Trade The Journey

Trade The Journey

Posts from Week of Febuary 11th

Hello, Fellow Traders! I trust you’re all making the most of this Superbowl weekend and gearing up for the week ahead. Personally, I don’t have a favorite team in the fray; I’m simply hoping for a riveting game. Given Patrick Mahomes’ track record, we’re likely in for an exciting spectacle.

Over the last week, the financial markets have shown remarkable dynamism. The S&P 500 surged past the 5,000 mark, setting a new all-time high. Similarly, the Dow Jones Industrial Average has continued its upward trajectory, reaching new heights. The Russell 2000 index is making efforts to break free from its year-long lateral movement, while the Nasdaq Composite shows promising signs of hitting new peaks in the near future.

The bond market saw yields rise across the board, a reflection of the unexpected positive turn in the ISM non-manufacturing index, suggesting ongoing challenges with inflation for the Federal Reserve. The sentiment across Federal Reserve speakers this week has largely mirrored Chairman Powell’s cautious stance on monetary policy, advocating for a steady course until inflation is clearly on the decline.

In a detailed discourse on February 7th titled “The Outlook for the Economy and Monetary Policy,” Governor Kugler addressed the moderating pace of inflation, attributing significant slowdown to the goods sector, despite persistently high services inflation. She noted the natural persistence of housing services inflation, particularly due to the slow adjustment of tenant rents under fixed-term lease agreements.

Housing costs, including tenant rents and owner-occupied housing estimates, constitute about 15% of the total Personal Consumption Expenditures (PCE) index. Excluding housing, core services make up a substantial half of the PCE index and are a focal point for the Federal Reserve. Governor Kugler identified three key factors contributing to the ongoing disinflation in core services: moderating wage growth, firms’ normalization of pricing strategies, and well-anchored inflation expectations.

The labor market appears to be regaining equilibrium, evidenced by improved labor force participation and a reduction in the quits rate. The role of immigration is noteworthy, with a significant portion of workers in construction and leisure & hospitality sectors being non-native.

Governor Kugler remains optimistic about progress on inflation, though she maintains a keen eye on labor market dynamics, geopolitical tensions, and their effects on commodity prices and global trade.

Governor Bowman highlighted the crucial role of small businesses and entrepreneurship, noting that they account for a significant share of private sector employment and the majority of net new job creation since 1995. Remarkably, business creation has surged by 32% compared to the last decade, underscoring the importance of community banks in providing essential capital to small businesses.

Yield dynamics present a nuanced picture. Short-term yields have returned to levels seen a year ago, suggesting a potential stabilization, while the long end of the yield curve points to ongoing adjustments in economic outlook and inflation expectations, contributing to increased market volatility.

The distinctions among secured overnight financing rates (SOFR), interest rate swaps (IRS), and treasury yields highlight the complex interplay of market expectations, economic sentiment, and policy outlook. SOFR, closely aligned with Federal Reserve policy actions, contrasts with the broader economic indicators reflected in treasury yields and the market’s credit risk assessment evident in IRS rates.

As we navigate these intricate financial landscapes, it’s crucial to remain informed and adaptable, ready to respond to the evolving market dynamics.

Inverted Curve:

  • Treasury yields: Recession signal
  • SOFR: Expectations of rate cuts due to policy shifts
  • IRS: Increased concerns about future economic conditions and credit risks

Globally, despite the Chinese government’s commitment to bolstering the economy, challenges persist as evidenced by the Caixin services and composite indices not meeting expectations. The services sector has shown growth over the past year, yet it remains below the performance levels of the previous year, although it has recovered from last October’s lows. Export sales have modestly increased after a period of decline. Moreover, there’s been a notable decrease in the M2 money supply by one percentage point year-over-year, highlighting its impact on liquidity, economic growth, and inflation.

In a significant move to stimulate economic activity, Chinese banks have disbursed a record 4.92 million yuan in new loans in January, marking a peak in lending to households, corporations, and social finance. This surge comes as China eases reserve requirements, despite loan growth hitting an all-time low. The inflation rate experienced a slight increase of twenty basis points to 0.3%, with the year-over-year inflation rate showing a contraction. Meanwhile, the Producer Price Index (PPI) has seen a minor rise but continues to linger in contraction territory.

India is emerging as a strong contender against China in the manufacturing sector and beyond, with continuous economic growth. Investors are increasingly redirecting their investments from China to India, bolstered by India’s burgeoning population, which rivals that of China’s. However, China’s demographic challenge lies in its aging population.

