Trade The Journey

Trade The Journey

New All-time Highs!

Greetings Fellow Traders! I hope you are enjoying this rainy weekend and preparing for the week ahead. This past week a lot of economic data was released alongside a Fed Reserve press conference that was guaranteed to move the markets. Most if not all had the Fed leaving rates unchanged, however the press conference and the Fed’s view of monetary policy ongoing was unknown. The market seemed to be mostly set on rate cuts occurring at the March meeting although the probabilities declined.

The ECB has kept the same stance, preferring to wait upon incoming data to signal a reversal in monetary policy. Japan has also left is monetary policy unchanged as there were reports that it would begin to tighten economic policy. Europe’s economy hasn’t enjoyed the same recovery as the United States.

Japan is still performing its yield control policy, targeting short-term rates at -0.1%, and the 10-yr yield around 0% allowing the rate to rise to 0.5%. Japan is still aiming to spur economic activity coming to inflation-overshooting. Inflation-overshooting involves expanding the monetary basis until the year-over-year CPI rate is above 2% consistently. China has pledged to spur the economy by allowing the reserve ratio and providing some assistance through monetary policy.

Its manufacturing was unchanged this past month on the Caixin index, however NBS manufacturing and nonmanufacturing both improved. The Caixin index covers small & medium sized companies and the NBS manufacturing index covers large & state-owned companies. The NBS covers a wider range of companies and state-owned companies. Although new orders and activity improved, deliveries rose, and prices fell exacerbating China’s fight against deflation.

The FED’s press conference provided the clarity the market needed regarding monetary policy and the future of rate cuts. Chairman Powell spoke about the Fed’s perception of inflation as it is seeing the falling of goods prices as being mostly responsible for the inflation’s decline. Services inflation has yet to recede in a meaningful way as the Fed would like to see. The Fed is looking for sustained deceleration in prices before it commits to cutting rates. One major deciding factor is the job market which the Fed would like to see weaken.

The Fed also addressed the market consensus that remained strong that rate cuts in March were more than likely to occur. Currently, the market is pricing in a 38% probability that rates will be cut by twenty-five basis points. The earliest cut is now projected at the May meeting with a 59% probability of rates being cut twenty-five basis points and 34.2% probability that rates will be cut fifty basis points.

Treasury yields dropped post-market Tuesday and traded in range before and after the Fed’s press conference. However, yields gapped up after the release of the jobs reports which surprised markets, adding 300k jobs. Ten-year yields returned to 4% and two-year yields rose three basis points, inverting the 2/10 spread a bit. Ten-year TIPS are down from their high of 2.49% to 1.582%.

The ten-year yield/10-yr corporate spread widened as the 10-15 corporate yield moved up to 5.21%, meaning investors are demanding a higher yield. When investors demand a higher yield it could mean several things, credit risk concerns, changes in inflation or interest rate expectations, or a change in the economic outlook.

Gold weakened as the dollar rose to $103.96, strengthening at the jobs report and with the possible acknowledgement that rates will have to remain higher for longer. Crude oil rose to a high of $78 but retreated sharply from this level, returning to the $72.40 reference level. Copper also retreated alongside China, currently at $3.819.

Also in the market’s focus was big tech with Google, Microsoft, Meta, and Apple reporting.  Google beat on earnings and forecasts but disappointed on Ad Revenue. Google beat Revenue & Cloud Revenue forecasts but saw traffic acquisition costs decline. It also faced $2.1 billion in costs related to the reduction in its workforce. Its subscriptions services which include YouTube premium, YouTube TV, and google revenue saw annual revenue reach $15 billion.

Google is investing heavily into AI as it integrates it within search, subscriptions, and cloud services. Microsoft beat on earnings and revenue forecasts. Its cloud services’ growth disappointed while its Azure segment improved. Microsoft continues to integrate AI into its products as its saw its Azure AI customers grow at a rapid pace, over one-third of the new subscribers. Azure continued to increase its market shar. It’s also rolling out Microsoft Co-pilot, AI for its Microsoft Office suite.

Meta beat on earnings and revenue forecasts. Meta issued positive guidance, saw revenue rise 25% to $40 billion revenue in the fourth quarter and issued a dividend. Meta is focusing on technology and leaning out as the company remains focused on the long-term vision of AI and the metaverse. Meta faces regulatory challenges in the US and EU which could impact the bottom line moving forward.

Apple beat on earnings and revenue forecasts although sales in China slowed sharply. Mac and other products beat revenue estimates while iPhone, iPad, and services revenue missed estimates. Sales rose 2%, breaking consecutive declines in previous quarters. Its active devices in use, which is a precursor to Apple’s services growth, rose from $2 billion to $2.2 billion.

Upcoming Economic Data Reports:

  • Monday: ISM Nonmanufacturing
  • Wednesday: Trade Balance, Consumer Credit
  • Thursday: Initial Claims, Wholesale Inventories

 

Economic Reports

Job Health

JOLTS – Job Openings: December

Job Openings were little changed at nine million. Openings increased in professional & business services but declined in wholesale trade. The number and rate of hires were little changed as hiring decreased in healthcare but increased in government. Separations were also little changed as were quits. Quits ticked up in wholesale trade. Layoffs and discharges changed little but increased in transportation, warehousing, utilities, and government excluding education.

