Trade The Journey

Trade The Journey

Markets spurred New HIghs, Inflation recedes!

Good afternoon, Traders, and a Happy Easter to you all! I trust you’re all making the most of the weekend and finding time to spend with family. Today, March 31st, not only celebrates my father’s 74th birthday but also commemorates the tragic loss of Nipsey Hussle, an iconic figure in Los Angeles, right in front of his store. While Nipsey’s name might not resonate as deeply outside the LA area, for those of us who observed his ascent from humble beginnings, his impact is unforgettable, embodying the true essence of what hard work can achieve.

Today is bittersweet, as I’m grateful to celebrate another year of life with my father, who remains in good health and spirits. Our plans include watching the NCAA men’s tournament and enjoying the day together.

This week, the markets have been fluctuating in anticipation of the PCE inflation report, which was released on Good Friday when the markets were closed. There were a few other reports released, though none as critical. The PCE report aligned with expectations, with current forecasts now showing a 55% chance of a 25-basis point rate cut in June, a decrease from 66.7%.

Expectations for a rate cut in July have also diminished slightly. Despite the market’s anticipatory moves towards rate cuts, the Fed, through Chair Bostic, has signaled a preference for a more cautious approach, suggesting only one rate cut. Treasury yields have remained relatively stable, with the ten-year yield at 4.206%, leaning on the 50-day SMA for support. We anticipate potential shifts in yields when the markets reopen on Monday.

Gold prices surged to a new weekly high, while the dollar lingered close to a recent peak of $104.889. A potential crossover of the 50-period SMA above the 200 SMA indicates upward momentum. Crude oil prices escalated to $83.11, approaching resistance near $84.3 amid OPEC+ production cuts and geopolitical tensions in the Middle East.

Copper prices have corrected from their peak, stabilizing around $4.0115 as China’s manufacturing sector showed signs of improvement, exceeding expectations in recent NBS non-manufacturing and manufacturing reports. With GDP growth accelerating to 5.2%, China aims for a 5% growth rate, with a slight easing in monetary policy anticipated. The ECB notes a downward inflation trend towards its 2% target, with rate cuts expected by summer. Consumer confidence in the eurozone is declining less rapidly, with a notable improvement in industrial sentiment despite rising selling price expectations.

Eurozone loans to corporations increased modestly to 0.4%, with household lending remaining steady. Recent speeches by Fed Governors Cook and Waller highlighted the importance of balancing maximum employment for a thriving economy and maintaining price stability, as defined by Alan Greenspan, to foster informed business and consumer decisions.

Because monetary policy affects the real economy, or the part of the economy that involves producing goods and services, with a lag and affects inflation with an even longer lag, monetary policy must be forward-looking. Therefore, we look at measures that may provide better guides to the direction of future inflation. One such measure is core inflation (excluding food and energy prices, which tend to be volatile). Core inflation rose less sharply than overall inflation but has also moved down a bit less, to 2.8 percent in January.

Housing services prices were boosted by several factors. The surge in working from home increased demand for larger homes and those located in less expensive metro areas or further from city centers. Because these shifts in demand happened much more rapidly than the response in housing supply, rents increased quite notably, especially for single-family detached homes. Initially, new and existing homeowners were able to lock in historically low long-term mortgage rates, which also drove up the demand for housing.

The housing-services price index adjusts with a lag to changes in market rents (or the rent charged to a new tenant), because the index measures the rise in rents for all tenants, including those with continuing leases whose rent is unchanged. But eventually, as leases turn over, changes in the rental market are reflected in housing services prices. Although housing-services inflation remains quite high, the current low rate of increase on new rental leases suggests that it will continue to fall.

Waller spoke on the need to allow inflation to moderate further before beginning the discussion on rate cuts. Waller felt that risks of cutting rates too soon outweighed the prospects of the damage due to cutting rates too late. Inflation although making progress towards the Fed mandate, the road has been bumpy and not as smooth as Waller would have liked.

In fact, the 3-month and 6-month CPI price index has risen sharply. The 3-month core CPI is up to 4.2 from 3.3 last month. The 6-month core CPI rate rose from 3.3 to 3.9 last month. Productivity growth, although rising recently its less likely to be sustained in the long-term unless there are more fundamental changes are made.

