The Market Today

Durable Goods Disappoint On Transports Drag, Markets Await FOMC Minutes

by Craig Dismuke, Dudley Carter

Today’s Calendar – Transportation Orders Drag Durable Orders Lower While Business Activity Shows Mixed Results: In this morning’s data, weekly mortgage applications were essentially flat, up 0.1% on a mix of stronger purchase activity (+5.3%) and weaker refinancings (-4.8%). In the labor data, initial jobless claims of 239k nearly matched economists’ estimate for 240k new filings; the prior week’s data was revised up 3k. The total number of individuals receiving unemployment insurance, however, rose more than expected. Despite the uptick in continuing claims, both first time filers and those still receiving benefits remain at healthy levels.


In the most important morning report, durable goods orders were much weaker than expected, dropping 1.2% in October compared with expectations for a 0.3% improvement. However, the disappointment was mostly centered in the volatile transportation category that showed nondefense aircraft orders fell 18.6% while defense aircraft orders dropped 11.3%. Stripping out those declines, the miss was less severe. Durable orders excluding transportation-related activity rose 0.4% compared with estimates for a 0.5% increase. The implications of the report on business investment was mixed. Looking backwards, shipments of core business items were up 0.4%, a bit better than the 0.3% expected. However, looking forward, future orders disappointingly declined 0.5% versus expectations for an increase of 0.5%. The pullback in core business orders for October ended a strong three-month string of gains (+2.1%, +1.4%, +1.3% for September through July) and was the first month-over-month decline since June. Softening the sting somewhat of the current month disappointment were positive revisions to both headline durable goods data and the capital goods subset.


Later today, the FOMC will release the Minutes from their November 1 meeting. At that meeting, the Committee voted unanimously to leave their target rate range unchanged but upgraded the assessment of economic conditions. After characterizing the pace of economic activity as “rising moderately” in September, the Statement instead noted that “economic activity has been rising at a solid rate”. As has been the case, despite the frustratingly slow wage growth there continues to be a level of comfort with the status of the labor market. Two days after the November meeting, the unemployment rate dipped to 4.07%, a new 17-year low. But there continues to be a consensus confusion as to why that has yet to translate into stronger wage gains and broader inflation pressures. Just a day before the FOMC began that November meeting, the core version of their favorite inflation measure (the PCE price index) held at 1.3% for a second month. The discussion in the Minutes on inflation will be what markets focus on; not necessarily to determine if the Fed will hike in December – fed funds futures are currently pricing in a roughly 94% chance of a December hike – but to try and discern how confident the Fed is in their future projected path. The Fed’s lack of complete confidence that recent inflation weakness will quickly fade was exhibited yet again in Fed Chair Yellen’s remarks last night. While she said that she still believes there are temporary factors restraining inflation that should fade and allow for continued gradual rate increases as price gains move back towards 2%, she also noted that Fed members aren’t certain this will prove true.


Overnight Activity – Stocks Maintain Their Weekly Positive Momentum: Global equities were mostly higher again Wednesday after a record day for U.S. stocks (more below) fanned the flames of this week’s positive momentum for stocks. European equities have leveraged another strong start in Asia to advance for a third consecutive session. Technology companies, which led yesterday’s U.S. gains, were a big driver of the strength in Asia but energy companies moved up the sector ladder as well and are one of Wednesday’s top performing groups. The improvement in energy is likely tied to higher oil prices overnight; U.S. WTI was up 1.7% while Brent rose a smaller 0.9%. Oil prices gained after the API projected U.S. crude inventories fell 6.4MM barrels last week (that would be the biggest draw since August if confirmed by the EIA) and ahead of next week’s OPEC-led meeting in Vienna. Markets expect that meeting could lead to another extension of the ongoing production cuts past the current March cutoff. The Dollar drifted lower for a second day despite a rarity of sorts occurring in the Treasury market. Ahead of this morning’s U.S. economic data, the 10-year yield was up 1.2 bps at 2.37% while the 2-year yield pulled back 1.0 bp to 1.76%, steepening that portion of the curve for just the second time in eight days.


Yesterday’s Trading Activity – Persistent Stock Strength Failed to Break Incessant Curve Flattening: Stocks moved sharply higher in the first couple of hours of trading and held those gains for the remainder of the session. On the day, the Nasdaq rose 1.1% to lead all gains while the Dow and S&P rose just under 0.7%; all three made a new record high. It was the Dow and S&P’s first record close in nearly two weeks. As expected based on the Nasdaq’s outperformance, the tech sector led wide-spread gains within the S&P where 10 of 11 sectors finished positive for the day; shares of telecom companies fell 0.5% on average. The risk-on tone that took stocks to record closes, however, wasn’t echoed by other asset classes. The Dollar was weaker in a day where most major currencies softened and longer Treasury yields failed to budge in response to the stronger stock performance. While the 2-year yield rose again, the 10-year yield remained anchored around 2.35%. The 2-year yield added 2.1 bps to 1.77%, its highest level since October 14, 2008. The 10-year fell 1.1 bps to 2.36%. The shifts kept the focus on the continued flattening trend, as the spread between 2s and 10s ticked down to 58.2 bps; the lowest since October 2007. And while our latest writings may seem overly obsessed with the flattening of the Treasury curve, Google’s search data shows that it’s not just us. And the geographic concentration of those searches within the U.S. seems reasonable when the trend in spreads is compared to the same trend in Europe.


Existing Home Sales Top Estimates: Existing home sales were better than expected in October with the annualized 5.48MM unit pace the strongest level since June. A portion of the gains were driven by a recovery of sales in the South that were dented after the hurricanes. Sales in the South improved 1.9% in October after falling more than 7% combined in the two months prior but still registered their third weakest pace in more than a year. Looking elsewhere, however, the data showed the monthly gain was widespread. The improvements were geographically diverse with sales in the Northeast up 4.2%, sales in the West 2.4% higher, and activity in the Midwest lagging but still improving by 0.8%. While this report in isolation provides a solid data point for home sales, a broader view shows the headwinds the series still faces. On a YoY basis, sales were down for a second consecutive month for the first time since 2014.

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