Trade The Journey

Trade The Journey

The first week of the New Year!

Top of the Morning! I hope everyone is enjoying their weekend and preparing for the week ahead. This past week proved to be challenging in terms of trade management. I ended up repeating the same mistake I made a few weeks ago, staying in a losing position. More about this trade can be found here.

This coming week will have two major report releases that I believe the market will be watching closely, the CPI on Thursday and the University of Michigan Consumer Sentiment preliminary report on Friday. The health of the consumer and the prices being paid by consumers will give the Fed and the market an update on the inflation trend and how it’s affecting the consumer.

Another report I’ll be watching is the consumer credit report, for signs of higher or lower credit usage by consumers. This past week the markets closed higher on Friday due to the somewhat positive employment situation report which showed average hourly earnings cooling a bit. The Fed is watching the rate of growth of wages because of the wage-spiral effect on prices. If consumers are earning higher wages they are inclined to spend more which hampers the Fed in its fight against inflation.

Economy Week

Total Construction spending rose 0.2% in November. Private construction spending rose 0.3% and public construction spending fell 0.1% in November. The construction spending report is a few months behind the current date. So, the total construction spending for the eleven months used in the report equaled a 10.5% rise and an 8.5% rise for the same period (November) from a year ago.

Residential spending continues to trend downward, $59,594,000 less than the spending in July of last year. Private spending on residential is also trending downward, slowing in the last few months. While new multifamily spending rose over 2% from the October amount, new single-family spending fell close to 3%. New single-family spending is over 11% down from July.

New multi-family construction spending has risen each of the last six months, except in October, and has risen over 42%. Clearly, builders have favored building apartments and condominiums over houses as prospective buyers remain hesitant on entering the housing market. Commercial spending has remained near the same amount for the past three months. Manufacturing total construction spending has steadily increased for the last six months.

Interested investors and traders should pay close attention to commodities prices, skilled labor hiring, and rates for a signal. Higher rates make construction projects more expensive and lower the profit margins of the project. Building materials costs have risen over 20% from the previous year according to the NAHB.

Mortgage applications fell 13% from two weeks earlier. The refinance index fell 16.3% and the purchase index fell 12.2% from two weeks earlier. Purchasing applications have slowed for new and existing housing according to the MBA weekly report.  The 30-year fixed rate for conforming loans rose 0.16%, bringing the rate to 6.58%. The 30-year fixed rate for jumbo loans remained at 6.12%.

It was my understanding that tracking the ten-year treasuries was the best indicator of potential mortgage rates but that’s not the case. You should be paying attention to mortgage-backed securities. Most home lenders sell mortgages slightly above the home loan value but at discount to the amount that will be received over time in the form of principal and interest to a firm.

The firm then takes these mortgages and bundles them together, a process known as securitization, and sells them to investors. Investors receive the principal and interest rate payments over time. Mortgage lenders raise rates when Mortgage-backed securities fall in price and lower rates when MBS rise in price. To be clear you should also keep an eye on 10-year treasuries also.

Job Openings were little changed in November. Separations, quits, layoffs, and discharges were also little changed from the previous month. Job openings rose in professional and business services and nondurable goods manufacturing. One important metric to track in this report is the trend of “Quits” indicating how confident workers are in finding another place of employment. While the quits rate remained near the same level as the previous month, it increased for businesses with 1 to 9 employees.

I included some graphs for small, mid-size, and large businesses.

                                                  Hires for companies for 1-9 employees

                                                          Hires for companies that are midsize

                                                             Hires for companies that are large

Initial claims remained above 200,000, decreasing slightly from the previous week. Continuing claims fell slightly from the previous week. The four-week average for initial claims decreased while the same average for continuing claims rose. Watching the four-week average gives you a better idea of the trend. From a paper, I gathered a quote that may help interpreting the weekly report:

Initial claims measure the flow of people into the Unemployment Insurance system while continuing claims measure the stock of people in the Unemployment Insurance system.

