Trade The Journey

Trade The Journey

Indices fall, as Yields rise!

Top of the Morning! Volatility is rising as the markets retreat from their highs. Bond yields rose across the maturities as the economy remains resilient. The two-year yield is nearing 5%, and the ten-year yield is nearing its more recent highs. Retail sales, covered below, showed that consumers are still spending, and industrial production recovered.

Only 33% of the companies within the S&P 500 are above their 50-day moving averages. The same story could be told for the remaining indices except for the Dow, in which 47% of the companies are above their 50-smas. Are participants taking profits or are they reassessing what’s priced into the markets?

Another major story is China, which is struggling to resolve growth. After disappointing report releases, China will the release of its unemployment levels for its youth. China lowered rates on its medium-term facility, but markets are calling for a more defined stimulus plan. The major question for participants is how will China’s slowing growth affect the Global economy?

Economy

Consumer Health

Retail Sales: July

Retail sales advanced higher than forecasted, showing that the consumer is still strong. Retail sales rose 0.7%, after a revision showed that sales in June rose 0.3% instead of 0.2%. Excluding motor vehicle & parts, retail sales rose 1% and excluding gasoline stations, retail sales rose 0.8%. Leading sales were found in nonstore retailers (1.9%) and food services & drinking places (1.4%). Retail sales aren’t adjusted for inflation.

Motor vehicle & parts dealers and automotive vehicles saw sales decline. Food & beverage store sales rose 0.8% after contracting in June. Overall, retail sales rose sharply in some areas but declined for some of the discretionary categories like furniture, electronics & appliances, and miscellaneous store retailers.

Initial Claims

Initial claims came within 1,000 of the forecasted 240,000. The week prior, initial claims rose 239,000, after registering 250,000 claims the week of August 5.  The four-week moving average moved up by 2,000 to 234,000. Continuing claims increased by 32,000 to 1.716 million. Although the labor market is loosening, it’s still relatively tight compared to other periods. The Fed minutes should provide more clarity on how the Fed is viewing the labor market.

Housing

Building Permits & Housing Starts: July

Building permits rose 0.1% this past month but are still 13% below the July levels. Single-family permits rose 0.6% and multi-unit permits with 2-4 units fell 7.7%, and for 5 units or more, permits fell 0.2%. The 2–4-unit permit level is at its lowest level since early February. Permits for 5 units or more are at their lowest level in the past year, after declining last month by close to 14%. Tightening credit conditions may be making it more challenging for builders to receive a loan.

Housing starts rose 3.9% with single-family housing starts rising by 6.7% after declining in June, following a high in May. Multi-units with 5 or more units were flat. Housing units under construction fell for single-family homes to the lowest level this year. Multi-unit housing with 5 or more units rose to its highest level over this past year. Completed construction for single-family homes rose by 1.3%, matching the high reached in January. Multi-unit housing with 5 units or more fell to its lowest level in the past year.

MBA Weekly Mortgage Applications

Mortgage applications fell 0.8% this prior week.  The refinance index fell 2% and the purchase index fell 0.2%. The 30-year fixed rate for a confirming loan rose 0.07% to 7.16%. The 30-year fixed rate for a jumbo loan rose 0.07% to 7.11%. Rates rose for a third consecutive week, constraining purchase activities.

Production, Manufacturing, and Inventories

Industrial Production: July

Industrial Production rose 1%, after falling for two consecutive months. Most of the categories rebounded after two consecutive months of declining production. Construction production was the lone industry to continue its decline although a smaller decline than the previous month. Leading the charge in production were consumer goods, materials, and business equipment, all rising at least 1%. Manufacturing production rose 0.5% as did Mining. Utilities rose sharply, recovering from three consecutive months of declining production. Utilities rose 5.4%.

Capacity Utilization rose 0.7% to 79.3%, nearing the 50-year average of 79.7%. Manufacturing utilization improved by 0.3%, rising for both Mining and Utility utilization.

Digging a bit deeper, production for consumer goods rose mostly due to a 4.8% rise in the output of automotive products. Durable manufacturing rose, with motor vehicles & parts, machinery and computer & electronic production contributing to the increase. Nondurable manufacturing was essentially unchanged, displaying mixed results for various industries. With production and capacity utilization rising, this probably isn’t the report the Fed was envisioning as it combats inflation.

