Trade The Journey

Trade The Journey

Volatility Recedes, as some Calm returns!

Top of the Morning! My major concern for the week was the GDP and PCE report. At the beginning of the week, I decided to open a slightly bullish butterfly options position. It turned out well but not without challenges. A full review of the trade can be found here.

This coming week, manufacturing & non-manufacturing, the jobs openings report and the employment situation report will be released.   Market participants will be the job openings and the employment situation report closely. The health of the economy is closely being watched for signs of a deceleration in rising prices which participants ultimately believe will influence to pause the rate hikes.

Trading around these market-moving reports can be treacherous so be careful if you plan to trade during the report release and afterward. Ultimately, I think we will some further moderation in the employment situation but openings may remain around the same level.

Economy

This week featured a few surprises such as inflation moderating and consumer confidence rising more than forecasted. The market responded positively to these developments as it signals a possible pause and maybe a rate cut in the not-to-distant future. Rates are forecasted to remain high well into 2025. Currently, the market is forecasting a rate cut at the next scheduled meeting in May. The current Fed Rate range is 475-500.

The market is forecasting a probability of 54.8% chance of another twenty-five basis point rate hike at the upcoming May meeting and the same percentage for a rate pause at the June meeting.

The VIX has returned below the twenty level and there’s been a sigh of relief that the banking crisis may have been a short-lived aberration. Volatility has also fallen from the peak made last week, as some calm has returned to the treasury market. Bond volatility has remained elevated.

Economic data releases can assist you in developing an outlook for the market and economy even though most of the reports lag.

Advance retail inventories rose 0.8% in February. Durable goods inventories rose by 0.6% and nondurable goods fell by 0.4%. Excluding motor vehicles & parts dealers, retail inventory rose 0.4%. Motor vehicle & parts dealers’ inventories rose by 1.9%. Retail and Merchant wholesale trade inventories are both above 10% from a year ago compared to December 2022-January 2023 levels which were almost flat.

Advance wholesale inventories rose by 0.2% in February, recovering from a 0.5% decline in January. The Advance international trade deficit in goods rose by $0.5 billion to $91.6 billion in February.  Imports and Exports fell in February. Exports of goods only rose in the “other goods” category by 4.5% and declined in every other category, falling 11.9% for Automotive Vehicles. Imports fell in most of the categories, only rising for other goods and slightly for capital goods. Imports and Exports rose slightly in January.

The year-over-year total from February of last year showed that exports had risen 5.5% but imports have fallen 1.9%. Consumer goods have declined by 11.7% possibly due to China’s covid protocol which slowed China’s growth and economy.

The third estimate and final GDP was released this past week. The Real gross domestic product or GDP for the fourth quarter rose 2.6%, a 0.6% decline from the third quarter. The second estimate of GDP totaled 2.7% as downward revisions were made to exports and consumer spending. The PCE price index remained at the 3.7% level from the second estimate. The PCE price index excluding food and energy rose 0.1% to 4.4% in the third estimate.

The report showed that consumer spending, nonresidential fixed investment, and state and local government spending decelerated in the fourth quarter. Private inventory investment and federal government spending both rose in the fourth quarter. Residential fixed investment declined by a smaller number than the third quarter total. Current-dollar personal income rose led by wage and salary increases in the private sector and an increase in government social benefits.

Real disposable income rose by 0.2% and the personal savings rate was 4%. Profits of domestic financial and nonfinancial corporations both fell in the fourth quarter while the Rest-of-the-world profits rose. Below is a graph that shows the contributions to percent change in Real GDP by Industry group.

The PCE report showed that inflation slowed more than forecast in February, falling to 0.3% for both PCE and core PCE. The PCE rose 5% year-over-year. Personal Income rose 0.3% and disposable personal income rose 0.5% in current dollars for February. Disposable income in chained dollars fell by 1.3% to 0.2%.

Below is a chart that features Personal Consumption Expenditures (PCE) for durable goods, nondurable goods, and services trends of the past two years. As you can see, while goods prices have moderated, services have remained in a steady uptrend.

Although rising prices have dampened the consumers’ enthusiasm to spend on big-ticket items, the consumer report showed that consumers remained somewhat confident. The consumer confidence report total rose 0.8 points to 103.4 for February. The present situation index fell 1.9 points to 151.1 while the expectations index rose 2.6 points to 73. Inflation expectations for the year ahead rose 0.1% to 6.3%.

The report also showed that consumers plan to decrease the amount of money spent on discretionary items while maintaining their spending on items and services that are less discretionary.  Entertainment, gambling/lottery, museums, sporting events, and movies are a few of the categories but not all that consumers plan to spend less on moving ahead.

Although the consumers’ view of the labor market remained positive, there was a slight decrease in sentiment on an environment of plentiful jobs. Consumers’ short-term business conditions outlook improved slightly in March. The short-term income prospects outlook was a bit mixed with consumers expecting their income to increase improving slightly while also increasing for consumers expecting their income to decrease.

The University of Michigan’s consumer sentiment final numbers showed a less optimistic consumer with the index falling 1.4 points to 62.  The current economic conditions and expectations index both fell in the final report. Five-year ahead inflation rose 0.1% to 2.9% in the final reading about the same level as the February reading. The report noted that the failure of recent banks affected sentiment and may have added to the declining sentiment due to a possible recession in the near future.

Moving to housing, the pending sales index rose 0.8% in February. The report noted that we may be nearing the end of the housing sector’s contraction. As the housing market numbers have improved amid a declaration in the rise of mortgage rates. Pending home sales improved in every region except for the West, which showed a decline of 2.4%. The Pending Home Sales Index measures housing contract activity and is based on signed real estate contracts for existing single-family homes, condos, and co-ops. This index leads existing-home sales by a month or two.

Mortgage applications rose 2.9% from the week prior. The refinance index rose 5% and the seasonally adjusted purchase index rose 2% from last week. Homebuyers are taking advantage of the decline in mortgage rates, although housing purchase and refinance activity remain far lower than a year ago. The 30-year fixed rate for conforming loans fell 0.03% to 6.45%. The 30-year fixed rate for jumbo loans also fell 0.03% to 6.27%.

Initial claims increased slightly from the previous week but remain below the 200,000 level. Continued claims decreased from the previous week but is still a bit higher than the total from a year ago.

This past week’s cash flow in Review:

My personal assessment of my spending plan is that I am improving in the implementation of the plan, but I am still spending far too much on discretionary items. A major part of the lag is my inability to accept another couple of years of restrained spending. I feel like this is the point in my life where I am supposed to be able to enjoy myself and travel internationally, and so far, I have been unable to do so. I’m optimistic about my near-term future but I must not let this optimism damper my eagerness to adhere to my spending plan.

Grade: D+

Reason: The spending plan wasn’t followed completely

 

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