June Durable Goods orders beat expectations

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Published Date 8/24/2022

The day began quietly, stock indexes in futures markets unchanged, the 10 yr. note 3.07% +2 bps. MBS prices at 8:30 am ET -12 bps from yesterday.

No change in what markets are waiting for, Jerome Powell’s speech on Friday morning. Hard to set the odds for what he will say, likely he will continue to say what he has been saying for two months, that the Fed must stop inflation and at the same time keep the economy from falling into recession. By the time he finishes markets will be the same as when he started, those that think a 50 bp increase and those that see 75 bps. The recent increase in rates across the curve now tilting to 75 bps at the Sept FOMC meeting.

Weekly MBA mortgage apps for last week; another decline. The composite -1.2%, purchase apps -0.5% from the prior week, refinances apps -2.8%.

July durable goods orders were expected +0.5% but were flat; excluding transportation orders expected +0.1% increased 0.3%. Core capital goods increased 0.4% and June core goods revised from +0.5% to +0.9%. The data suggest that firms are still investing in longer-term technology and equipment, likely due in part to ongoing labor shortages. In the coming months, however, durable goods orders could weaken amid higher borrowing costs and growing uncertainty about the US economic outlook. Core capital goods shipments, a figure that is used to help calculate equipment investment in the government’s GDP report, increased 0.7% in July after a 0.8% jump a month earlier.

There is a view circulating that consumers will expect inflation to continue to increase thus making it a self-fulfilling prophecy and keep inflation at high levels. It may give too much weight to financial-market pricing and not enough to the relatively muted views of households, according to Nobel laureate economist Richard Thaler. There’s little evidence that they (consumers) anticipate further sharp gains or are acting to compensate for such a scenario in wage negotiations, he said in an interview. “There’s a lot of discussion among economists of inflationary expectations, and I say: whose?” Thaler said. “We have central bankers, we have bond traders, we have the financial sector more generally, and we have employers and employees.” “I don’t see a lot of pressure on wages in sectors where they’re not scrambling to get people to work,” he said. “If the war ended and Covid stopped in China, I think we could have deflation,” he said. “Certainly, the price of natural gas is artificially high. And the price of chips is high because China isn’t making enough of them and there are shipping problems.”

At 9:30 am the DJIA opened -44, NASDAQ -7, S&P -2. 10 yr. 3.09% +4 bps. FNMA 4.5 30 yr. coupon -16 bps and -4 bp from 9:30 am yesterday. FNMA 5.0 coupon -9 bps and +13 bp from 9:30 am yesterday.

At 10 am July pending home sales were expected to have declined 2.5% after dropping 8.6% in June; sales declined 1.0%.

At 1 pm Treasury will auction $45B of 5 yr. notes, yesterday’s 2 yr. note auction was met with lukewarm demand.

Most of the outward focus this week has been on the Jackson Hole symposium and Powell’s speech but also on Friday another inflation report when July income and spending and PCE inflation release. The personal consumption expenditures are expected +0.1% m/m from +1.0% in June, yr./yr. +6.3% down from +6.8% in June. Core PCE m/m +0.3% from +0.6% in June, yr./yr. +4.7% from 4.8% in June. If the report reflects the forecasts, it will give additional credence that the Fed may just do 50 and not 75 as is currently the marginal expectations.

Source: TBWS

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