Trade The Journey

Trade The Journey

The Markets Rise !

Good morning, fellow traders! I trust you had a rejuvenating weekend and are geared up for the week ahead. In the coming trading sessions, we are presented with a wealth of data to dissect, primarily honing in on the job market’s health. The prior week, our attention leaned towards the PCE report and GDP estimate, but as earnings season bids adieu, our focus reverts to the overall economic vitality.

Federal Reserve Insights: Federal Reserve speakers seem content with the ramifications of recent rate hikes, with most indicating that interest rates presently stand at a level deemed constraining. One speaker has even left the door slightly ajar for an additional rate hike should the situation warrant it. Consequently, yields across various maturities have retraced. On the other hand, gold has surged to a new pinnacle at $2095, leveraging a retreat in the US dollar, which now resides below its 200-day Simple Moving Average (SMA) at $103.19. Meanwhile, crude oil seems ensnared in a lateral pattern, nestled below the $77 reference level but comfortably above $72.46, holding steady at $74.38.

OPEC Meeting Highlights: The recent OPEC gathering delivered significant outcomes, with Saudi Arabia pledging a hefty 1 million barrel per day cut until the end of Q1, complemented by Russia’s commitment to reduce production by 500,000 barrels. Furthermore, individual OPEC members have volunteered additional cuts amounting to 2% of the world’s supply. Presently, there’s a lingering uncertainty in the market regarding OPEC’s capacity to defend an $80 price floor.

China’s Complex Economic Landscape: China continues grappling with multifaceted economic challenges, notably an upsurge in borrower defaults encompassing both mortgages and business loans, as reported by Reuters. Alarmingly, the tally stands at a staggering 8.54 million individuals. In parallel, household debt looms at a substantial 64% of the nation’s gross domestic product (GDP). Notably, youth unemployment remains a thorn, accentuated by China’s discontinuation of unemployment data reporting.

Unlike the US and other developed nations, defaulting or failing to meet loan requisites in China curtails consumer participation in specific economic activities. Furthermore, the country’s manufacturing activity has contracted, accompanied by dwindling exports and diminished factory manager confidence. Additionally, the non-manufacturing index teetered on the brink of contractionary territory in November. China exhibits reluctance to infuse more capital or trim rates, primarily due to an expanding interest rate differential and concerns of currency devaluation, which could precipitate heightened capital outflows.

Week Ahead Calendar:

  • Monday: Factory Orders
  • Tuesday: ISM Non-manufacturing Index, JOLTS Job Openings
  • Wednesday: ADP Employment Change, Productivity, Trade Balance
  • Thursday: Consumer Credit, Wholesale Inventories, Initial Claims
  • Friday: Employment Situation, University of Michigan Consumer Sentiment (Preliminary)

Economic Data Analysis:

Housing Overview:

New Home Sales

New Home Sales for October revealed a 5.6% contraction, though sales have surged by 17.7% compared to the preceding year. The median new home sales price stands at $409,300, with an average sales price of $487,000. Currently, new homes have an inventory supply of 7.8 months at the existing sales pace. New home sales have been consistently around the 600,000 mark over the past year, with the slowdown attributed to tighter monetary policies.

Construction Spending Report

Construction Spending in October escalated by 0.6%, signifying a remarkable 10.7% annual upswing. Private construction spending exhibited a 0.7% gain, while public construction spending notched a modest 0.2% uptick. Within the private residential construction sphere, single-family spending experienced slight growth, whereas multi-family construction spending dipped marginally.

Meanwhile, there was a notable deceleration in commercial real estate spending, ostensibly reflecting diminishing demand for physical establishments. The manufacturing private construction sector demonstrated a pronounced uptick. On the public construction front, spending increased by 0.2%, attributable to heightened investments in educational and highway construction.

MBA Weekly Index (Week of November 24):

Mortgage application volume edged up by 0.3%. However, the refinance index encountered a 9% downturn, contrasting with a 5% surge in the purchase index. The 30-year fixed conforming loan average rate receded by four basis points to 7.37%, while the 30-year fixed jumbo loan rate ascended by three basis points to 7.51%. The refinance portion of the total loan application retreated by 1.8% to 30.6%.

Pending Home Sales for October:

Pending home sales encountered a 1.5% descent, spanning all US regions. Limited inventory persists as a formidable hurdle for potential homebuyers, particularly evident in the high volume of houses priced above $750,000.

Consumer Landscape – Job Health:

Initial Claims

Initial claims inched up to 218,000, surpassing estimates set at 215,000, suggesting that consumers continue to enjoy access to a robust job market. Nonetheless, the job market, while still robust, has begun exhibiting slight signs of fragility, as continuing claims ascended to 1.927 million, marking its highest level since November 2021.

The four-week moving average for initial claims inched up to 220,000, with recent weeks maintaining claims within the 210,000-221,000 range, reaching a peak of 233,000 in the week of November 11. The upcoming week is anticipated to provide further clarity on the job market’s health.

Price Movements – PCE for October:

The PCE price index unveiled a 3% year-over-year price hike, while the core PCE price index, excluding food and energy, posted a 3.5% annual upsurge. Over the past month, the PCE price index inched up by 0.1%, remaining virtually unchanged from September. August and September witnessed PCE levels at 0.4%.

