Trade The Journey

Trade The Journey

Debt Ceiling Agreement Passed in the Senate!

Top of the Morning! A debt ceiling agreement was reached and passed in the Senate to avoid a breach of the debt limit. The senate voted 63-36 to pass the bill. Within the bill is a scheduled restart for student loan payments at the of the summer, tighter work requirements for the Temporary Assistance for Needy families program, a rescind of roughly $28 billion in unused Covid relief funds, and new measures in the National Enviornmental Policy Act. Further details of the bill were released this past weekend.

All of the indices closed on their highs Friday afternoon with the release of a mixed employment situation report. With the job market still showing signs of resislence, markets have completely shifted their forecast of a rate cut or pause to a rate hike at the next meeting in June. The current range for the fed funds rate: 5-5.25%. Below is a small graph of the probabilities associated with a rate hike, pause or cut:

The chart as well is part of a Fed Watch tool available at CME, the website address is below:

https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html

As the economic data is released and the probabilites of rate hike or pause change, you can check this website. The Federal Reserve is currently in a blackout period (June3-15), so responses from voting Fed members regarding the economic enviornment and data are sparse.

This upcoming week doesn’t feature much in terms of economic data except for the ISM nonmanufcturing index which should give market participants an idea of how the services sector is faring. The following week, we’ll get the much anticipated CPI and PPI reports. The retails sales report will also be released and on Wednesday we’ll get the FOMC rate decision.

Trade Outlook: With few market moving economic data reports scheduled this week, perhaps a neutral or bullish strategy might be best. Most of the indices ended the week closing on their highs. With volatility edging towards its most recent low, the markets seen calm but we all know that can change in an instant. Will tech continue to drive the rally powered by AI?

If the ISM services PMI shows that the services sector is continuing to expand, will it add legs to the rally?

One thing to keep an eye on is the Treasuries need to rebuild its cash account once the dust settles on the debt limit. Bloomberg released an article stating that $1 trillion in treasury bill sales likely to end in the third quarter could affect market liquidity. 

Economy

Employment Picture

Job Openings and Labor Turnovers (Jolts Report)

After retreating in February and March below the ten million level, in April Job openings returned above ten million in the preliminary report. Job Openings rose in retail trade, health care & social assistance, and transportation, warehousing & utilities. The number of hires was unchanged at around six million. Total separations decreased by 0.2% to 3.7%, which is the lowest level in the past year. Quits, which is an indicator of worker’s confidence in finding employment, was unchanged at 2.4%.

Layoffs and discharges fell 0.2% to 1%. Layoffs and Discharges remain high in the construction industry at 2.4% but did slow, falling 1.4% from the previous month. Arts, entertainment, and recreation are also quite high at 2.6% and slowed from the previous month, falling 1.3%. The information sector saw a sizeable decrease in layoffs and discharges, falling 1.1% to 0.5%.

Job Openings rose in almost every establishment size, falling 0.2% for companies with 10 to 49 employees, and 50 to 249 employees. Job openings rose above 1% for companies with 1 to 9 employees, 250 to 999 employees and 5,000 or more employees.  In all the establishment sizes, openings were above 6% signaling companies are still looking for qualified employees.

Below is a chart showing that the number of unemployed persons per job openings has steadily decreased from its high in 2020 as the country emerged from the Pandemic.

ADP National Employment Report

Private employers added 278,000 jobs in May. The goods-producing sector added 11,000 jobs led by growth in the natural resources/mining and construction sectors. Job growth fell in Manufacturing.  The service-providing sector added 168,000 jobs led largely by leisure/hospitality with 208,000 jobs added. Job growth fell in financial activities, information, education/health services, and professional/business services.

Small establishments added 235,000 jobs, medium establishments added 140,000 jobs while large establishments with 500 employees or more saw a 106,000 decrease in the number of jobs added. Pay gains slowed for job changers and job stayers, falling a full percentage point for job changers. This report is based on the aggregated payroll data from over 25 million employees.

Employment Situation Report for May

A total of 339,000 jobs were added in May, which is close to the average monthly gain of 341,000 jobs over the past twelve months. Job gains were in professional and business services, government, healthcare, construction, transportation & warehousing and social assistance. Job gains were also found in leisure and hospitality, which has added an average of 77,000 jobs per month.

The unemployment rate rose by 0.3% to 3.7%. The labor force participation rate was unchanged at 62.6%. Average hourly earnings for all employees rose by 0.3% to $33.44. The average hourly earnings for all employees are $1.38 over the past year. For production and nonsupervisory employees, average hourly earnings rose 0.5% to $28.75, which is $1.36 high over the past year. The average workweek edged down by 0.1 hours to 34.3 hours which 0.3 hours lower than the total over the past year. Manufacturing was unchanged in the average workweek at 40.1 hours, which is 0.3 hours lower than over the past year.

Initial Claims

Initial claims for the week ending May 27 came within 1,000 claims of the forecasted 233,000 level. Continuing jobless claims rose by 6,000 to 1.795 million. Initial claims above 344,000 have typically signaled the onset of a recession and initial claims are nowhere near this level indicating that the labor market is still strong. The four-week average moving for initial claims rose by 2,000 to 232,000, which is the highest level reached in May by 1,000 claims.

Employment Productivity

Nonfarm business Productivity fell 2.1% in the first quarter; however, it was a bit higher than the forecasted fall of 2.7%. Output rose 0.5% while the hours worked also increased by 2.6%. Unit labor costs rose 4.2%, with a 2.1% increase in hourly compensation and a 2.1% decrease in productivity as mentioned earlier. Business productivity fell 1.7%, with output rising 0.9% and hours worked rising 1.7%.

