Trade The Journey

Trade The Journey

Greetings and Economic Review: Embracing the Festive Season Amidst Market Dynamics

Welcoming the Festive Season

Good morning! I hope you are all relishing the weekend, immersed in the festive mood as Christmas draws near. Although it seems like Christmas is still a bit away, it’s actually arriving this weekend—time indeed flies! Usually, one would expect a calmer market during this period, but recent and upcoming significant reports suggest we might see increased market volatility.

Economic Indicators and Market Response

Regarding the anticipated rate decision, it remained unaltered, aligning with expectations. Interestingly, as new economic data emerged indicating a slowdown in the economy and job market, the likelihood of a rate reduction diminished. The focus of the market shifted from the decision itself to the press conference and the dot plot projections, which outline Federal Reserve members’ future rate predictions.

Insights from the Federal Reserve Press Conference

During the press conference, a clear picture emerged, reinforcing the belief that rate cuts are likely in 2024. The Chairman forecasted a drop in rates to 2% by 2026, after concluding this year at 2.8%, and reaching 2.4% in 2024. Chairman Powell highlighted that we are nearing the end of the rate hiking cycle, and there was a consensus that no additional rate hikes were necessary.

Future Projections and Economic Outlook

The Fed funds rate is projected to close the year at 4.6%, followed by 3.6% in 2025, and finally 2.9% in 2026. However, Fed members have not ruled out the possibility of an additional rate hike if future data justifies it. Powell mentioned the potential for a recession next year, but noted the unique situation where the economy is cooling without significant job losses.

Powell’s Perspective on Economic Trends

Responding to a query about the economy potentially slipping into a recession and its influence on rate cuts, Powell stated: “We certainly don’t wish to see a recession. Our hope is for a continued trend of what we’ve been observing: a labor market achieving better balance without a major rise in unemployment, inflation decreasing without a notable increase in unemployment, and moderated growth without a significant hike in unemployment. That’s our primary goal.”

Economic Projections for the Next Year

Fed members predict a 1.4% growth next year, with unemployment rates expected to climb to 4.1%. Inflation, as measured by the PCE, is forecasted to drop to 2% by 2026 as the anticipated Fed rate cuts take effect. The FOMC dot plot reveals a consensus among most participants for a rate range of 4.25-5%, with a few exceptions. It is anticipated that rates will decrease further in the following years, eventually settling around the 2.5% mark.

Below is an illustration of the FED dot plot released this past week:

Following the announcement of probable rate cuts in 2024, market indices soared to record highs, while bond yields experienced a significant drop. Yields for five, ten, and thirty-year bonds decreased as investors returned to the bond market. Notably, the ten-year yield dropped below 4% after a peak near 5% in October.

Commodity and Currency Markets

As yields declined, gold prices surged, and the dollar initially dropped to $101.82, later recovering to $102.59 following hawkish comments from a Fed member. Crude oil prices increased from $67 to just below $72.46. Copper also exhibited a steady uptrend, approaching the $3.92 high earlier this month. Global ETFs, following the lead of US markets, saw new highs in India, Germany, Euro Stoxx, and Canada. Market volatility decreased to a low of 11.28 but has since risen slightly above 12. Each of the indices reached new highs, with the Dow Jones Industrial Average setting a new all-time record.

Treasury Budget and Deficit Trends

The Treasury Budget revealed an increase in the deficit to $314 billion from $248.5 billion last year, as expenditures significantly outpaced receipts. However, the deficit has noticeably decreased from levels observed just a few months ago.

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Upcoming Economic Events

This coming week, we anticipate several key economic reports:


      • Tuesday: Building Permits & Housing Starts

      • Wednesday: Consumer Confidence, Existing Home Sales

      • Thursday: Initial Claims, GDP (Third Estimate), Philadelphia Fed Index, Leading Indicators

      • Friday: PCE, Durable Goods, New Home Sales, University of Michigan Consumer Sentiment – Final

    Small Business and Economic Indices

    NFIB Small Business Optimism Index: November

    The Index slightly decreased by 0.1 to 90.6, remaining below the 50-year average of 98 for almost two years. Inflation and the challenge of filling positions with qualified applicants continue to be primary concerns for small business owners. The outlook has marginally improved, and reports of higher nominal sales remained stable.

