Trade The Journey

Trade The Journey

Markets lOSE steam?

Top of the Morning!  With so much economic data released this past week in addition to the earnings report, I feel it’s best to get started with the economic reports.

Economy

The first and least mentioned NFIB small business optimism index report was released this past Monday. The index rose slightly in January, coming in at 90.3, rising 0.5 points from the previous month. However, the index remains below its 48-year average. Inflation remains a top concern for small business owners, although prices are easing.

Uncertainty concerning future business conditions remains, as small business owners are finding it challenging to fill open positions. Of small business owners looking to fill positions, 91% reported few or no qualified applicants available to fill the positions.  Industries reporting these challenges include construction, transportation, and manufacturing. 46% of the small business owners reported raising compensation, up two points from the previous month.

 Owners mentioned that supply chain challenges are starting to recede, as some owners have begun to accumulate inventory. The net percentage of owners raising average selling prices fell by just one point, meaning that prices are still quite high compared to past prices. Price hikes were reported in construction, retail, wholesale, and transportation. Higher nominal sales were up 4 points from the previous month, totaling a net negative of four percent.

Most small business owners are forecasting a recession this year, as owners hold off on capital spending and inventory investment.  Clearly, small business owners aren’t too optimistic about the economy moving forward, as they battle higher costs and look to the available labor pool for qualified applicants with little success.

Rising Prices for Producers but falling for Consumers this past month:

The CPI came in at the forecasted level, while the core CPI was a bit higher than forecast. The CPI report lifted the market’s level of optimism, but the week wouldn’t end as it started, as the following reports dampened the market’s hope for a Fed pivot or slowdown in its hikes. According to the charts, it looks like headline inflation may have peaked in July, and core inflation in September.

The headline CPI rose 0.5% in line with forecasts, and the core CPI rose 0.4%, 0.1% higher than forecasted. The shelter contributed to the increase, with food, gasoline, and natural gas also rising.  Excluding food and energy, shelter, motor vehicle insurance, recreation, apparel, and household furnishings rose in January. Used cars and trucks, medical care, and airline fare prices fell in January.

Digger deeper into the CPI report, the food index rose 0.1% in January to a total of 0.5%. The food at home index rose 0.4% (falling 0.1%) and the food away from home rose 0.6% (rising 0.2%). Most of the grocery store group indexes rose, with eggs rising 8.5%. Fruits and vegetables rose 0.5%, while fresh fruits and vegetables fell 2.3%. Dairy and related products were unchanged. In the food away from home index, limited-service meals rose 0.7% and full-service meals rose 0.5%.

The energy index rose 2% in January, after falling in the previous two months. Gasoline rose 2.4% and natural gas continued to rise, coming in at 6.7%, 2.2% above the December level. Fuel oil remained in negative growth territory and electricity price growth fell to 0.5%.

Excluding food and energy, the shelter index rose 0.7%. The rent index and the owners’ equivalent rent index rose 0.7%. “The owners’ equivalent rent (OER) index figures the amount of monthly rent that would be equivalent to the monthly expenses of owning a property. If the OER is high, it may be more worthwhile to buy a home rather than rent it. On the other hand, if OER is low, renting might be a better prospect.”

Although the headline CPI report came in mostly within expectations, are prices really falling for the consumer in the areas that matter? Prices still seem to be relatively high for the categories that have the highest relative importance, like shelter, food, and energy. It seems like the Fed still has a lot of work to do before prices are in line with their mandate.

The CPI rose 6.4% and core CPI rose 5.6% in the past twelve months ending in January, the smallest increase since October 2021 according to the CPI report.

The retail sales report showed that sales rose 3% in January after falling in December. Excluding motor vehicles & parts, sales rose 2.3%. Food services & drinking places sales have risen over 25% from the previous year and rose 7.2% from the previous month.  Department store sales rose 17.5% in January. Motor Vehicle & parts dealers’ sales rose 5.9% in January. Most of the sectors within the report enjoyed higher sales even if a slight increase from the previous month. Higher prices clearly have not stopped consumers from spending and going out, as evidenced by the food services & drinking numbers.

The PPI report showed that prices for producers are still rising, as the final demand came in above forecast. The PPI report is an indicator of the CPI, as higher prices for producers translate into higher prices for consumers. The Producer price index for final demand in January rose 0.7%, above the forecasted rise of 0.4%. The final demand for goods led to a rise in final demand, rising 1.2%. The final demand for services rose by 0.4%. Excluding food, energy, and trade services, final demand rose by 0.6%.

For final demand goods, the price of gasoline led to an increase. Food fell 1% in January. For final demand services, hospital outpatient care led to an increase. Final demand for services also rose in trade and transportation & warehousing.

Processed goods for intermediate demand rose by 1%, led by the increase in prices for processed energy goods which includes electric power, natural gas, and gasoline. Unprocessed goods for intermediate demand fell 5% led by a decline in the index for natural gas. Services for intermediate demand rose by 0.5%, which is unchanged from the previous month.

*Intermediate demand, tracks price change for goods, services, and construction sold to businesses as inputs to production. Unprocessed goods for intermediate demand (Crude petroleum sold to refineries), measures prices change for goods sold to businesses as inputs to production that have undergone no fabrication.

The final demand for construction rose by 1.6%, with new office building construction leading the final demand rise with an increase of 3.4%. For intermediate demand by commodity type, natural gas for commercial and industrial rose 11.1% and 7.6% respectively. Diesel fuel rose by 10.9% and Jet fuel rose by 11.9%.

