Starting with U.S. data, durable goods orders sky rocketed in July adding +22.6% month over month blowing past expectations of +8%. Most of July’s strength is attributed to a +318% (notice no decimal points) gain in non-defense aircraft orders stemming from London Farnborough Airshow. Excluding transportation, durable goods orders fell -0.8%. What matters the most in this report are the core capital goods data since they feed into most GDP tracking models. Core capital shipments gained 1.5% in July with June being revised up to +0.9% from -0.3%. Forward-looking core capital goods fell in July however with revisions to June and smoothing out the volatility, orders continue to point to increased shipments in coming months. Adding all the numbers together, analysts have revised Q2 GDP estimates to upwards of +4.2%. Speaking of GDP and staying stateside this week, the U.S. economy rebounded stronger than previously thought in the second quarter with an increasing percentage of growth driven by domestic demand. As we stated above, Q2 GDP was revised up to +4.2% from +4%. An increase in business spending and exports coupled with lower business inventories provides a stronger underpinning for the remainder of the year. In separate reports, initial claims showed a second straight weekly decline in the number of American filing for jobless benefits and a jump in home purchase contracts, both signaling underlying momentum in the economy. While the economy shrank at -2.1% in Q1 of this year, economists expect to end the year at around +2%, with GDP expanding +3% in 2015. On another positive note, gross domestic income, which measures the income side of the growth ledger, increased at +4.7% rate and stayed consistent with strong job gains. While first-quarter household disposable income was revised down, the second quarter estimate beat estimates also signaling positive momentum for future spending, The positive data is still unlikely to lead the Federal Reserve to push forward the timing of interest rate hikes as they continue to site significant slack in the labor market and inflation remains below the central bank’s 2% target. The economy and income growth still has a long way to go and the Fed remains cautious about monetary policy. Next week we have a few major data releases scheduled on the economic calendar. On Tuesday, September 2nd, ISM Manufacturing Index will report on the general direction of production, new orders, backlogs, inventories, employment and overall demand from 300 manufacturing firms nationwide. Investors track this as the results provide valuable insights into the economic backdrops of their investments. On Thursday, September 4th, International Trade will report on the changes in the level of imports and exports, along with the trade balance. Investors track this as the data provides valuable trends on the economic conditions here and abroad. On Friday, September 5th, the Employment Report will provide the unemployment rate. This is a powerful report that will move the markets as Fed policy and investments are driven by the results and the information provides valuable insights into future economic trends. And finally this morning is currently trading slightly higher in price off yesterday’s close as FNCL 3s through 4.5s price around +1/32. The 10-year Treasury is currently trading at 2.336 as the 2s/10s curve is slightly steeper at +184 and swap spreads are flat. Markets remain tethered to geopolitical headlines, as well as ECB expectations, which should keep yields relatively low and prices high over the near term. The week closes out with some higher tiered economic releases with July Personal Income, consumption and Core PCE prices and August Chicago PMI. As we close out the month, U.S. stocks are headed for the biggest monthly gain since February amid speculation global banks will support economic growth. On the scoreboard, the DJIA adds 0.1% at 17,080 and the S&P 500 adds +0.17% at 2,000. There was a slight bid to risk in overnight trading but most major indexes were narrowly mixed as the Ukraine / Russia situation continues to limit the appetite.
Posted on: Fri, 29 Aug 2014 16:13:12 +0000
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