    Compensation and Profit Trends

    There was a notable rise in owners planning to increase compensation, reaching the highest level since December 2021. Profits, however, remained unchanged. Lower profits were attributed to weaker sales, higher costs of materials, labor, and in some cases, reduced prices. On the flip side, 60% of owners who reported higher profits credited increased sales volume.

    Labor Market and Capital Expenditures

    About 40% of owners reported difficulties in filling job openings, particularly in construction, manufacturing, and transportation sectors. The trend in unfilled openings appears to be decreasing from the highs experienced in 2022. Owners are increasingly investing in capital expenditures, with 61% upping their capital outlays, particularly in technology, to address labor shortages. Despite inflation being a major worry, it is showing a downtrend as most owners managed to lower their average selling prices. Price increases were predominantly reported in finance, retail, construction, wholesale, and service sectors.

    Inventory Levels and Small Business Challenges

    Inventory levels seem to be well-balanced, with no significant change in owners reporting excessively low stock levels. Inventory shortages were noted in retail, finance, and service sectors. It’s noteworthy that small businesses did not benefit as much as larger companies, which had more leeway to adjust prices in response to inflation.

    Production, Inventories, and Manufacturing Reports

    Industrial Production: November

    Industrial production saw a modest increase of 0.2%, a positive shift from the previous month’s contraction. Improvements were seen in the production of final products, with consumer goods and business equipment entering positive growth. Nonindustrial supplies, including construction, remained stable. Materials production rebounded from the previous month’s 0.3% contraction.

    Manufacturing and Capacity Utilization

    Manufacturing production improved, except in the utilities sector. Consumer durable goods production rose by 3.5%, thanks largely to motor vehicle production, while consumer nondurable goods fell by 0.8%. The rise in materials production is attributed to increased consumer parts manufacturing. Durable goods manufacturing increased by 1.2%, whereas nondurables decreased by 0.5%. Capacity utilization edged up by 0.1 points to 78.8%, still below the long-term average. Manufacturing utilization saw an uptick, with a slight increase in mining and a decrease in utilities.

    Empire State Manufacturing: December

    In an unexpected turn, business activity declined, registering at -14.5. Both new orders and shipments continued their downward trend. A larger proportion of respondents reported worsening general business conditions. The decline in new orders and unfilled orders led to improved delivery times. Inventory levels also decreased, with more respondents reporting lower stock levels. Both prices paid and received moderated, and there was a slight decline in both employee numbers and the average workweek.

    Looking forward, the business outlook for general conditions and new orders improved. Planned capital expenditures remained stable, with a noticeable uptick in technology spending. The average workweek showed a slight decrease but is expected to rebound, while employee numbers are anticipated to decline.

    Business Inventories: October

    This report, although slightly delayed, offers insights into business profitability expectations. Inventories dipped by 0.1% after a previous 0.2% rise. The total business inventories to sales ratio stood at 1.37. Retailers and merchant wholesalers saw inventory reductions of 0.1% and 0.4% respectively, while manufacturers’ inventories marginally increased. Motor vehicle & parts dealers were the only sector to report an inventory increase, likely due to the resolution of the Auto Union strike. Total Business sales decreased by 1%, affecting manufacturers, retailers, and merchant wholesalers.

    Retail Sales: November

    Following the Fed rate decision, retail sales outperformed expectations, increasing by 0.3%. Excluding motor vehicles & parts, the rise was 0.2%. Notable increases were seen in food services & drinking places (up 1.6%), food & beverage stores (up 0.2%), and motor vehicle & parts dealers (up 0.5%). Declines were noted at gasoline stations, general merchandise stores, including a sharp drop in department stores, and electronics & appliance stores.

    Inflation and Employment Trends

    Consumer Price Index (CPI) – November Update

    The Consumer Price Index (CPI) presented a slight upward surprise, increasing by 0.1%. Excluding the volatile food and energy sectors, the core CPI experienced a rise of 0.3%. On an annual scale, CPI escalated by 3.2% and core CPI by 4%. Notably, while energy prices declined with a decrease in crude oil prices and a 6% drop in the gasoline index, the shelter index escalated by 0.4%. Despite a uniform decrease in energy prices, electricity costs went up by 1.4%. Comparatively, the previous month saw a 5% decline in the overall energy index.

