Trade The Journey

Trade The Journey

Rate cuts in 2024?

Top of the Morning!  This past week was light in terms of economic data being released and with earnings season coming to an end, the market has returned their focus to the “higher for longer” narrative from the Fed. At the moment, VIX is at 13.84% and hasn’t been above twenty since March. A few weeks ago, the VIX came close to 20 but retreated in the weeks that followed.

As fears of a recession occurring have receded, cash is still on the sidelines to the tune of $5.58 trillion which is a record amount. With some heralding the latest Nasdaq surge as a bubble, the market may not have the strength to break through its most recent highs. Currently, you can earn over five percent on short-term treasuries. One year ago, a one-month treasury earned 2.57% and now the same maturity treasury earns 5.52%.

With the Fed advocating a higher for longer monetary policy, it’s hard to say when the Fed will reverse its policy stance thus enabling investors to earn a higher yield on their cash. There is a 92% probability that rates will remain unchanged for the September Fed meeting. For the November meeting, the probability of rates remaining unchanged fell and rose with rates rising twenty-five basis points.

According to the market, rates aren’t foreseen to be cut until next year at the May meeting. As the economy remains resilient, it looks like the market is forecasting a narrow path towards a soft-landing. Rates on the ten-year yield seem to be heading back toward their most recent highs, as are the five and thirty-year yields.

Housing rates in turn are above seven percent as the housing market struggles to bring homes on the market. The consumer, while still spending, has shifted their spending towards necessities. The international story is much different as some countries see stubbornly high inflation and other countries like China struggle to reignite their economy. The biggest story is perhaps China which is known as the factory of the world.

China is an exporter to nearly forty countries and is a major consumer of resources, evidenced by coppers inability to sustain any kind of rally. A Bloomberg article, entitled “Preparing for a declining China”, highlights some of the challenges China faces moving forward. The article can be found here:

 

There’s a mountain of evidence that China’s economy is weakening as it moves into disinflation, its service activity eases, and its property market continues to faulter. There’s a growing debt issue that has caused the leadership to be cautious of easy money. Youth unemployment has also risen to record levels, as China has now ceased its publication of this employment metric. Foreign investment is in turn declining as economic data releases are being guarded or interpreted with skepticism.

 In Europe, inflation remains high despite the rate hikes as the European Central Bank is scheduled to release its rate decision this upcoming Thursday. The German inflation rate is above 6% as are rates in United Kingdom while Italy’s inflation rate is above 5%. The Euro Area is showing an inflation rate of 5.3%. Business confidence in the Euro area has fallen sharply as both the Manufacturing and Non-manufacturing remain in contractionary territory.

Upcoming Week: This upcoming week I am netural to slightly bullish based on the CPI and PPI showing that prices are easing. Retail sales have continued to rise and last month sales came in higher than forecast.

The Russell 2000 and S&P 500 both closed last week on some type of support but the Russell looks oversold as the RSI is at 39. With VIX ending the week at its low, I think that vertical call position on either the Russell 2000 might work. The Russell 2000 volatility index is at 18.63, closing slightly off its highs, indicating that participants brought puts to bring the index of the low for the week.

This week’s upcoming reports: The CPI (Forecast: CPI – 0.6%, Core CPI – 0.3%) on Wednesday, PPI (Forecast: PPI – 0.5%, Core PPI – 0. 3%)  retail (Forecast – 0.1%) sales on Thursday, and Industrial production (Forecast: 0.2%) & University of Michigan Consumer Sentiment (Forecast : 69.6) on Friday.

Economic Data:

Trade and Inventory

Factory Orders: July

Factory orders fell by nearly the same amount it rose by in June. New orders for manufactured goods fell 2.1% after rising by 2.3% in June. New orders for durable goods increased a second consecutive month, rising 5.3%. Nondurable goods rose by 1.1%. This decline comes after four consecutive increases and the most recent reading is the lowest this year.

Shipments rose 0.2%. Shipments for durable goods rose 0.1% and rose 1.1% for nondurable goods. Unfilled orders rose 0.5%. Inventories for durable goods were unchanged from the previous month but rose 0.3% for nondurable goods. The inventory to shipment ratio was unchanged for durable goods and fell 0.01 points to 1.12 for nondurable goods.

Wholesale Inventories: July

Wholesale inventories fell for a second consecutive month, declining by 0.2%. The inventory to sales ratio fell two points to 1.39. For durable goods, the ratio dropped by 0.01 points to 1.64 and fell by the same amount for nondurable goods to 0.99. Inventories for durable goods were unchanged but did fall sharply for furniture. For nondurable goods, inventories rose 0.1%, after falling the previous month.