Business Inventories: June

Business Inventories were unchanged, while sales declined 0.1%. The inventories/sales ratio was 1.40 up a total 0.07 points from the level a year ago. The ratio was unchanged from the May level.  Inventories for manufacturers were unchanged after falling 0.2% in May. Retailers’ inventories were virtually unchanged, rising 0.1% to 0.7%. Merchant wholesalers’ inventories fell for a second consecutive month, declining by 0.1% to 0.5%.

Sales were in the positive territory but declined noticeably from the May levels. Manufacturers’ sales declined 0.3% to 0.1%. Retailers’ sales declined 0.3% to 0.2% and merchant wholesalers’ sales continued their decline, contracting further from 0.5% to 0.7%.

Empire State Manufacturing Survey: August

Business activity fell in the New York, one of the manufacturing hubs in the US. General Business conditions declined sharply, falling 19% with a higher percentage reporting worsening conditions and a lower percentage reporting better conditions. The same story could be told for new orders, which fell twenty-three points to the contractionary territory of 19.9. Shipments fell twenty-six points to a negative 12.3. Unfilled orders were negative and have yet to recover, little changed according to respondents. Inventories were also lower, improving slightly while delivery times were steady.

Prices paid drifted higher after hitting a low, with a higher percentage reporting better conditions. Prices received edged higher, with respondents reporting better conditions. The number of employees drifted lower, with respondents reporting a lower number. The average employee workweek dropped sharply as the number of hours worked declined.

However, future business conditions rose to the highest level in more than a year as manufacturers remain optimistic. New Orders, shipments, and unfilled orders rose sharply as respondents’ look toward a recovery. Planned technology spending, capital expenditures, and the number of employees expected also rose. Prices received edged lower as inflation is expected to moderate while input prices edged higher.

Philadelphia Manufacturing Business Outlook: August

General Activity improved rising into positive territory, with a higher percentage of firms reporting better conditions. The employment index edged down with more respondents reporting a deceleration in hiring. The average workweek or hours worked during the week rose slightly. Prices paid rose slightly and prices received edged down.

The firms’ median forecast for the rate of inflation for U.S. consumers over the next twelve months edged down to 4% from 5%. The expected inflation rate for the ten-year period rose by 0.2% to 3.5%.

The index for future activity wasn’t nearly as positive as the Empire State manufacturing report.  New orders and shipments declined. Planned capital expenditures also fell into contractionary territory.

U.S. Import and Export Price Indexes: July

US imports edged up 0.4%, after declining the last two months. Most of the rise can be attributed to a 3.6% increase in imported fuel prices. Despite the rise, the past twelve months have seen a decline in energy prices. Nonfuel import prices were unchanged. Capital goods prices rose 0.1% while the prices for nonfuel industrial supplies and materials rose 0.3%. Foods, feeds, and beverages import prices fell 1.4%.

US export prices rose 0.7%. Most of the increase can be attributed to higher prices for agricultural and nonagricultural exports.  Agricultural export prices rose 0.9%. Excluding agriculture, prices for exports rose 0.6%. Nonagricultural industrial supplies and materials rose 1.5%. Capital goods export prices rose 0.1%, following an increase in June.

Prices for China imports continued its deceleration, falling 0.2% in July. Import prices from China haven’t recorded an increase since late 2022. Export prices to China rose 1.5%.

The Conference Board: Leading Economic Index for July

The Leading Economic Index continued its descent, falling 0.4%. Non-financial components over the past twelve months have declined 2.7%, with the ISM index of new orders and avg. consumer expectations for business conditions falling sharply. The coincident economic index rose 0.4%. Payroll employment, personal income less transfer payments, manufacturing trade & sales and industrial production is the data used to determine if were in a recession. The lagging economic index was unchanged.

FOMC Minutes: July Meeting

Respondents foresee both headline and core PCE returning to the 2% inflation target by the end of 2025. Although inflation is decelerating, most think that additional policy tightening is possible. Due to spending and real activity coming in stronger than expected, respondents no longer expect a recession towards the end of the year. However, they did expect real GDP growth to decelerate in 2024 and 2025.