    Food expenses saw a modest rise of 0.2%, with groceries at home ticking up by 0.1% and dining out costs increasing by 0.4%. Most major grocery categories witnessed price hikes, except for the meats, fish, and eggs category, which dipped by 0.2%. Within the shelter segment, rents for primary residences surged between 0.2% and 0.5%, and the owners’ equivalent rent of residences climbed by a similar margin.

    Vehicle pricing remained stable, with new vehicle costs unchanged, while prices for used cars and trucks jumped by 1.6%. Transportation Services experienced a notable increase of 1.1%.

    Producer Price Index (PPI) – November

    The Producer Price Index (PPI) for final demand remained steady, with the core PPI, excluding food, energy, and trade services, inching up by 0.1%. The prices for final demand goods remained constant. Despite significant hikes in certain categories like chicken eggs (up by 58.8%), the overall goods sector did not see a change. Services in final demand, including transportation and warehousing services, also saw no variation.

    Intermediate demand goods displayed a mixed picture. Processed goods remained unchanged, while unprocessed goods prices declined by 1.4%. The drop in unprocessed energy materials was notable at 3.2%, and foodstuffs and feedstuffs saw a 1% decrease. Crude petroleum prices plummeted by 9.5%. However, services for intermediate demand marked a 0.2% increase, propelled by a significant 4.5% rise in gross rents for retail properties.

    Stage of Intermediate Demand by Production Flow

        • Stage 4: Prices for stage 4 intermediate demand rose by 0.1%, with services inputs increasing by 0.25 and goods inputs by 0.1%.

        • Stage 3: Stage 3 intermediate demand saw a 0.1% decrease, despite a 0.3% rise in services inputs and a 0.6% fall in goods inputs.

        • Stage 2: Prices for stage 2 intermediate demand declined by 0.5%, as services inputs increased by 0.3% and goods inputs decreased by 1.4%.

        • Stage 1: Prices for stage 1 intermediate demand climbed by 0.1%, with services inputs up by 0.2% and goods inputs by 0.1%.

      Final demand construction prices showed a slight variation, rising by 0.2% and then decreasing to -0.2%. The prices for private capital investment construction and government construction mirrored this trend. Materials and components for construction prices also saw a marginal increase.

      Import/Export Prices – November

      Import prices experienced a 0.4% decline, while export prices fell more sharply by 0.9%. Year-over-year, import prices decreased by 1.4% and export prices by 5.2%. Fuel imports witnessed a significant 5.6% drop, despite natural gas prices soaring by 38.3%. Petroleum prices fell by 7.1%. Import prices for foods, feeds, and beverages dipped by 0.5%, and nonindustrial supplies and materials rose by 0.2%. Prices for finished goods remained unchanged, with automotive vehicles experiencing a slight 0.1% decline. Consumer goods import prices also stayed stable.

      Export prices also varied across categories. Agricultural prices increased modestly by 0.2%, with fruits and soybeans contributing to the rise. Nonagricultural industrial supplies and materials decreased by 2.2% due to a 5.1% fall in fuel prices. Finished goods prices saw a decrease, with consumer goods dropping by 0.2% and automotive vehicle prices by 0.1%.

      Employment and Mortgage Trends

      Initial Claims – Week of December 9th

      Initial jobless claims came in lower than anticipated, dropping by 19,000 claims to 202,000. However, continuing claims edged up by 20,000 to 1.876 million. The four-week moving average for initial claims further decreased, reaching its lowest level in several weeks. This trend suggests the labor market remains robust, which could support the idea of a potential soft landing for the economy.

      MBA Weekly Mortgage Applications

      Mortgage application volume witnessed a 7.4% increase from the previous week. The purchase index climbed by 4%, and the refinance index surged by 19%. Following the Federal Reserve’s recent rate decision and press conference, yields have declined, which is likely to lead to lower mortgage rates. The refinance share of mortgage applications rose nearly 5% from the prior week. Average rates for 30-year fixed-rate confirming loans dropped by ten basis points to 7.07%, and jumbo loans saw a thirteen basis point reduction to 7.22%.

      Technical Story:

      Personal Financial Review

      The past week marked significant progress in personal finance management. There was a notable decrease in discretionary spending, including reduced expenses on dining out. However, challenges persist with rising bills and credit card payments. With better control over expenses, the focus now shifts to trimming unnecessary bills.

      Grade: C+ Reason: Notable Improvement


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