Wholesale sales were up 0.8%. Sales for durable goods rose 0.3% after declining by 0.4% in June. Sales for nondurable goods rose 1.3%, after declining by 1.2%.

International Trade in Goods and Services: July

The US trade deficit increased by 2% as exports rose 1.6% and imports rose 1.7%. Exports increased in automotives, vehicles & parts, industrial supplies and materials, and consumer goods. Imports increased for consumer and capital goods but fell for industrial supplies and materials. The deficit with China increased, as exports and imports both increased.

Productivity

Productivity and Costs: Second Quarter revised.

Labor productivity rose by 3.5% declining 0.2% for the preliminary estimate. Output increased by 1.9% and hours worked fell by 1.5%. Unit labor costs rose 2.2% as hourly compensation rose 5.7% and productivity rose 2.5%. Manufacturing productivity rose 2.9% as output rose 0.8% and hours worked fell 2.1%. Unit labor costs rose by 4.9% as hourly compensation rose 8% and productivity rose 2.9%.

Consumer Health

Consumer Credit: June

Consumer credit for revolving credit rose 9.2% after falling 0.8% in June. Nonrevolving credit rose 0.2% after rising 4.8% in June. Credit outstanding rose for revolving credit but only increased slightly for nonrevolving credit. Total credit flow fell sharply, as revolving credit flow increased sharply after declining the previous month while nonrevolving credit showed that flow slowed sharply although still positive.

Initial Claims

Initial claims came in well below forecast. Claims for the previous week fell 13,000 to 216,000. Continuing claims fell by 40,000 to 1.679 million. The four-week moving average fell by 9,000 to 229,000, which is the lowest over the past month. While the latest reading signals the economy is still strong, it also adds to the belief that rates will be higher for longer.

MBA Weekly Report

Mortgage applications fell 2.9% from the prior week as the applications rate hit a twenty-eight-year low. The refinance index fell 5% and the purchase index fell 2%. The average rate for a 30-year fixed conforming loan fell by 0.10% to 7.21%. The average rate for a 30-year fixed jumbo loan fell by 0.07% to 7.21%.

Manufacturing (Services)

ISM Manufacturing: August

Services expanded for the eight straight month, rising above forecast. Services rose 54.5%, nearly reaching the high for the last twelve months of 55.9%.  The only month that services contracted was in December of last year. Business Activity rose 0.2% to 57.3%, with a higher number of respondents indicating that business activity improved and was worsening. Respondents claiming that conditions were about the same dropped.

New orders rose 2.5% to 57.5%, expanding for the eighth straight month. Respondents were mixed in their opinions and mirrored business activity sentiment. Supplier deliveries rose 0.4% to 48.5% indicating delivery performance is improving. Employment activity rose 4% to 54.7%, with a higher number of respondents indicating that open positions are being filled. Respondents also mentioned that the labor market remains very competitive.

The prices index rose 2.1% to 58.9% indicating that the prices paid for materials and services are still rising. Prices have been rising for several years and have yet to see a month where they have decreased below the expansion level. The inventories index rose 7.3% to 57.7% and the inventories sentiment index rose 4.9% to 61.5%. A higher number of respondents indicated that inventory and inventory sentiment is rising too high.

The backlog of order index fell 10.3% to 41.8%, falling into contractionary territory. A higher number of respondents reported that their backlog is lower. New export orders rose 1% to 62.1%, with a slightly higher number of respondents reporting that export orders improved. Import orders were unchanged from the previous month.

Respondents were mixed on the current business environment, with some saying that sales remain positive, and prices are settling down.  For most, overall conditions are solid, as labor costs are softening, and supply chain pressures are easing. Only five industries reported a decrease in performance which were: Agriculture, Mining, Wholesale Trade, Health care & Social Assistance, and Management of companies & Support Services.

Beige Book:

The Beige book reported that conditions in the labor market softened across the districts. There still seems to be an imbalance between open positions and skilled applicants. Wage growth is expected to slow in the second quarter. Prices slowed in most districts, slowing in manufacturing and consumer goods especially.

Consumer spending rose on tourism but slowed in retail spending with the report indicating that consumers may be nearing the end of their pandemic savings. With savings dwindling, consumers are turning to credit. Single-family homes remain low, as existing inventory is still tight although construction is picking up for new homes. Districts were mixed on loan demand.

Technical Story:

This past week’s cash flow in review:

This past week, I finally received my paycheck from the last period, but I was unable to cash it. Luckily, I received my paycheck from the most recent pay period. It was tough trying to survive without a paycheck, but I was able to make do with my savings and investment accounts.

When I finally receive the paycheck from the previous pay period, I will be using the check to pay down some of my credit accounts and add to my savings. Overall, I’m in a good position financially.

Grade: C

Reason: Continued Improvement

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