Trade The Journey

Trade The Journey

Inflation continues to moderate!

Top of the Morning! I hope everyone is doing well and enjoying their weekend. This past week, the market got another inflation report within the range expected although it did trend higher, more about this later. Bond yields finished the week higher mostly due to a resurgence in manufacturing activity and industrial production.

The ten-year yield is close to testing its most recent high of 4.47% after closing the week at 4.41%. The two-year yield, the most sensitive to monetary policy, remained above 5%. The two-year yield hit a twenty-year high of 5.13% back in 2006 a little before the Great Financial crisis. The lowest level for two-year yields was reached a little before and during the Pandemic with rates bottoming out near zero.

Most analysts agree that rates won’t return to this level so consumers and businesses might have to adjust to high rates being the new normal. So far, the consumer has remained resilient but as the constrictive monetary policy works it way through the economy, the health of the consumer could deteriorate.

Only time will tell. In other news, Auto workers went on strike at the biggest three automakers. One in ten workers is on strike seeking better pay and benefits. The automakers involved in the strike are: General Motors, Ford and Stellantis which owns Chrysler.

Here are what the United Auto Workers union is seeking:

  • Wage increases of 36% over four years (Countered by Automakers offering 17.5-20%)
  • Cost-of-living pay increases.
  • End to different tiers of wages for factory jobs
  • A return to traditional define-benefit pensions for new workers and higher pension for retirees.
  • A 32-hour week with 40 hours of pay

Automakers are reluctant to agree to the terms saying that a settlement would force them to raise vehicle prices. The union and its members believe that they should benefit from increased profits Automakers are receiving. While a agreement between the two parties is likely a some point, a prolonged strike could damage US automakers.

All of this comes at a time when crude oil rose to $91 after supply cuts were instated by Russia and Saudia Arabia, reducing the supply by one million barrels. The next level of resistance is at $93.63, which crude oil attempted to break through in June but failed both times. Higher crude oil prices take close to a month to be reflected in gas prices. Crude is still well below the highs reached last summer when crude was over $100.

The ECB raised rates twenty-five basis points with inflation still running above its two percent mandate. The ECB president, Christine Lagarde, is unsure if the hikes will continue with the current rate at 4%. Most of the ECB officials believe that the current rate will remain in place for some time and will be enough to bring down inflation. 

Trades

This past week I put on two trades that didn’t end well. The trade review can be found here. The total loss I incurred from the trades was a little above $100. Although my hypothesis stated that I expected inflation to moderate further and the Russell would rise, I reversed my opinion before placing the trade.

Hypothesis for the Trade: Another CPI Play, if the Russell can’t form a support level, it may rise after a positive inflation report. Could fall heavily if inflation is higher than expected.    

Upcoming Week:

Tuesday: Housing Starts & Building Permits

Wednesday: FED Rate Decision & Press conference

Thursday: Initial Claims, Philadelphia Fed Index, Existing home sales   

Economic Data

Prices

CPI: August

CPI rose 0.6% and rose 3.7% year-over-year, which is 0.5% higher than July year-over-year total. Core CPI rose 0.3% and rose 4.3% year-over-year.          

Gasoline was the main contributor to headline inflation rising above forecasts. The energy index rose 5.6%, with the gasoline index rising 10.6%. Electricity and natural gas rose moderately. The shelter index also increased, rising 0.3%. The rent index rose 0.5% and the index for owner’s equivalent rent rose 0.4%. The shelter index has risen over the last three years consecutively. Year-over-year, shelter has risen over 7%, second only to transportation services which has risen over 10% from the previous year.

The food index rose 0.2%, unchanged from the previous month. The index for food at home rose 0.2% and the index for food away from home rose 0.3%. Used vehicle prices decreased for a third consecutive month, falling 1.2%. If the autoworkers strike continues, use car prices could rise as newer vehicles become more expensive. New vehicle prices rose 0.3%, after falling 0.1% in July.    

PPI: August

The PPI final demand rose 0.7% with most of the rise attributed to a 2% increase in final demand for goods. Most of the increase in goods is attributed to a 20% jump in gas prices. Final demand for services rose 0.2%, after registering 0.5% in July.  Most of the rise can be attributed to an increase in residential real estate services, truck transportation of freight, and brokerage services.

Excluding foods, energy, and trade services, final demand prices rose 0.3%. Intermediate demand for processed goods rose 2.1% with most of the rise attributable to a 41.1% increase in diesel fuel. Intermediate demand for services rose 0.5% with most of the rise attributable to an increase in prices for nonresidential real estate services.

Intermediate demand for unprocessed goods rose 1.3% after rising 2.4% in July. Crude petroleum rose 8.9% and contributed mostly to the rise. Each stage of intermediate demand increased.

  • Stage 4 intermediate demand increased by 0.6%. Goods inputs rose 0.6% and services inputs rose 0.5%.
  • Stage 3 intermediate demand increased 0.9%. Goods input rose 2.5% and services input fell 0.5%.
  • Stage 2 intermediate demand increases 0.7%. Goods inputs rose 2.2% and services inputs fell 0.4%.
  • Stage 1 intermediate demand increased 1.6%.  Goods inputs rose 2.5% and services inputs rose 0.6%.

