Trade The Journey

Trade The Journey

One rate hike from the Fed?

Top of the Morning! I hope everyone is doing well and enjoying their weekend. While most of the market anticipated that the Fed would leave rates unchanged, the press conference and dot plot of future rate projects was shrouded in uncertainty. Although inflation is gradually making its way towards the Fed’s 2% mandate it remains high.

Inflation isn’t just a concern in the United States. Globally, central banks are raising rates to combat inflation and ensure that it doesn’t become entrenched or develop into stagflation. Stagflation is an economic environment characterized by rising prices and slowing or even negative economic growth. Before continuing let’s look at some of the possible causes of rising inflation:

  • Demand-pull inflation: Excess demand for goods and services that overwhelms supply and causes prices to rise.
  • Cost-push inflation: Rising cost of inputs like raw materials, labor, energy that causes the cost of production to rise and is passed onto the customer.
  • Wage-price inflation: Workers receive higher wages and higher wages spur consumers to spend and businesses to raise prices to cover higher wage costs.
  • Monetary policy: The Fed lowers rates or increases the money supply leading to demand-pull inflation.
  • Fiscal policy: The government runs a budget deficit by increasing their spending leading to higher demand.

 Of course, this list isn’t all-inclusive, but it gives you an idea of what could be causing prices to rise. Looking at this list and some of the causes, it seems like you could attribute each of the causes as a contributor to where inflation is presently. While the Fed left rates unchanged, Fed chairman Powell put the markets on notice that the possibilities of additional rate hikes are on the table. “The higher for longer” is also the sentiment among Fed officials which might continue to fade hopes of a soft landing.

 Japan is one of few if not the only country that has maintained its dovish policy due to years of deflation or what has been called the lost decade. Japan left its rates unchanged but the whispers of Japan ending their accommodative policies is growing louder. The yen has weakened significantly against the dollar and might prompt an intervention if it drifts above 150.

China which is battling slowing economic growth has also eased its rates to spur economic activity. China has its own challenges as investors withdraw from the country, a continued weakening in the real estate market, a revision to its anti-espionage law, and a shift in capital flow from private to state owned enterprises. Concern about China’s economy and its ability to recover have been widespread as it seems that Xi is tightening his control.

However, China is making changes like loosening its restrictions of capital flows and easing their short-term rates. A good metric to track to gauge China’s economy is the trend of its copper usage. China is the largest buyer of refined copper and consumer half of the world’s refined copper according to Bloomberg. The construction sector, power transmission & generation, and consumer goods make up the bulk of the copper demand. Copper has been range bound for most of the year.

The ECB raised rates by twenty-five basis points as inflation remains above its 2% mandate. Rates rose to 4%, which is still below the Fed funds rate. Apart from the slower recovery in Europe, the story of how inflation rose to decade highs follows the same path as the US.

Upcoming Week:

  • Tuesday: Consumer Confidence & New Sales
  • Wednesday: Durable Goods Order
  • Thursday: GDP Third Estimate & Initial Claims
  • Friday: PCE report, University of Michigan Consumer Sentiment – Final

Economic Activity

Initial Claims:

Initial Claims fell 20,000 to 201,000, far below the 225,000 claims forecasted, signaling the labor market’s resilience. Continuing claims fell by 21,000 to 1.662 million. The four-week moving average of initial claims is 217,000. Initial claims reached a high in July and has descended since then.


Housing Starts & Permits

Building permits rose 6.9% and single-family permits rose 2%. Permits for 5 units or more rose 7.1%. Housing starts were 11.3% below July levels. Single-family housing starts fell by 4.3% and starts for 5 units or more fell 26.3%. Starts for 5 units or more are at their lowest level in the past year. Housing completions rose 5.3% but fell 6.6% for single-family housing completions. Completions for 5 units or more rose by 45.8% after falling to a low in July. Housing under construction was virtually unchanged for single-family and multi-family housing.