The US Import and Export Prices report showed that import prices fell by 0.2% and export prices rose by 0.8%. Prices have slowed from their highs in 2021, falling by 10% for import prices and 12.2% for export prices. Digging deeper into the report, the following insights were gathered:

  • Fuel Imports fell 4.9% in January, led by falling prices for petroleum (4.9%) and natural gas (11.9%).
  • Excluding fuel, prices rose for foods, feeds, & beverages, capital goods, automotive vehicles, and consumer goods. Higher prices for vegetables, fish, other animal and vegetable preparations, and coffee led to an increase in the foods and feeds.
  • Imports for non-fuel industrial supplies and materials prices fell 0.2% led by decreases in plastic materials, lumber, and other unfinished building materials.
  • Prices also rose for imports of consumer goods which included capital goods, automotive vehicles, medicinal, dental, and pharmaceutical prices.
  • Agricultural exports declined led by a decrease in vegetable prices, while soybean and corn prices rose. Nonagricultural export prices rose 0.8% led by higher prices for industrial supplies (0.8%), capital goods (0.8%), automotive vehicles (1.2%), and consumer goods (0.9%).
  • China Import prices declined by 0.8%, led by a drop in prices for communications equipment manufacturing. Japan imports prices rose by 0.2%, Europe Union imports rose by 1.3%, and Mexico Import prices advanced by 0.8%.
  • Prices for exports to China rose by 0.1%, Japan fell by 0.3%, the European Union rose by 0.2% and Mexico rose by 0.7%.
  • For services, import air passenger fares fell by 12.4%, alongside import air passenger fares which fell by 11.2%. However, export air passenger fares rose 12.4%.

Economic Data continued:

Industrial Production was unchanged in January with manufacturing output rising 1% and mining output rising 2%. Utility output fell close to 10%, due to less demand for heating because of the warmer weather. Industrial production for final products fell 0.1% with consumer goods production falling 0.1% and business equipment production rising 1.2%. Hardwood lumber rose by 9.2% and asphalt rose by 15% after falling the previous month by over 30%.

However, consumer non-energy nondurable goods rose for nonmetallic mineral products, machinery, computer & electronic products, electrical equipment, appliances & components, aerospace, and miscellaneous transportation equipment. Production for chemical and food, beverage & tobacco products posted a 1.5% increase. Production for Construction supplies rose 0.8% and materials rose 0.1% in January.

Capacity Utilization fell 0.1% and is now 1.3% below its long-run average of 79.6%. Manufacturing capacity utilization rose by 0.6% and rose for mining by 1.6%.  Utilization fell for utilities.

Business Inventories rose by the same amount in December as in November, 0.3%. The inventories/sales ratio was 1.37, as the ratio steadily rose in 2022. Total business sales fell by 0.6%, while total inventories rose by 0.3%. Sales fell for manufacturers, retailers, and merchant wholesalers while the opposite was true for inventories. The inventories/sales ratios were about the same for all three from the preceding month. Inventories improved decisively for furniture, home furniture, electrical & appliance stores. Inventories continued to fall for department stores, and food & beverage stores.

The Conference Board Leading Economic Index (LEI) fell by 0.3%, falling by 3.6% in the last six months. Contributing to the deteriorating outlook was a fall in new orders for manufacturers, a decrease in consumers’ expectations for business conditions, and weakening credit conditions. Labor conditions and a strong performance in the S&P 500 prevented the LEI from falling further.

The coincident economic index measuring current conditions in the economy rose by 0.2%, and the lagging economic index also rose by 0.2%. Below is a chart of the LEI components:

Housing

The NAHB housing market index rose two points to 81 in February. NAHB housing market index is comprised of three metrics which are present single-family sales, single-family sales for the next six months, and traffic of prospective buyers. The metrics are gathered from a survey completed by a panel of builders.

Single-family sales for the present rose two points to 89, single-family sales for the next six months rose ten points, and traffic prospective buyers declined by one point to 65. Each of the metrics has been trending upward these past few months.

 

The housing starts and building permits report was released this past week. Building permits for privately-owned housing rose by 0.1% in January. Single-family authorizations fell 1.8% in January. Building permits for housing with 2 to 4 units rose over 25%. Housing starts for privately-owned housing rose by 1% and single-family housing starts fell by 4.3%. 

Starts for housing with 5 units or more fell by 5.4%. Housing completions for privately-owned housing rose by 1% and single-family housing completions rose by 4.4% in January. Completions for housing with 5 units or more fell by 8.6%. Housing under construction for single families fell by 1.1% but rose slightly for housing with 5 units or more.

Mortgage applications fell 7.7% from the prior week. The refinance index fell 13% and the purchase index fell 6% from the previous week. The 30-year fixed rate for confirming loans rose by 0.21% to 6.39% and the 30-year fixed rate for jumbo loans rose by 0.30% to 6.26%.

The Labor Market remains tight:

Initial claims rose by a meager 1,000 claims, bringing the total initial claims for this past week to 194,000. Continuing claims rose by 16,000, with the total continuing claims for the prior week at 1.696 million. The four-week average for initial claims remains below 200,000.

Earning Insights (Factset & CNBC):

Most of the companies have reported thus far. 68% of the companies have reported earnings above estimates, however, companies reporting above estimates are below the five and ten-year averages. Only four sectors have reported earnings growth above estimates which are energy, industrials, real estate, and utilities. Year-over-year declines in earnings growth have been reported in most sectors led by communication services, materials, and consumer discretionary.

Revenue has been a bit of the same story, with only 65% of the companies reporting revenues above estimates, which is below the five-year average but above the ten-year average. Nine sectors reported year-over-year growth in revenue, while materials and information technology reported declines from the past year.

This past week’s cash flow in review:

This past week was a little hectic but manageable. My spending habits are starting to improve but not yet where I envisioned them. This coming week I expect my expenses to increase due to a trip out of town.

Grade: C-

Reason: Some improvement but not much.

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