Trade The Journey

Trade The Journey

Market Uncertainty Reigns Supreme!

Hello Traders,

I trust you’re all enjoying your weekend and gearing up for an exciting week ahead, especially with key inflation reports on the horizon, including the CPI and PPI. We’re witnessing a downward trend in inflation, yet Federal Reserve speakers seem to dampen the market rally, as seen last week following the release of the Fed minutes. It seems the futures markets are now aligning with the reality that interest rate cuts may not align with market expectations.

Global tensions continue to stir market volatility, particularly in the crude oil sector. The situation in the Middle East is escalating, with Iran deploying a warship to the Red Sea in response to U.S. actions against several attacking ships. Meanwhile, the Ukraine conflict persists.

This past week saw a spike in volatility, which peaked but didn’t surpass 14.32, indicating that the market hasn’t succumbed to fear. The VIX ended the week on a low note. Copper, often seen as an economic health indicator and sensitive to Chinese demand, has been in a holding pattern recently, showing no significant trends. China remains a dominant player in the copper market, importing about 60% and consuming nearly half of global production.

China’s relentless demand for minerals and resources is growing as they expand their global footprint. They are also key importers of aluminum, iron ore, and soybeans. Gold’s upward trajectory towards its recent high stalled, closing the week at $2052.6, as a stronger dollar made the metal pricier. The dollar has risen from its late December low of $100.63 to $102.44, fueled by geopolitical tensions and climbing yields.

Crude oil hovered around the $72.46 reference level, using it as support and ending the week on an uptick. The 50-day SMA crossing below the 200-day SMA suggests a potential downward trend in crude prices. Treasury yields defied expectations, reflecting the market’s anticipation of the Fed maintaining higher interest rates for an extended period. However, the data hasn’t shown the consistency the Fed desires.

The ten-year treasury yield closed just above 4%. The 2/10 treasury yield spread remains inverted at thirty-five basis points, unchanged from last week. The spread between the 10-year treasury yield and the 10-year AAA corporate bond yield widened significantly. The velocity of M2 money supply is on an upward trend, indicating continued spending by businesses and individuals. The 90-day commercial paper rate remains above 5%, currently at 5.2%.

Looking ahead to next week:

  • Monday brings us Consumer Credit data.
  • Tuesday will reveal the Trade Balance.
  • Wholesale Inventories are due Wednesday.
  • Thursday is packed with the CPI, Initial Claims, and Treasury Budget.
  • Friday marks the beginning of the earnings season, alongside the release of the PPI.

Economic Data:

Job Picture

JOLTS – November:

Job Openings fell short of expectations, recording at 8.8 million. There was a noticeable decrease in job openings in the sectors of transportation, warehousing, utilities, and the federal government. In contrast, openings in the wholesale trade sector showed an uptick. The number of hires and total separations remained relatively constant.

 The quit rate stayed stable, with a slight reduction in the number of quits. Layoffs and discharges saw minimal change, though there was a notable decrease in durable goods manufacturing. Interestingly, the quit rate experienced an increase in companies with a workforce of 5,000 or more.

ADP Employment Change:

The private sector observed a notable increase in employment, adding 164,000 jobs, which was significantly higher than the initially forecasted 120,000. The construction sector emerged as the sole sector exhibiting job growth with 24,000 new positions.

 The service-providing sector also contributed positively by adding 155,000 jobs, with leisure/hospitality contributing 59,000 jobs, education/health services 42,000 jobs, and other services 22,000 jobs. It’s important to note that pay growth for both those who remained in their jobs and those who changed jobs declined compared to the previous month.

Initial Claims:

Initial jobless claims saw a reduction by 18,000, bringing the total down to 202,000, which was significantly below the expected 220,000. The four-week moving average for initial claims reached its lowest level in several weeks, averaging around 210,000 jobs. Continuing claims decreased by 31,000, settling at 1.855 million. This past week’s continuing claims matched the four-week moving average recorded in the week of December 23rd.