MBA weekly Report

Mortgage loan application volume increased by 5.4%. The refinance index rose 13% and the purchase index rose 2%. The average rate for a 30-year fixed conforming loan rose 0.04% to 7.31%. The average rate for          a 30-year fixed jumbo loan rose 0.07% to 7.32%. According to the site, the average size on a purchase application was $416,800.

Existing Home Sales

Existing Home sales fell 0.7% as the supply of available homes remains tight. The median existing home sales price rose 3.9% to $407,100 over the past year. The inventory of existing homes fell 0.9% and the existing supply of homes at the current monthly sales price is 3.3 months. Over the past year, the supply has fallen 14.1%.

Homes remained on the market for twenty days, remaining at the July levels. Single-family homes sales fell 1.4% and the median price was $413,500.

The NAHB housing market index fell to 45, returning to the April levels. Single-family sales present and for the next six months fell. The traffic of prospective buyers also fell.


Philadelphia Fed Index: September

Manufacturing fell in the region. Business activity and shipments moved into contractionary territory. New Orders continued to fall, contracting for the fourteenth straight month. Employment also fell with most reporting little change in employment. The average workweek also declined. Prices paid rose five points, with 73% reporting no change and prices received were unchanged.

Industrial production & capacity utilization were both unchanged with one-fifth of the firms reporting that labor was a constraint and 34% reporting that it was not. Overall, the outlook for manufacturing in this region is optimistic with most firms expecting an improvement in economic activity.

US Conference Board: August

The Leading Economic Index declined 0.4% in August and has fallen for nearly two years. The Coincident Economic Index rose 0.2% and the Lagging Economic Index rose 0.2%. Both indices rose in July. Various factor contributed the LEI’s decline which is detailed in the table below.

FOMC Rate Decision:

The Fed maintained current rates between 5.25%-5.50%. Most market participants expected the Fed to leave rates unchanged, evidenced by the swaps market. While most market participants agreed that rates were left to be unchanged, the uncertainty surrounded the press conference and projections by the Fed members.

The projected rate range or target level came in higher than forecasted with one Fed member forecasting the target range to be between 6-6.25% in 2024. The lowest range was between 4.25-4.50%. Target rate ranges varied between 5.50-5.75% and 2.50-2.75%. For 2026, the rate range declined with most participants forecasting the Fed Funds rate at 2.50%. Overall, Fed members seeing the real GDP residing in the 2.0-2.1% in 2023, 1.2-1.3% in 2024, and 2.0-2.1% in 2025, and 1.8-1.9% in 2026.

Over the long run, the unemployment rate is projected to be between 4.2-4.3%. Most FOMC participants are uncertain about their economic projections. Uncertainty about the unemployment rate is high but the risks are seen to be broadly balanced. The risks and uncertainty and risks surrounding PCE inflation remain high.

In his press conference, Chairman Powell reiterated that rates will be higher for longer and that they are prepared to raise rates further if needed. Powell sees below-trend growth and a softening of labor market conditions as needed to help bring inflation down. There is a high probability that the Fed will raise rates one more time in the two remaining meetings for the year.

Regarding rate cuts, Powell avoided giving a exact time or even a guess. He instead focused on the data and the economies’ reactions to the high rates over time as an indicator.  Another indicator given is real rates rising because inflation is receding. According to Powell, more important than achieving a soft landing is the restoration of price stability.

Techinical Story:

This Past Week’s Cash Flow Review:

This past week I felt uneasy about my spending, I’m spending way too much. With a higher income, you tend to spend more on items and services because you know that you have enough money to cover the expenses. However, by adopting this mentality you open yourself to a future destined to be dependent on the next paycheck.

While I have saved a significant amount of money, I am confident that I can save even more. So far, I’ve saved 18% of the income I have received. Realistically, I believe that number could rise to about 25-30%.  If I rein in my spending, I think its even possible to reach 30-35%. Only time will tell if this is possible.

Grade: D-

Reason: Little self-control

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