Trade The Journey

Trade The Journey

Short Post!

Top of the Morning! I decided to make this a short post for the week. Why? I’m not sure. Maybe it’s the time of day, and I waited to write my blog post a little later than usual.

The second round of the NBA playoffs began today, and perhaps it’s affecting my enthusiasm for completing this blog post.

Each of the indices closed the week with a large red bar indicating heavy selling. Most of the sectors closed the week with losses. With the Fed’s upcoming meeting, the market seems to be anticipating some guidance on rates. The Fed has indicated that a rate hike of fifty basis points is on the table for the meeting this Wednesday.

This Fed’s upcoming meeting will set the tone for the next rate hike in June. Inflation is proving to be stickier than the Fed imagined, and aggressive rate hikes may be needed to help slow inflation. The latest PCE report surged close to one percentage point, with the annual PCE rate at 7.0%.

Also occurring this week will be the treasury department’s announcement of quarterly debt sales. With the Fed focused on reducing its balance sheet, how will the treasury department adjust its bond auction amount?

The Fed plans on reducing its balance sheet by unloading $60 billion in treasuries and $35 billion in Mortgage-backed securities. The Fed will not be reinvesting the amount it receives from the purchases.

The five-year yields are at multi-year highs and continue to invert and flatten with the ten-year and thirty-year yields. These rates continue to affect the mortgage market with thirty-year fixed rates on mortgages at 5.37%. Mortgage application volume continues to fall, as does the refinance and purchase index.

Existing homes for sale are in short supply and with home prices and rates rising, current homeowners may be less likely to look for a new home to buy. Prospective home buyers continue to be priced out.

Pending home sales declined for a fifth straight month. The average sales price for single-family homes is $523,900. Single-family homes decreased 8.6% from the previous month. Sales increased the most for the $500,000 to $749,000. Sales increased a bit for the $300,000 to $349,000 and the $750,000 and over range. Homes sold fell from the previous month, coming in close to the November levels of last year. Interestingly enough, homes for sale at the end of the period will be higher than last year.

The PCE report showed that personal income increased 0.5%, and personal spending increased 1.1% for the month indicating that consumers are still spending. Disposable income fell by 0.4%. Consumers are clearly spending more than they earned evidenced by the fall in disposable income by either reaching into their savings or using credit.

The employment cost index increased 1.4% for the quarter and 4.5% for the year. Currently, employment costs are higher this year than in the last several years. Even though employees are earning more, inflation has neutralized the wage increases. Wage and salaries increased for civilians, private and government workers.

The labor market remains tight as employers face continuing challenges in hiring skilled workers. Initial claims for unemployment remain at record lows. This is one reason why analysts think the Fed may be aggressive in its attack on inflation. So far companies’ have been able to pass on the rising costs to consumers.

Although the labor market is strong, real GDP suffered its first contraction to the tune of 1.4% after growing 6.9% the previous quarter. With the dollar reaching new highs, exports fell 5.9% for the quarter after rising 22% the previous quarter. Nonresidential investment increased to 9.2% from 2.9% in the fourth quarter. Equipment also rose from 2.8% in the 4th quarter to 15.3% this quarter.

The GDP advanced report also showed that services increased 4.3% while durable goods fell. Household consumption for services rose 15%, and food and services accommodations rose 5.2%. Transportation services fell 2.1% and recreation services fell close to 10%. Nondurable goods slowed a bit in food and beverages purchased for off-premises consumption, clothing, and gasoline.

Here is some helpful information to help decipher the clues in the GDP report:

1. Nonresidential investment: Expenditures by firms on capital such as commercial real estate, tools, machinery, and factories.

2. Residential Investment: Expenditures on residential structures and residential equipment that is owned by landlords and rented to tenants.

3. Change in inventories: The change of firm inventories in a given period.

Gross: Gross private domestic investment includes the production of all capital goods, including those used to replace depreciated capital.

Private: Moreover, gross private domestic investment measures investment expenditures made by the private sector.

Domestic: Lastly, gross private domestic investment is expenditures on capital goods used in the domestic economy.

https://www.mic.com/articles/15168/us-gdp-how-three-types-of-investments-impact-economic-growth

Advanced Retail inventories were up 2.0% from February to March. Wholesale trade inventories rose 2.3% from February to March but increased less than the previous month. International Trade slowed with the top exports falling significantly in industrial supplies and automotive vehicles. Imports rose for foods, beverages, industrial supplies, capital goods, automotive vehicles, and consumer goods.

Durable goods recovered from the fall in February. Durable goods increased 0.8% from February to March. Capital goods shipments continued to decrease, falling to 0.5% from February to March. New Orders for capital goods improved this month. Tranportation equipment, primary metals and electrical equipment increased in shipments and new orders. Motor Vehicles and parts increased in shipments and New orders close to 5.0% from the previous month.

Indices

Russell 2000

S&P 500

Dow Jones

Nasdaq

Sectors


Market Review:

With China’s zero-tolerance Covid stance complicating supply chains, companies have already begun issuing cautious forward guidance. Although companies, for the most part, are beating earning consensus, some of the notable companies like Amazon are struggling. As the war in Ukraine rages on, Russia is firming its stance on being paid in rubles for natural resources to help strengthen its currency.

There are a lot of challenges ahead for markets, the top concern being the Fed’s response to inflation. Deutsche Bank has stated that its expectation for a coming recession in 2023 is all but certain. Looking at the charts, indices have backed off their all-time highs and are now entering bear market territory. The Nasdaq is already in a bear market.

With analyst forecasting the Fed’s increase in rates to a total of close to 3% at year’s end, there’s turbulence ahead for the trader and investor.


Cash flow review for the previous week:

I’m making a shift in the investments I make on a weekly basis, focusing on companies slated to do well in a slowing growth environment. I’m also saving a lot more than I usually do. This past week was a bit challenging, however, I was able to weather the storm. Most of my expenses were travel-related, namely gas. I don’t think much will change in this upcoming week.

Grade: D+

Reason: I made some unnecessary purchases.

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