August durable goods orders shows big increase driven by defense spending

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Published Date 9/27/2023

After the FOMC last Wednesday the bellwether 10 year note broke above 4.35% a technical resistance that had held since late August. The reaction sent the 10 year note from 4.35% to 4.56% yesterday with relentless buying driven by increasing belief rates and inflation would continue, the idea of a soft landing and no recession grew sending stock indexes lower and rates higher.

This morning some relief with rates overbought for the near term. At 9 am ET the 10 year note -5 bps to 4.50%, MBS prices +19 bps. Yesterday rates began quietly then shot higher in the afternoon. Early trading stock index futures were improving.

Weekly MBA mortgage applications last week declined again; the composite index -1.3% from +5.4% the prior week, purchase index -1.5% from +2.3% the week before, re-finances index -0.9% from +13.2%.

August durable goods orders. New orders expected -0.3% were up 0.2% (July new orders -5.6%); excluding transportation orders expected +0.2% increased 0.4%, core capital goods increased 0.9% from -0.4% in July. The improvement driven by defense spending, durable-goods orders minus defense fell 0.7% last month. The increase in the core positive with future investments ahead.

JPMorgan Chase CEO Jamie Dimon has been active recently on his forecasts: “Going from zero to 2% was almost no increase. Going from zero to 5% caught some people off guard, but no one would have taken 5% out of the realm of possibility. I am not sure if the world is prepared for 7%.” While financial markets don’t necessarily envision a world with 7% interest rates, they are adjusting to a higher-for-longer stance at the Fed.

Minneapolis Fed’s Neel Kashkari commenting this morning sees one more rate hike this year then no more increases in 2024. He said the possibility of a government shutdown that presently lurks, or the UAW strike drags on could slow economic growth would allow the Fed to sit quietly. “If these downside scenarios hit the US economy, we might then have to do less with our monetary policy to bring inflation back down to 2% because the government shutdown or the auto strike may slow the economy for us,” he said in an interview Wednesday on CNN. “I’m not hoping for that, but there’s an interaction there.”

At 9:30 am the DJIA opened +68, NASDAQ +53, S&P +14. 10 year at 9:30 am 4.52% -2 bp after ending yesterday unchanged on the day at 4.54%. FNMA 6.0 30 year coupon at 9:30 am +21 bps from yesterday’s close and -2 bps from 9:30 am yesterday.

At 1 pm Treasury will auction $49B of 5 year notes. Yesterday’s 2 year auction was decent with good demand that generally matched the averages over the last 12 2 year auctions.

Source: TBWS

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