Trade The Journey

Trade The Journey

Yields rise to multi-year highs!!

Top of the Morning! I hope everyone is enjoying their weekend and preparing for the week ahead. This past week, the markets were a little choppy.  The final revision of the GDP came in within estimates as did the PCE Report.  The big story of the week was the rise in yields which reached multi-year highs. The ten-year yield hit a multi-year high of 4.688% before retreating and ending the week at 4.578%.

The five-year yield hit a high of 4.747% before ending the week at 4.606%. Yields on the five-year bonds hit levels not seen since 2005-2007, which was before the Great Recession. The same chart action could be seen in the 10-year yield and the thirty-year yield. The thirty-year yield hit a high of 4.808% before ending the week at 4.711%.

With Fed speakers adding commentary to the recent FED hike and voicing their concern on stubbornly high inflation, it seems like the bond market is finally agreeing with the idea that rates will be higher for longer. The question is, is the sell-off in the bond market overextended or are they at the level they should be at?

Yields also rose in Europe to multi-year highs as higher rates permeated economies in most countries. As time goes on, the era of low rates is starting to seem more like ancient history than the not-too-distant past. Unfortunately, because of the lag between the rate hikes and their total result of tighter monetary policy won’t be felt for some time, no one can say for sure if we have avoided a recession. Only time will tell.

The government narrowly avoided a shutdown, passing a stop-gap funding bill in the late hours of Saturday evening. The bill will keep the government open for another forty-five days. The Auto union continued it strike and expanded their strike by adding two additional assembly plants. The total number of auto workers on strike is at 25,000, as President Biden visited with the members as did former President Trump.

While the autoworkers union has ramped up its effort to pressure Ford and GM, stellantis was spared as they have made progress with the union in settling their differences. If the strike continues indefinitely, it will put pressure on the auto industry, which could raise prices for new cars and make used cars more desirable. One of the Fed speakers mentioned that, with the auto union strike, and tighter credit conditions, the Fed’s work could be coming to an end.

Gold continues to fall as it was unable to break through the 20 SMA, and rates continue to rise. The dollar continues to rise, and the dollar continues to benefit from higher rates. The dollar is at $106 and faces minor resistance at a pivot high of $108. On the weekly chart, the dollar faces resistance at $109.29. Crude oil retreated from its high of $95.03 to end the week at $90.77. Crude faces resistance at the $97-$98 level.

Upcoming Week

  • Monday: ISM Manufacturing Index and Construction Spending
  • Tuesday: JOLTS – Job Opening
  • Wednesday: ISM Non-Manufacturing Index, Factory Orders
  • Thursday: Initial Claims
  • Friday: Employment Situation Report and Consumer Credit

Economics

Consumer Health

Consumer Confidence: September

Consumer confidence declined by 5.7 points to 103. Consumers across income and age levels remained concerned about higher food and gas prices.  Uncertainty about future conditions is still rising, as assessment of current family financial conditions weakened. The present situation index, which includes the current outlook on income, business, and labor market conditions, declined by 0.4 points to 146.7.

The expectations index, which is based on the short-term outlook for business and labor conditions fell by 9.6 points to 73.7 as consumers concerns of a recession rose. A reading below 80 for the expectations index signals a heightened probability of a recession. The expected outlook for family financial conditions also soured. While plans to purchase automobiles and appliances remained elevated, plans to purchase a home declined due mostly to higher rates.

Twelve-month inflation expectations were mostly unchanged. Consumers’ confidence in the short-term labor market and income prospects weakened. As consumers’ savings from the pandemic have dwindled and higher prices have risen steadily in proportion to income, it is unlikely that consumers will be able to the economy indefinitely.

University of Michigan Consumer Sentiment: Final

The final reading of the Consumer sentiment index rose by 0.4 to 68.1. The current economic conditions index rose by 0.6 points to 71.4 in the final reading. The index of consumer expectations fell 0.3 points to 66. Year ahead and five-year inflation expectations both rose by 0.1% to 3.1% and 2.8% respectively. While the assessment of outlook and present conditions improved, sentiment fell from the month prior. Sentiment has improved noticeably from the May lows, and from the levels recorded a year ago.

Consumers seemed noticeably concerned about higher prices and their ability to make do with their current income. With saving levels declining and the potential for economic growth to slow, a recession is looking more probable.

Health of the Job Market

Initial Claims

Initial claims only increased by 2,000 to 204,000, well below the forecast of 215,000. Continuing claims rose by 12,000 to 1.670 million. The four-week moving average for initial claims fell to 211,000, to its lowest level in several weeks.

PCE index: August

Personal Consumption Expenditures (PCE) rose 0.4% in current dollars and 0.1% in chained dollars. Expenditures for durable goods fell 0.6% and rose 1.3% for nondurable goods. Expenditure on services rose by 0.4%. Spending on services was mostly on housing, transportation services and healthcare. Goods spending was mostly on gasoline and other energy services.

