Trade The Journey

Trade The Journey

Is There Turbulence Ahead?

Top of the Morning! I hope everyone is enjoying their weekend and preparing for the week ahead.  This past week or should I say this past weekend I watched Terrance “Bud” Crawford become the undisputed welterweight champion of the world. He defeated Errol Spence decisively and left little room for doubt for those questioning who was the better fighter that night. I didn’t pick Bud to win, thinking Errol Spence’s pressure would overcome Bud’s agility but I was wrong, dead wrong.

Bud’s agility and power proved too much for Spence as he looked slow and unable to adjust. There’s a rematch clause for Errol Spence should he decide to take it but like many I’m not sure how the outcome would be any different from the first fight. Spence is one of my favorite fighters so I’m hoping that he’ll be able to bounce back.

Moving to the markets, this week volatility rose as the Treasury announced an increase in the amount of long-term debt issued, resulting in a downgrade of the United States governments credit rating. Bonds sold off only regaining their footing towards the end of the week. The ten-year yield rose above resistance at 4.09% to a new recent high of 4.20%, five basis points shy of its 52-week high of 4.25%. Thirty-year treasuries also rose while the short end of the curve either fell or remained at the same level.

The VIX rose sharply near the end of the week as the rise in yields among other factors cause the indices to retreat. I’m sure I’m not the only trader who got burned this past week thinking the run up would continue, luckily the loss I took was within reason. The VIX closed the week near its high and returned to levels not seen since late May. Unlike the rise seen in July, the VIX never retreated which may indicate that a heightened since of concern is in the markets.

However, until a trend higher develops above the twenty level, it should be noted that the VIX is still quite low compared to past levels. This week’s trade review can be found here.


Credit conditions

Senior Loan Officer Opinion Survey on Bank Lending Practices

The Senior Loan Officer Opinion Survey on Bank Lending Practices is a survey the Federal Reserve conducts to gain insight into bank lending practices and conditions. The voluntary survey polls up to 80 large domestic banks and 24 branches of international banks.

Credit standards tightened as demand weakened for most loans categories. Banks cited an uncertain economic outlook, the credit quality of loans and an expected deterioration in collateral values. Commercial and industrial lending tightened for small to large firms as banks have tightened the maximum size and maturity of credit lines, loan covenants, collateralization requirements and the use of interest rate floors. Demand also weakened from firms seeking a loan.

A similar story could be told regarding the banks appetite for risk in commercial real estate lending. Residential real estate lending tightened standards for loans apart from Government-sponsored enterprise eligible and government loans. Along with tighter standards, weaker demand was also seen in home equity lines of credit.

For consumer credit, banks slowed its extension of credit card loans for customers unable to meet credit score requirements. Banks also increased the minimum credit score and decreased credit limit. A news story released this week showed a sharp increase in consumer credit debt. Demand for auto and consumer loans also weakened. Below are charts highlighting the changes in the credit environment mentioned above.

The credit cycle is an important factor in the markets and economy’s performance. If consumers and businesses are unable to borrow the economy certainly faces an increased probability of a recession.

The Job Picture

Initial Claims

Initial claims rose by 6,000, slightly coming in above forecasts. Initial claims for the past week totaled 227,000, which is 2,000 claims above the week of July 22 but lower than the weekly totals over the month. Continuing claims rose by 21,000 to 1.7 million. While I’m sure the Fed doesn’t want people to lose their means of income, higher initial claims and continuing claims levels could bring the supply and demand in the labor market back into balance. Higher claims levels could also alleviate wage pressures.

Job Openings

Job openings were little changed, remaining around the 9.6 million level. Openings rose the sharpest in health care & social assistance with over 130,000 jobs. Local government openings also rose by 62,000. Openings fell largely in transportation, warehousing & utilities, state & local government education and in the federal government. The number of hires fell by 326,000 to 5.9 million led by durable goods manufacturing.

Quits decreased by 295,000 to 3.8 million with the quits rate coming in at 2.4%, returning to the April level after rising in May. Quits decreased in retail trade, health care & social assistance and construction. Layoffs and discharges were virtually unchanged from the previous month. Small businesses saw its quit rates decline while the opposite was true for large businesses.