The core PCE price index exhibited a 0.2% uptick in the past month. Food prices registered a 0.2% increase, while energy prices faced a 2.6% downturn. In chained dollars (2017), the PCE rose by 0.2%. Personal income recorded a 0.2% increment, alongside a 0.3% rise in disposable income, although it slipped by 0.1% compared to the previous month. PCE, both in current and chained dollars, slipped to 0.2%. The personal savings rate dwindled to 3.8%, significantly below its post-pandemic zenith.

Consumer Confidence:

The consumer confidence index advanced to 102. The present situation index experienced a minor 0.4-point dip to 138.2. In contrast, the expectations index, gauging the short-term outlook on income, business, and the labor market, witnessed a notable 5.4-point ascent to 77.8. It’s worth noting that a reading below 80 typically signals a potential recession, and 66% of respondents still perceive a recession as somewhat likely within the next year.

The report highlights an uptick in confidence among baby boomers, albeit a slight dip among individuals below 55 years old. Despite a general softening of consumer confidence, some encouraging factors include enhanced family financial conditions and relatively stable business conditions. Consumers’ short-term outlook improved, driven by the perception of reduced chances of another rate hike. Twelve-month inflation expectations eased to 5.7%, while consumer intentions to make significant purchases declined as expected financial conditions improved.

Manufacturing and Inventory Overview – ISM Manufacturing:

Manufacturing remains entrenched in contraction territory for the 13th consecutive month, with the manufacturing index holding steady at 46.7%. This level is below the twelve-month average, with September being the sole month that approached expansion. Sectors experiencing growth encompass transportation and food, beverage & tobacco products. New orders logged their 15th successive month of contraction, albeit at a reduced pace, rising by 2.8% to 48.3%.

Only Food, Beverage, & tobacco products exhibited growth, while Computer & electronic products, machinery, and fabricated metals recorded tepid new order activity. Production dipped into contraction territory, declining by 1.9% to 48.5%, with only transportation equipment and food & beverage sectors expanding. Employment descended by 1% to a reading of 45.8%, with the sole exception being chemical products. Manufacturers find themselves at a juncture, contemplating whether to maintain or reduce their workforce in the backdrop of persistently weak manufacturing conditions.

Supplier delivery performance improved, down by 1.5% to 46.2%, indicating faster deliveries (a reading below 50). Inventories improved by 1.5% to 44.8%, primarily due to seasonal factors. Customer inventories inched up by 2.2% to 50.8%, reflecting customers’ perceptions of approaching the desired inventory levels. Prices surged by 4.8% to 49.9%, driven by raw material price fluctuations. Backlogs receded by 2.9% to 39.3%, with most respondents reporting lower backlogs. Imports and exports both remained in contractionary territory.

  • In addition, the average commitment lead time for capital expenditures increased by seven days, while the lead time for production materials declined by four days, and the lead time for maintenance, repair, and operating supplies declined by three days.

Advance International/Wholesale/Retail Inventories for October:

The international trade deficit expanded by $3 billion to 89.8, with exports declining and imports remaining unchanged. Exports increased in capital goods and automotive vehicles. Wholesale inventories registered a 0.2% decline, down 2% from a year ago. Durable goods inventories inched up by 0.1%, while nondurable goods witnessed a 0.6% drop for wholesalers. On the retail front, inventories remained static but have increased by 5.4% over the past year. Motor vehicles & parts dealers reported a 2% inventory upturn.

GDP – Second Estimate for the Third Quarter:

Real GDP expanded by an annualized 5.2% in the third quarter, propelled by robust consumer spending and inventory investments. This figure was a slight upward revision from the initial estimate of 4.9%. Notably, nonresidential fixed investment and state & local government spending received favorable revisions, while consumer spending, although on an upward trajectory, was revised downward. The PCE price index and core PCE were both revised downward by 0.1% to 2.8% and 2.3%, respectively. Personal income, disposable income, and the personal savings rate were all revised upwards.

Profits from current production surged, with domestic financial corporations witnessing a sharp decline, while domestic nonfinancial corporations experienced growth. Rest-of-the-world profits increased but at a slower pace than in the second quarter. 

The Beige Book indicated an overall economic slowdown, with some districts exhibiting moderate growth. Discretionary and high-ticket item sales remained sluggish, while the travel and tourism sector continued to display resilience. Business loans, particularly real estate loans, witnessed a decline. In the realm of real estate, commercial, office, and multi-family activities weakened. Residential sales dipped, with some signs of inventory improvement in select districts. Delinquency rates among consumers remained relatively low.

Technical Story

*Vix standard deviations not accurate.

Review of Cash Flow for the Previous Week:

The financial performance of the past week deviated significantly from expectations, resulting in expenditures that surpassed initial projections. There is a notable concern regarding the upward trend in spending observed over recent weeks. Despite the commendable achievement of earning a substantial salary, there is an ongoing process of adaptation to this increased income level. While savings have been successfully accrued, they fall short of targeted objectives.

The primary objective moving forward is to concentrate on eliminating outstanding credit balances. In the forthcoming week, there will be a strategic increase in the allocation of funds dedicated to enhancing credit scores.

Grade: D+

Reason: Reckless spending

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