Trade The Journey

Trade The Journey

Turbulence Ahead

Top of the Morning! There’s turbulence ahead for market participants with no end in sight. Well, of course, there’s an ending, but right now the markets seem plagued with uncertainty. Much of the uncertainty depends on how the Fed will adjust its rate hikes as inflation remains stickier than initially thought.

The CPI report showed that inflation rose 0.3% from the previous month in which inflation rose 1.2% the month before last. Energy declined overall with the Gasoline index providing much of the decline, falling over 6%. Natural gas and electricity prices rose this previous month. Inflation remains stubbornly high at 8.3% from the previous year in April.

The food at home index showed price increases remain at historic highs and the food away from home index is still high albeit less than the food at home index. Here’s an excerpt from the latest CPI report:

Increases in the indexes for shelter, food, airline fares, and new vehicles were the largest contributors to the seasonally adjusted all items increase. Along with indexes for shelter, airline fares, and new vehicles, the indexes for medical care, recreation, and household furnishings and operations all increased in April. The indexes for apparel, communication, and used cars and trucks all declined over the month.

*The PPI measures the price change from the perspective of the seller. The CPI measures the price change from the perspective of the buyer.

  • Final Demand Goods: The final demand goods index measures price changes for both unprocessed and processed goods sold to final demand.
  • Final Demand services: measures price change for the retailing and wholesaling of merchandise sold to final demand, generally without transformation.
  • Unprocessed goods for intermediate demand: measures price change for goods sold to businesses as inputs to production that have undergone no fabrication.
  • ¬†Processed goods for intermediate demand: tracks price change for fabricated goods sold as business inputs.
  • Intermediate demand for Services: measures price change for the services of retailing and wholesaling goods purchased by businesses as inputs to production

The PPI report also showed a slight increase  for final demand. Final demand for services remained unchanged. The largest rise in final demand services was in truck transportation of freight.

Prices for intermediate goods continued to climb, rising consecutively the last couple of months. Unprocessed intermediate goods prices rose with the increase attributed to unprocessed energy goods. Unprocessed energy goods significant increase is mostly due to natural gas. Natural gas, one of Russia’s main exports, shows continued uncertainty as Russia is in the process of halting its export to certain European countries.

One-third of the April rise in the index for services for intermediate demand can be traced to a 4.3-percent advance in prices for nonresidential real estate rents. 

Initial claims increased slightly while continuing claims fell to its lowest level since the 1970s. The labor market remains tight, as employers continue to hunt for talent in the job pool. Jobs remain open for skilled workers who continue to be in short supply.

The NFIB small business optimism index highlighted these concerns. The small business index is at its lowest level in years with owners citing inflation, challenges filling positions, and supply chains as their major concerns.

The difficulty in filling open positions is particularly acute in the construction, manufacturing, and retail sectors. Openings are lowest in the agriculture and finance sectors. A recovery in investment will be needed to spark an improvement in productivity, but this is unlikely to occur while owners remain pessimistic about future business conditions.

Small business owners overall are pessimistic concerning business conditions and may start to delay capital investments. With high rates and the talk of a potential recession in the third quarter or the start of next year, owners remain cautious about the future.

Employers are looking to fill positions immediately and there just isn’t the pool of qualified workers employers had hoped for. In the last few months, I have been on several job interviews, in which one hiring manager remarked, “We need people bad, and we as a city are hurting.”

The preliminary University of Michigan Index of Consumer Sentiment report showed that consumer confidence continues to fall. The top concern for consumers is inflation. Even with the rise in wages, consumers are still filling the pressure of higher prices.

With the stimulus checks and other government programs issuing additional funds to consumers ending, consumers face a challenging road ahead. Companies are competing to attract talent by raising wages in an attempt to fill positions. So far, companies have been able to pass on higher input costs to the consumer but that strategy may soon end.

Wholesale inventories rose 2.3% in March following a revised increase of 2.8% in February. Sales increased 1.7% in March and Inventories increased 2.3%. Inventories increased in durable and nondurable goods as did sales. Inventories increased notably in nondurable goods for the following sectors: Apparel, Groceries, Farm products, and Petroleum.

The indices, which provide a forecasting tool for conditions ahead falling, talks of a potential recession coming are growing louder. All four major indices fell but ended the week with a slight increase off of their lows. The Nasdaq is in a bear market, and the S&P 500 isn’t too far behind.

Cryptocurrencies continue to fall as bitcoin fell below the $30,000 level for most of the week. As of right now, Bitcoin has reclaimed the $30,000 level slightly. Market participants are not interested in risk as of now and continue to migrate into safer assets like bonds.

Participants brought bonds across maturities as yields backed off of their highs. The Fed has remained fixed on its plan to hike rates no more than 50 basis points in the next few meetings perhaps viewing a 75 basis point hike as excessive. Back in the 1980s, Volcker raised the fed funds rate to an unprecedented high of 20% to help fight inflation. He succeeded but as a result of the increase in rates, unemployment rose over 10% and a recession resulted.

Powell seems to be in a similar position. It is clear that the Fed is focused on fighting inflation which is at odds with the market’s performance but that seems to be a risk the Fed is willing to take.

As I mentioned in the previous post, market participants should prepare for or expect volatility to continue. I do believe there are some great bargains for investors willing to find them. Interestingly enough, now is the time that Warren Buffett is putting his cash to use.

Past week’s Cash Flow report:

This past week, I spent less than in the previous week although I slipped up at the end of the week. While driving home after dropping off my dog at a pet hotel, I was sideswiped by a driver who attempted to switch lanes without noticing I was in the lane.

This driver had no insurance or ID and apparently had only been in the country for a month. Now, I’m at risk of my insurance rate increasing due to another driver’s negligence. Luckily, the driver incurred the damage while I was left with a few scratches on my passenger door.

That accident is a reminder that sometimes things happen through no fault of your own. The week ahead should be relatively smooth and I plan on continuing to contribute to my growing savings account. In my opinion, the markets will test the levels below and I want to be prepared to buy great companies selling at an extreme discount.

Grade: C+

Reason: I maintained my spending plan for the week with a few hiccups.

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