The first thing to note is that productivity growth is notoriously volatile. Though productivity grew fast for the final nine months of last year, it actually fell in the first quarter of 2023 and rather substantially for all of 2022. One may view this fast growth as making up for the earlier declines. In fact, smoothing across the past two years, productivity growth averages a bit above 1.25 percent annually. Also keep in mind that periods of fast growth that last more than a few years are unusual, and it is also difficult to be sure about the causes.

When thinking about productivity, one has to distinguish between factors that raise productivity in the short run but ultimately are one-off increases in the level of productivity, as opposed to those that increase the long-run growth rate of productivity so that the level is constantly increasing.

The U.S. economy saw a 3.4% annual growth in GDP in Q4 of 2023, picking up from the previous estimate of 3.2% due to stronger consumer spending and business investment, although a dip in private inventory investment partly offset this. The pace was slightly slower than Q3’s 4.9% rise, with inventory investment and federal spending cooling down. Overall GDP hit $27.96 trillion, with the price index for purchases holding steady at a 1.9% increase.

Personal income rose by $230.2 billion, a slight revision upwards, with disposable income up by 3.8%. However, the latter saw a modest downward revision, and the saving rate was adjusted to 4.0%. The gross domestic income grew a robust 4.8%, averaging out with GDP for a 4.1% rise.

Corporate profits enjoyed a $133.5 billion boost, led by nonfinancial corporations. Financial sector gains were more modest, and international profits dipped due to lower receipts.

The GDP by the industry section revealed a 7.0% surge in goods production, a 2.6% uptick in service industries, and a 3.1% rise in government contributions. Mining, retail, technical services, and healthcare led the growth, which saw a 2.1% increase in gross output across industries for the year.

In 2023, real GDP climbed by 2.5%, with notable contributions from consumer and government spending and exports, despite residential investment and inventory decreases. GDI’s growth was more muted at 0.5%, with corporate profits growing by $49.3 billion, contrasting with the previous year’s larger gains.

New single-family home sales are reported at a seasonally adjusted annual rate of 662,000 units, which is slightly down by 0.3% from January’s revised rate of 664,000 units. However, when comparing year-over-year figures, there is a 5.9% increase from February 2023’s estimate of 625,000 units.

The median sales price of new homes sold stands at $400,500 with an average sales price of $485,000. These figures suggest a market with strong pricing, potentially driven by factors such as construction costs, land prices, and demand outpacing supply in certain areas.

The inventory level at the end of February is 463,000 new houses, which is indicative of an 8.4-month supply at the current sales rate. This supply level is above the 6-month mark, which is traditionally seen as a balance between a buyer’s and seller’s market. The higher supply suggests that buyers may have more options to choose from and possibly more leverage in price negotiations, although the higher median and average prices could also imply quality or luxury homes pushing the average.

Year-over-year data shows an increase in sales, hinting at sustained demand. The Northeast experienced the most significant percentage increase from February 2023 to February 2024, which could reflect regional economic growth, a shift in population trends, or changes in housing preferences.

New orders for manufactured durable goods rebounded, increasing by $3.7 billion or 1.4% to $277.9 billion after a sharp 6.9% decline in January. When transportation is excluded, the growth is more modest at 0.5%, and excluding defense, new orders rose by 2.2%. The rise was led by transportation equipment, which, after two months of declines, increased by $2.9 billion or 3.3% to $90.4 billion.

Shipments of manufactured durable goods also improved, rising by $3.5 billion or 1.2% to $282.7 billion, following a decrease in January. Transportation equipment drove this growth with a $3.4 billion or 4.0% increase to $89.8 billion.

Unfilled orders, which signal future shipments and production activity, were virtually unchanged at $1392.9 billion. However, transportation equipment’s unfilled orders saw a slight increase of 0.1% to $898.1 billion. This suggests a relatively stable demand for long-lasting goods, with transportation equipment orders showing resilience.

Inventories, an indicator of future production requirements, increased for the seventh consecutive month by $1.7 billion or 0.3% to $528.7 billion, suggesting manufacturers are anticipating a need for higher production capacity. Transportation equipment inventories led this rise, up by $1.2 billion or 0.7% to $170.2 billion.

Capital Goods, a proxy for business investment, saw nondefense new orders increase significantly by $3.5 billion or 4.4% to $84.3 billion. However, defense new orders for capital goods fell by $1.7 billion or 12.7% to $11.8 billion, which might reflect shifting priorities in government spending.

Revised January figures showed slight adjustments, but the overarching trends remained consistent with the initial report, indicating a strong underlying data set.

