Trade The Journey

Trade The Journey

Resilience or Calm before Storm?

Good Morning! I trust you’re all having a splendid weekend as we gear up for a week filled with pivotal job reports, shedding light on our economic terrain. This past week was notable, with the indices climbing to new highs, barring the Russell which hovered near its peak. The market’s attention is riveted on the prospect of a soft landing and a potential shift in the rate hike trajectory.

While indices did scale new heights, these peaks weren’t as emphatic as those seen during the previous surge, hinting at possible overextension. As earnings season rolls on, companies strive to outperform earnings and revenue expectations amidst anticipations of decelerating performance. The financial sector’s lackluster showing has weighed down otherwise mediocre fourth-quarter earnings.

So far, 25% of S&P 500 companies have reported, with 69% surpassing earnings forecasts, trailing the five and ten-year averages of 77% and 74% respectively. Despite the financial sector’s underwhelming results, the industrial and IT sectors saw numerous firms report positive earnings surprises. The tech and communications sectors continued their ascent last week.

Year-over-year earnings growth was championed by communication, utilities, consumer discretionary, and IT, while energy, materials, healthcare, and financials experienced declines. Revenue-wise, 68% of companies exceeded forecasts, aligning with the five-year average and surpassing the 64% ten-year average. Industrial, communication, and healthcare sectors led in revenue beats, whereas energy and financials reported negative surprises.

Earnings growth is anticipated to pick up in subsequent quarters. Netflix, despite falling short of earnings expectations, marginally exceeded revenue forecasts and significantly boosted its subscriber base, alongside announcing a partnership with WWE. This enables Netflix to stream WWE events live and potentially produce related content. Netflix’s foray into gaming and its noticeable growth in advertising, with 23 million monthly active users, pushed its subscriber count to a record 260.8 million.

Tesla’s failure to meet earnings and revenue projections, along with Musk’s remarks, did little to reassure investors about its future, leading to an $80 billion market value loss. Tesla projected a markedly lower volume growth for 2024 and grappled with an influx of its cars in the used car market, notably by Hertz. Tesla’s response included price cuts across several markets amid intensifying competition.

On a brighter note, the Model Y emerged as the globally best-selling vehicle, with Tesla achieving record production and deliveries in 2023. Additionally, its energy storage business saw improvements, and it maintained robust free cash flow levels. However, inflation and soaring interest rates pose challenges as Musk aims for greater control over Tesla, steering it towards AI and robotics advancements.

Looking ahead, this week’s earnings releases include tech giants like Google, UPS, General Motors, and Microsoft on Tuesday, followed by Facebook’s earnings announcement on Thursday.

Upcoming Economic Data:

  • Tuesday: Consumer Confidence, JOLTS – Job Openings
  • Wednesday: ADP Employment Change, Employment Cost Index, Chicago PMI, FOMC Rate Decision
  • Thursday: Initial Claims, Productivity, Construction Spending, ISM Manufacturing Index
  • Friday: Employment Situation Report, Factory Orders, University of Michigan Consumer Sentiment – Final

The VIX, indicating market volatility, has been fluctuating in a narrow range for several months, touching a low of 11.81 in December, signaling market stability. However, bond yields are edging higher amidst uncertainty over a potential shift in the interest rate cycle, as central banks, including the Fed, maintain a cautious stance due to inflation rates exceeding the 2% target.

The yield on two-year Treasury notes has risen by ten basis points over the last month, suggesting a steepening yield curve, with the thirty-year yield marginally higher than the two-year. The ten-year Treasury yield remains above 4%, having risen from a low of 3.789% to 4.16%. There’s a notable movement in moving averages, with the 20-day SMA on the verge of crossing above the 200-day SMA, indicating market reevaluation of rate cut expectations for March.

Gold prices are maintaining levels above $2000, showing significant movement on Friday. The US dollar has strengthened from its recent lows in late December, moving from $100 to $103.474, influenced by rising yields and ongoing geopolitical tensions. The dollar has surpassed the 200-day SMA and is now at the 50-day SMA level. Crude oil prices have risen to $78.23, breaking past the $77.09 benchmark, fueled by escalating tensions and uncertain supply dynamics, potentially prompting a reassessment of inflation expectations.

In China, despite an uptick in industrial profits, the economy remains in contraction. The country has kept its short- and medium-term loan rates stable, while easing reserve requirements to stimulate economic activity. The European Central Bank (ECB) and Bank of Japan have maintained their current interest rates, with future policy directions still unclear.

In the US, the likelihood of maintaining current interest rates at 5.25-5.50% is high, at 96.9%. Market predictions suggest a 52.3% chance of rates holding steady and a 46% possibility of a 25-basis point reduction. Options trading indicates significant put volume around the $480 level, with changing probabilities for the May meeting: a 50.9% chance of a 25-basis point rate cut, a 36% chance of a 50-basis point cut, and an 11.9% chance of rates remaining unchanged.