ADP Employment Report

The private sector added 324,000 jobs. The goods producing sector added 21,000 jobs with natural resources/mining adding 48,000 jobs. The construction sector added 9,000 jobs while the manufacturing sector shed 36,000 jobs.

The service providing sector continued its robust growth, adding 303,000 jobs. The leisure/hospitality sector contributed to bulk of the growth, adding 201,000 jobs. The information sector added 36,000 jobs and trade/transportation/utilities added 30,000 jobs. The professional/business services sector added 5,000 jobs while the financial sector saw jobs added decrease by the same amount.

Small businesses led the charge in employee growth, adding 237,000 jobs. Medium-sized businesses added 138,000 jobs with 250-499 employee establishments decreasing the number of jobs added by 14,000. Large companies shed 67,000 jobs. Pay growth slowed for both job stayers and job changers.

Employment Situation Report

187,000 jobs were added in July and the unemployment rate came in at 3.5%. The labor force participation rate remained at 62.6% for the fifth straight month.  Healthcare led the sectors in jobs added was health care, ambulatory health care services, hospitals, and nursing & residential care facilities. Construction employment improved again, rising by 19,000, which is above its monthly gain of 17,000 jobs. Leisure and hospitality were virtually unchanged.  Average hourly earnings rose 0.4%, and over the past year earnings have risen 4.4%. The year-over-year total rose above last month’s total of 4.3%. The average workweek decreased slightly for nonfarm payrolls and remained about the same for manufacturing.

The number of long-term unemployed and permanent job losers were unchanged. The employment situation report represents the net change of paid workers in the US economy which totals the number of jobs added or created. While the report displayed a decrease in the number of jobs added, wage pressures continue to cloudy the inflation outlook.


ISM Manufacturing

Manufacturing contracted for the ninth straight month; however, it seems like things may be turning as the index rose 0.4% to 46.4% which is an improvement from the May levels. New orders rose 1.7% to 47.3%. Chemical products were the only sector that recorded growth in the six largest manufacturing sectors. A higher percentage of the respondents reported that new orders’ levels were about the same as the previous month.

The production index rose 1.6% to 48.3% and of the sixth largest manufacturing sectors, only Machinery recorded growth. Production remains below the expansion level for the second consecutive month. The prices index rose 0.8% to 42.6% and contracted for a third consecutive month. Noted in the report is the transition to a buyers’ market as prices fall and demand slows. The backlog of orders index rose 4.1% to 42.8% and fell for the tenth straight month. An improvement in the percentage of reporters reporting backlog of orders rose while the percentage reporting lower orders fell.

Supplier deliveries rose 0.4% to 46.1% as a number below 50 indicates faster deliveries. Deliveries have improved as the supply chain recovers. Inventories rose 2.1% to 46.1% and customer inventories rose 2.5% to 48.7%. Respondents reported varying conditions and sentiments towards future activity with most siding towards a slow down and possible recovery from the slowdown within the next year. The lead time for capital expenditures decreased by one day.

ISM non-manufacturing Report

The services sector expanded for a seven straight month as the sector remains resilient, rising the past three years.  Although services have been expanding overall, the reading came in 1.2% lower than the May totals. Business activity decreased 2.1% to 59.2% and new orders drifted lower 0.5% to 55%. Nearly all the industries expanded in business activity except for health care & social assistance, forestry, fishing & hunting and arts, entertainment & recreation. A higher percentage reported the business activity was about the same.

For new orders, the same industries listed above except for health care & social assistance saw deceleration in new orders. Mining also fell for new orders. A higher percentage reported that the new order levels were about the same as the previous month. Supplier deliveries rose 0.5% to 48.1% indicating the pace of service deliveries may be slowing. Inventories fell 5.5% with a higher percentage reporting inventories to be around the same level.

A lower percentage reported higher or lower inventory levels. Prices rose 2.7% to 56.8%, with a slightly higher percentage reporting that prices were higher or about the same. There was a decrease in respondents reporting prices moving lower. The backlog of orders index rose 8.2% to 52.1%, indicating that the backlog of orders reentered the expansion territory. The employment index drifted downward by 2.4% to 50.7% which indicates that employers are still looking for employees although the pace of hiring is slowing.