Overall, the report presents a picture of a manufacturing sector that is managing to bounce back from a dip in January. The rise in new orders across several sectors, particularly in capital goods excluding defense, points to business confidence and willingness to invest. The stable unfilled orders, combined with increasing inventories, hint at an expectation of steady or growing future demand.

The March Consumer Confidence Index remained stable at 104.7, a slight dip from February’s revised figure of 104.8. While current perceptions of business and labor improved—the Present Situation Index rose from 147.6 to 151.0—future outlooks dimmed, with the Expectations Index dropping from 76.3 to 73.8, nearing recession-warning levels.

Chief Economist Dana M. Peterson highlighted the contrasting views of consumers, with the present situation garnering a more favorable view, especially among older consumers and most income brackets except for those earning between $50,000-$99,999. Nonetheless, the overall six-month trend of consumer confidence showed neither significant improvement nor decline across different income and age groups.

Inflation concerns persist, particularly with food and gas prices, though gas price worries have lessened recently. Inflation expectations remained stable at a low of 5.3%. Recession fears have eased slightly, yet political unease has grown.

Employment perspectives improved in March, with a higher employment differential signaling optimism about job availability. However, the six-month outlook worsened to its lowest since October 2023, with consumers showing apprehension about future business conditions, job prospects, and income growth. Less optimism was also seen regarding personal financial situations.

On investments, there’s a stronger sentiment about rising stock prices, but over half of the consumers now anticipate interest rate increases, a sentiment not seen since November 2023. Interest-sensitive purchasing intentions like cars, homes, and major appliances have declined, but service-related spending is expected to grow, specifically in health care, vehicle services, and lodging for personal travel, with a cutback anticipated in entertainment expenditures.

Consumers rated current business conditions slightly less favorably in March, with a small decrease in the percentage of those viewing them as “good.” However, labor market assessments were more positive, with an increased share of consumers finding jobs “plentiful” and fewer finding them “hard to get.”

Looking six months ahead, consumers showed more pessimism. Slight increases were seen in expectations for business improvement, but more consumers also expect conditions to worsen. The labor market outlook was similarly bleak, with a small decline in those anticipating job growth and an increase in those expecting job reductions. Income expectations were mixed, with a marginal rise in those predicting increases but also a higher percentage bracing for decreases.

The University of Michigan’s final Consumer Sentiment Index for March marked an improvement, settling at 79.4 against the preliminary estimate of 76.5 and outperforming the consensus prediction of 76.5. This is a rise from the final February figure of 76.9 and a significant jump from the previous year’s index of 62.0.

Key components of the index showed positive movements. The Current Economic Conditions Index climbed to 82.5, up from February’s final number of 79.4. The Index of Consumer Expectations also saw a gain, reaching 77.4, compared to 75.2 the month before.

Inflation expectations for the year ahead softened marginally to 2.9%, down from 3.0%, while the five-year outlook also declined to 2.8% from 2.9%.

For the MBA weekly index ending March 22, 2024, reveals a slight dip in mortgage applications by 0.7% compared to the previous week, signaling a cautious approach from borrowers despite a marginal decrease in mortgage rates. The Market Composite Index, reflecting the overall loan application volume, similarly fell by 0.7% on a seasonally adjusted basis.

Notably, the Refinance Index saw a 2% decline from the prior week, standing 9% lower than the same period last year, underscoring the reduced appeal of refinancing under the current economic climate. The seasonally adjusted Purchase Index also experienced a marginal decrease of 0.2%, whereas, on an unadjusted basis, it showed a slight increase of 0.2% from the preceding week. However, it was significantly lower by 16% when compared to the same week the previous year, highlighting the challenges in the housing market.  The average rate for a thirty-year fixed rate conforming loan fell four basis points to 6.93%. The average rate for a thirty-year fixed rate jumbo loan was unchanged.

Initial claims edged down slightly to 210,000 claims, slightly below forecasts. The four-week moving average fell to 211,000. Continuing claims edged up slightly to 1.819 million. The labor market remains tight which is a good sign that a soft-landing is in the cards for the U.S. economy.

Technical Story:

This past week’s cash flow in review:

This past week I was mostly within range for my spending plan. However, I started to fall off during the end of the week, spending more than needed. For some reason, I haven’t gotten use to my the new income I’m earning and I think subconsciously, I try to give it away. This upcoming week, I planned to work on my mentality as I hope to remain within budget for the new month.

Grade: C-

Reason: Reasonable spending but need some improvement

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