Trade The Journey

Trade The Journey

Inflation continues to moderate!

Good morning traders! I trust everyone had a restful weekend and is gearing up for the abbreviated holiday trading week. As Thanksgiving approaches, may we all find time to gather with loved ones and share what we are grateful for.

Recapping last week, the markets saw an upswing propelled by a favorable CPI report, which I regrettably overlooked due to a scheduling mishap. Nevertheless, I exercised prudence by refraining from an impulsive trade. Waiting on the sidelines was challenging, given the apparent upward momentum in the markets. Feel free to review my latest trade here.

Yields retracted in response to positive Fed commentary and an improved CPI report indicating a deceleration in rising prices. Notably, across the five, ten, and thirty yield maturities, yields dipped below crucial support before closing slightly above for the week. Bonds, lingering near recent lows, exhibited a rising trend, particularly in the five and thirty-year sectors.

In the realm of commodities, gold is reclaiming ground as the dollar inches closer to its 200 SMA. Crude oil found support around $72.57, almost fully recovering from Thursday’s losses. Copper remains on a robust upward trajectory, while Bitcoin maintains its position near recent highs.

Anticipating the week ahead, here’s the schedule:

  • Monday: Leading Indicators
  • Tuesday: Existing Home Sales and FOMC minutes
  • Wednesday: MBA Weekly Index, Initial Claims, Durable Goods, and University of Michigan Consumer Sentiment – Final

Now, let’s delve into earnings reports:

Home Depot: Despite beating earnings and revenue forecasts, sales witnessed a 3% decline over the last year. Comparable sales dropped by 3.1%, with US stores experiencing a 3.5% contraction. Consumers leaned towards small projects, avoiding big-ticket items. Purchase volumes over $1000 declined by 5.2%. While some segments, like roofing and installation, saw growth, higher labor costs impacted the operating margin, down 1.5% from the previous year. Merchandise inventories are down 11%, and cautious optimism prevails for the fourth quarter.

Walmart: Though beating earnings and revenue forecasts, Walmart’s margin was narrower than previous quarters. Comparable sales in the US rose by 4.9%, with international sales up 5.4%, notably China sales up 25%. Walmart foresees a deflationary period, aligning with Home Depot’s experience. Consumers seek value amid budget management, reflected in a 24% and 16% rise in e-commerce sales for Walmart and Sams Club, respectively.

Target: Impressively surpassing earnings and revenue forecasts, Target faced lower sales for discretionary items. Comparable sales declined by 4.9%, in line with expectations. Improved inventory management and decreased freight costs were notable, though challenges persist due to higher rates, student loan payments, and shifting consumer behaviors. Target remains cautious for the fourth quarter, expecting a mid-single-digit decline in comparable sales.

Economic Data Overview:

Treasury Budget: In October, the deficit saw a modest increase, attributed to a higher number of receipts compared to outlays. Over the past year, total receipts witnessed growth, excluding miscellaneous receipts, customer duties, and unemployment insurance. Corporate and individual income tax receipts showed a substantial increase. Although the deficit rose slightly, total outlays also increased over the past year. Higher rates led to almost doubling interest on treasury debt securities in the last year. Publicly held debt nearly tripled, while total assets contracted last year but expanded in the past year, including U.S. treasury operating cash. Borrowing from the Federal Financing Bank contracted over the past year.

Inflation Picture:

Consumer Price Inflation (CPI): October The CPI index remained unchanged from September, with a 3.2% rise over the past year. Core CPI, excluding food and energy, increased by 0.2%, slightly lower than September. The core CPI rose by 4% over the past year, marking its smallest change in the last two years. Notable changes include a 0.1% to 0.3% rise in the Food index, with food at home increasing by 0.2%, and no change in food away from home.

The energy index contracted by 2.5%, reflecting decreases in energy commodities, gasoline, and fuel oil prices. Energy services rose by 0.4% to 0.6%, with electricity prices increasing by 1.1% to 1.3%. Shelter, falling by 0.3% to 0.3%, played a significant role in the Core CPI, accounting for 70% of the total increase in the last month. Other notable changes include declines in new vehicles and used car & truck prices, while rent of primary residence and owners’ equivalent rent of residences experienced minimal changes.

Producer Price Inflation (PPI): October PPI for final demand fell by 0.5%, driven by a 1.4% decline in final demand for goods, which remained unchanged for services. Core PPU rose by 0.1%, translating to a 2.9% increase in core CPI over the past year. The decline in final demand goods was primarily due to a 15.3% drop in gasoline prices, with energy prices falling collectively.

Final demand services saw a notable 3.1% increase in airline passenger services. Intermediate demand prices for processed goods fell by 0.9%, while unprocessed goods declined. Intermediate demand prices for services remained unchanged, with chemicals and allied products wholesaling rising by 6.7%. 