Inventory sentiment rose 2.6% to 56.6% as respondents felt their inventory levels were too high for the current business activity levels. Contrary to the manufacturing report, respondents listed business conditions as steady and the supply chain as stable.

Productivity, Factory Orders, and Construction spending


Labor productivity rose 3.7% as output increased 2.4% and hours worked fell 1.3% in the second quarter. Unit labor costs rose 1.6% as hourly compensation increased by 5.5% and productivity rose 3.7%. Unit labor costs are the ratio of hourly compensation to labor productivity. Manufacturing labor productivity rose 4% with output rising 1.9% and hours working falling by 2%.

Durable manufacturing productivity rose 5.2% as output increased 4.1% and hours worked declined by 1.1%. Nondurable manufacturing productivity rose 3.4%, as output fell 0.1% and hours worked by 3.4%. Unit labor costs for manufacturing rose 3.6% as hourly compensation rose 7.8% and productivity increased 4%.

Factory Orders: June

New orders for manufactured goods rose for a fourth consecutive month, rising 2.3% after three readings below 1%. Excluding transportation, new orders increased by only 0.2%. Transportation equipment new orders rose by 12%. Durable goods new orders increased by 4.6%, rising for a third consecutive month. Nondurable goods rose 0.1%, after declining for two consecutive months. Inventories for durable goods rose slightly in June, while inventories for nondurable goods declined by 0.3%. Materials and supplies rose 0.2% for durable goods and declined by the same amount for nondurable goods.

Work in process rose 0.2% for durable goods and remained at the same level for nondurable goods. Finished goods for durable goods rose 0.4% and fell 0.5% for nondurable goods. Shipments rose 0.1%, rising a second straight month. Shipments for durable goods rose 0.2% and for nondurable goods shipments rose 0.1%. Unfilled orders continued to rise, increasing by 1.8%. Unfilled orders for durable goods were unchanged from the previous month’s level. Unfilled orders to shipments ratios improved by 0.10 points to 6.74. Inventories were unchanged.

For capital goods (Nondefense), new orders rose 16.8% indicating that businesses are investing in improving, possibly preparing for growth in the future. Shipments for capital goods rose to 0.1% and unfilled orders rose 3.1%. Inventories for capital goods remained at 0.1% from the previous reading. Consumer goods declined for durable and nondurable goods in shipments, new orders, unfilled orders, and total inventories.

Construction Spending: June

Total construction spending rose 0.5%. Private construction spending rose 0.5% with residential construction spending rising 0.9%. Nonresidential construction spending was unchanged from the May level. Public construction spending rose by 0.3% with education construction and highways construction spending falling by 0.1%. Public residential construction spending fell slightly.

Private construction spending on residential is a better indicator of the housing market and level of demand for housing. Private construction spending on single-family homes rose 2.06%, after rising 1.64% in May. The year-over-year change for single-family construction is down 21.5%. Private construction spending for multifamily units rose 1.50% after remaining virtually unchanged in May. The year-over-year change for multifamily construction is up 21.8%.

MBA Weekly Index

Mortgage applications fell 3% from the prior week. The refinance index declined by 3% and the purchase index declined by the same amount. Year-over-year mortgage application volume is down 26%. The average rate for a thirty-year conforming loan rose by 0.06% to 6.93%. The average rate for a thirty-year jumbo loan declined by 0.01% to 6.89%. With rates near or above 7% in some regions and existing inventory strained, the housing market still has time before a full recovery is in place.

Technical Story:

This past weeks’ cashflow report:

This past week was rough as I have yet to receive a paycheck from my new place of employment. A list of expenses zapped my available cash flow and nearly decimated my savings account. Thankfully, I’ll be receiving a paycheck at the beginning of the week. While I do have plans for how I’ll manage the increase in pay, I’m still eager to see what my real income will be after deducting taxes and insurance. My hope is that I’ll have enough to trade, invest, and save.

Grade: C+

Reason: Without my accumulated savings I would have had to use my credit card to cover expenses.

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