Trade The Journey

Trade The Journey

Bull trap

Insight: May 5

Top of the Morning! I hope everyone is enjoying their weekend and taking breather from the volatile week that just ended. With earnings for big name companies absent from this week earning releases apart from Apple, the Market had the rate announcement and press conference to focus on.

The Fed funds rate was raised by twenty-five basis points, bringing the range to 4.75-5%, the highest in over fifteen years. While the market is forecasting a pause at the June meeting, no mention of rate cuts was mentioned during the press conference. Rates remaining higher for longer seems to be the general consensus among the Fed voting members while the market thinks otherwise.

Further information on the press conference is below.

Economy

Employment Picture:

Jolt- Job Openings report

The number of job openings for March fell to 9.6 million, falling from 9.974 million reported in the previous month. Job openings are far below the high of 12.027 million from a year ago. In almost every sector the number of job openings fell, rising only in information, educational services, and financial activities (Finance & insurance and real estate and rental and leasing). Openings also rose in the government sector.

Hires and total separations were little changed. The rate of quits also changed little for March. However, layoffs and discharges increased, rising noticeably for construction, accommodation & food services, healthcare & social assistance. The private industry layoffs and discharges rose past the January level, rising in every region. For establishment size class or business size, job openings fell from small and medium size businesses if only slightly. For larger companies, with 5,000 or more employees, openings rose in March.

Hires rose for businesses with 1 to 9 employees but fell for the remaining establishment sizes. Layoffs and discharges rose sharply for businesses with 1 to 9 employees. Medium-sized businesses saw an increase while large businesses remained relatively unchanged. Quits fell for the small to medium sized businesses and remained close to unchanged for larger size businesses.

ADP Employment Change

The private sector added 296,000 jobs in April. The goods-producing sector added 67,000 jobs and the service producing sector added 229,000 jobs. For the goods-producing sector, natural resources/mining and construction added around 50,000 jobs. For the service-producing sector, leisure/hospitality sector featured most of the job additions, adding 154,000 jobs, followed by education/health services with 69,000 jobs added.

Small and medium-sized businesses added a similar number of jobs, close to 120,000. Large businesses added 47,000 jobs. Job changers saw pay growth decline of 1%, bringing the annual pay to 13.2%. Job stayers saw a change of 6.7%, with leisure/hospitality seeing the largest change at 8.9%.

Initial and Continuing Claims

Initial claims came in near forecast, increasing by 13,000 from the week before the last, bringing the total initial claims to 242,000. Continuing claims fell by 38,000 to 1.805 million.  Continuing claims drifted back to the levels at the beginning of the month. Continuing claims is a good barometer for the labor market because it indicates job availability and strength of the labor market. Initial claims are a leading indicator while continuing claims serve as a lagging indicator.

Initial claims have steadily risen since February of this year, breaking above the 200,000 level.

Employment Situation Report

Nonfarm payroll employment rose by 253,000 while the unemployment rate fell by 0.1% to 3.4%. Although the number of jobs added remains elevated it is below the 296,000-level averaged over the last six months. Employment gains rose in professional & business services, health care, leisure & hospitality, and social assistance. The participation rate was unchanged at 62.6% and is 0.7% below the pre-pandemic levels. A larger participation rate could possibly slow down wage growth, one of the components adding to the stubbornly high inflation. The average hourly earnings rose by 0.5%, higher than the forecasted 0.3%.

The average workweek was unchanged for nonfarm payrolls and manufacturing. Overtime for manufacturing was also unchanged. Some good news for the inflation picture was that employment was revised down for the March and February report.

Productivity and Labor Unit Costs

Business sector labor productivity fell 2.7%. Output only increased 0.2%, while the hours worked rose 3%. Unit labor cost rose 6.3% in the first quarter, with a 3.4% in compensation and the decline in productivity mentioned above. Manufacturing labor productivity, fell 1.3% with output increasing by 0.5% and hours worked increasing by 1.8%. The hours worked for manufacturing rose by 0.1%. Unit labor costs for the manufacturing sector rose 3.4%.

Durable manufacturing fell 4.4% and nondurable manufacturing rose 2.7%.

Construction and House Reports:

Construction Spending

Total construction spending rose 0.3% in March. Private construction spending rose 0.3% and public construction spending rose 0.2%. Public residential construction spending fell in March by 0.767%. Private residential spending for new single-family homes fell 0.771% and for new multi-family homes spending rose by 0.35%.

Single family home construction is at its lowest level in the past six months and is down 22.9 from the year prior. Multifamily home construction hasn’t slowed down and is at its highest level in the past six months. Multifamily construction spending is up 23% on the year. This shouldn’t be a surprise as rates are above 6% and the supply of existing homes remains tight. According to the pending homes sales report, home buying is not set to recover until 2024.

Mortgage applications fell 1.2% from the week prior. The refinance index rose 1% while the purchase index fell 2% from a week earlier. The average 30-year fixed rate for conforming loans fell 0.05% to 6.50%. The average 30-year fixed rate for jumbo loans fell 0.3% to 6.37%.

Manufacturing, Services (Nonmanufacturing), and Factory Orders:

Factory Orders

Manufactured goods include electrical equipment, durable medical equipment, sporting goods, various food products, gasoline, computers, electronic products, machines and appliances.

After falling for two consecutive months, new orders for manufactured goods rose 0.9%. For durable goods, new orders for construction machinery rose by 10.5%, and transportation equipment rose by 9%. Mining, oil field and gas field machinery fell sharply, as did industrial machinery, and household appliances. Shipments of manufactured durable goods fell 0.1% and for nondurable goods shipments fell 1.4%. Unfilled orders rose by 0.4%.

