Trade The Journey

Trade The Journey

Growing Economy?

Greetings and salutations! I trust everyone had a delightful weekend and is now gearing up for the week ahead. The preceding week brought with it heightened market fluctuations, with indices plunging to fresh lows. Over the past few weeks, markets have been jolted by soaring treasury yields. But intriguingly, even with treasury yields pulling back from peak levels, the market took a dive. Is the slowing economic momentum reflected in the recent financial updates?

A clearer understanding emerges when it comes to trading: every market movement needs a narrative, a topic that sparks either concern or enthusiasm among its participants. The presence of a catalyst is crucial for market shifts. If you’re not adopting a neutral trading approach, a catalyst becomes essential. In my early trading days, I would typically hold out for weeks with significant economic data releases.

Yields: The five, ten, and thirty-year treasury yields wrapped up the week slightly below their peak levels. Bonds displayed a comparable trend, hovering near their lowest points as investors stepped in. Earlier in the week, both Bill Ackman and Bill Gross expressed concerns over stretched bond positions and subsequently closed their short positions. The Federal Reserve’s steadfast stance on maintaining elevated yields for an extended period undeniably pushed yields to multi-year peaks.

Elevated yields aren’t exclusive to the U.S. Europe too witnesses surging rates, especially as the European Central Bank’s chief, Christine Lagarde, chose to keep rates static. The ECB’s unique focus remains on price stability. Over the past year, bond yields in countries like the Netherlands, Spain, Italy, France, the UK, and Germany have jumped by more than eighty basis points. Notably, the UK has experienced a surge of over a hundred basis points this year.

Many central banks chose to maintain the status quo on rates, echoing the sentiment that “higher for longer inflation persists.” Rising borrowing costs pose challenges for nations with a significant debt-to-GDP ratio, and the U.S. falls into that bracket. As the U.S. issues more bonds aiming to replenish its treasury coffers, this increased supply might also be impacting yields. Moreover, surging interest payouts played a part in adding a trillion to the deficit, which currently hovers just above $2 trillion.

Other Developments: Gold is currently trading above the $2,000 mark. To provide some perspective, over the last month, the gold price trajectory has shifted from around $1,800 to over $2,000, closely approaching its recent peak of $2085.4. Crude oil is priced at $85, exhibiting fluctuations around this value during the week’s closing days. Crude hovers slightly below its 50-day moving average. Bitcoin underwent a correction from its top levels and presently stands at $33,837. Copper maintains a prolonged lateral movement as China endeavors to jumpstart its economic machinery.

Upcoming Week:

  • Tuesday: Employment Cost Index, consumer confidence
  • Wednesday: MBA Applications index, construction spending, ISM Manufacturing, JOLTS- Job openings, and FOMC rate decision
  • Thursday: Initial claims, productivity, and factory orders
  • Friday: Employment Situation report and ISM Non-Manufacturing Index

Economic Overview:

Housing Picture:

New home sales -September: Sales of new homes surpassed August’s figures by 12.3%, marking the highest tally of new homes sold this year. While the trajectory for new home sales has generally been upward, it hasn’t been without its bumps, primarily due to the rising yields. All price segments saw an uptick in home sales, except for the $400,000 to $499,999 bracket. As for the status of new homes during their sales, those yet to start construction saw a slight dip. In contrast, those under construction and those completed witnessed a rise. The count of new homes available for purchase at the month’s end increased for both homes yet to start and those completed but declined for homes under construction.

MBA Weekly Index: The overall mortgage application volume experienced a 1% dip following its ascent the previous week. The refinancing index climbed by 2%, while the purchasing index dropped by 2%. The average lending rate for a thirty-year conforming loan jumped twenty basis points, settling at 7.90%. Similarly, the rate for a thirty-year jumbo loan saw an increase of twenty-three basis points.

Pending Home Sales – August: The figures for pending home sales recorded a 1.1% rise. The contract numbers for these sales are currently at a twenty-year low.

Manufacturing:

Durable Goods – September: The month of September witnessed a 4.7% uptick in new orders for manufactured durable goods, overturning a two-month downward streak. Excluding transportation, these orders marked a 5.8% growth. Delivery numbers for durable goods increased by 0.3%, while backlogged orders expanded by 1.4%. Inventory levels grew by a marginal 0.1%. The automobile segment observed a downturn for both new orders and deliveries, likely influenced by the ongoing Autoworkers strike.

Orders for capital goods surged by 18.6%. The delivery metrics inched up by 0.2%, and unfilled order volumes grew by 2.4%. Within the manufacturing sector holding backlogged orders, the new order figures showed a 7% increase, while delivery numbers remained unchanged. New orders for transportation equipment saw a significant 12.7% jump, reversing a two-month declining trend. Concurrently, the unfilled order numbers for transportation equipment also went up.

