Trade The Journey

Trade The Journey

Market Downturn!

Top of the afternoon! I hope everyone is doing well and is in good spirits. Yesterday, Canelo fought Bivol in a light heavyweight matchup on Cinco de Mayo weekend.

It was a great fight. It seemed like Canelo’s plan was to bully Bivol with hard punches and consistent pressure, but it didn’t work out that way. Bivol remains undefeated and won on the decision. The UFC also had their pay-per-view last night, which had some exciting moments.

Although the build-up for both events was advertised as exciting matchups, both events left much to be desired.

The markets are all in a state of confusion and bearish sentiment. There was a hint of bullishness after the Fed made its announcement of a fifty basis point hike but the market quickly gave back the gains.

Some think a seventy-five basis point hike may be on the table for the June meeting but so far chairman Powell said for now only fifty-basis point hikes are expected. High rates are complicating the economic growth trajectory as supply chain challenges and price pressures remain.

Market participants are bracing themselves for an extended period of volatility. Another interesting tidbit from Chairman Powell’s speech was the pace of the balance sheet reduction.

The Fed plans on starting slow in reducing its assets and quickening the pace after a couple of months.

ISM Manufacturing

Top Concerns:
Supply chain and Price pressures Respondents’ top concerns:
China- Covid Shutdowns
Fuel and Freight Costs
Supply Chain Constraints
Longer lead times for deliveries

Manufacturing up for the 23rd straight month.

Commodities in short supply:
Semiconductors: Last 17 months
Electronic Components: Last 17 months
Electrical Components: Last 19 months
Labor: Last 12 months
Aluminum: Last 6 months Demand:
New Orders Index: Growing Slower
Customer Inventories: Very low, growing slower
Backlog of Orders: Growing slower Consumption:
Production: Growing slower
Employment: Growing Slower Inputs:
Supplier Deliveries: Slowing Faster
Inventories: Growing Slower
Imports: Growing Slower

Although above 50, the manufacturing PMI has declined for the last three months. High prices are causing a pause in new orders and factories are struggling to operate at peak production. There’s a smaller labor pool with elevated turnover rates.

Inventories remain strong, but customer inventories remain low which is just right according to respondents. Although prices came down a little, they remain elevated for commodities, oil & fuel, and food ingredients.

Construction

Construction spending increased 0.1% from the previous month. Total private construction increased while Total public construction fell.

For private construction, the new single-family residential building rose, and for non-residential, commercial, power, and manufacturing building fell.

For public construction, a slight increase in residential spending is offset by a slight decrease in non-residential construction. For non-residential, construction fell for office, education, transportation, water supply, and highway & street building.

Factory Orders:

Manufactured goods for new orders were up 2.2%. New orders for durable goods industries increased 1.1% for the month but were down from the previous month. Leading the new orders is a computer and electronic products. Unfilled orders were up for durable goods industries and the highest in transportation equipment. Shipments increased by 1.4% and transportation equipment led the increase.

Manufactured nondurable goods increased by 3.2% and have risen twenty-two months out of the last twenty-three months. Petroleum and coal products led the increase in value for manufactured nondurable goods.

Other Economic News:

Job openings rose slightly and remain at the highest level in history. Job openings increased in retail trade and durable goods manufacturing. Job openings fell in transportation, warehousing, and utilities. Quits increased in professional/business services and construction.

Labor costs rose 11.6% from the previous quarter, however, productivity fell 7.5% from the previous quarter. Unit Labor costs are the average cost of labor per unit of output produced. Productivity is the ratio between the volume of output and input.

Initial claims rose slightly while continuing claims decreased by the same amount (19,000). The unemployment rate remains at 3.6%

Hourly earnings continue to rise but less than the rate of inflation. People unemployed for 27 weeks or longer made up a large number of the unemployed. The labor force participation decreased. The labor force participation rate is the percentage of the population either working or actively looking for work. The participation rate has yet to return to pre-pandemic levels.

The services ISM index reported that prices reached all-time highs, inventories continue to expand and be replenished leading to lower levels of inventories. The services ISM index grew at a slower pace overall.

Business Activity: Growing Faster
Supplier Deliveries: Growing Faster
Prices: Increasing Faster
New Orders: Growing Slower Commodities in short supply:
Labor: Last nine months. Respondents’ top concerns:
Price pressures
High Mortgage rates
Supply chain logistics
Qualified workers

Mortgage rates remain above five percent. The refinance, purchase, and application indexes continue to trend downward. Trending upward are adjustable rate mortgages while home sales are expected to continue trending downward evidenced by the decline in purchase applications.

Indices:

Market Review:
Companies continue to beat earning forecasts although at smaller margins than the previous quarters. As evidenced by some of the reports, the economic growth trend is facing challenges in its continuation. With higher rates and labor costs, companies are finding it harder to keep their impressive margins from previous quarters.

As mentioned earlier, volatility is here to stay and the popular strategy of “buying the dip” is slowly leaving market participants’ arsenal of tools for trading the market. Analysts have noticed that these traders and investors are slowly leaving the market.

The current market environment requires skill and patience to find the opportunities hidden in the downturn. With the exception of Energy, most sectors are far from their highs made a couple of months ago. In fact, the finance and technology sectors reached new lows this past week with the other sectors not too far behind.

Although the economic reports showed continued growth, it’s not hard to see that growth is slowing. Markets are hoping to see inflation level off at some point but so far prices continue to increase. Consumers have been able to absorb most of the pass-through costs from companies but that may be coming to an end soon.

Bond yields for the five, ten, and thirty-year yields steepened this past week. Participants are still forecasting a possible hike of seventy-basis points for the meeting in June.


Cash flow for the past week:

I have to admit these past couple of weeks have been challenging. Gas prices and travel expenses remain high. It also seems like there’s a new emergency expense each week. I’m having a hard time maintaining my savings account balance.

I don’t foresee these coming weeks providing any relief.

Grade: C-
Reason: Adhered to my current spending plan.

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