Trade The Journey

Trade The Journey

Surprise from Japan!

Top of the Morning! What a week for me to trade through as I watched the market and my option position gyrate between a profit and loss. With a rate decision on the table among other economic data reports being released it was bound to be a week where stocks moved. In addition to these economic report releases, earnings for the second quarter continued. Companies have done quite well although the bar was lowered for forecasts. More on earnings below.

This week I decided to place a bull vertical on QQQ, the trade review and resulting profit/loss could be found here. The Federal Reserve raised rates twenty-five basis points as forecasted. The European Central Bank followed suit. While the US has experienced economic stability as the Fed hiked rates at one of the fastest paces in history, Europe has seen sluggish growth and the possibility of a recession occurring rise.

While the ECB has continued its fight against inflation, a reversal to cuts may be in the cards for Europe. Surprising markets this week was the Bank of Japan as Governor Kazuo announced a shift in policy, announcing “greater flexibility” in its yield curve control. Yield Curve control is a long-term policy that sees the central bank target an interest rate, and then buy and sell bonds as necessary to achieve that target. – CNBC.

Essentially, the Bank of Japan will allow the ten-year Japan bonds to fluctuate with a wider range than the original 0-0.5% band. The range was increased another fifty basis points, allowing the yield to reach 1%. Not only is this a shift from the dovish policy that Japan has held in place for many years, it also leaves market participants to wonder if further tightening is coming. Currently, Japan is a large holder of overseas bonds, and a shift policy could cause repatriation.

Economy

Consumer Sentiment

Consumer Confidence: July

The consumer confidence index ticket up by 6.9 points to 117. The present situation index rose 4.7 points to 160 and the expectations index improved by 8.3 points to 88.3.  A level above eighty for the expectations index signals a recession likely within the next year. Consumers across income levels reported greater confidence in the economy. Within the present situations index, consumers reporting better business conditions ticked slightly lower while those reporting worsening business conditions edged down by 0.1%.

The present labor market outlook improved for consumers reporting that jobs were plentiful and lessened for consumers reporting that jobs were hard to get. Assessment of the family’s current financial situation improved for consumers reporting that their current situation is good and edged down slightly for consumers reporting their financial situation as bad. Consumers’ expectations improved for the short-term business conditions and labor market outlook improved while fewer consumers expected short-term income prospects to increase. Assessment of the family’s future financial situation was virtually unchanged.

Below is a chart projecting future consumer spending.

As you can see from the chart, consumers plan on spending more on necessities rather than leisure activities. While consumer confidence improved across the board, there still seems to be hesitancy to returning to the post-pandemic level of spending.

University of Michigan, Consumer Sentiment: July

The index of consumer sentiment rose 7.5 points to 71.6. The index of current economic conditions rose 7.6 points to 76.6. The index of consumer expectations rose 6.8 points to 68.3. Short-term and long-term business conditions improved, 18% and 14% respectively. Sentiment worsened for lower-income consumers as inflation and job prospects are set to decrease. However, for consumers earning a higher income, their ability to weather inflation along with a stable income improved sentiment.

Year-ahead inflation expectations were relatively unchanged, rising 0.1% to 3.4%. Long-run inflation expectations remained within the 2.9-3.1% and were unchanged from the 3% level reported in June.

Employment and Consumer Costs

Employment Costs Index: March to June

This index is measured in three-month periods. Compensation costs rose 1% along with wages and salaries. Benefit costs rose 0.9%. Over a twelve-month period, compensation costs decelerated from 5.5% to 4.5%, wages salaries decelerated from 5.7% to 4.6% and benefit cost declined from 5.3% to 3.9%. In current dollars, wages & salaries declined as did benefits and health benefits. In constant dollars, wages & salaries and benefits continue to trend up.

Current dollars are the nominal change without accounting for inflation and constant dollars use a base year and accounts for inflation.

