Trade The Journey

Trade The Journey

Merry Christmas!!

I hope everyone is making the most of their weekend and setting the stage for the upcoming week. This past week brought a bounty of data reports that shed light on the potential direction of interest rates, the progress in tempering inflation, and the pulse of the housing market. Also on the agenda was the final revision of the GDP figures and a peek into the state of manufacturing.

The bond market experienced a surge in buying activity, buoyed by the prospect of multiple rate hikes in 2024, despite some Federal Reserve officials’ attempts to dampen the enthusiasm. The Bond Volatility Index, also referred to as the Move Index, has trickled down to 111.38, marking its lowest level in a stretch of weeks. Over the prior three months, the Move Index has diminished just over 21.38%. Yield movements across various maturities were minimal, with closing figures hovering near their openings. The ten-year yield concluded the week at 3.90%, sitting fifty-two basis points beneath the previous month’s metric.

The five-year yield wrapped up at 3.87%, fifty-seven basis points under the level of the preceding month. The thirty-year bond culminated fifty basis points down from last month, finalizing the week at 3.90%. The yield for two-year notes closed at 4.31%. The spread between the 2-year and 10-year yields remains in an inverted state, albeit to a lesser extent than a few months prior. The softened yields have provided a boost to the housing market, leading to reduced mortgage rates and possibly contributing to a revival in home buying, provided that housing prices don’t escalate too rapidly.

The dollar ended its weekly journey at $101.709, significantly below its 50 and 200-day Simple Moving Averages, as the market anticipates several rate reductions in 2024. The 50-day SMA is on a downward trajectory towards the 200-day SMA. With the dollar’s descent, gold is approaching its recent zenith of $2,152, terminating the week at $2,064. It suggests that gold might still have some upward momentum as the year draws to a close. Crude oil settled at $73.49, cresting above the benchmark level of $72.46. A weakening dollar may underpin stronger crude oil prices. Angola’s exit from OPEC barely nudged the needle on crude prices.

In the previous week, I extended a trade from the week before, which seemed promising in light of the GDP and PCE reports unveiled during the week. More details on this trade will be shared here.

Economic Data

Housing Landscape

Housing Starts & Building Permits for November:
Building permits retracted by 2.5%, yet single-family permits saw a 0.7% uptick from October. Housing starts leaped by 14.8%, with single-family starts even more robust at 18% above October’s figures. Multi-unit housing starts (2 to 4 units) climbed 8.9% above October. Housing completions softened by 5%, with single-family completions down by 3.2% from October. Authorizations for yet-to-be-started housing receded by 4.2%, and those for units of five or more decreased by 0.7% compared to October. Conversely, construction in progress for single-family homes rose by 1.9%, though multi-unit constructions (2 to 4 units) fell marginally by 0.1% from the prior month.

New Home Sales for November:
Sales of new homes fell by 12.2% from October’s data. The median sale price reached $434,700, with the average price at $488,900. The inventory of new homes for sale at November’s end stood at 451,000, indicating a supply for 9.2 months at the current sales rate, the highest annual level, and 0.2 points beneath the supply in November of the preceding year. Notably, the $300,000 to $399,999 price bracket witnessed a significant drop in sales.

Existing Home Sales for November:
Sales of existing homes nudged up by 0.8%. The median sales price appreciated by 4%, while the inventory of unsold existing homes decreased by 1.7%, equivalent to a 3.5-month supply at the prevailing sales rate. First-time buyers constituted 31% of sales, a 3% increase, and second-home buyers made up 18%, also a 3% rise.

Manufacturing and Durables

Durable Goods for November:
Orders for durable goods bounced back by 5.4% after a 5.1% dip in October. Excluding transportation, the rise was a modest 0.5%, potentially influenced by the conclusion of an automotive union strike. Shipments ticked up by 1%, following a contraction the previous month. Noticeable hikes in orders were observed in the computer and electronic sectors, motor vehicles and parts, and nondefense capital goods. While orders increased, shipment volumes remained largely static.

Philadelphia Manufacturing for December:
Manufacturing activity took a downturn as new orders sharply retracted into a contraction phase. Shipments and employment rates tapered off, maintaining a balance. Overall prices surged, yet they hover near long-term averages. Capacity utilization showed minimal fluctuation, with a portion of responses signaling a reduction in production levels.