ADP Employment Report: January

Both hiring and pay growth slowed with employers adding 107,000 jobs in January. The goods producing sector added 30,000 jobs with natural resources/mining, construction, and manufacturing showing job growth. The services-providing sector added 77,000 jobs, leisure/hospitality added 28,000 jobs and trade/transportation/utilities added 23,00 jobs. Pay gains continued to slow for job-stayers and job-changers, see chart below.

Employment Cost Index: December (Measured Quarterly)

Employee compensation rose 0.9%, with wages and salaries rising 0.9% and benefits costs rising 0.7%. Year-over-year, compensation costs have declined 0.9% to 4.2%. Wages & salaries and benefit costs have shown similar declines over the past year. The same type of slowing growth can be seen in the private industry with union workers earning higher wages but seeing decreased benefits when compared to nonunion workers. Employment costs rose in the goods-producing industry as the service industry saw a decrease in employment costs. The construction industry saw a slight decrease while manufacturing employee costs rose.

Initial Claims

Initial Claims rose to 224,000 this past week following last week’s increase. The four-week moving average of initial claims rose to 208k from 203k, still well below the threshold for an oncoming recession. Continuing claims, which signals if people are able to find a job, rose 70,000 to 1.898 million.

Productivity: January

Nonfarm business sector productivity rose to 3.2% as output increased 3.7% and hours worked rose 0.4%. Unit labor cost rose 0.5% as hourly compensation rose 3.7%, and increased 3.2% from productivity, indicated earlier. Real hourly compensation rose 0.9%. Manufacturing productivity rose 2.3%, as output declined 2.4% and hours worked fell 4.6%. Durable manufacturing rose 1.4% and nondurable manufacturing rose 2.5% in productivity. Unit costs in total manufacturing rose 4.2%. Productivity across all sectors all up across the spectrum as unit labor costs have fallen. Unit labor costs remain high for durable manufacturing at 7.4% (6.4%) as nondurable manufacturing is unchanged at 3.4%. Below is a graph of the productivity cycle highlighting the cycle we are in:

Employment Situation report: January

Nonfarm employment rose 353,000 which was well above market expectations and above December’s job additions of 333,000. Job gains occurred professional and business services, health care, retail trade, and social assistance, while employment declined in mining, quarrying, and oil and gas extraction. The unemployment rate remained at 3.7% which indicates the demand/supply imbalance in the job market is abating. The labor force participation rate remained at 62.5% which signals that although the unemployment rate is low, the labor force is growing.

 The average hourly earnings for all employees on private nonfarm payrolls rose by 19 cents to $34.55, marking a 4.5 percent increase over the past 12 months. The average workweek for all employees decreased by 0.2 hours to 34.1 hours.

Manufacturing and Construction Spending

Total Construction Spending: December

Total construction spending increased 0.9% and rose 13.9% this past year. Private construction spending rose 0.7% as residential construction spending rose 1.4% and nonconstruction spending fell 0.2%. Public construction spending saw highway construction increase 4.1% while education construction spending fell 0.1%.

Factory Orders: December

New orders for manufactured goods rose 0.2%. Shipments were unchanged and unfilled orders rose 1.3% as backlogged orders. Unfilled orders to shipments rose to 7.08 from 6.96. Inventories rose 0.1% and the inventory to shipments ratio was unchanged. Manufacturers seems to be cautiously optimistic as inventories seem to be moving in better balance and unfilled orders indicate improving demand backlog.

ISM Manufacturing: January

The January 2024 Manufacturing ISM® Report On Business® indicates marginal contraction in the manufacturing sector with a PMI® of 49.1%. There’s a mix of growth and contraction across different components: new orders grew, signaling potential demand improvement, while employment and raw materials inventories contracted.  New orders showed that respondents are reporting higher new orders overall as the index rose to 52.5% into expansion territory.  Production entered into expansionary territory for the first time in three months.

Supplier deliveries quickened, suggesting easing supply chain pressures. Despite the overall contraction, there were signs of stabilization in production and slight improvements in demand. Economic activity in the manufacturing sector shows resilience, with expansion in the overall economy for the 45th consecutive month. Challenges remain, including rising prices and contracting exports. The average lead time for capital expenditures declined by two days to 172 days. The lead time for production materials rose one day to 83 days. The lead time for maintenance, repair and operating supplies decreased by three days to 43 days.

Consumer confidence

Consumer confidence rose to 114.8 as the present situation index rose to 161.3 from 147.2 and the expectations index rose to 83.8 from 81.9. Consumer confidence rose across age, race and income levels as inflation recedes and the job market remains strong. Consumers reported that the current family financial conditions were good and they feel positive about their current financial stance. Expectations for a continued rise in rates by consumers fell. Consumers feel that the stock market should be higher by the end of the year.  The expected family financial situation remained on net optimistic. Plans to purchase big-ticket items declined slightly.

The final reading for the University of Michigan consumer sentiment report that readings came higher than in the preliminary report. The current economic conditions index dipped in the final reading of 83.3 to 81.9. The index of consumer expectations rose from the preliminary reading of 75.9 to 77.1. Year ahead inflation was unchanged while the five-year inflation expectations rose to 2.9%.

Technical Story:

This past week’s cash flow in review:

This past week didn’t go well as I had some surprise expenses. While my credit card balance has decreased, my payments have increased. I also received notice that a second education loan is now requesting payment. For a year, this loan has been in forbearance. So far, I have over $300 in student loan payments upcoming. I’m not spending as much as I did before on entertainment, however my available funds are dwindling. Although, I have increased the amount contributed to investment accounts, I still should have some discretionary income available.

Grade: D+

Reason: Minimal improvement

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