Manufacturing productivity fell 2.5%, with output falling 1% and hours worked rising 1.6%. Durable goods manufacturing productivity fell 5.6% and nondurable goods manufacturing productivity rose 1.3%. Unit labor costs for manufacturing rose 3.1%, with a 0.5% rise in hourly compensation and a 2.5% decrease in productivity.

Trend: Overall it seems that there is potential for inflationary pressures as the job market remains strong. Although consumers are showing signs of pulling back in their purchases of discretionary items and favoring items deemed as necessity, the crack the Fed hoped for in the labor market is emerging slower than originally hoped.

Consumer Confidence

The consumer confidence index fell 1.4 points to 102.3 points. The present situation index fell 3.2 points to 148.6. The expectations index fell two points and remains below 80, which according to the index is a level associated with a recession within the next year. Consumer confidence showed growing pessimism about current conditions and future expectations. Current employment conditions according to the consumer are seen as deteriorating, however the outlook for income and jobs remained stable. Consumer confidence outlook fell across ages and income levels and particularly fell for consumers over the age of 55.

Inflation expectations remained stable, only rising 0.1% to 6.1%. Plans to make major purchases was mixed, edged a bit for autos and big-ticket appliances and remaining stable for homes.

Housing and Construction

Total Construction Spending

Total construction spending rose 1.2% in April. Private construction spending rose 1.3%. Private Residential construction rose 0.5% and nonresidential construction spending rose 2.4%. New single-family and new multifamily spending rose slightly from the previous month. Nonresidential spending rose in each sector from lodging to manufacturing. Public construction spending rose 1.1%. Public residential construction rose slightly from the March levels. Public construction spending rose in every sector except for conservation and development.

S&P Corelogic case- Shiller US National Home Price NSA Index

As a lagging indicator the Shiller price index can provide some idea of the trend in home prices. Home prices fell 1.1%, falling less than the forecasted 1.8%. The FHFA housing price index rose 0.6%.

MBA Application weekly report

Mortgage applications fell 3.7% the week prior. The seasonally adjusted refinance index fell 7% and the purchase index fell 3%. The average fixed-rate for a 30-year conforming loan rose sharply by 0.22% to 6.91% with some rates at or slightly above 7%. The average fixed-rate for a 30-year jumbo loan rose sharply by 0.31% to 6.78%. Higher rates will likely persist as the Fed is unlikely to cut this year as markets initially forecasted.

Manufacturing

ISM manufacturing Report

The May manufacturing PMI remains in contractionary territory for a seventh consecutive territory, falling 0.2% to 46.9%. This level is near the low of the past twelve months and is 2.5% below the twelve- month average. New orders fell 3.1% to 42.6%. New orders rose in furniture& related products, plastics & rubber products, and miscellaneous manufacturing. Production rose by 2.2% to 51.1%. Production rose in computer & electronic products, machinery, and transportation equipment.

Prices slid by 9% to 44.2%. Backlog of Orders fell 5.6% to 37.5%. The employment index rose 1.2% to 51.4%. Employment rose in transportation equipment and machinery. Supplier deliveries’ performance improved 1.1% to 43.5%. As a reminder, the supplier deliveries levels below 50 indicate faster deliveries. Inventories rose 0.2% to 50%.

Respondents’ sentiments vary by the industry with higher costs still plaguing some industries. Consumer demand is seen as uncertain specifically in the food, beverage & tobacco products, and transportation equipment. Transportation and Equipment reported that the backlog of orders remains strong, however new orders are declining. The business environment remains mixed with the computer & electronic product sector while business is returning to the commercial/government market for machinery.

The average lead time for capital expenditures increased by two days to 172 days. The average lead time for production materials fell by six days to 84 days.

Earnings Summary

With most of the companies reporting earnings for the first quarter of this year, 75% had a positive earnings surprise and the same amount had a positive revenue surprise. For the second quarter, 66 companies reported negative earnings guidance and 44 companies reported positive earnings guidance. It’s important to remember that the bar for earnings was set lower due to an anticipated slowdown. Year-over-year earnings growth was led by the consumer discretionary and industrials sectors. Year-over-year earnings declines were led by the materials and utilities sectors.

Year-over-year revenue growth was led by the utilities and financial sectors. Year-over-year revenue declines were led by the materials sector. Industries beating earnings per shar estimates were energy industrials, and information technology sectors with above 80% of the companies within these sectors reporting earnings beats.

 Industries beating revenues estimates were utilities, information technology and consumer discretionary sectors. While information technology and consumer discretionary reported above 80% of the companies’ beating estimates within the two sectors, utilities had 90% of the companies within the sector beating revenue estimates.

Net Profit margins over the past year rose for the energy sector, industrials, and consumer discretionary sectors. In total the S&P 500 net profit margins fell 0.7% from the first quarter of 2022 to 11.5%.

Companies with the largest positive earnings surprises:

Illumina, Wynn Resorts, MGM Resorts, Insulet Corporation, CarMax, Martin Marietta materials, Coors beverage, and Qorvo

Companies with largest negative earnings surprises:

Expedia, NRG energy, Principal West Capital Corporation, Seagate, Tyson Foods, and Targa Resources Corp.

Techinical Picture:

Volatility Picture:

This past weeks’ cash flow management review:

This past week was disappointing as most of my paycheck was spent on bills and a few surpise expenses. I was able to save a bit of my income but not as much I hoped too. While I continue to look for new employment as I work on my options strategies, I hope I can weather this storm.

Grade: D

Reason: Poor money management

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