Initial Claims: The initial claims were in line with expectations, registering at 210,000. The four-week average adjusted slightly, rising by 2,000 to reach 208,000. Continuous claims numbers went up by 63,000, totaling 1.79 million. These figures have remained relatively stable over recent weeks. While we aren’t seeing the kind of fluid job transitions as in times past, the labor market continues to be robust.

GDP & Treasury Budget: The real GDP, accounting for inflation, experienced a growth of 4.88%, catching both analysts and the market off-guard. The GDP price deflator increased by 3.50%, following a mere 1.68% rise in Q2. Inventory and consumption were primary contributors to the GDP growth, with residential investments and governmental spending also chipping in.

In terms of consumer outlay, both service and goods sectors recorded increased spending. Expenditure in services was primarily driven by housing, utilities, healthcare, financial services, and food services & lodgings. For goods, non-durable items and recreational goods & services led the charge in spending increments. On the other hand, non-residential fixed investments were on the decline, primarily due to decreased equipment spending.

Regarding PCE, expenditure levels went up by 2.9%. Eliminating the influence of food and energy, the PCE grew by 2.4%, showing a pullback from Q2. Current-dollar personal earnings saw a reduced growth compared to the preceding quarter, reflecting in a decline in disposable income. Real disposable income took a 1.9% hit after a 6.1% upswing in Q2. The savings rate for individuals retreated by 1.4%, finishing at 3.8%.

Though this report has its bright spots, like the PCE nearing the Federal Reserve’s targets and a sharp pullback in the deflator from 2022’s first quarter at 9.11%, there are road bumps. The drop in disposable income and the overall decline in saving rates, while inevitable, do raise eyebrows. As for the Treasury Budget, the deficit surged past expectations, reaching $1 trillion. The total outlay amounted to $4.69 trillion, exceeding the $3.69 trillion revenue figure.

Treasury Budget: September Overview The September deficit escalated by $171 billion, reversing August’s $89 billion surplus. While receipts saw an uptick, outlays also surged, reaching some of their peak levels in recent months. Interest on the national debt went up, as did Social Security payments by 12% and Medicare expenditures by 13%.

Spending on national defense and veterans’ benefits witnessed an increase, whereas income from individual taxes dipped by 17%. 2023’s deficit is now at $1.695 billion. With a reshuffling in the House’s leadership, reaching a budget consensus among and between the Republican and Democratic parties presents challenges.

PCE: September Review The PCE price index registered a 0.4% increase, with core PCE seeing a 0.1% rise from its August mark, even as PCE itself dropped by 0.1%. Annually, PCE ascended to 3.4% and core PCE to 4.7%. Both goods and services observed a price surge, 1% and 0.8% respectively.

Durable goods saw a 1% rise, rebounding from August’s decline, whereas nondurable goods increased by 0.5%, a slight decrease from the prior month. As food and energy prices climbed, personal income fluctuated between -0.1% to 0.3%. Real disposable income grew by 0.4% after remaining stagnant in August, which, coupled with a drop in the personal savings rate to 3.8%, reflects the strain of inflation on consumers.

Earnings Highlights:

Visa (V) Achieving both earnings and revenue expectations, Visa reported an 11% growth in net revenue and a 22% increment in EPS. Although the annual payment volume remained constant, cross-border volume (excluding Europe) saw an 18% rise. The company remains optimistic despite anticipating a bifurcated fiscal year ahead, expecting low double-digit growth for payment volume and processed transactions year-over-year.

UPS While UPS surpassed earnings expectations, it fell short on revenue. Factors like challenges in international and freight forward volume, labor concerns, and contract negotiations affected the company’s performance. Hiring 100,000 seasonal employees for the anticipated busy holiday season, UPS also reported decreased average daily volumes in both business-to-consumer and business-to-business sectors, particularly in retail and tech.

Microsoft Outperforming in both earnings and revenue, Microsoft’s cloud business thrived, bolstered by its global data centers and the integration of AI. The company’s upcoming acquisition of Activision and the expansion of its Microsoft 365 services also hint at an optimistic future.

Google Google exceeded both earnings and revenue projections. Advertising revenues and daily views experienced growth, although the cloud division fell short this quarter. The company made cost-cutting moves by reducing its workforce and optimizing recruiting operations, even as search continues to be its primary revenue driver.

Technical Story:

Weekly Financial Reflection: The week saw a boost in discretionary income allocated to savings. However, an upfront mobile phone purchase and oversight in settling a no-interest credit account led to unexpected credit accumulation. The accrued annual interest nullified my year’s payment on that account. I managed to offset this by tapping into an alternative savings account. Looking ahead, once my savings target is reached, funds earmarked for savings will be redirected to clear credit.

Performance Assessment: C+ Rationale: Notable progress but room for refinement.

Hope this week’s data and insights prove valuable as you navigate the week ahead!

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