Employment Situation Report – December:

Nonfarm payroll employment witnessed an increase of 216,000 jobs, which was contrary to market expectations. The accompanying surge in private employment may indicate a continued robust level of hiring activity. Employment gains were observed in the government sector with 52,000 jobs, healthcare with 38,000 jobs, social assistance with 21,000 jobs, and construction with 17,000 jobs. Employment in retail trade and leisure/hospitality sectors showed little change.

The unemployment rate maintained its stability at 3.7%. Average hourly earnings rose by 0.4%, consistent with the previous month’s figures. Year-over-year, average hourly earnings increased by 4.1%, exceeding the 4% mark noted in November. The average workweek saw a slight decline by 0.1 hours, settling at 34.3 hours, while the manufacturing workweek and factory overtime remained unchanged.

The labor force participation rate experienced a minor decrease of 0.3%, dropping to 62.5%. The number of individuals working part-time for economic reasons remained constant but showed an increase over the year.

Construction Report – November:

Total construction spending saw a rise of 0.4%, with a significant year-over-year increase of 11.3%. Private construction spending climbed by 0.7%, and on a year-over-year basis, it increased by 1.1%. Public consumption spending, however, experienced a decrease of 0.7%. In specific sectors, education construction spending fell by 0.3%, while highway construction spending saw a marginal increase of 0.1%.

In the residential segment, private residential construction spending overall rose, with single-family housing showing a notable increase and multi-family housing spending slightly edging up. On the other hand, public residential construction spending saw a slight decrease.

Factory Orders & Manufacturing:

Factory Orders Report:

Manufacturing orders rebounded, with new orders for manufactured goods increasing by 5.4%, recovering from a nearly equivalent decline in the previous month. Excluding transportation, new orders rose by 0.5%, primarily driven by orders for transportation equipment.

There were also increases in new orders for computer & electronic products, communications equipment, transportation equipment, motor vehicles & parts, and manufactured products with unfilled orders. Orders for capital goods surged by 12.7% after a contraction of 10.1% in the previous month. Unfilled orders for capital goods also saw an uptick, rising by 1.2% to 1.7%, and total inventories marginally increased.

ISM Manufacturing – December:

The manufacturing sector continued its decline for the 14th consecutive month, but it did show a slight improvement, rising by 0.7% to 47.4%. None of the six largest manufacturing industries experienced growth in December. Despite two months of stagnant activity, manufacturing edged up slightly, surpassing its twelve-month average of 47.1%. New Orders decreased by 1.2% to 48.3%, with only one of the six largest manufacturers recording growth.

 The most significant contributors to the manufacturing GDP, such as computer & electronic products, transportation equipment, machinery, and fabricated metal products, witnessed a decline. Production increased by 1.8% to 50.3%, indicating a move into expansion territory. Employment in manufacturing rose by 2.3% to 48.5%, although the pace of hiring continued to decelerate. The report suggested a division among respondents between those increasing and those reducing their labor force.

Supplier deliveries improved by 0.8% to 47%, with levels below 50% indicating faster deliveries. Inventories decreased by 0.5% to 44.1%, as a level of above 44.3% indicated expansion. Customer inventories reduced by 2.7% to 48.1%, aligning with the ‘just right’ territory of the ISM non-manufacturing inventory sentiment. Prices saw a decrease of 4.7% to 45.2%, continuing a downward trend observed over several months. The backlog of orders index rose by 6% to 45.3%, indicating a possible expansion in manufacturing, despite remaining in contraction territory. New export orders increased by 3.9% to 49.9%, and new import orders saw a slight rise of 0.2% to 46.4%.

ISM Non-Manufacturing – December:

The services sector continued its expansion, registering at 50.6%, marking its 12th consecutive month of growth. However, there was a 2.1% decline from the previous month, slowing down to a twelve-month average of 52.8%. Business activity grew by 1.5% from the previous month, reaching 56.6%. Some respondents indicated a decrease in business activity, while a smaller proportion reported an increase, and fewer still reported no change. New orders saw a decrease of 2.7% to 52.8%, with reports of lower order volumes.

