Trade The Journey

Trade The Journey

Uncertainty Regins Supreme!

Top of the Morning! I hope everyone is enjoying their weekend as parts of the world are engaged in warfare. Putin continues his attack on Ukraine and Israel prepares to enter Gaza. Israel has given civilians trapped within Gaza 24 hours to evacuate but countries the civilians seek to enter are ill-prepared for such an influx of people. Protests were conducted in Arab countries against what they say are war crimes against Israel.

Countries like Egypt, Lebanon, and Turkey are warning Israel against a full-scale ground invasion. Israel has yet to enter Gaza but most think it will occur this weekend. The flight to safety has showed up in gold prices as uncertainty rises about the future. Crude oil rose sharply, ending the week above a short-term resistance level. The dollar resumed its trend up as treasury yields ended the week higher. The dollar faces resistance at its most recent high of $107.348.

Revisiting yields, yields across maturities rose on the release of the CPI and PPI which rose above forecasts, more on that below. The five-year yield pulled back a bit but ended the week at slightly below the tested level of 4.652%. The ten-year yield ended below the tested level of 4.639%, as it is beginning to look like it may at least test 5% before year end. The thirty-year yield used the 50 SMA as support as it ended the week at 4.78%.

A month ago, the 2/10 spread was inverted by seventy-one basis points, and now the spread has declined to forty-one basis points. Volatility neared twenty to end the week, after falling to 15.44 on Thursday, its lowest level of the week. Bank Earnings were positive, as Wells Fargo, JP Morgan, Citigroup, and Blackrock beat earnings forecast buoyed by net interest income. Blackrock beat forecast by the largest margin followed by Citigroup, JP Morgan, and Wells Fargo.

The Week Ahead:

Economic Reports:

  • Monday: Empire State Manufacturing
  • Tuesday: Retail Sales, Industrial Production & Capacity Utilization, and Business Inventories
  • Wednesday: Housing Starts & Building Permits
  • Thursday: Initial Claims, Exiting Home Sales, Philadelphia FED Index, and leading indicators.
  • Friday: Treasury Budget


Prices/Inflation picture

PPI: September

PPI rose 0.5% for final demand, down 0.2% from August and 0.1% from July levels. Final demand for goods rose 0.9% and for services rose 0.3%. Nearly all the rise in goods can be attributed to an increase in prices for energy, specifically gasoline which rose 5.4%. For services, the rise can be attributed to a 13.9% increase in deposit services (partial). Core PPI rose 0.2%.

For Intermediate demand, prices for processed goods rose 0.5%, with energy goods leading to most of the increase. For unprocessed goods, prices increased 4% with most of the rise attributable to unprocessed energy materials, specifically crude petroleum. Intermediate demand for services rose 0.3%, led by a rise in gross rents of retail properties.

Intermediate Demand by Stages of Production

  • Stage 4: Prices rose 0.4% at this level, advancing 0.3% for goods inputs and 0.5% for services inputs.
  • Stage 3: Prices rose 0.9% at this level, advancing 1.6% for goods inputs and 0.3% for services inputs.
  • Stage 2:  Prices rose 1.5% at this level, advancing 3.4% for goods inputs and 0.1% for services inputs.
  • Stage 1: Prices rose 0.4% at this level, advancing 0.3% for goods inputs, and 0.4% for services inputs.

CPI: September

The CPI rose 0.4%, a bit higher than forecasted. Year-over-year the index has risen 3.7%. Core CPI, excluding food and energy, rose 0.3%. Year-over-year, Core CPU has risen 4.1%. Last month’s rise was attributed mostly to higher prices for energy as crude oil prices rose to $95. This month the rise in the index for shelter along with gasoline rising contributed to the CPI surprising rise.

The energy index rose 1.5%, with gasoline moderating from its 10.6% increase in August to 2.1%. The electricity rose 1.3% and the natural gas index declined by 1.9%. Despite the recent rise in crude prices, year-over-year, gasoline has risen 3% and the overall energy index has fallen 0.5% over the last year.

The food index rose 0.2%, remaining at the same level as the previous two months. The food at home index rose 0.1% and the food away from home index rose 0.4%. The shelter index continues to remain at high levels, rising from 0.3% in August to 0.6% in September. Year-over-year the index has risen 5.7%. Rent of shelter rose 0.6% and owner’s equivalent rent of residences rose by the same amount as both indexes continue to rise.

Despite the auto worker’s strike, new car prices rose 0.3% unchanged from August’s levels, and used car prices declined 2.5%, its third consecutive decline. Used car prices should be monitored closely as the strike continues.