Forecasts for manufacturing’s future activity lend support to a potential rebound. Expectations for rising orders and shipments are prevalent. Firms forecast a steady employment outlook, even as the future employment index dips slightly. Projections for incoming and outgoing prices have both diminished, and the index for future capital expenditures has slipped into negative terrain.

Consumer Health & Prices

University of Michigan, Consumer Sentiment Final for December:
The finalized index of consumer sentiment marginally increased to 69.7, a climb from last year’s 59.8. The component gauging the current economic conditions slightly declined, while the index of consumer expectations decreased by one point. Inflation expectations for the upcoming year remained stable, with a slight rise in five-year inflation forecasts.

Consumer Confidence for December:
Contrary to expectations, consumer confidence escalated to 110.7, a substantial elevation from November. The assessment of the present situation advanced significantly, and the short-term outlook expectations similarly rose. Confidence levels peaked among higher-income households and those aged between 35-54.

Economic Indicators

PCE: November
The Personal Consumption Expenditures (PCE) index witnessed a marginal downturn of 0.1% to 2.6% on a year-over-year basis, as the deceleration in prices surpassed expectations. Specifically, the prices of goods fell by 0.7%, whereas the prices of services saw an uptick of 0.2%. In an annual comparison, there was a 0.3% reduction in the prices of goods, while service prices experienced a 4.1% increase. The pricing for food items retracted by 0.1%, paralleled by a similar 0.1% reduction in energy prices. Excluding the volatile food and energy sectors, the core PCE index edged up by 0.1%.

The ‘real’ PCE, which accounts for inflation, went up by 0.3% as both goods and services exhibited price increases. In the realm of goods, notable price escalations were recorded for recreational items, information processing equipment, vehicles, clothing, and durable household equipment. In the services sector, there was an upward price movement for food services and accommodations.

Personal income rose by 0.4%, matched by an equivalent rise in disposable personal income. Wages and salaries outpaced these figures, climbing by 0.6% and marking a 0.4% increase from October. The current dollar personal income also experienced growth, buoyed by higher personal income receipts and compensation. Personal spending ticked up by 0.2%, in sync with a 0.1% increase in the savings rate to 4.1%. The outpacing of personal income over the PCE inflation rate suggests a consumer economy well-equipped to manage heightened interest rates.

GDP: Final Estimate for the Third Quarter
The final estimate for the third-quarter GDP was adjusted downwards to 4.9%, reflective of a dip in consumer spending from 3.6% to 3.1%. There was a slight uptick in the personal savings rate by 0.2% to 4.2%, hinting at a potential consumer reticence to spend amidst hopes of further economic improvement. Gross private domestic investment fell by 0.5% to 10%. Both exports and imports experienced declines, while government spending saw an upward revision from 5.5% to 5.8%. Corporate profits showed an increase in the final estimate, painting a picture of an economy that’s resilient and expanding in several key areas. Areas displaying contraction included structures, equipment, intellectual property, nonresidential investment, and the PCE, while residential investment, inventory changes, exports/imports, and government spending were areas of strength. The GDP price index escalated from 1.7% in the previous quarter to 3.6%.

Leading Indicators: November
The Leading Economic Index (LEI) contracted by 0.5%, indicating a milder pullback than in preceding months. Financial Components slid by 0.8% over the last half-year, in contrast to a 2.3% decline in non-financial components. Of the financial indicators, the S&P 500 stood as the sole positive contributor. On the non-financial front, average consumer expectations for business conditions and the ISM index of new orders were predominant in the downtrend. Conversely, the coincident economic index (CEI) increased by 0.2%, bolstered by rises in most components, which included payroll employment, personal income excluding transfer payments, manufacturing & trade sales, and industrial production. The Lagging Economic Index (LAG) also rose by 0.5%.

Technical Story

Past Week Financial Cash Flow Management Review:
The preceding week echoed its antecedent in terms of adept cash flow management, with minimal discretionary expenditures. A subtle yet impactful modification to my financial strategy markedly improved my alignment with my budgetary goals. December stands out as the inaugural month where my entertainment spending did not exceed the budgeted amount, and I am poised to maintain this fiscal discipline throughout the entire month barring unforeseen exigencies.

Currently, my assets robustly overshadow my personal credit account balances. However, when student loans enter the equation, the scale of liabilities tips considerably. My continued objective is to aggressively reduce my credit card debt, thereby paving the way to concentrate on extinguishing my student loans.

Grade: C+
Reason: Persistent

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