Core Durable Goods Drop Again

Wrapping up the week in terms of North American economic data, durable goods orders for the month of July were released this morning.  After non-voting St. Louis Fed President Bullard reined-in QE expectations yesterday by commenting that the FOMC minutes on Wednesday were “a bit stale,” and that the economic landscape had changed since the beginning of August, traders were closely watching the Durable Goods report to see if the recent string of better-than-expected data from the US would continue.  The August payrolls number will obviously be an important catalyst in the Fed’s decisionmaking framework before their monetary policy decision in mid-September; however, the numbers today show that the proxy for future business investment is still struggling.
Expectations were for both the core and headline readings to illustrate a pickup from June’s print, with economists forecasting an increase of 2.5% in the headline figure and a slight bump of 0.5% for the reading excluding transportation goods.  The headline reading bested estimates with a 4.2% print, essentially all driven by non-defense aircraft spending as orders for transportation equipment shot up 14.1% in July.  When omitting the volatile orders for aircraft, and the transportation sector as a whole, core durable goods fell 0.4% in July, its second consecutive decrease; adding salt to the wound, June’s prior reading of -1.1% was revised lower to -2.2%.  Worse still, nondefense capital goods excluding aircraft imploded to -3.4%, well short of the -0.2% that was expected.

Regardless of the miss in the core durable goods number this morning, there is no denying that US economic data has remarkably improved relative to expectations since the Fed’s last meeting in August.  Citigroup’s economic surprise index has turned sharply higher in the last four weeks, and while this could very well reflect soft expectations because of a “muddle-along” economy, it still raises that question as to how the FOMC committee members will view the recent string of data, and how it will flow through into their updated economic projections in mid-September. 
Even with the miss below the headlines for durable goods, the USD is finding itself on strong footing against a basket of currencies as QE expectations are still being re-evaluated.  The DXY is past 81.6 this morning, with yields on the benchmark ten-year US treasury falling back below 1.64%.
Make sure to contact your dealing teams to outline strategic hedging strategies moving into the end of the month, as headline risk from QE expectations could accelerate the slight uptick we’ve seen in volatility this past week.

Have a great weekend!