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Durable Goods Orders Climb 7.3% in June

Karl Schamotta July 27, 2020

Orders for goods meant to last more than three years rose 7.3% in June after a downwardly-revised 15.1% surge in May – slightly beating consensus estimates for a 7.0% gain. A huge 85.7% month-over-month jump in orders for motor vehicles and parts was a large contributor to the headline number, but machinery, electrical hardware, and communications equipment categories also generated solid increases.

With defense and aircraft excluded, core capital goods orders – a proxy for business investment – rose 3.3%.

Overall consumer spending has proven remarkably resilient in the face of a massive jump in unemployment levels and an incredibly sharp economic downturn.

This is likely related to unprecedentedly large amounts of government support. Stimulus checks, expanded unemployment benefits, and other programs have helped to offset the shock and lift income levels across the poorest strata of society – among those with the greatest marginal propensity to spend.

Unfortunately, with unemployment supplements expiring over the weekend, that spending is now under threat. On Sunday, after several months of internal negotiation, Treasury Secretary Steven Mnuchin said Republicans have agreed on a fifth package of coronavirus relief measures and plan to introduce it later today – but details will need to be ironed out and difficult negotiations with Democrats concluded before the legislation becomes law.

Markets currently expect this to be completed before Congress goes into recess in August – but alarming headlines are likely to spur market turbulence throughout the process. As Churchill is supposed to have said, “Americans can always be counted on to do the right thing…but only after they have exhausted all other possibilities”.

Looking further ahead, markets are facing a number of potential volatility catalysts. Tomorrow’s Conference Board consumer confidence survey for July is widely expected to weaken, with a spike in coronavirus infections across the Sunbelt states taking a toll on sentiment levels. On Wednesday, market participants see the Federal Reserve staying the course, keeping policy unchanged while emphasizing risks associated with the loss in momentum that has become evident across most high-frequency economic indicators.

On Thursday, second-quarter gross domestic product data will land with a devastating thud. Consensus estimates currently show the economy shrinking 34% on an annualized basis (but an upside surprise is possible).

Against that backdrop, it’s important to note that at this stage in the world’s economic recovery, the dollar is trading as a funding currency. Positive surprises – even those that are domestically-focused – tend to depress the greenback and lift its counterparts by spurring risk-taking in other regions of the world, while negative shocks have the opposite effect.

Karl Schamotta
Chief Market Strategist

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