Trade The Journey

Trade The Journey

Fed to cut rates in 2024?

Top of the Morning! I hope all is well and everyone is enjoying the weekend. This upcoming week is a shortened week with a few economic reports scheduled to be released, the most important being the Fed’s beige book. This past week there was a plethora of economic reports released that moved the market higher after few weeks of disappointing moves. The overall takeaway for me after reading the reports was that with the labor market seemingly reaching demand/supply balance, a rate pause or cut isn’t out the picture.

Inflation is also moderating although rates remain high for home buyers and businesses seeking loans. In Europe, the inflation picture isn’t nearly as encouraging as some countries in Europe continue to see prices rise despite the rate hikes.

China’s growth is also concerning, as the government attempts to revive its economy by lowering rates and offering support to businesses and consumers. The risk of contagion is starting to rise. Yields across maturities also fell as the market saw the reports supporting fewer rate hikes in the future.

This past week, I closed my first trade that had an expiration date longer than week and it went well. There’s was enough time for me to allow my strategy to work. You can read about it here.

Economy

Job Market Health

JOLTS (Job Openings and Labor Turnover Survey) Report: July

Job openings fell this past month to 8.827 million, which is below forecast and a good signal that the job market is loosening. Job openings increased in information, transportation, warehousing, and utilities. Openings also increased in construction and manufacturing. Job openings decreased in professional & business services, and government.

The number and rate of hires were little changed. Total separations were little changed, but separations fell sharply in accommodation and food services. Quits decreased 253,0000 to 3.5 million with the quits rate remaining unchanged. Layoffs and discharges were also little changed. Small and medium establishments were little changed in this report, however, large establishments with 5,000 or more companies saw quit rates and total separations decrease.

The quit rates fell sharply in leisure and hospitality but did increase in the retail trade. The nondurable goods quit rate was about the same as the previous month, but the nondurable goods quit rate rose slightly. Construction quit rates were unchanged.

ADP Employment Change: August

The private sector increased employment by 177,000 jobs, in line with expectations. The goods producing sector added 23,000 jobs, led by an increase in manufacturing. The service-providing added 154,000 jobs led mostly by the trade/transportation/utilities sector. Leisure/hospitality only added 30,000 jobs. So far small establishments with 50-249 employees have added the most jobs within the last several years.

While small establishments only added 18,000 jobs, medium and large establishments added around 80,000 jobs a piece. Pay growth slowed in all 50 states, rising only 5.9% for job-stayers and 9.5% for job-changers. For job stayers, construction led pay growth in the goods producing sector, rising 6%. In the service-producing sector, leisure/hospitality and education/health services were both above 6.5%.

Employment Situation Report: August

Nonfarm payroll employment rose by 187,000, almost in line with the forecast. The unemployment rate rose to 3.8%, reaching the highest rate in the last several months. Last year the employment rate was at 3.7%. Job losers and persons who completed temporary jobs increased after falling last month.

The labor participation rate edged up by 0.2% to 62.8%. The number of people unemployed for fewer than five weeks edged up. Employment trended up in health care, leisure & hospitality, social assistance, and construction. Employment was little changed in retail trade, mining, wholesale trade and manufacturing.

The average workweek edged up by 0.1 hours to 34.4 hours. The manufacturing sector average hourly workweek was unchanged while overtime edged down. The goods-producing average weekly hours edged up slightly. The private service-providing average weekly hours was unchanged. Average weekly hourly earnings rose 0.2% to $33.82. Over the past year, average hourly earnings rose by 4.3% edging down from the 4.4% level.

Initial Claims

Initial Claims fell by 4,000 to 228,000 claims which came in below forecasts. The four-week moving average declined by 1,000 to 238,000 claims. Continuing claims rose by 28,000 to 1.725 million claims, slightly higher than the previous month.

Prices: July

The PCE price index, the Fed’s preferred inflation gauge, edged up by 0.2% as did the core PCE index. Year-over-year price index rose by 0.3% to 3.3%.  Prices for goods fell 0.3% and services prices rose 0.4%. The year-over-year core price index rose 0.1% to 4.2%. The personal consumption expenditure index rose 0.2% to 0.8% in current dollars. In chained dollars, rose over 0.2% to 0.6%.

In services, the rise can be attributed to final services & accommodations, and health care. For goods, the large contributors to the rise were other nondurable goods, foods and beverages, recreational goods, and vehicles.

The personal income index fell 0.1% to 0.2%. The disposable personal income index was flat month after month after rising 0.2% the previous month. In chained dollars, the disposable personal income index fell 0.2% after coming in flat the previous month. The personal saving rate was 3.5%. The core price deflator was unchanged month-over-month and rose 0.1% from the past year. The price deflator is calculated by taking the ratio of the price index for core personal consumption expenditures to the price index for total personal consumption expenditures.

Manufacturing and Inventory

The ISM Manufacturing Report

While the ISM Manufacturing INDEX rose 1.2% to 47.6%, manufacturing remains in contractionary territory. After spending a little over two years at the expansion level, it has contracted for nine months. Of the largest six manufacturing industries, transportation equipment, food, beverage & tobacco products, and petroleum & coals improved.