Respondents also skewed their inflation expectations to the upside, with more a possibility of inflation remaining stickier than expected. Further evidenced is needed for a confirmation that inflation is clearly on track to reach the 2% mandate. Tighter credit conditions are expected to weigh on households and businesses. Although rates were hiked, not all members favored a rate hike, some members favored leaving the target range unchanged. The members who favored unchanged rates, thought that current degree of restrictiveness would allow the progress needed to bring the inflation rate to 2%. The Federal Reserve continued its reduction of its balance sheet.

Some Earnings

Deere & Company: Second quarter

Deere beat forecasts on both earnings and revenue. Deere saw a sustained demand for both farm and construction equipment. Net sales for equipment operations rose 10%, for production & precision Ag business net sales rose 12%, and small ag & turf net sales rose 3%. Expected sales for large ag equipment is expected to rise, as ag fundamentals remained solid. Midsized equipment sales are expected to decelerate, with weakness seen in consumer-oriented products, heavily affected by higher interest rates.

While Europe industry sales are expected to between 0%-5%, sales in Asia are expected to decline. Its construction & forestry sections’ net sales were up 14%. Demand for earthmoving and compact construction equipment remains strong. Deere cited stabilization in housing and reshoring efforts in manufacturing offsetting weakness in office and commercial real estate.

Deere also seen its supply chain improve, reducing costs by nearly 50% in premium freight compared to the previous year.

Home Depot: Second quarter

Home Depot beat on earnings and revenue forecasts. Sales declined 2% year-over-year as consumers shunned big-ticket item purchases. Big-ticket comparable transactions (Over $1000) declined 5.5% compared to the second quarter of last year. Although the consumer remains cautious, they still see the homeowner consumer in a good position and engaged in home improvement. As prices decelerate, Home Depot lowered some of the prices in various categories.

Comparable sales declined 2% and the average amount typically spent by the customer decreased even as the number of shopper transactions is rising. Building materials, outdoor garden, hardware, plumbing, tools, and millwork reported positive comparable sales. Consumers remained engaged in small projects.

Target: Second quarter

Target beat earnings forecasts but missed on revenue. Lately, consumers have been largely shunning discretionary items in favor of necessities.  Target cut is full year expected sales and profit forecasts. Its shares rose 3%. While sales and store traffic improved, Target cited headwinds ahead for the consumer.

Comparable sales fell more than expected, declining 4.3% and digital comparable sales fell 10.5%. Consumers are buying less clothing, home décor and other nonessential items. Inventory at the end of the quarter fell 17% compared to levels a year ago.

Walmart: Second Quarter

Walmart beat on earnings and slightly beat on revenue forecasts. Walmart continues to see growth in its sales, raising its full-year forecast. They expected its net sales to increase 4 to 4.5% in the next fiscal year. E-commerce sales rose 24% this past quarter and it has also profited from advertising through its online channel. While Walmart sales have increased, only a modest improvement was seen in big-ticket and discretionary items.

Walmart sees the consumer as still cautious about their spending. Transactions rose by 2.9% and the size of the amount spent per transaction rose 3.4%. Comparable sales grew faster than forecasted, rising 6.4% in the second quarter. Consumers are purchasing more food from Walmart, specifically from its private label brand. Sales of private label brands grew 9% year-over-year. Walmart cited the same headwinds for the consumer as Target.

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This Past weeks’ cash flow in Review:

This past week I received my first paycheck and an additional paycheck from my former job for vacation and sick time. It was a large sum of money that resulted in a delay in my paycheck being processed. While I was able to save a large portion, unexpected expenses arised that I had to cover that put a damper on my enthusiasm.

The biggest surprise being automotive expenses nearing $1,000. Luckily, I can weather this storm. In near the future, I’ll be getting my own place so managing my spending will be essential. I’ll basically have to cut more of my discretionary expenses to have enough to save. Rent in the city I live at is over $3,000 per month which doesn’t leave much left over for too much entertainment.

Grade: C

Reason: Managed a large income increase relatively well.

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