Trade The Journey

Trade The Journey

Rates left unchanged but there’s more…

Top of the Morning! This past week featured a treasure trove of data with the highlight being the Fed rate decision. The markets were quite sure that the Fed would skip this June meeting and possibly raise rates at the July meeting. Normally, with a projection of hawkishness by the Fed, markets usually retreat but this time it was a little different. I watched the press conference live and felt that Chairman Powell left the door open to different interpretations.

Market participants seem to be looking past the higher rates to an economy that possibly has a chance to avoid a hard landing. It should be interesting to see how this plays out as some of the indexes have reentered into bull territory. Be careful because we could also be in the midst of a bear rally.

Economy

Treasury Budget

The treasury budget showed a deficit of $240.3 billion, after a surplus of $176.2 billion in April. Receipts were much lower than outlays due to shrinking corporate income taxes, social insurance & retirement receipts, and individual income taxes, which were far lower than the April amount. Outlays were much higher than the April amount led by social security, health, Medicare, and national defense according to briefing.

Prices & Retail

Consumer Price Inflation: May

The CPI showed that prices for consumers rose 0.1%, which was in line with forecast. Over the last twelve months, the CPI rose 4% which is the smallest year-over-year increase since March 2021. Core CPI rose 0.4%, which was also in line with forecast and unchanged from the previous two months. Over the last twelve months, the core CPI rose 5.3%.

The food index increased by 0.2%, after remaining unchanged for the previous two months. The Food at home index rose by 0.1% and the food away from home index rose by 0.5%, increasing 0.1% from the previous month. The energy index declined by 3.6% with energy commodities and gasoline both declining by 5.6%. Fuel oil prices declined by 7.7%.

Energy services also declined, falling by 1.4%. Electricity declined by 1% and utility (piped) gas service declined by 2.6%. Natural gas fell 2.6% from the previous month and has declined for the fourth consecutive month, likely due to warmer temperatures. Unlike the energy index which shows an increase in prices the prior month, energy services have declined for a fourth consecutive month apart from electricity which rose 0.5% in February.

Shelter and transportation were the largest contributors to the rise in the CPI, with shelter increasing 0.2% to 0.6% and transportation services rising 0.10% to 0.8%. Used cars and trucks prices increased 4.4% while new vehicle prices increased by 0.1%. The services index declined, led by household furnishings and operations index.

Producer Price Inflation: May

The PPI came in below the unchanged level, falling 0.3%. Core PPI rose 0.2%, which is unchanged from the previous month and slightly above forecast. The final demand for goods led to the decrease in the PPI, falling 1.6%. The fall in goods was led by the final demand for energy which fell by 6.8%. Within the final demand energy index, gasoline fell 13.8% with the prices for jet and diesel fuel also falling. Final demand for goods less food and energy increased by 0.1%.

Final demand for services rose 0.2% in May, which is 0.1% less than the April level. Final demand for trade services led the increase, rising 1%. Trade indexes measure changes in margins received by wholesalers and retailers. Over 40% of the increase is attributed to margins for automobiles and automobile parts retailing. Final demand for transportation & warehousing services declined by 1.4% and prices for truck transportation of freight fell by 2.1%.

For intermediate demand, prices for processed goods fell 1.5%, unprocessed goods prices fell 4.8% and prices for services rose 0.2%. Most of the decrease in processed goods prices can be attributed to the fall in diesel fuel, which declined 13.7%. Gasoline, natural gas, electric utilities, and jet fuel also fell.

For unprocessed goods, most of the fall can be attributed to a 7.8% fall in prices for unprocessed energy materials. Crude petroleum led to a decrease in prices for unprocessed energy materials, falling by 10.2%.

For services, the rise can be attributed to a rise in the prices for services less trade, transportation, and warehousing. Within this category, prices for business loans led the increase, rising by 3.2%. Intermediate demand declined at each stage, with the largest increase being in stage 2 at a 1.4% decline led by total goods.

Import/Export Prices: May

Import prices fell by 0.6% and export prices fell by 1.9%. Prices for fuel imports fell by 6.4%, continuing the decline from April. Prices for fuel imports have fallen 35.2% from the previous year. Petroleum fell 5.9% following an increase in April and natural gas prices fell 26.1% after falling 18.9% in the previous month. Excluding fuel, import prices fell 0.1%. Higher prices were found in automotive vehicles, automotive parts, and capital goods. Consumer goods import prices were unchanged from the previous month.

For exports, agricultural prices fell 2.1% led by lower prices for corn, soybeans, and wheat. Excluding agriculture, export prices fell 1.8%. Higher prices for capital goods, consumer goods and automotive vehicles were offset by lower prices for nonagricultural industrial supplies, materials, and nonagricultural food.

For services imports, import air passenger fares rose 8% due to higher European fares while air freight declined by 4.5%. For services exports, prices declined 5.5% for air passenger fares led by lower prices for Latin American/Caribbean fares. Export air freight prices declined 3.2%.

Retail: May

Retail sales rose 0.3%. Excluding motor vehicles & parts sales rose 0.1% and excluding gasoline stations, sales rose 0.6%. Building material & garden equipment & supplies dealers led the increase rising 2.2%. Motor Vehicle & parts dealers’ sales rose 1.4%.  Gasoline stations sales continued to fall for a second month, declining by 2.6%.

‘Food services & drinking places rose 0.1% from the previous month to 0.4%. Miscellaneous and Nonstore retailers both declined from the previous month. Food & beverage stores, which includes grocery stores rose after declining in April. It’s important to remember that the retail sales report does not account for inflation.