Import/Export Prices: September

Import prices rose 0.1%, mostly attributable to higher fuel prices. Fuel prices rose 4.4%, as import petroleum rose 4.9%. Excluding fuel, prices fell 2%. Foods, feeds, & beverages, nonfuel industrial supplies and materials, and finished goods prices declined. Nonfuel import prices have fallen for the fourth consecutive month whole fuel imports have risen for the same period.

Export Prices rose 0.7%. Agricultural exports fell 1.1% and excluding agriculture, prices rose 1%. Industrial supplies and materials, and finished goods prices rose. Higher fuel prices have contributed to the rise in industrial supplies and materials over the last three months. Exports for consumer goods declined 0.3%.

Capital good export prices rose 0.1%, led by a 0.9% increase in semiconductor prices.  Capital good import prices declined by 0.1%. Prices lowered for oil drilling, mining, construction machinery and equipment. Import prices from China declined by 0.3% and have not shown an increase since October of last year. Export prices to China increased by 1%.

Sentiment amongst Business and Consumer

NFIB Small Business Optimism Index: September

The Small Business Optimism Index declined to 90.8, which is below the 49-year average of 98. Inflation and labor quality remain a top concern among Business Owners. The number of owners citing that they could not fill openings rose, especially in construction, retail, manufacturing, and the service sector. Among the 61% attempting to hire, 93% reported that could not find a qualified applicant to fill the position.

In response to inflation, owners reporting raising their average selling prices. Finance, construction, retail, services, and wholesale small business owners reporting raising prices. 36% of owners reported raising compensation, unchanged from the previous month.  The number of owners planning to raise compensation in the next three months was unchanged from the previous month. Small business owners taking out loans remain at lows, as the rising rates make it challenging for small businesses to manage.

University of Michigan – Consumer Sentiment Report (Preliminary): October

Sentiment fell for current economic conditions and expectations. The Consumer sentiment index fell 7%, as concerns about inflation and business conditions declined sharply. Consumer sentiment across income and age decline. Year-ahead inflation expectations rose 0.6% to 3.8% and are above the 2.3-3% range. Long-run inflation expectations rose 0.2% to 3%.

Wholesale Inventories: August

Wholesale inventories fell by 0.1%, rising 0.1% for durable goods and declining by 0.4% for nondurable goods. Retail inventories rose by 1.1%, rising by 2.3% for motor vehicles and parts dealers. Excluding motor vehicles and parts dealers, inventories rose 0.6%. The trade deficit declined by 7.3% as exports of goods rose more than the imports.

Initial Claims

Initial claims for the week prior remained at the 209,000 level, below forecast. The four-week moving average for claims is at 206,000, its lowest level in several months. Continuing claims rose by 30,000 to 1.7 million.

MBA Weekly Mortgage application index

Mortgage application volume rose by 0.6% from the week prior. The refinance index rose 0.3% and the purchase index rose 1%. The average rate for a thirty-year conforming loan rose by fourteen basis points to 7.67%. The average rate for a thirty-year jumbo loan rose by nineteen basis points to 7.70%. While the points declined for 80% Loan-to-value ratios, the rise in mortgage rates in a sense nullifies the decrease in points.

FOMC Minutes (Moody’s) : September Meeting

Most members believe that an additional hike is needed due to resilient consumer spending and strong labor market. The Fed funds rate is at 5.38%, 1% higher than the rate in December. The discount rate is at 5.50%, also higher by the same amount from December. The Fed’s balance sheet continues to decrease in terms of percentage of nominal GDP as quantitative tightening continues. 

An extended government shutdown, continued slowing growth in China, and credit conditions tightening further than expected are risk to a possible easing of monetary policy. The market expects a pause in rate hikes at the next meeting.

Technical Story:

This Past Week’s Cash Flow in Review:

This past week went well as my income was raised based on the CPI rate. It totals to a thousand dollars extra per year. It’s not an amount that will change your living conditions but it’s enough to make a slight difference. Recently, I opened a new account with a bank that supports that city or company that I work for. Because the bank can deposit your funds earlier than the actual pay day, I have to transfer the money to the bank I normally bank at. Although it’s a pain to do, it’s actually very helpful in helping me to manage my spending.

I transfer the amount I need based on rent, spending, and savings and leave the rest of the money in the account to build a secondary emergency spending account. So far, I’ve been able to double the amount I’m saving per paycheck. To date, I have saved close to 25% of my income. I’m getting closer to my goal of saving 35% of my income.

With overtime available, I’ll be able to pay off some of the credit I hold without taking away from usual income. Slowly but surely, I’m moving into a better financial addition and in a couple of years, I’ll be debt free.

Grade: C-

Reason: Some improvements still needed

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