Economic Indicators:

Conference Board Leading Economic Index:

This index contracted by 0.1%, showing a minor improvement from the previous 0.5% contraction. Non-financial components continue to drag the index down, with ISM new orders and consumer expectations for business conditions showing weakness. Average weekly manufacturing hours also remained subdued. Financially, the interest rate spread between 10-year Treasury yields and the fed funds rate is still inverted. Upcoming manufacturing data will offer further insights into this sector’s health.

Durable Goods for December:

New Orders slightly decreased in December, but there was a year-over-year increase, especially in computers & electronic products and transportation equipment. Excluding transportation, durable goods orders dipped by 0.1%. Shipments also fell by 0.3%, yet year-over-year figures showed a 3.1% increase.

 Capital goods saw new orders but a decline in shipments. Unfilled orders for capital goods rose significantly, hinting at potential business investments. Overall, unfilled orders increased, suggesting growing demand for durable goods. Total inventories rose by 0.4%, with year-over-year unfilled orders and inventories up by 9.7% and 1.5% respectively, indicating a potential for growth as companies don’t appear to be overstocked.

GDP- Advanced Estimate: 4th Quarter

Real GDP experienced a notable growth of 3.3%, a slight decrease from the previous quarter’s 4.9%. The growth was fueled by increases in consumer spending, exports, government spending, and investment, though there was a deceleration in areas such as private inventory investment, federal government spending, and residential fixed investment.

Significant increases were seen in consumer spending across various sectors, notably in healthcare, recreational goods, and food services & accommodations. Year-over-year, Real GDP saw a 2.5% increase, an improvement from the prior year. Prices for gross domestic purchases in Q4 rose by 1.9%, a positive shift from Q3, mirrored in the PCE index as well.

Current-dollar personal income and disposable income, both in real and current dollar terms, showed an uptick. However, the savings rate dipped from 4.2% to 4%, indicating heightened consumer spending. The US economy displayed consistent growth, albeit with a year-end slowdown. Encouragingly, inflation deceleration combined with robust consumer spending and investment show promise, despite the slow recovery in residential fixed investment.

PCE: December

The PCE price index witnessed a 0.2% rise, matching the core PCE increase, a decline from the previous 0.4% in August. Year-over-year, the PCE price index remained steady at 2.6%, with a slight drop in core PCE to 2.9%. Goods prices saw a marginal decrease, while service prices increased by 3.9%.

PCE in current dollars rose by 0.7%, remaining constant at 0.5% in chained dollars. Personal income saw a slight dip in current dollars to 0.3%. Disposable personal income and chained dollars also decreased marginally. Service sectors such as financial services, healthcare, and recreational services contributed significantly to PCE, alongside goods like motor vehicles and energy products. The personal savings rate registered at 3.7%.

Initial Claims:

Initial claims exceeded forecasts, hitting 214,000, a rise of 25,000. Continuing claims climbed to 1.833 million. The four-week moving average marginally increased to 202,250, staying at a low indicative of economic stability and hinting at a possible soft landing.

MBA Weekly Index

Mortgage application median payments fell from $2,137 to $2,055 as yields retreated, signaling improving home affordability. Mortgage applications increased by 3.7% week-over-week, with the refinance index dropping 7% and the purchase index climbing 8%. The refinance applications’ share fell to 32.7%.

Average rates for 30-year conforming loans rose slightly to 6.78%, with jumbo loans seeing a similar increase. Commercial real estate and multifamily lending are expected to recover after a challenging year, as remote work reduces the demand for office spaces.

Pending and New Home Sales: Pending home sales surged by 9.3% in December. New residential sales rose by 8% after a previous decline, with the median sales price at $413,200 and an average price of $487,300. The current pace indicates an 8.2-month supply of homes, with mixed activity across various price ranges.

Advanced Retail Inventories

Wholesale inventories rose 0.4% but decreased year-over-year by 2.7%. Durable goods increased by 1%, while nondurable goods declined by 0.7%. Retail inventories were up 0.8%, rising 5.3% from the previous year. The trade deficit decreased slightly as both exports and imports increased. Exports saw noticeable increases in foods, feeds & beverages, industrial supplies, consumer goods and other goods. Imports saw a noticeable rise in consumer goods and industrial supplies.

Technical Story

Personal Financial Outlook

This past week was challenging financially, with increased spending on dining out and rising bills, though I made progress in reducing my credit balance. I’m nearing the closure of some accounts, marking significant progress. My living situation has shifted from a patient wait to an urgent need for relocation.

 My current circumstances necessitate a quicker-than-expected move, but thankfully, my job allows for flexible living options within the city. Reflecting on past struggles to move, I now see maturity and growth in myself. Family dynamics, however, haven’t mirrored this personal growth, leading to a bittersweet distance. As I navigate this transition, I remain mindful of its potential impact on my market trading and aim to adapt my strategies accordingly.

Grade: D+

Reason: Poor Spending Choices

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