Trade The Journey

Trade The Journey

Merry Christmas

Top of the Morning! I want to wish everyone a Merry Christmas and happy holidays. This coming week and the following week the trading week will be shortened in observance of Christmas and the start of the new year. Next week’s post will be a recap of all the major events that occurred this year, as its been a rough year for the market’s in general.

In a surprise move the Bank of Japan adjusted its yield control strategy, allowing the middle of the curve or the ten-year yield to venture above its 0.25% cap to 0.50%. Japan, which has been in a deflationary environment for the last decade, was one of the last central banks to implement an easy money policy to help spur the economy. Japan’s latest yield curve adjustment caused the yields of bonds in the major markets to move, the US treasuries were no exception.

The yen rose, as traders and investors piled into the currency, as they believe that a change in yield control will ultimately end in a rate increase. Some have remained short, believing that these adjustments won’t help, others have begun to unwind the carry trade that has been profitable until the announcement. The carry trade involves borrowing in a currency with lower rates and lending in a currency with higher rates thus profiting from the spread between the rates.

This is a market development that should be monitored. In China, the Coronavirus is rapidly spreading as President XI removed most of its zero-tolerance policy implementation. China’s economy has taken a hit from reduced demand and production while fighting to maintain its property market which is a large part of its GDP. China has pledged to assist and spur its faltering economy.

Next door to China, Russia is still engaging in an ongoing war with Ukraine and so far, the war has proved to be much more difficult than Putin planned. Alongside the atrocities that Russia has committed, it has continued maintain its stance on the justification of its invasion of Ukraine. The United States has pledged to send Ukraine additional aide and patriot missiles to assist in their fight against Russia.

Besides the obvious toll this war has taken on human life, resources that come from both countries have been volatile. Russia is a major producer of the world’s energy supply, especially to Europe and it has pledged to cut production if a cap is placed on the price of its oil. Russia has pledged to cut production by 5-7% which equals 500,000-700,000 barrels a day. The price cap that G7 countries, the European Union, and Australia introduced is $60 per barrel. Currently, the price of Russian oil per barrel is around $55.

A supply cut could further increase the price of oil, reintroducing high prices for energy felt around the world earlier this summer. The White House continues to draw oil from its strategic oil petroleum reserve to help mitigate the volatility of crude oil prices. The strategic petroleum oil reserve was established after the oil embargo placed on the United States from OAPEC in the 70s and serves as the world’s largest emergency oil reserve.

With all the geopolitical developments and soaring inflation in the developed economies, markets have faced a rough year.  A global tightening of monetary policy has pressured economies around the world as governments attempt to quell inflation.  The challenge for central banks is to bring down inflation without sending their respective economies into a recession. Europe has already entered a recession and the United States may not be too far behind.

The United States has raised rates sharply to bring inflation down to its target 2% inflation level and continues to stand firm on its hawkish monetary policy even if a recession occurs. The yield curve has signaled an incoming recession for quite some time now. While the economy is showing that the rate hikes are beginning to slow the economy, the job market remains strong, and consumers are still spending. Only time will tell what’s the ultimate result of aggressive rate hikes and quantitative tightening.  

Below is a picture of some tools I use to help assist the effects of the rate hikes and monetary policy in general. I will provide a link below the picture.

https://www.cmegroup.com/tools-information/quikstrike/treasury-watch.html

Economy

The NAHB housing market index has been falling since January of last year and is at its lowest level in two years. Except for an increase in single-family sales in the next six months, present single-family sales fell again in December and traffic of prospective buyers remained at the same level as the previous month. Below is a chart of the NAHB housing market index.

Building permits fell 11.2%, while housing starts fell 0.2% in November. Both are far from their levels over a year ago. Housing completions rose 10.8% in November. Single-family building permits fell 7.1% and single-family housing starts also fell 4.1%. Single-family completions rose 9.5% in November.

2-to-4-unit building permits rose 2%, while 5 units or more building permits fell close to 20%. Housing starts for 5 units, or more rose close to 5%. Housing completions rose across all size units. Housing units under construction at the end of the period fell 1.3% for single-family homes but rose slightly for 5 units or more.

Existing home sales fell 7.7% and single-family home sales fell 7.6% in November. The median home sales price is $370,700, 3.5% higher than a year ago and the inventory of unsold existing homes fell to 1.14 million in November. This number is equivalent to 3.3 months’ supply. First-time homebuyers’ percentage of purchasing homes was unchanged from the previous month. Distressed sales remained unchanged from the previous month at 2%.

New single-family home sales were 5.8% above the October level. The median sales price for new home sales was $471,200 and the average sales price was $543,000. The current inventory level for new homes for sales is 8.6 months. New home sales in the price range from $300,000 to $399,999 rose the most for this month followed by a slight increase in the $400,000 to $499,999 range.

Mortgage applications rose 0.9% from a week earlier. The refinance index rose 6% and the purchase index fell 3% from a week earlier according to the latest MBA weekly survey. Conforming loans for 30-year fixed mortgage rates fell to 6.34% and jumbo loans for the same maturity fell to 5.97%.

The housing market has simmered down from the buoyant environment we saw when rates were low. Homebuilders are pulling back from constructing new homes as the traffic of prospective buyers slows. Rates remain high enough to discourage prospective buyers.

Initial claims remain at the 200,000 level, increasing slightly from the previous week. Continued claims fell from the previous week.

The conference board’s leading economic index fell by 1% in November. Looking at the chart below, the only positive addition to the leading economic index was the S&P 500 index of stock prices. The rest of the components of LEI continued weakening. The LEI continues to signal a recession. The Coincident economic index rose by 0.1% and the lagging economic index rose by 0.2%. The coincident index is heavily correlated with the real GDP.

New orders for manufactured durable goods fell 2.1% in November. Transportation equipment was the leading good driving down new orders. Shipments rose 0.2% in November led by transportation equipment. Unfilled orders were unchanged, and inventories rose 0.1%. New orders for non-defense capital goods fell 7.6% and unfilled orders fell 0.2%. Businesses seem to be slowing their orders, further evidence of a weakening economy. New Orders across goods were little changed or fell, only rising slightly for computers and electronic products.

The PCE price index rose 0.1%, slowing from the previous month. PCE, excluding food and energy, also slowed to 0.2%. Services spending remains resilient, while goods spending fell. Personal income rose 0.4%, while disposable personal income rose 0.4%. Food and energy prices both rose.

If you’re trading in this marketing environment, make sure you keep your stops tight and listen to what the market is telling you. The charts are visual evidence of the prevailing sentiment of the market.

The Charts

This Past weeks’ Cash Flow in Review:

This holiday season proved to be challenging in terms of implementing my spending plan. As soon as my paycheck arrived, the bill collectors and creditors arrived. With all that said, I still managed to save a portion of my paycheck which has helped me tremendously during cash flow crunches. I’d like to save a higher portion of my paycheck moving forward.

My biggest challenge now and moving forward is lowering impulsive spending.

Grade: C-

Reason: There are still adjustments to be made

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