Trade The Journey

Trade The Journey

The Fed meeting is upon us!

Top of the Morning! I hope everyone is enjoying their weekend. Last night I watched the final fight between Canelo and Gennady Golovkin, marking the third fight between the two fighters. Their first fight ended in a draw and the second fight ended with Canelo winning. Both fights’ results were highly contested and many feel that Golovkin won both fights.

But last night, the fight wasn’t even close as Golovkin has aged considerably. At forty years old, his best fights are far behind him. He looked tired and it seemed like his goal was to take minimal damage, collect his check and return home. Hopefully, Canelo can step up the level of his competition in the next fight and give the younger fighters an opportunity to fight him.

As you can tell, boxing is one of my favorite sports to watch. It’s one of the few sports besides MMA where the best is determined in the ring.

Returning to the market, this past week, we got to see the latest CPI and PPI numbers alongside the retail sales report. The CPI report release was anticipated by most market participants because of the signals it may provide to the Fed at their next meeting. Most participants expected the CPI report to come in flat or fall a bit, but it rose 0.1% for the month of August.

The Fed has made it clear that they intend on fighting inflation by continuing to raise rates until inflation returns to its target. Many say that returning to the 2.0% target is nearly impossible and the Fed may have to settle for inflation closer to 4.0%. Bond yields are reflecting this sentiment, as yields across the curve rose with the five and thirty-year yields reaching new highs. The yield curve is now deeply inverted with rates for the one-year reaching 4%.

The 2/10 spread inverted by 39 basis points. Mortgage rates have followed suit, with rates nearing 6%. Mortgage applications fell this past week as did the refinancing share of applications. Purchase applications also fell this past week, as prospective home buyers remain on the sidelines. With little incentive to continue building, home builders are pulling back on the number of homes they are constructing. Overall applications are at their lowest level since 2018.

Initial claims fell this past week while continuing claims increased slightly. Initial claims are at their lowest level in a month. The labor market is still strong, leading the white house and some government officials to conclude that we are not in a recession. Typically, two-quarters of contractionary GDP growth indicates that the economy is in a recession, however, the labor market says otherwise.

As rates continue to rise, and companies lower the amount of capital and inventory investment, we’ll see the staying power of higher wages, but we’ll also see the need for fewer workers.

The NFIB optimism report highlighted the challenges construction companies are facing which include finding quality labor.  Optimism among small business owners rose 1.9% but is still below the forty-eight-year average of 98.

The top concern among small business owners is inflation and labor quality. Owners have continued to raise compensation in the hope of attracting workers. Expectations for better business conditions and higher real sales increased while the number of owners raising selling prices has decreased. Inventory is too low as reported by 3% of owners with the highest being in Manufacturing, transportation, and retail.

46% of owners reported increasing compensation. 60% of the owners reported not being interested in loans and 52% reported capital outlays.

Construction, manufacturing, and transportation reported trouble in filling positions. Overall, small business owners are concerned about future economic conditions.

CPI rose 0.1% after coming in flat in July. The small increase caused the indices to fall as the market anticipates another aggressive rate hike. Shelter, food, and medical care led to an increase in prices. The gasoline index posted its largest decrease, nearing 11%. Food at home rose 0.7% and food away from home rose 0.9%.

Taking away food and energy, prices rose 0.6%. Energy fell 5%. Airline fares, communication, and used car & trucks declined in August. Shelter rose 0.2% in August. According to the report, less food and energy, and shelter accounted for 40% of the total increase. Rent remained about the same from the previous month.

The PPI for final demand fell 0.1%. Final Demand prices fell 0.4% in August. The final Demand for goods fell 1.2%. Most of the fall was attributed to the decline in Energy. Gasoline fell 12.7%. Construction machinery and equipment increased.

The final Demand for services moved up 0.4% largely attributed to fuel and lubricants retailing. Truck and transportation of freight fell 1.9%.

Intermediate demand for processed goods fell for a second consecutive month. The fall was mostly attributed to processed energy goods. Unprocessed goods for intermediate demand rose 5.7%. Prices for unprocessed energy materials attributed to the rise, namely natural gas. Crude petroleum, iron, and steel scrap fell.

Services for intermediate demand rose 1.0%. Nonresidential real estate rents are attributed to the increase. Services inputs increased for stage four intermediate demand. All other goods and services input for the other stages of intermediate demand fell.

Industrial production and capacity both fell. Industrial production fell 0.2% in August. Manufacturing output increased slightly. Mining was unchanged and utilities decreased. Industrial production for final products fell 0.2%. Consumer goods industrial production fell 0.25 eld by energy products. Business equipment rose 0.7%, construction fell 0.6% and material fell slightly. Business equipment increase was led by information processing and related equipment.

Recovering from a decrease in July, retail and food services sales showed a 0.3% increase from the previous month. Motor vehicles & parts dealers showed the largest increase from the previous month at 2.8%. Food services & drinking places and miscellaneous store retailers showed a 1.1% and 1.6% increase respectively. The largest increase in sales came from gasoline stations, followed by furniture & home furniture stores.

Clearly, inflation is slowing and has possibly reached its peak but have higher prices become entrenched? Inflation isn’t a challenge only in the United States but for most of the world, with the exception of Japan and China. Europe is facing an energy crisis that is only bound to worsen as Putin has begun to weaponize its resources. Germany has begun purchasing companies to help with its energy challenges.

As the global economy tips into a recessionary period, how will markets fare? Looking at the charts, each of the indices is currently in a downtrend with the high of the bull rally ending in late November. The S&P 500 is close to 1,000 points from its high. The question participants should ask themselves is how likely is the S&P able to recover from a 1,000-point fall?

My guess is that the market still has further to fall so most of my options strategy will consist of bearish puts and call spreads. Luckily, I’ve been on the right side of the trades for the past few weeks and I hope that will continue.

This past week:

This past week went extremely well as I continue to save a large portion of money from my paycheck. I’m also making money from my options trades. Although trading is highly uncertain, receiving my bi-weekly paycheck isn’t.

I pay myself first from my check which has helped me accumulate money in my savings account. After paying myself, I then pay the creditors and bill collectors. If you haven’t had the chance, read the “Richest man in Babylon”. It’ll change the way you handle money.

Grade: C+

Reason: Continued Improvement

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