Sentiment: Small Business Owners & Consumer Sentiment – University of Michigan

NFIB Small Business Optimism Index

The small business optimism index rose 0.4 points to 89.4, which is well below the 49-year average of 98. The top concern for small business owners was inflation followed by labor quality. 63% of the owners said to plan to hire in May but 89% reported the lack of qualified applicants. 41% of the owners planned on raising compensation. The following industries reported difficulties in filling positions: construction, transportation and manufacturing.

57% of owners reported capital outlays in the last six months led by spending on new equipment, acquired vehicles and new fixtures & furniture. A net negative 3% of owners reported the current inventory stock as too low. The following industries listed from highest to lowest are retail, manufacturing, finance, and agriculture.

Regarding credit, 1% of the owners stated that their borrowing needs were not satisfied with 27% reporting that their credit needs were met and 63% reporting that they were not interested in a loan. The average loan rate according to the report has risen from 4% to 8%. Overall, small business owners remain cautious.

University of Michigan- Consumer Sentiment Report: June

The index for consumer sentiment rose 4.7 points from the May level to 63.9. The indices for both current economic conditions and index of consumer expectations. The short run outlook for the economy improved 28% and the long run improved 14%. Year-ahead inflation fell 0.9% to 3.3%. Long-run inflation expectations remained within range at 2.9-3.1%, far above the 2.2-2.6% range previously seen.

Production and Inventory

Industrial Production and Capacity Utilization

Industrial production drifted lower by 0.2% after rising for several months. Manufacturing production edged down for both mining and utilities. Final Products, which include consumer goods and business equipment production both edged down by 0.1. Nonindustrial supplies were flat with construction rising by 0.6 points. Materials production edged down by 0.3 points.

Capacity Utilization edged down by 0.2 points to 79.6 points. Manufacturing capacity utilization was unchanged while mining edged down, and utilities edged up. Durable manufacturing edged up by 0.3% and nondurable manufacturing edged down by 0.1%. The largest gain within durable manufacturing production was aerospace & miscellaneous transportation equipment which rose 2.5%.

Business Inventory: April

Total Business sales rose 0.1% after falling 1.5% in March. Manufacturers’ sales declined for a second consecutive month, falling 0.4% in April. Retailers and Merchant wholesalers’ sales both rose in April after declining in March. Total business inventory rose 0.2% in April, rising 0.5% for manufacturers. Manufacturers’ inventory improved from a decline in March. Retailers’ inventory rose 0.1% but declined from the 0.4% level in March.

Merchant wholesalers’ inventory declined for a second consecutive month. The percentage change in inventories declined for nearly every category, especially for furniture, home furniture, electronics & appliance stores. Inventory changes although negative improved for department stores and building materials, garden equipment & supplies.

Manufacturing: Empire State & Philadelphia Fed Index

Empire State Manufacturing

General business activity improved in June, climbing thirty-eight points to 6.6. New Orders improved with the number of respondents reporting higher new orders increasing by eleven points. Shipments improved with a higher percentage of respondents reporting higher shipments versus lower shipments. Unfilled orders edged up slightly but remain negative. The inventories index was virtually unchanged, as were the delivery times.

The prices paid and received both fell in June. The number of employees and the average employee workweek both showed a higher percentage of respondents reporting lower totals. The outlook for future business conditions improved, while the new orders and shipment outlooks increased modestly. Employment is expected to expand. Capital spending plans remain soft.

Philadelphia Fed Index

Manufacturing activity and new orders in this area remain weak although shipments rose while employment remains steady. The prices’ paid index was little changed while the prices received edged up slightly. Firms reported an increase in production compared to the previous quarter and cited labor as a significant challenge. Supply chains also remained strained.  While the outlook improved, expectations remain tempered.

FOMC Rate Decision & Press Conference

The Fed kept rates unchanged within the current range of 5-5.25%. However, the Fed saw a need for two additional twenty-five basis point rate hikes.

The Fed cited the unchanged rate decision as an opportunity to assess the effectiveness of its tightening so far. The Fed has stuck to its data dependent philosophy as it gauges the need for tighter policy. The dot plot showed a divided Fed on the amount of tightening needed to bring inflation within its mandate of 2%. Ranges were within 5.5-6% on the high end and within 5-5.25% on the low end.  The range disparity remained in 2024 and 2025 with a moderation in the range of rates only seen in the long run.

Some analysts were confused as to why the Fed didn’t raise rates at the June meeting if they planned to raise rates possibly in July and September. Chairman Powell responded that time was needed to assess the effects of its policy. Core PCE inflation is projected to run higher than total inflation and the labor market remains a bit stronger than the Fed needs to see to cease raising rates. Tighter credit conditions will likely weigh on economic activity, hiring and inflation but its total effect remains uncertain.

The Fed did not commit to a rate hike in July.

MBA Weekly Survey

Mortgage Applications rose 7.2% from the week prior. The refinance index rose 6% and the purchase index rose 8% from the week prior. The average rate for a 30-year fixed conforming loan fell 0.04 points to 6.81%. The average rate for a 30-year fixed jumbo loan rose 0.02 points to 6.79%.

Initial Claims

Initial claims were virtually unchanged at 262,000 but came in above forecast. Continuing jobless claims rose by 20,000 to 1.715 million. The four-week moving average is at highest level in the past several weeks, totaling 247,000. Consecutive weeks above the 300,000 level would signal the onset of a recession.

Technical Story:

This Past cash-flow management in Review:

This past week went okay but I can do better. I showed some restraint in my discretionary purchases but still have a lot to work on. I’ve been able to rebuild my savings account and pay down some of my credit balance but not nearly as much as hoped for.  While I learn the art of trading and diligently look for employment with a higher income, this is the time I should remain lean.

Grade: C-

Reason: Some improvements but not much.

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