Personal income rose 0.4% and disposable income rose by 0.2%. Personal income registered its highest level since February and March with a high of 0.5%. Disposable income rose by 0.2% after coming in flat in July. Disposable income has steadily decreased since May. Personal current taxes rose by 1.5% after rising 2.1% in July. The personal savings rate for August was 3.9%, the lowest level this year.

The PCE price index rose 0.4% and year-over-year the PCE price index rose 3.5%. Prices for goods rose 0.8% and rose 0.2% for services. While food prices moderated, rising 0.2%, energy prices rose 6.1%. The core PCE price index rose 0.1% and rose 3.9% year-over-year.

Prices are still rising albeit at a slower pace. While the market cheers at the possibities of a soft landing, a lot of consumers might be facing treachous waters ahead. With the pandemic savings all but gone, consumers are turning to their credit cards. Higher rates have increased the financial burden some consumers must bear and at some point the consumer may faulter especially if their income isn’t inflation adjusted.

At my previous job, my income didn’t match the rise in prices. My income grew at a 3.45% rate annually while the inflation rate rose 8.26% last year.

100 + 3.45 = 103.45

With a rate that matches the rate my income grew with (3.45%)

50 + 1.725= 52.725

$50.72

Now with the 8.26% rate

50 + 4.13 =54.13

$49.32

This is example is basic and most people know how inflation works but writing this out helps me internalize the information.

The US economy is built on consumers spending and if you add a higher repayment amount for monthly credit cards, auto loans, student loans, and rent/housing loans, maybe the FED might be overplaying its hand.

Inventories and Durable Goods

Durable Goods

After a sharp decline in July, new orders for manufactured durable goods rose 0.2%. Excluding transportation, new orders rose 0.4%. Shipments rose 0.5%, unfilled orders rose 0.4%, and inventories of durable goods rose 0.2%. Shipments and new orders for computers and related products rose sharply after contracting in July. Electrical equipment, appliances and components also recovered. Unfilled orders and inventories remained near the July levels.

New orders for capital goods fell by 2.9%. Shipments rose 1.2%, unfilled orders rose 0.4% and inventories rose 0.3%. Unfortunately, the durable goods report doesn’t provide a detailed account of the sectors that decreased the amount spent on capital goods.  Perhaps companies have decided to pause their investments due to the uncertainty surrounding the economic future.

Advance Wholesale and Retail Inventories: August

Wholesale inventories fell 0.1% while retail inventories rose 1.1%. On the wholesale level, durable goods inventories rose 0.1% while nondurable goods inventories fell by 0.4%. Retail inventories excluding motor vehicle & parts dealers rose 0.6%. Motor vehicle & parts dealers’ inventories rose 2.3%. Keep in mind this is below the auto union’s strike started.

The international trade in goods declined as did imports while exports of goods rose. Leading exports were industrial supplies, capital goods, consumer goods and other goods. Automotive vehicle exports declined by 8.1%. Imports fell sharply for other goods and consumer goods. Imports also fell for food, feeds & beverages, capital goods and automotive vehicles.

Housing

New Home Sales: August

New home sales fell 8.7% but rose 5.8% year-over-year. The median sales price was $430,300 and the average sales price was $514,000. Across different price ranges, new homes sales fell, only rising slightly for houses between the price range of $200,00 to $299,999. Sold during the period, sales rose for new homes not started but fell for homes under construction and completed. For sale at the end of the period, new homes sales rose for homes not started and completed but fell for homes under construction. At the current sales rate, the supply of homes is at 7.8 months.

Weekly MBA Index

Mortgage application volume fell 1.3% from the week prior. The refinance index fell 1% and the purchase index declined by 2%. Mortgage rates are at the highest rate since December 2000 according to the report. The 30-year fixed rate for a conforming loan rose 7.41. The 30-year fixed rate for a jumbo loan rose 7.34% the highest level since January 2011.

Pending Home Sales: August

Pending home sales fell 7.1%, sales fell across the United States.

GDP: The final estimate for the second quarter

The estimate for the GDP remained at the same level as the previous estimates. The GDP deflator was revised from 2% to 1.7%. The PCE only grew 0.8% compared to the original estimate of 1.7%. Gross private domestic investment total was revised upwards by 1.9% to 5.2%. Both exports and imports declined from the original estimate. The personal savings rate was revised upwards from 0.7% to 5.2%.

Nonresidential investments continued to rise from the previous quarters as did structures. Equipment rose 7.7% this quarter have declining for two consecutive quarters. Intellectual property rose 2.7%, declining from the previous quarter but still growing.

Technical Story:

Cash Flow management from the previous week:

This past week I saw some moderation in my spending although my expenditures on eating out this week increased. With that said, the current amount of savings I have accumulated is at its highest level. So far, I’ve saved a little over 20% of my income. Receiving a check two weeks from the original pay day helped me double the amount I saved.

Although it was an anomaly it showed me how much I actually needed to live on. My current goal is to save 30-35% of my income and it’s good to see that I’m not too far away.

Grade: C+

Reason: Continued improvement

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