Trade The Journey

Trade The Journey

Insight: April 14


This week the market focused on the inflation reports which covered Consumer and wholesale prices. Most of the coverage surrounding these reports agreed that there was likely a deceleration in rising prices and the peak in inflation was most likely last summer. The consumer has been holding up well amid the higher prices although low to middle income consumers are feeling the pinch. The upcoming earnings report will likely give the market a better idea of the trend in consumer spending. While most agree that a slowdown is in the near future, the severity of the recession is unknown.

Currently the market is pricing in 83.4% probability of another twenty-five-basis point increase at the next Fed meeting in May. For the June meeting, it’s a little above a 70% probability that the hikes will be paused.  While the banking crisis seems to have abated for the moment, the potential for another crisis to emerge because of higher rates continues to rise.

The CPI for all items rose 0.1% after rising 0.4% in February and 0.5% in January.  Over the past year, inflation for consumers rose 5% which was the smallest yearly increase since May 2021. Excluding food and energy, the CPI rose 0.4%.  Over the past year, the index for all items less food and energy rose 5.6%.

The indexes for shelter, motor vehicle insurance, airline fares, household furnishings and new vehicles rose. The energy price index declined by 3.5%, falling for gasoline, fuel oil, electricity, and gas service. The food index was unchanged, remaining at the same level as the previous three months for food away from home and falling by 0.3% for food at home. The shelter index rose by 0.6% and has yet to see a price percentage increase of less than 0.5%. The used car index fell by 0.9% and has fallen most of this year.

The CPI came in somewhat within the level forecasted while the core CPI was a little higher than forecasted, showing that higher prices remain sticky in some areas of the economy.

The Producer Price Index showed that prices for final demand declined by 0.5% in March. Final demand for both goods and services declined. Excluding food, energy, and trade services, the PPI final demand rose by 0.1%.

Final Demand for goods fell by 1%, mostly attributable to a fall in energy.  Gasoline prices at the producer fell by 11.7%. However, removing food and energy, final demand rose by 0.3%.  Final demand for services fell 0.3%, mostly attributable to a drop in margins for machinery and vehicle wholesaling.  Intermediate demand for processed goods fell 1%, mostly attributable to a decline in processed energy goods, specifically diesel fuel. Other energy goods also moved lower.

Intermediate demand for unprocessed goods fell 5%, mostly attributable to a large decrease in the prices for unprocessed energy gods. Unprocessed foodstuffs & feedstuffs and nonfood materials less energy also moved lower. Intermediate demand for services fell by 0.5%, mostly attributable to the fall in loan services (partial) prices. All the stages of intermediate demand declined by varying amounts.

Digging a bit deeper, materials and components for construction rose by 0.5%. Materials and components for manufacturing were unchanged. Transportation of passengers for intermediate demand rose by 1.3%, rising for manufacturing and nonmanufacturing industries.

Although prices are falling at the consumer and wholesale level, the retail report showed that sales are falling for the second consecutive month. Retail sales fell 1% after falling the previous month by 0.2%. Retail sales fell for nearly every industry except for grocery stores which were unchanged, nonstore retailers, food services & drinking places, and health & personal care stores. Sales fell sharply for gasoline stations, general merchandise stores, building materials & garden eq. & supplies dealers, electronic & appliance stores. Each of the industries listed in the previous sentence fell by more than 2%.

Continuing with reports focusing on prices or inflation, the import/export price report showed that import and export prices fell in March. Both indexes for import and export prices show prices trending downward sharply. Import prices fell for both fuel and nonfuel imports. Prices for import fuel have not advanced higher since June of last year. Export prices fell for agricultural and nonagricultural exports although rising for finished goods that were exported. Prices for imports and Exports from and to the US trading partners like China, Japan, Canada and the European declined. Prices for imports to Mexico was unchanged and rose by 0.2% for exports to Mexico.

Finally, the University of Michigan preliminary report on consumer sentiment showed a modest increase, also rising for the outlook on current economic conditions and consumer expectations. The buying conditions for cars and durable have continue to fall sharply. The report noted that consumers expect high inflation to persist in the short run. Year-ahead inflation expectations unexpectedly rose by 1.2% to 4.6%.  Sentiment improved for lower-income consumers while it declined for consumers with a higher income.

Consumer Credit showed that revolving credit rose at an annual rate of 5%, and nonrevolving rose by an annual rate of 3.4%. The flow data, which represents changes in the level of credit due to economic and financial activity, rose sharply for nonrevolving credit and fell for revolving credit. Rates for new car loans continued to increase, rising above 7% for a 60-month plan and nearing 7% for a 72-month plan. Rates for credit card plans are now above 20%.

Moving to the business environment, inventory reports were released for businesses and wholesalers. Business inventories rose 0.2% in February. Sales were unchanged and inventories rose 0.2% The inventories-to-sales ratio was unchanged month to month. Inventories rose slightly for retailers and merchant wholesalers and fell slightly for manufacturers. Sales fell slightly for clothing & clothing accessory stores, furniture and electrical & appliances stores, and motor vehicle & parts dealers.