In addition to the weekly initial claims, the employment situation report was also released this past week. There was a total of 223,000 jobs added in December. The unemployment rate increased by 0.1%, coming in at 3.5%. The labor force participation rate, which is the proportion of the working-age population this is either working or looking for work, remained unchanged at 62.3%. You can also divide the civilian labor force by the civilian noninstitutional population to arrive at the participation rate.

Job gains were in the following industries: leisure and hospitality, health care, construction, and social assistance. Average hourly earnings rose by 0.3%. The average workweek declined by 0.1 hours to 34.3 hours. Manufacturing’s average workweek was unchanged, but overtime fell by 0.2 hours. According to this report, it looks like the Fed’s job of taming inflation still needs some work.

The Ism manufacturing and nonmanufacturing (services) indexes were also released this week. The ISM manufacturing index contracted for the second straight month and came in at 48.4%. Below 50% indicates contraction. New orders contracted as did production. Prices fell by 3.6%, bringing it close to the pre-pandemic level. The backlog of orders rose slightly while employment expanded. Supplier deliveries fell slightly. Inventories increased slightly.

The average lead time improved for capital expenditures and decreased slightly for purchased materials. Primary metals and Petroleum & coal products grew in December. Included below is the ISM manufacturing table:

The ISM nonmanufacturing contracted in December for the first time in over two years. It is below the 50% level, coming in at 49.6%. Business activity fell ten percentage points. New orders fell by a little over the same amount. Supplier deliveries improved, indicating faster deliveries. Prices fell slightly and inventories contracted as did inventory sentiment. Employment also contracted. Included below is the ISM nonmanufacturing table:

The factory order report showed that new orders for manufactured goods in November fell by 1.8%. Shipments fell by 0.6% and unfilled orders were unchanged. Inventories were also unchanged. New orders for manufactured nondurable goods fell by 1.4%. Shipment for manufactured nondurable goods fell by the same amount. Inventories for manufactured nondurable goods fell slightly from the previous month.

Moving to the short-term energy outlook released by the EIA. Crude oil production is expected to increase in 2023. Electricity generation expectations are for an increase in renewable energy and a slight increase in nuclear energy. Expectations for natural gas and coal generation are expected to fall. A link to the report can be found here.

The FOMC minutes for the last meeting were also released this past week. Most of the information detailed in the report was not a surprise if you follow the news and read the important economic releases. In the report, participants forecasted that inflation would moderate as supply/demand imbalances improve and the labor market loosens. Participants project inflation will be skewed to the upside in the near term.

It was also said that a below-trend real GDP growth rate will help further bring supply and demand into balance resulting in inflation slowing even further. As consumers continue to dwindle down their excess savings, participants expect that consumers will continue to switch to cheaper alternatives and increase the amount of credit usage, especially among low-income households. Higher-income households will be better able to maintain their excess savings.

Participants expect the housing market to remain weak and business activity to moderate as concern about the economic outlook for 2023 continues to weaken. Participants said that they need substantially more evidence that inflation is retreating before pivoting from higher rates. They also said that demand will need to further weaken.

Core services excluding shelter, as participants noted, are closely linked to nominal wage growth. The longer inflation remains above 2% the greater the risk. No participants voiced any support for reducing the federal funds rate target in 2023.

This past week’s cash flow:

I can’t say that I feel very good about the management of my disposable income. One step I took toward better cash-flow management was to write down the necessary expenses and see how much is left over. After I completed the calculation, I saw that there isn’t much disposable income left. So, either, I can find new ways of earning extra income or find a way to eliminate my necessary expenses.

I think both options are viable. One big cash-flow drain is my personal credit accounts, so I decided to liquidate some of my investments to pay off my credit accounts. But then I thought about the downturn and not receiving the full appreciated value and decided to hold off on some of the liquidations. Once the market recovers, I plan on eliminating all my personal credit accounts which will increase the amount of disposable income I have under my control.

Moving forward, I have committed myself to not making any stupid purchases since I know where my money is going.

Grade: B

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