Seeing the largest increase over a twelve-month period for compensation were service occupations and leisure & hospitality. Goods producing industries saw a 0.8% increase in compensation over the three-month period, its smallest increase since December 2022. Service producing industries saw a 1% increase in compensation over the three-month period which is inline with the previous levels. Compensation includes base wages or salaries, bonuses, benefits, allowances, and incentives.

Personal Consumption Expenditures Index: June

The PCE index rose 0.2% and core PCE rose by the same amount. Year-over-year the PCE index increased by 3% and core PCE rose by 4.6%. Durable goods rose 1.42%, after falling in May. Nondurable goods rose 0.45% in June. For goods, motor vehicles & parts, gasoline, and other energy goods. Services rose 0.42% and rose by the same amount in the previous months, signaling that services price pressures may finally be abating. The leading sectors in services, financial services & insurance, housing & utilities, and recreation services.

Household consumption expenditures rose by 0.42%. Personal income rose by 0.3%, after rising briefly in May to 0.5%. Disposable income rose 0.3%, oscillating between 0.3% and 0.5% over the past few months. The personal savings rate was unchanged at 4.3%. Below is a chart that highlights trends in PCE, durable and nondurable goods and services. Durable & Nondurable goods and services are moderating, while services is rising although slowing.

Housing

New Homes sales: June

New homes sales fell 2.5% and the median sales price was $415,400. The average sales price was $494,700. At the current sales rate, there is a supply at 7.4 months. New home sales fell for each of the price ranges, remaining the same for the $300,000 to $399,999 level. For homes sold during period, homes not started rose sharply, however for new homes sold that were under construction and completed fell. New homes sold have been trending up, slowly returning to the 2021 levels.

For new homes for sale at the end of the period, new homes not started rose and completed rose slightly, while new homes under construction fell slightly.

Pending Home Sales: June

Pending home sales rose 0.3% and is the first increase since February. The Midwest showed the largest increase over the past month, while the Northeast rose 0.6%, the south fell 1.4% and the west fell by 1%. The report showed that a recovery is set to begin in 2024.

MBA weekly Survey

Mortgage Applications decreased 1.8% from the prior week. The refinance index and the purchase index both declined, falling 0.4% and 2% respectively. The average rate for the 30-year fixed rate for a conforming loan remained at the same level as the previous week, 6.87%. The average rate for the 30-year fixed rate for a jumbo loan rose 0.01% to 6.90%.

Durable Goods and Inventories

Durable goods: June

New orders for durable goods rose 4.7% and has risen the last fourth months straight. Shipments rose 0.3%. Unfilled orders rose by 1.8% and inventories increased by 0.1%. Nondefense new orders for capital goods rose 16.9%. Unfilled orders rose 3.1% for capital goods. Inventories rose 0.1% for capital goods. New orders rose sharply for transportation equipment (12.1%), electrical equipment, appliances & components (1.5%), communications equipment (2.2%), and computers & related products (1.5%). Inventories remained about the same for the various sectors. Unfilled orders remained about the same for most of the sectors, excluding transportation equipment (2.9%) and manufacturing with unfilled orders (1.8%).

Wholesale, Retail, Advance International Trade: Goods Deficit Inventories: July

Wholesale inventories fell 0.3% and were unchanged from the May level. Retail inventories drifted up 0.7% and were unchanged from the June level. Merchant wholesale inventories trade dropped 0.3%, durable goods fell 0.1% and nondurable goods fell 0.7%. The goods deficit fell 4.4%, exports rose 0.2% and imports fell 1.4%.

Foods, feeds & beverages rose 0.1% after falling 13.6% in May. Industrial supplies, consumer goods, and automotive vehicles exports fell. Capital goods and other goods exports rose. Foods, feeds & beverages imports rose 1.8%. Automotive vehicles imports rose by 3.7% and consumer goods imports remained unchanged. Industrial supplies, capital goods and other goods imports fell.

Initial Claims

Initial claims came in below forecasts, falling by 7,000 to 221,000 this past week. The four-week moving average fell to its lowest level in the last several weeks. Continuing jobless claims fell 59,000 to $1.690 million. As the job market remains resilient, the Fed has a tricky situation on its hand but so far it seems like a soft landing is a growing possibility.