For the most part, respondents reported that consumer demand has softened or moderated with some supply constraints still existent. The Fed’s rate hikes have their intended effects by slowing down demand from the customer. Manufacturing PMI is now closing in on the 12-month average of 47.8 indicating that manufacturing is stabilizing and may even be improving.

New orders continued to contract, marking the 12th straight month of a slowdown. New orders fell 0.5% to 46.8%. A slightly higher percentage reported improving conditions for new orders. Production was at the 50 level, which is the level between contraction and expansion. A high percentage of respondents reporting that conditions were about the same as the previous month.

Employment improved, rising 4.1% to 48.5%. While still in contractionary territory, employers are balancing their workforce through attrition mostly as right-sizing remains the primary goal. Supplier deliveries rose 2.5% to 48.6%, which indicates faster deliveries. Inventories fell 2.1% to 44%, as manufacturers attempted to navigate the uncertainty in demand.

Customer inventories were unchanged, as customers have determined inventory levels at their current levels to be appropriate. Prices rose 5.8% to 48.4% as commodity markets remained volatile. Respondents that reported prices had risen or remained at current levels rose. The backlog of orders rose 1.3% to 44.1% as consumers continued to see orders soften.

Inventories: July

Wholesale inventories were down 0.1% in July. Durable goods fell 0.3% for another straight month. Nondurable goods fell 1.2% after rising 0.2% this past month. Retail Inventories rose 0.3%. Excluding motor vehicle & parts dealers edged down from last month’s rise, falling from 1.3% in June to a 0.9% rise. International trade in Goods rose 2.6%.

GDP Second estimate for the Second quarter

GDP growth edged down from the first estimate of 2.4% to 2.1%. The PCE price index edged lower by 0.1% to 2.5%. The PCE index rose 0.1% to 1.7%. Gross private domestic investment edged down sharply by 2.4% to 3.3%. Government spending rose 0.7% to 3.3% after declining sharply from 5% in the first quarter.

The GDP price deflator edged 0.2% from the first quarter to 2%. The personal savings rate rose slightly to 4.5%. Disposable income rose by 5.9% while real disposable income increased by 3.3%. Residential investment fell another quarter, but the contraction is slowing, especially from the highs made in the third quarter last year. Final sales fell by 2% from the first quarter to 2.2%.

Profits of domestic financial corporations fell sharply in the second quarter, while profits of domestic nonfinancial corporations rose.

Construction Spending: July

Total Construction spending rose 0.7%. Total private construction spending rose 1% with residential construction spending rising 1.4%. Nonresidential construction spending rose 0.5%. Total public construction spending fell 0.4%. Residential construction spending for the public sector also rose.

Consumer Confidence report

The consumer confidence index fell 7.9 points to 106.1. The present situation index fell to 144.8 and the expectations index to 80.2. The expectations index is slightly higher than 80 level which signals that a recession is likely in the next six months. Consumer confidence fell across age groups but varied for various income levels.

While consumers indicating a recession as probable in the near future fell this past month, it remains at elevated levels.  Consumers do plan on making big-ticket purchases soon, however, home-buying plans continue to fall. Expectations of rising rates increased noticeably. Current family financial conditions are starting to weaken, with those citing “bad” conditions rising and those citing “good” conditions declining.

This report echoed the earnings reports and calls from big retailers that spoke of a cautious consumer that has switched their buying preference from experiences and big purchases to nessecities. With rates and prices still relatively high, the consumer has remained resilient.

Trading Week ahead:

With the exception of the Fed Beige book, Productivity and the ISM nonmanufcaturing report, most of the reports being released this upcoming week have a low impact on trading. The following week, the CPI, PPI and retail sales report will be released which is guaranteed to add some volatility to the market.

Volatility is a trader’s best friend, so this upcoming week might be a little tricky. Bond yields for the five, ten, and thirty rose on Friday but hit resistance at the 20 SMA. It will be interesting to see if yields continue to rise after the employment situation report and other job metrics lend evidence that the job market is cooling.

While the US may be taking a breather this upcoming week from its focus on jobs and inflation, international monetary policies and economic releases may take center stage. Data coming out of China and Europe should be watched closely. With the recent run up, I’m interested in seeing how the market opens tomorrow before I place a trade.

Technical Story:

This past week’s cash flow review:

This past week was challenging being that I did not receive a paycheck from the previous pay period. My employer sent the check but somehow it never arrived. I have my suspicions on what happened, but I don’t know for sure. I had to really scale back on my spending and certain monthly memberships were cancelled.

Luckily, I have money saved in various investment accounts, but I try not to withdraw from these accounts too often. So far, I’ve been able to survive and some of things I thought I needed, I don’t really need.

This coming week my third paycheck should arrive but being that the previous one didn’t arrive, I’m not too optimistic. The envelope has “payroll office” written in large bold letters so if someone does have it that may be waiting to cash it. While I’m hopeful the funds will be deposited in my account soon, I’m prepared if it takes a little longer.

Overall, I feel good about my spending habits moving forward.

Grade: C+

Reason: Was able to maintain my standard of living without receiving a paycheck.

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