Intermediate Demand by Production Flow

  • Stage 4: Prices for Stage 4 intermediate demand declined by 0.3%. Goods inputs declined 0.4% and services inputs fell by 0.3%. Energy prices declined by 0.2% but remains around 4.4%. Inputs to Stage 4 construction producers declined by 0.6%.
  • Stage 3: Prices for Stage 3 intermediate demand declined by 0.5%. Goods inputs declined by 1.7% while services inputs rose by 0.5%. Inputs to Stage 3 construction producers was unchanged.
  • Stage 2: Prices for Stage 2 intermediate demand declined by 0.1%. Goods inputs fell 0.5% and services inputs rose by 0.2%.
  • Stage 1: Prices for Stage 1 intermediate demand declined by 0.4%. Goods inputs declined by 0.7% and services inputs fell by 0.2%. Inputs to Stage 1 construction producers declined by 0.11%.

Import/Export Prices: October Import prices declined by 0.8%, with fuel imports witnessing a substantial 6.3% decline. Excluding fuel, import prices fell by 0.2%, affected by decreases in foods, feeds, & beverages, as well as industrial supplies and materials. Capital and consumer good import prices both fell. Export prices saw the most significant decline since early May, falling by 1.1%. Agricultural export prices, especially soybeans, contributed to the decline. Excluding agricultural products, export prices fell for industrial supplies and finished goods, including capital and consumer goods.

Housing: MBA Weekly Index Lower CPI and PPI reports led to a fall in Treasury yields last week. Mortgage application volume increased by 2.8%, with the refinance index rising and the purchase index showing a 3% increase. Average rates for 30-year fixed loans remained relatively stable, but 30-year fixed jumbo loans experienced a seven-basis-point increase to 7.65%.

Housing Starts & Building Permits: October Building permits rose by 1.1%, with single-family permits showing a 0.5% increase, rising by 13.9% over the past year. Multi-family permits rose by 2.2%. Housing starts increased by 1.9%, with single-family housing starts rising by 0.2%. Starts for multi-family units rose by 4.9%. Housing completions fell by 4.6%, while single-family housing starts fell by 0.9%.

Sales, Manufacturing, Production, and Inventory: 

Retail Sales: October Retail sales declined by 0.1%, with motor vehicles & parts sales showing a 1% decline. Excluding motor vehicles & parts, sales rose by 0.1%. Furniture & home furniture sales declined by 2%, and gasoline station sales declined by 0.3%. However, food services & drinking places sales rose by 0.3%, up 8.6% over the past year. Food and beverage store sales rose by 0.6%, while general merchandise store sales declined by 0.2%, and department stores sales declined by 1.2%.

Industrial Production & Capacity Utilization: October Industrial production declined by 0.6%, with manufacturing production down by 0.7%, primarily due to the strike affecting motor vehicles & parts production. Excluding motor vehicles & parts, manufacturing and production rose by 0.1%. The index for utilities declined by 1.6%, and for mines by 0.4%. Final products production declined by 1.8%, impacting both consumer goods and business equipment.

Construction production declined by 1.9%, while materials production rose by 0.6%. Capacity utilization declined by 0.6 points to 78.9, below the 49-year average. Durable manufacturing declined by 10%, mainly due to the strike. Primary metals, furniture, computer & electronic products, and electrical equipment also experienced declines. Nondurable manufacturing remained virtually unchanged.

Empire State Manufacturing: November Business activity improved, with general business conditions rising by 9.1 points. New orders declined slightly, while shipments improved sharply. Unfilled orders continued to contract, and inventory levels improved, with slowed delivery times. Prices paid for inputs slowed slightly, while selling prices remained largely unchanged.

Employment levels declined, with both the number of employees and average workweek showing reductions. The outlook for general business conditions, new orders, shipments, delivery times, and employment declined. However, the average workweek is expected to increase, while the outlook for business investment and technology spending worsened.

Business Inventory: September Sales rose by 1.1%, and inventories increased by 0.4%. The inventory-to-sales ratio moved up one basis point to 1.37. Most industries reported sales levels similar to the preceding month, except for motor vehicle & parts dealers, where sales rose moderately. Inventories declined for department stores, building materials and furniture stores, while rising 2.1% for motor vehicles & parts dealers.

Business Formations:

Technical Story:


Review of Last Week’s Cash Flow:

In the previous week, the financial dynamics were influenced by the necessity to work from home due to a freeway closure. This arrangement resulted in notable savings concerning both time and fuel costs associated with commuting. However, despite these positive aspects, there were instances where discretionary spending occurred.

Looking ahead to the upcoming week, the objective is to curtail unnecessary expenditures and enhance savings, ultimately contributing to the stabilization of the checking account. It’s essential to exercise prudence and financial discipline to ensure that resources are allocated efficiently.

Regrettably, there was an increase in credit balances during the week, prompting a degree of concern. While the situation remains manageable, it is imperative to address the factors contributing to this rise in credit balances promptly.

Financial Grade: D+

Reasoning: The grade reflects a suboptimal financial performance, primarily attributed to discretionary spending when it was not deemed necessary. Going forward, a more judicious approach to expenditures is advised to improve overall financial health and maintain fiscal discipline.

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