Stage 4, 3 and 1 intermediate demand all rose near their highs. Stage 2 intermediate demand moderated from its 1.7% reading in July. Construction for intermediate demand was unchanged from the previous month.

The PPI came in largely within expectations excluding the spike in crude oil prices which affected the CPI, PPI, and retail sales report.

US Import/Export Prices: August

Import prices rose 0.5%, with imported fuel rising 6.7%. Both imported petroleum and natural gas also rose. Imported prices for nonfuel industrial supplies & materials, capital goods and automotive vehicles fell. Prices for foods, feeds, & beverages, and consumer goods rose.

Export prices rose 1.3%. Agricultural export prices fell 2.2%. Excluding agriculture, exports rose 1.7%. Nonagricultural industrial supplies & materials, capital goods and automotive vehicle export prices rose. Consumer goods and nonagricultural food export prices fell. Capital goods and consumer goods prices fell.

Sales and Manufacturing

Retail Sales

Retail sales rose 0.6%. Excluding motor vehicles & parts, retail sales rose 0.7% and excluding gasoline stations, sales rose 0.6%. The increase in retail sales can largely be attributed to the 5.2% rise in gasoline stations. Most of the other categories remained around the same levels and were virtually unchanged.

Empire State Manufacturing Report

Manufacturing surprised to the upside. General business rose twenty-two basis points to 1.9, which brings it to expansionary territory slightly. A higher percentage reported that business conditions improved. New orders also expanded into positive territory with a higher percentage of respondents reporting higher orders. Shipments rose into positive territory with the number of respondents reporting higher shipments rising. Unfilled orders improved but respondents reported worsening conditions. Delivery times were virtually unchanged.

Inventories improved slightly but remained negative. Prices paid were unchanged while prices received rose. The number of employees was unchanged but the average employe workweek increased.

Looking ahead, general business conditions improved as did the new orders. Plans for capital expenditures and technology spending fell. While the forecasted number of employees fell while the average employee workweek is unchanged. Prices paid were about the same and prices received rose in the near future. Optimism about the future is growing.

Production and Inventories

Industrial Production and Capacity Utilization: August

Industrial Production rose 0.4%. Final products production rose 0.2% after rising 1.1% in July. Consumer goods fell 0.2% after declining 1.2% in the previous month. Business equipment production rose 0.8%. Nonindustrial supplies were unchanged, while construction fell 0.4%. Materials production rose 0.7%.

Manufacturing production rose slightly, with mining and utilities both rising. Durable good manufacturing rose 0.1% and nondurable goods manufacturing rose 0.2%.

Capacity Utilization rose 0.2% to 79.7%, which is the long-run average.  Manufacturing capacity utilization was unchanged.

Business Inventories: July

Inventories came in flat while sales rose 0.6%. Excluding motor vehicles & parts, inventories were unchanged.  The inventory to sales ratio was 1.39. Department Stores inventories fell 1.6% after rising 0.7% in June. Clothing & clothing accessory store inventories rose 0.4%, after falling 0.8% in June. For the most part, inventories remained near the June levels. Sales rose for each of the sectors except for Motor vehicle & parts dealers and furniture stores.

NFIB Small Business Optimism Index: August

The NFIB index fell 0.6% and remains below the long-run average. Inflation is still the top concern for small business owners, resulting in owners raising the average selling price. The worker shortage continues as owners continue to face challenges in finding qualified applicants. The challenges exist mainly in construction, services, and manufacturing.

Capital spending rose by one point, with most owners reporting planned expenditures on new equipment, followed by vehicles, and improved or expanded facilities. A small percentage reported that their borrowing needs were unmet. The average rate paid on short maturity loans was 9%. Owners reporting higher nominal sales the past three months were net negative and inventory shortages were reported in retail, finance, manufacturing and services. No owners reported inventory investment in the coming months. Small business owners remain uncertain about future conditions, hindering spending and investment.

Initial Claims

Initial claims came in slightly below forecasts. Initial claims increased by 3,000 to 220,000 this past week. Continuing claims rose 4,000 to 1.688 million. The four-week moving average decreased for the second week in a row.

MBA Weekly Applications

Mortgage applications for new homes rose 20.6% while new loan applications fell 0.8% from the week prior. The refinance and purchase index both decreased from the week prior. The average rate for a thirty-year confirming loan rose by 0.06% to 7.27%. The average rate for a thirty-year jumbo loan rose 0.04% to 7.25%.

University of Michigan Consumer Sentiment Report

The index of consumer sentiment fell 1.8 points to 69.5. The index for current economic conditions fell 5.9 points to 69.8 while the index for consumer expectations rose by 0.7 points to 66.3. Consumers remain uncertain about the economy and expressed some concern with persistently high inflation.  Year-ahead inflation expectations slowed to 3.1% from 3.5%. Long-run inflation expectations came in at 2.7%, slightly below the 2.9-3.1% range.

Technical Story:

 

This past week’s cash flow review:

This past week I adhered to my spending plan. Luckily, I was able to deposit the check that I originally thought was lost. I was able to save most of the check and it gave me a good start. For some time, I was spending recklessly but slowly I’m starting to return to my spending plan.

Grade: C-

Reason: Adhered to my spending plan but still spent more than expected.

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