GDP: Second-quarter, first estimate

GDP surprised the market, rising 2.4% showing a still resilient economy. Real GDP rose reflecting increases in consumer spending, nonresidential fixed investment, state & local government spending, private inventory investment and federal government spending. The only decrease in the contributors was in exports and residential fixed investment.

Consumer spending rose in both goods and services. The goods spending increase was led by gasoline and other energy goods. The services spending increase was led by housing & utilities, health care, financial services & insurance, and transportation. The price index for gross domestic purchases fell by 1.9% from the first quarter to 1.9% in the second quarter. Disposable income fell 6.7% from the first quarter to 5.2% in the second quarter. The personal savings rate rose slightly by 0.1% from the first quarter to 4.4%.

The GDP deflator or price index fell 2.2% which was below forecasts. The GDP price deflator measures the ratio of nominal GDP to Real GDP multiplied by 100. Real GDP adjusts for inflation while the nominal GDP does not. When the GDP deflator rises it indicates that nominal GDP is rising faster than Real GDP, meaning prices are rising over time. The reverse is true when the GDP deflator is declining.

FOMC Rate Decision

The Fed raised rates by twenty-five basis points to the range of 5.25-5.50% with interest paid on reserve balances to 5.4%. This is the highest level since 2021 and the 11th consecutive increase. The Fed has also continued to run-off its balance sheet, allowing nearly $8.3 trillion to be rolled off its balance sheet. The Fed plans to conduct overnight repurchase agreements with a minimum bid rate of 5.5% and operation limit of $500 billion. The Fed plans to conduct overnight repurchase agreements with a minimum bid rate of 5.3% and a per-counterparty limit of $160 billion per day.

During the press conference, Powell highlighted a couple of things they will be looking at which are moderating growth in the economy, a better supply and demand balance in the labor market, and if the culminative collection of data suggest higher rates are needed. A rate hike or pause is equally like according to Powell depending on the data and so far, the data is suggesting a pause.

We think and most economists think that core inflation is actually a better signal of where headline inflation is going, because headline inflation is affected greatly by volatile energy and food prices. – Powell

Powell also mentioned monitoring non-housing services inflation and its correlation with the labor market. Next week the Senior Loan Officer Opinion Survey on bank lending practices will be released, which will give a clearer picture of credit conditions. This survey includes eighty large domestic banks and twenty-four US branches and agencies of foreign banks. 

Earnings

Microsoft beat on earnings and revenue forecasts. Net income rose 9% over the past year, as Azure led the growth, rising 2%. Microsoft saw revenue growth in its commercial office 365 software subscription of 14%. Its personal computer segment which features Bing, windows, surface, and Xbox continued to disappoint, falling 9%. Its window operation system license declined 28%. As Microsoft continues to add AI features to its platforms, its shares have risen 15% over the past year.

Google beat on earnings and revenues forecasts as its ad-based revenue is showing some signs of recovery. Google beat forecasts for its YouTube ads, google cloud and traffic acquisitions costs. Its cloud unit rose 28% and its search revenue grew slightly. According to CNBC, google is testing a A.I. tool that writes news articles.

Meta beat on earnings and revenue forecasts. Meta improved on its daily active users, monthly active users, and average revenue per user. After the layoffs, Meta cut its operating costs but is still spending or investing in Metaverse which posted a loss of $3.7 billion. Meta’s overall headcount has been reduced by 14%.  Its forecast for capital expenditure decreased from its prior estimate of $30-$33 billion to $27-$30 billion.

Technical Story:

This past week’s cash flow in review:

This past week I adhered to my spending plan although I spent a little more on discretionary items than usual. This coming week I will have to rely on my savings account as I won’t receive my first paycheck for another two weeks. I’m eager to see what my new income will be and have pledged to contribute a large amount to my trading account. Although my income has increased significantly, it will be important for me to have a solid budget so that my expenses don’t rise to meet my new income.

Grade: C

Reason: Adherence to my spending plan

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