The Market Today

ECB Tees Up Rate Cut and Asset Purchases; U.S. Business Investment Sees Some Positive News for a Change

by Craig Dismuke, Dudley Carter


Business Investment Perks up Just before Fed Officials Decide on 25 or 50 BPS Cut: Durable goods orders for June were stronger than expected when excluding the volatile aircraft categories.  Orders rose 2.0%, well above the expected 0.7% increase but May’s tally was revised down from -1.3% to -2.3% on the volatile aircraft categories, offsetting the June beat.  Excluding transportation, orders rose a much better-than-expected 1.2% (exp. +0.2%) on strength across the board.  Looking at the key indicators of business investment, core capital goods orders and shipments, both handily beat expectations.  Shipments of those items, which reflect current-quarter activity, were expected to have pulled back 0.2% MoM but rose 0.6%.  The 2Q capital goods shipments data now point to business investment in equipment being positive, albeit a small 2.0% QoQ, SAAR gain, but positive nonetheless.  New orders of core capital goods items blew out expectations, jumping 1.9% in June.  New orders, in fact, now point to a fairly solid rebound in business investment in 3Q (see Chart of the Day).  While the ECB’s more-dovish-than-expected decision could put pressure on Fed officials to deliver the same result next week, this rebound in business activity should keep a 25 bps rate cut as the consensus expectation.


Jobless Claims Show Now Impact from the Uncertainty: The labor data once again proved impervious to the uncertainty which has seemed to grip other parts of the economy. Initial jobless claims for the week ending July 20 fell back from 216k to 206k during the week, the fourth-lowest reading of the cycle.  For context, recall that claims below 350k were, prior to this experience, considered positive.


Disappointing Trade and Inventories Data Likely to Be a Larger Drag on 2Q Growth: In the data that can move the needle on tomorrow’s first look at 2Q GDP, the advanced goods trade balance remained a larger deficit than expected.  The goods deficit shrunk from $75.0 billion to $74.2 billion but was expected to fall to $72.5 billion.  This will likely add to the drag that trade is expected to be on the 2Q GDP total.  Additionally, the inventory data were disappointing with wholesale inventories only rising 0.2% in June (exp. +0.5%) and retail inventories falling 0.1% (exp. +0.2%).  Previous retail inventories were also revised lower.  While the durable goods orders report is likely to help the 2Q tally on better business investment, the inventory and trade numbers should more than offset the improvement.



Overnight – Stocks Rise and Sovereign Yields Fell on More-Dovish-than-Expected ECB Communications: U.S. equity futures rose along with Eurozone stock prices after ECB officials set the stage for a rate cut and opened the door to restarting its bond buying program in this morning’s policy decision.  The ECB added a twist to their previous Statement, saying that they expect rates to stay at present levels “or lower” through the first half of 2020, at least.  The “or lower” further opens the door to a September rate cut as the markets are currently projecting.  They went further in their Statement by “task[ing] the relevant Eurosystem Committees with examining options … for the size and composition of potential new net asset purchases.”  The decision was more convincingly dovish than investors expected, sending the German 10-year down 4 bps to -0.42%, a record-low.  Yields in other Eurozone countries fell from 4 to 10 bps. Treasury yields followed suit with the 10-year yield dropping from 2.03% to 2.01%.  Eurozone stocks rose 1% and U.S. futures ticked up 0.2% immediately after the announcement.


Yesterday – Stocks Hit a Record Despite Mixed Earnings and Treasury Yields Fell on Speculation Weaker Data Cemented Central Bank Stimulus: Weaker PMIs were the focus of the Treasury market Wednesday while equity investors were busy digging through mixed messaging from key corporate earnings results. Treasury yields slumped overnight after a round of PMIs showed the slowdown in Europe worsened in July, drifted down again as U.S. futures weakened in pre-market trading on disappointing earnings announcements from Boeing and Caterpillar, and made another leg lower after the U.S. PMIs pointed to unexpected deterioration in manufacturing activity in July (more below). The major equity indices closed pointing in opposite directions, as the losses for Boeing and Caterpillar had an outsized impact on the Dow but were neutralized by strength in other sectors within the S&P 500. The Dow dropped 79 points, or 0.3%, with Boeing and Caterpillar combining for a 117-point drag. The S&P 500, however, joined the Nasdaq at a new all-time high, rising 0.5% on gains in the financials, technology-related, and industrials sectors. Stronger-than-expected forward guidance lifted the share price of Texas Instruments and boosted semiconductors more broadly, while a earnings-related rally in UPS strengthened industrials. Despite equities recovery throughout the day, the 2-year Treasury yield slipped 0.8 bps while the 10-year yield fell 3.8 bps.



Services Picked Up in July While Manufacturing Slump Deepened Unexpectedly: The flash Markit PMIs tracking the U.S. economy showed a stronger-than-expected pick-up in services activity in July, but an unexpected worsening of the manufacturing weakness that’s beleaguered the sector since the first half of 2018. The services PMI picked up more than expected in the initial estimate, notching a second month of recovery to a three-month high but holding near the bottom of its post-election range. While services strengthened somewhat, the manufacturing PMI slumped unexpectedly to neutral reading of 50, its weakest level since September 2009. The 50 level signals that activity stagnated in July. In the details, the output index fell to its weakest level since August 2009 and the employment index dropped to its lowest level since January 2010. The offsetting sector results nudged the composite index up 0.1 points, but continued to show the near-term outlook remains uncertain.


New Home Sales Missed Estimates as Negative Revisions Knocked the Recent Trend Lower: Negative revisions to each of the prior three months led to a stronger monthly percentage gain for new home sales in June, but the overall level of unit sales came up short of expectations. New home sales rose 7% last month to 646k, short of the 658k that was expected. In addition to the current-month miss, each of the prior three months were revised lower for a cumulative downward adjustment of 55k new home units. The regional results were mixed and the inverse of existing home sales activity. While the South and West were the two regions of weakness for existing sales, they were the two areas that saw stronger sales of new homes, the West (+50.4%) more so than the South (+0.3%). After plunging 38.5% in May, the biggest monthly slump since 2010, sales in the West surged back 50.4%, the biggest monthly gain since 2010. The volatility in the West is a reminder of the volatility of new home sales in general, but the overall message from the recent housing data in an uneven pick-up in activity despite multi-year lows for mortgage rates.


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