Trade The Journey

Trade The Journey

Happy New Year!

Happy New Year! A new year is upon us and while most are setting their new year’s resolutions, hoping to stick to them, Trade the Journey continues its upward trajectory. It’s important to remember that anything worth having takes time and continued effort. This past year, the indices fell from their highs on concerns of stickier inflation, a hawkish Fed, and a looming recession that may transform into a global recession.

Countries around the world tightened as inflation soared. People once confined to their homes, ventured out to make up for lost time as the Pandemic consumed most people’s lives for nearly two years. Services spending rose sharply, as consumers shifted their spending from goods to services. Companies eager to have enough products, stocked their shelves and hired workers to keep up with the post-pandemic demand.

Energy soared in price with crude oil reaching $130 per barrel in March and retesting the high in June before falling later in the year. The White House drew from its strategic petroleum reserve as crude oil faced upward price pressure due to supply cuts from OPEC and the Russian/Ukrainian war. The war between the two countries is entering its 12th month.

To deter Putin from continuing the war, the United States and European countries commenced sanctions on Russia and imposed a price cap on its Oil. Recently the US pledged more support to Ukraine and sent patriot missiles to assist them in their fight. Between January and November of last year, the US sent a total of $48 billion in aid to Ukraine.

US treasuries became quite treacherous at the beginning of the year and continued to fall throughout the year, only rebounding recently. The yield curve has remained inverted although less so than before as the Market forecast an easing or pivot by the Fed from its hawkish stance. As the Fed raised rates, it strengthened the dollar, wreaking havoc for countries around the world. The picture below gives you a good idea of the current Fed rate projections, treasuries, etc..

Japan the last remaining country with an accommodative monetary policy, finally made an adjustment to its policy by allowing its ten-year yield to rise to fifty basis points. Japan a massive holder of its country’s assets, has continued to buy buys to prevent the yield from rising above the fifty basis point level.

The US treasury market wasn’t the only bond market facing selling pressure during the year, the British bond market faced a crisis that ultimately resulted in the Bank of England intervening.  The event was set off by then Prime Minister Liz Truss announcing a plan to cut taxes and place a cap on energy prices. Investors wondered how the government would support those policies along with the possibility of further accelerating inflation.

Pension funds received margin calls and a sell-off commenced, as they rushed to cover their hedges. The situation was ultimately resolved by the Bank of England increasing its bond-buying for a few days. The situation could have transformed into a real crisis, as pension fund managers sold assets to raise the necessary collateral.

This year we shall see how the US economy and markets fare as the Fed has pledged to rein in inflation to its 2% target. While it is evident that the hikes are having their intended effects on the economy, is it enough for the Fed to pivot from its hawkish stance? Indicators like the Leading Economic Index and the yield curve are flashing warning signs of a looming recession but will it materialize?

Economy

This week featured a few economic reports, as the year winds down and a new one begins, fraught with uncertainty. 2023 should be an interesting year as there are mixed views about the economic environment not only here in the United States but globally. The proposed rate hikes by the Fed conflict with the market’s perception of the Fed. There’s also concern that inflation may prove stickier than originally thought, preventing the Fed from reaching its 2% inflation-rate goal.

Let’s also not forget the ongoing war in Ukraine, and Russia’s pledge to cut its oil production, further weaponizing its energy. China is in the midst of a covid surge as it attempts to reopen its economy and boost its economy by providing capital infusion and lower rates. Its property market, a key component of its economy, is still facing a challenging recovery.

Last week, I covered Japan’s sudden shift in its yield control policy, allowing its benchmark 10-year yield to reach fifty basis points. For a third straight day, Japan purchased bonds, as traders are betting against the government’s continued dovish stance. The Bank of Japan is a larger holder of its assets. The yen has continued to fall for a second straight month, descending fast from its peak against the dollar. The monthly chart shows that it could be headed towards the 125 level.

Moving to the economic reports released this week, the advance international trade goods report showed a deficit of $83 billion in November, down over 15%. The numbers cited in this report are adjusted seasonally but not for price changes. Advance wholesale inventories were up 1% and Advance retail inventories were up 0.1% in November. Exports fell in almost all categories apart from automotive vehicles and consumer goods, which rose slightly.

Imports fell in every category. Merchant wholesale trade rose in total boosted by an improvement in durable goods, nondurable goods increased slightly. Retail trade inventories rose slightly with most of the increase attributable to motor vehicles & parts dealers.

The Case-Shiller index measures the value of single-family housing within the United States. The national Case-Shiller index fell 0.53% in October. In the last three months, this index has fallen a total of 2.67% but in the last year, the index of prices rose close to 10%. Homes are remaining on the market longer, and there is slowdown in the number of homes being built as higher mortgage rates are wreaking havoc on prospective buyers.

The S&P/Experian also offers indices covering defaults across different sectors. First mortgage defaults edged up 0.01%, while second mortgage defaults edged down 0.01%. Second mortgages often have a higher rate, as they are borrowed against the equity in a home and subordinate to the first mortgage. Auto defaults remained at the 0.77% level of the previous month but have steadily risen for all this year. Current auto rate loans are above 6% across maturities, which is far more than the 3.7% rate I am paying for my auto loan.

Consumers locked in at higher rates may have a higher probability of defaulting which may be rising as the economy slows and the cushion consumers had from savings dwindle. A good metric to track would also be credit card usage. The credit default index which tracks consumer credit accounts that go into default for the first time each month is rising although still down from the Pandemic highs.

Pending home sales fell for a sixth straight month and fell for all four major U.S. regions. According to the report, there is a two-month lag between mortgage rates and home sales. So, the pending home sales should show some improvement as rates retreat slowly from their highs a few months ago.

Mortgage application volume rose 0.9% from a week earlier. The refinance index rose 6% while the purchase index fell 3% from the previous month. Conforming loans for 30-year fixed-rate mortgages fell 0.08% from the previous week. Jumbo loans for the same maturity also fell by the same amount.

Initial claims rose slightly, coming in above expectations. Continuing claims also increased from the previous week. The increase in initial claims shows that the labor market is showing slight signs of loosening and continuing claims support the evidence that the labor market may ultimately be slowing which could influence the Fed a bit.

Last week, I forgot to include the Fed dot plot which shows where the Fed and its board members see rates. The black dots are the Fed members’ projections, the blue dots are the median projection for the Fed members and the red dot is where the market is projecting rates. As you can see, there is a large disparity between the Fed’s and the market’s projections. The market is clearly saying that the Fed will have to change course sooner than is projected by the Fed.

 Some say the market has not priced in a recession. A large amount of money is still on the sidelines. Assets of institutional money market funds increased by $3.36 billion bringing the total to a little over $3 trillion.

The mood of the market seems to be actively patient. With the VIX hovering around 20, there is still concern in the market. I’d advise keeping your stops tight if you’re trading and if you’re investing, this may be a period of research.

                       Last week’s trade review or trade strategy post can be found here

This past week’s cash flow in review:

This past week was another challenging week in terms of cash-flow management. I didn’t spend much on discretionary items, however, I did spend a lot on bills and credit repayment. It’s not always the surprise expenses that sink you but the steady outflow of capital on a consistent basis. This is the second week I had to withdraw the amount I placed into savings.

The first was to cover an emergency expense for my dog and the second was to cover a credit payment. Managing the amount of money I receive as income is important for me because any leftover funds can be contributed to my trading account. It’s tough from week to week, as I feel I am too close to living paycheck to paycheck. I’ll have to make a better effort at increasing my secondary income.

Grade: D+

Reason: Little Improvement from last week

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