Employment in the services sector fell sharply by 7.4% to 43.3%. The report highlighted challenges in attracting and retaining skilled workers due to the prevalence of remote and hybrid work arrangements, as well as prevailing economic uncertainties. Supplier deliveries remained relatively stable, showing a marginal decline of 0.1% to 49.5%. Inventories dropped significantly by 5.8% to 49.6%, as companies reduced their inventory levels.

Inventory sentiment decreased by 6.9% to 55.3%, with a higher number of respondents indicating that inventory levels were appropriate. Prices edged down slightly by 0.9% to 57.4%. The backlog of orders index increased marginally by 0.4% to 49.4%, suggesting companies are better positioned to meet order requests. Both new export and import orders experienced declines.

Minutes & Mortgages Analysis

Fed Minutes:

The recent Fed minutes revealed a cautious stance by the Federal Reserve, indicating a reluctance to declare a definitive triumph over inflation. This approach entails maintaining higher interest rates for an extended period. The Fed expressed satisfaction with the economy’s overall performance, acknowledging a slowdown in prices and activity in various sectors, although noting that housing services prices continue to rise, albeit more slowly.

Reflecting on historical context, the Fed aims to avoid the inflation resurgence experienced in the 70s and 80s. During that period, then Chairman Paul Volcker had to elevate interest rates to 20% to combat inflation, leading to significant economic repercussions, including recessions in the 1980s that resulted in nearly 4 million job losses. It was a challenging era, and the Fed’s current strategy seems focused on preventing a repeat of such conditions. However, questions linger about the sustainability of economic growth or stability under persistently high rates.

Borrowing costs have decreased for businesses, households, and municipalities, as evidenced by lower yields and narrower spreads. The minutes indicated a reduction in consumer credit flows, though loans remained accessible and real estate credit availability largely unchanged. Conditions have tightened for small businesses. Of particular interest is the observation of a broad but sector-specific deterioration in credit quality. Notably, delinquency rates in nonfarm nonresidential commercial real estate loans have increased, with a similar trend in small business loan delinquencies, surpassing pre-pandemic levels. Considering the significant role of small businesses in private sector employment and job creation, these delinquency and default rates are critical indicators to monitor.

The Fed has adjusted its inflation forecast, with recent data supporting its target of returning the inflation rate to 2%. Nonetheless, concerns about persistent inflation risks and potential disruptions in the supply-demand equilibrium in the labor market remain. Anticipations for this year include a deceleration in GDP growth, a rise in unemployment, and a rebalancing of the labor market. The current interest rate levels are viewed as appropriate, nearing the peak of the rate hike cycle. The Fed also plans to continue reducing its balance sheet, albeit at a potentially slower pace to maintain adequate reserve levels.

MBA Weekly Application:

The Mortgage Bankers Association reported a 9.4% decrease in mortgage applications from the previous week. There was an 18% decline in the refinance index and a 5% drop in the purchase index. The 30-year fixed rate for conforming loans fell by four basis points, while the rate for jumbo loans increased slightly by one basis point. Mortgage rates have been on a downward trend, influenced by declining inflation and yields, and speculations of a potential shift in Fed policy.

Technical Story:

Cash Flow Management Review for the Past Week:

During the festive Christmas period, I found myself spending more than planned. Unexpected expenses arose, necessitating multiple withdrawals from my savings account. These withdrawals amounted to 75% of the funds I had deposited from my paycheck into savings. Generally, I manage to save about 25% of my income, a notable enhancement from previous years, especially as I’m currently earning the highest salary I have to date.

Despite the uptick in my spending, I’ve been able to double my savings in line with my increased earnings. My objective for the current year is to completely clear the balances on all my credit card accounts and begin chipping away at my student loan debt.

Grade: C+ Reason for Grade: This grade reflects a distinct improvement, despite the challenge of managing extra expenditures during the holiday season.

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