paint a complex picture of the current economic landscape, leaving us to wonder about the long-term implications of these trends.

The New York manufacturing index showed signs of contraction at a modestly reduced pace, registering at -2.4. While new orders and unfilled orders saw a slight improvement, shipments increased, and delivery times decreased. However, inventories dipped over the last month, and although employment remains in a contraction phase, there was a slight extension in the average workweek. For the second month in a row, prices climbed as selling prices accelerated. Future activity expectations rose, albeit at a tempered pace.

January witnessed a 0.5% decrease in manufacturing production, contrary to market expectations for steady production levels. Durable goods manufacturing experienced a slight uptick of 0.1%, whereas nondurable manufacturing declined by 1.1%. Notably, production of electrical equipment, computer and electronic products, aerospace, and various transportation equipment increased.

Industrial production slightly fell by 0.1% in January. There was a 0.4% rise in the production of final products, driven by a 0.6% increase in consumer production, though business equipment production dropped by 0.2%. Production of nonindustrial supplies and construction supplies declined by 0.5% and 0.9%, respectively, over the past year.

Meanwhile, materials production dipped by 0.4% for the month but showed a 0.5% increase over the year. Mining production saw a significant downturn, dropping by 2.3%, but utilities production surged by 6%, marking a 9% increase over the year. Capacity utilization decreased slightly to 78.5%, remaining below the long-term average.

Initial jobless claims were lower than anticipated, coming in at 212,000, with the four-week moving average rising to 218,500. Continuing claims edged up to 1.895 million, indicating a still-tight job market. Mortgage applications for new home purchases jumped by 19.1%, despite a 2.3% decrease in overall mortgage applications from the previous week. The refinance index and the purchase index saw declines of 2% and a rise of 4%, respectively, with the average rate for a 30-year fixed mortgage climbing to 6.87%.

The housing market in January presented a mixed picture. Building permits saw a minor decrease of 1.5% from December, settling at a seasonally adjusted annual rate of 1,470,000, yet this was still an 8.6% increase from the previous year, hinting at underlying market optimism. Single-family home construction appears to be on the rise, offering hope to prospective homeowners. However, housing starts took a significant downturn, decreasing by 14.8% from December. This notable drop suggests builders may be pausing due to rising costs or interest rates. Despite these challenges, housing completions were up by 2.8%, indicating progress in finalizing new homes.

Technical Story:

This Past Week cash flow management in review:

This past week went as expected but there were a few hiccups but nothing significant. Most of the spending was on food away from home as I tend to get a little reckless towards the end of the week. Luckily, I work from home for most of the week so I am able to save on gas and food. This upcoming week I plan to pay off one credit card and continue paying down my credit card balances. I will also resume looking for a new place to live that’s more within my budget which will still allow me to save money for investing and emergencies.

Grade: C-

Reason: Some improvements

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