Economic Data Insights:

Initial Claims Report: The past week saw initial unemployment claims align with predictions at 218,000, reflecting steady labor market conditions. A notable drop in continuing claims to 1.871 million underscores the job market’s resilience. The four-week moving average escalated to its peak in recent times at 212,000, showcasing stability despite a minor rise in initial claims, with last June being the outlier when claims approached the 300,000 mark, indicative of potential economic downturns.

Mortgage Bankers Association (MBA) Weekly Applications: The mortgage sector witnessed a 3.7% increase in loan applications, buoyed by a 12% surge in refinancing activities, even as purchase applications slightly declined. The share of refinancing in total applications ascended to 35.4%. Interest rates for 30-year fixed-rate mortgages saw marginal adjustments, reflecting subtle market shifts. Despite an uptick in the delinquency rate to 3.88%, the broader year-over-year trend points towards improvement in loan repayment behaviors.

Mortgage Credit Availability: Slight enhancements in mortgage credit accessibility were observed, yet the market remains constrained, far from the liberal lending era of 2004-2007. Despite these challenges, there’s a gradual shift towards easing credit conditions, albeit not reaching the more accommodating levels seen between 2014 and 2019.

Senior Loan Officer Opinion Survey – January: The survey highlighted a tightening in credit standards and a dampening demand across commercial, industrial, and consumer loan sectors. Notably, financial institutions anticipate further restrictions in credit card and auto loans. Amidst these tightened lending conditions, there’s an expectation of growing loan demand in 2024, albeit coupled with concerns over loan quality degradation.

January’s ISM Non-Manufacturing Index highlights the services sector’s growth for the 13th month in a row, marking a notable recovery with a brief contraction in December 2022. The index rose by 2.9% to 53.4%, indicating stronger than expected performance. Business activity held steady at 55.8%, while new orders saw a healthy increase of 2.2% to 55%, with a mix of reports on higher and slightly more reports on lower orders, suggesting potential supply chain pressures due to increased demand.

Prices for materials surged by 7.3% to 64%, reflecting widespread increases across industries, with the majority of respondents noting higher prices, leading to a 2% rise in the backlog of orders index to 51.4%. This rise points to challenges such as material shortages. Specific sectors like accommodation & food services, wholesale trade, construction, and transportation & warehousing noted a drop in backlogged orders.

Inventory sentiment among respondents increased by 4% to 59.3%, indicating concerns over high inventory levels, though there was a slight increase in overall inventory as firms aimed to cautiously manage stock levels. Employment in the services sector grew by 7% to 50.5%, signaling expansion and a push to increase headcount in several industries, including accommodations & food services, construction, and public administration, despite facing mixed economic signals and the impact of global conflicts on transportation. However, demand has yet to reach pre-pandemic levels.

Consumer Credit experienced a significant decrease in growth to $1.56 million in December, likely affected by seasonal trends, in contrast to the substantial increase observed in November. Both revolving and non-revolving credit sectors saw increases, with the annual growth rate at 2.6%.

December also saw a modest 0.4% increase in Wholesale Inventories, recovering from a decline the previous month, with both durable and nondurable goods contributing to the growth. Notably, computer equipment inventories increased, while sectors such as petroleum, farm products, and apparel witnessed declines.

The manufacturing sector observed a slight rise in new orders for goods in December 2023, increasing by $1.2 billion to $594.3 billion, a modest 0.2% growth following a more substantial gain in November. Shipments saw minimal change, maintaining consistency with previous months’ growth rates.

Manufacturers faced growing backlogs, with unfilled orders increasing by $18.2 billion or 1.3% to $1,393.2 billion, indicating sustained growth over the past year. The inventory-to-shipment ratio remained stable, reflecting careful inventory management despite the challenges.

The durable goods sector saw little change in new orders, primarily due to decreased orders for transportation equipment, while nondurable goods orders, especially in the food products category, experienced growth. Inventory levels adjusted accordingly, with durable goods seeing an increase and nondurable goods, especially in petroleum and coal products, experiencing a decline.

Reflecting on personal finance, the past week’s cash flow was strained due to unexpected automotive expenses exceeding $500. Although efforts were made to reduce credit balances, the outcome fell short of expectations. With an impending transition to a new living situation and heightened responsibilities, the emphasis on careful financial management becomes paramount, underscoring the need for continued moderation in spending and striving for improvement in financial stewardship.

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