 Inventories for manufactured durable goods fell 0.9% and fell for manufactured nondurable goods by 0.6%. Materials and supplies for durable goods rose 0.2% and fell nondurable goods by 1.1%. Work in process fell for durable goods by 2.4% and nondurable goods by 1.1%. Finished goods rose 0.2% for durable and nondurable goods by 0.2%.

New orders for nondefense capital goods rose by 10.1%, shipments rose by 2.9%, and unfilled orders fell by 1.7%. The inventory/shipments ratio was virtually unchanged for manufacturing industries. For the durable goods industries, the ratio fell slightly by 0.04 points to 1.76. For nondurable goods industries the ratio was virtually unchanged.

ISM Manufacturing

The ISM manufacturing came in at 47.1%, 0.8% higher than the March levels. Respondents remained mixed in sentiment between optimism about future demand and near-term contraction or recessionary period. Some respondents mentioned that supply chains are improving, with business conditions improving. While other respondents mentioned discounting to move products due to the inability of passing on higher prices to consumers. Lead times for capital expenditures improved by eight days in April, while the lead time for production materials slowed by three days.

Demand: New orders rose by 1.4% to 45.7%. This year, new orders have remained below the 52.7% level, which indicates expansion. Petroleum & Coal products and Transportation were the only two sectors out of the six largest manufacturing sectors reporting growth. The backlog of orders index fell 0.8% to 43.1%. The orders previously placed are continuing to be completed, as new orders continue to contract.

Output/Consumption: The production index rose 1.1% to 48.9%. The production index is at its highest level in the past year with an improvement in the percentage of respondents reporting that production is higher. According to the report, executives are looking to maintain the existing workforce to ensure they are prepared for an improvement in the second half. The employment index rose 3.3% to 50.2%. A level above 50.4% indicates expansion over time. Turnover rates declined, and panelist indicated parity between hiring and staff reductions.

Inputs: Supplier deliveries came in 0.2% lower indicated some improvement in delivery times, with a reading of 44.6%. A reading below 50% indicates faster deliveries. Prices increased, as the price index rose 4% to 53.2% in April. Prices for materials continue to put upward pressure on prices.

ISM Services

The services sector expanded for a fourth straight month, totaling 51.9% for April. Respondents indicated mixed sentiment with some respondents citing inflation and business activity concerns while others have cited lower material costs, improved lead times and steady business activity. The services sector has remained in expansionary territory for quite some time and only registered a slight contraction in December of last year. However, services PMI have slowed in expansion compared to last year.

Business Activity remains in expansionary territory although there was a 3.4% decrease from the March level, bringing the level to 52%. This is the lowest level this year, as clients are pulling back somewhat on spending due to uncertainty. New Orders rose by 3.9%, to 56.1%. Employment activity declined by 0.5% to 50.8%. After mixed 2022, employment activity has remained in expansionary territory so far for 2023.

Supplier deliveries rose 2.8% to 48.6%, with supplier deliveries slowing a bit but still below the 50% level. Inventories fell 5.6% to 47.2%, contracting for the first time this year as suppliers may be working down inventory levels. Prices rose 0.1% to 59.6%, as prices move towards equilibrium according to the report. The backlog of Orders index rose 1.2% to 49.7%, nearing the expansionary level.

Rate Decision & Press Conference

As mentioned, the Fed raised rates twenty-five basis points, bringing the range to 4.75-5%. Projections for real GDP were virtually unchanged for 2023 but fell 0.4% to 1.2% for 2024. 2025 real GDP projections were inline with the December projection. The unemployment rate was about the same as the December projections. PCE Inflation rose 0.2% to 3.3% for 2023 but moderated for 2024 and 2025. PCE inflation is projected to return near the 2% level in 2025.

The midpoint target range for the participants assessment of appropriate monetary policy was around 5-5.25% for 2023, 4-4.25% for 2024 and varied for 2025. For 2025, the range is a bit wider from 2.75-3% or 3-3.25%. The longer run shows the midpoint range at 2.5%. According to the dot plot the Fed isn’t forecasting a cut rates until 2024 which is much different to the projected cuts toward the end of this year by the future markets.

Participants’ uncertainty about GDP growth remains elevated and near the high of the December Projections. Risk to GDP growth is weighted to the downside. Uncertainty surrounding the unemployment is also near the highs of the December projections and is weighted mostly to the upside. Uncertainty surrounding PCE and core PCE are near the highs of the December projections. However, the weighting to the Upside for both PCE and core PCE fell noticeably from the December projections, with broadly balanced rising above the December projections.

Notable quotes made by Chairman Powell during Press Conference:

  • We no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation; instead, we do anticipate that some additional policy firming may be appropriate.
  • Where we didn’t have in February, and we still don’t have now, is a sign of progress in the nonhousing services sector…that’s just something that will have to come through softening demand and perhaps some softening in labor market conditions.
  • The question of how significant this credit tightening will be and how sustainable it will be? That’s the issue.
  • So, the recent liquidity provision has increased the size of our balance sheet but the intent and the effects of it are very different from what we—from when we expand our balance sheet through purchases of longer-term securities. Large-scale purchases of long-term securities are, are really meant to alter the stance of policy by pushing down—pushing up the price and down the rates, longer-term rates, which supports demand through channels we understand fairly well. The balance sheet expansion is really temporary lending to banks to meet those special liquidity demands created by the recent tensions; it’s not intended to directly alter the stance of monetary policy.

This past week in Review:

In terms of money management, it was a terrible week. Most of my income was dispersed as soon as the deposit arrived in my account. Bills and a little over eagerness to return to my trading account to its previous balance influenced my spending this past week. One positive takeaway from this past week was that most of the bills and expenses won’t occur during the next pay period.

I’m hopeful that I won’t have too many weeks like this past one.

Grade: D+

Reason: Spending on bills and other expenses severely affecting my discretionary income.

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