Trade The Journey

Trade The Journey

The rally continues

Top of the Morning! I hope everyone is enjoying their weekend.  The indices bounced back off their lows made in early June. It’s a continuation of last week’s rally, as most participants believe the worst scenario has been priced into the market. Some analysts believe that we saw the feared bottom a few weeks back. Others believe that the worst is yet to come due to the high levels of debt.

The white house issued a statement citing the low unemployment as evidence that the traditional idea of what a recession is, is not applicable to this situation. Normally, two-quarters of negative growth typically means we are in a recession. However, this situation is unique with low unemployment and some growth even its slowing.

After the Fed’s latest announcement of a seventy-five-basis point increase to the overnight rate, the market held its breath for the Fed’s interpretation of future conditions. Being that the rate increases are having an effect in slowing down demand, the market interpreted the Fed as being dovish after the rate increases are completed. This sentiment helped to spark the rally last week as the shorts in the markets removed their positions.

The housing market is still relatively strong even though it’s evident that a slowdown is upon us. Consumers are still spending even if their confidence in future conditions is trending lower. These are unique times we are living in with a ground war still occurring in Ukraine. Recently, Russia decided to cut down the amount of natural gas flowing into Europe.

Europe has called for a reduction in the amount of natural gas used. Europe’s chances of a recession are steadily increasing as its inflation rate is near historic levels partly due to energy. China is in the midst of a slowdown in growth mostly due to its zero covid policy and real estate sector. China has pledged to assist the property sector by issuing loans totaling $148billion with the purpose of helping developers to complete unfinished projects. Its also issued loan assistance to state banks.

“Private developers account for around 70% of the market, and at least half of them have run into liquidity issues, according to analysts.” – Reuters

Residents have pledged to stop paying mortgages on the unfinished property which prompted the government to get involved. After China’s crackdown on easy money, property developers began defaulting on their loans with the largest being Evergrande’s default which sent shock waves to global markets. Property developers depend on the down payments residents pay in advance of the project being completed.

China may have to issue additional funds to help shore up the market.

Economy

Consumer confidence continues to trend down. Consumers viewed the present conditions of the labor market and business conditions as less favorable. The six-month expectations index was mixed for business conditions and the labor market. Expectations for the outlook on consumers’ finance were less than favorable.

Even with the negative outlook, consumers are spending evidenced by Visa’s latest earnings report. Visa topped earnings forecast. Visa stated that consumer spending is still strong and remains higher than pre-pandemic levels and this includes spending on goods. They also noted that there is a shift in spending from goods to services. Spending on travel remains robust and affluent spending is recovering in “restaurants, travel, and entertainment“. Non-affluent spending also remains strong. According to their earnings report, they renewed relationships with both domestic and non-domestic traditional issuers. One important point mentioned in the report is the opportunity for growth in cash digitization in the United States.

Moving forward, cash digitization will be an area of growth as we move to a digital society. Other economies like China are already in the process of restructuring their economy digitally.

New orders for manufactured durable goods rose 1.9% in June. Growth in the new orders for durable goods showed relative solid strength in the last five months. Transportation equipment led to the increase in new orders and unfilled orders which was up 0.7%. Shipments of durable goods rose 0.3% led by computer and electronic products. Inventories rose 0.4% led by machinery. Nondefense capital goods increased 0.1%.

New Orders excluding transportation and defense growth slowed from the previous months as did the shipments. New orders for communications equipment fell for a second consecutive month. Machinery and primary metals new orders slowed from the previous month. Electrical equipment, appliances, and components new orders rose sharply from the previous month. Capital goods shipments and new orders both fell from the previous month. Unfilled orders and total inventories for capital goods remained about the same from the last two months. Judging by the numbers, capital goods growth may face challenges moving forward.

Real GDP growth contracted for a second straight month. The largest decreases were in private inventory investment, residential fixed investment, and federal government spending.  The personal savings rate fell 0.4%. Real disposable income decreased by 0.5. Current-dollar income, not adjusting for inflation, increased from the first quarter. The decrease in private inventory investment reflected a decrease in the retail trade, specifically general merchandise stores and motor vehicle dealers.

Personal Consumption expenditures rose 1.0% for the second quarter supported by services spending. Household consumption expenditures led to an increase in spending on services. Healthcare and food services & accommodations spending also rose in the second quarter. Goods spending fell for both durable and nondurable goods. Gross private domestic investment fell sharply led by a decrease in investments in structures. Intellectual Property was the sole investment category that rose in the second quarter. Residential spending fell sharply in the second quarter.

Exports for goods and services rose sharply while imports also rose slightly. Services led to the increase in imports led by an increase in spending on travel. Personal Consumption expenditures rose 1.0% in the second quarter slowing its growth by 0.8%. The PCE rose to 7.1% which is the same as the first quarter.

The GDP implicit price deflator increased to 0.6% from the previous quarter bringing the total to 8.9%.

“The GDP deflator, also called implicit price deflator, is a measure of inflation. It is the ratio of the value of goods and services an economy produces in a particular year at current prices to that of prices that prevailed during the base year.

This ratio helps show the extent to which the increase in gross domestic product has happened on account of higher prices rather than increase in output.”

Important to note that the GDP faces several revisions as data is added and adjusted.

The employment cost index was up 1.3%. Compensation costs for civilian, private industry, and state & local governments rose during the month. This increase can be attributed to rising wages & salaries and benefits costs.

New home sales continue to fall while the median sales and average sales prices continue to rise. New home sales rose sharply in the Midwest and fell sharply in the west. New home sales fell 8.1% in June. New homes for sale at the end of the period rose slightly. New home sales for the $400,000 to $499,999 fell sharply for the month and rose slightly for the $300,000 to $399,999 range.

New houses sold that haven’t started construction rose in June but fell for new houses under construction and completed. At the end of the period, new houses started, under construction and completed all rose for the month of June. Mortgage application volume decreased as did the refinance and purchase applications index. The purchase index fell across all loan types.

Initial claims decreased slightly, although the revised number from last week showed an increase. Continuing claims decreased last week. The labor market remains tight although there are some cracks that are beginning to appear.

This is a tough market to call as there are so many diverging views on if we are in a recession or not. I wouldn’t get too overly excited about the market’s recent rally. As the earnings season continues, I’ll believe we’ll get a clear picture of the outlook. One development that still stands out to me is Bank’s preparation for possible mortgage defaults in the future.

No option trades were made this past week.


This past week in Review:

This week was about the same as last week. I did spend a little more on discretionary items than the previous week but not by much. This coming week, I’ll receive my first paycheck. Once I receive my paycheck, I’ll be able to develop a more realistic budget. One benefit to my spending plan is that I’ll always have excess money available if I decide to cut back on the automatic withdrawals to my investment account.

The only drawback to having money in investment accounts is that some accounts take time to deposit those funds back into your checking account. One account takes close to two weeks to transfer money back into my checking account which often dissuades from me doing it. This coming week should be about the same in terms of spending.

Grade: C

Reason: Continued adherence to a spending plan. Nothing special.

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