Wholesale inventories rose by 0.1% in February after declining 0.6% in January. Sales rose 1.3% and total inventories rose slightly. The inventory-to-sales ratio was virtually unchanged from the previous month. Sales for durable goods rose by 1.2% and fell 0.3% for nondurable goods in February. For durable goods, sales only fell in hardware, rising for the rest of the durable good wholesalers. Inventory level changes for durable goods were mixed, falling sharply for lumber and furniture. The largest inventory change occurred in electrical.

For nondurable goods sales, most of the industries rose, only falling in farm products, misc. nondurable goods, and sharply for petroleum. Inventory levels for nondurable goods fell in half of the industries, falling sharply for petroleum and farm products. Groceries inventories displayed the largest increase in inventory levels, rising by 1.6%. Please keep in mind that these inventory reports are lagging.

Industrial production rose by 0.2% and capacity utilization rose by 0.2 points to 79.8 which brings utilization 0.1 points than long-run average. Production fell for business equipment by 1% and in construction supplies by 1.8%. Production fell for manufacturing and mining by 0.5% while rising sharply for utilities.  Durable good and nondurable goods manufacturing both fell.

Capacity utilization rose sharply for utilities while falling slightly for mining and manufacturing. Although utilities showed a sharp increase in capacity utilization this past month, they remain below its long-run average.

The NFIB small business optimism index shows deteriorating confidence among small business owners. The index fell 0.8 points to 90.1 and remains below its 49-year average of 98. Filling job positions remains a challenge for small business owners and labor quality is a top concern behind inflation as a top concern for the small business owner. Inventory levels were unchanged, however the Construction, transportation, and wholesales industries are still facing serious labor challenges. Inventory shortages were reported in transportation, retail, manufacturing, and wholesale. Capital spending fell slightly and remains weak.

Small business owners seem to be scaling back in preparation for a slowdown in the economy’s growth. However, the difficulty small business owners face is that the recession has not yet appeared and there’s only estimates on when and how severe it might be.

Initial claims rose above forecast, bringing the total claims filed at 239,000. Continuing claims rose by 13,000 to 1.810 million signaling the job market is still strong despite the rise in initial claims. The last four weeks initial claims have come in above 200,000, bringing the four-week moving average back to the 240,000 level.

Mortgage applications rose 5.3% from the week prior. The refinance index increased slightly, and the purchase index rose by 8% from a week ago. The 30-year fixed rate for conforming loan mortgages decreased by 0.10% points to 6.30%, its lowest level in the last few months. The 30-year fixed rate for jumbo loan mortgages also fell by 0.10% to 6.26%.

Mortgage-backed securities prices for the thirty-year UMBS 5.0 and 5.5, and Ginnie Mae 5.0 and 5.5 securities remained in a sideways range near the one-hundred level. As a reminder when MBS prices decline, it can result in higher mortgage rates. The same story could be told for the fifteen-year UMBS.

Clearly the economy is slowing, and prices are falling but not enough for the FED to consider pausing. While the market is pricing in rate cuts, the Fed has yet to affirm that any rate cuts will occur soon. With the next Fed meeting scheduled to occur less than a month from now, it will be interesting to see what market or economic developments occur between now and then. Keep in mind that the pace and level of rate hikes has occurred at history-setting trend as the Fed attempts to quell inflation.

As mentioned in the previous insight, global growth is scheduled to slow in the next few years. The war in Ukraine is entering into its second year and China and the US are in the midst of a new kind of cold war. Although volatility has retreated below the 20 level, don’t be surprised if we see heightened volatility in the months ahead.

Lastly, the Fed minutes from the March meeting was released giving us insight on how the Fed is viewing the economy and market developments. Inflation was viewed as being more volatile in the short-term, but little changed long-term wise. There is a discrepancy between how the market sees the target range towards the end of the year and how the Fed sees the target range. Expectations for future credit quality continued to deteriorate in some markets. Leveraged loan credit quality deteriorated somewhat after the closures of Silicon Valley Bank and Signature Bank. Inflation is expected to moderate and reach the Fed’s goal of 2% for total and core PCE price inflation in 2024 and 2025.

Historical recessions due to financial related market problems tend to persist for longer and often are more severe. Fed participants attributed steady consumer expenditures to strong job gains, disposable income, and pandemic savings. Participants noted that wage growth remains above the level needed to bring long run inflation within the 2% range. They also noted that the disinflation process is slowing a bit.

Participants also saw the risk of the economic activity drifting towards the downside. There was no dissention among the Fed members on the latest twenty-five basis point increase nor was there dissention on the continued balance sheet runoff. However, had the banking crisis not emerged, a fifty-basis point hike would have been on the table. Participants will be monitoring changes in credit conditions, credit flows, and broader changes in financial conditions.

This past week in Review:

This past went as planned. Recently, I’ve been trying to contribute more of my disposable income towards some crypto accounts. Hopefully, this upcoming week I’ll be able to continue to pay down my credit accounts which have been a thorn in my side for awhile.

Grade: C-

Reason: Somewhat adhered to my spending plan

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