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Durable Goods Show Healthy Economy, but What About the Fed?

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Pre-market futures continue the roller-coaster ride of the past week or so of trading, up now again across the major indices. The Dow, coming off its single-worst trading day since March, is up +87 points at this hour. The Nasdaq, which saw the largest drop yesterday among the indices, is +50 points right now. The small-cap Russell 2000 is up +9 points, or +0.51%. This doesn’t erase yesterday’s big losses, and maybe it won’t, but at least the indices are clawing back.

Durable Goods Orders for August, with news much more positive than expected and in month-over-month comparisons: +0.2% is above the -0.5% consensus and the downwardly revised -5.6% the previous month. These do tend to be volatile figures, but that July low was the worst monthly performance since the early pandemic cratered durable goods orders (April 2020). It also broke up a four-month winning streak; now we see four out of five months stronger.

Ex-Transportation, we see +0.4% for last month, up from the big downward revision for July, which initially came in at +0.8% but this morning is down to +0.1%. Non-defense, ex-aircraft goods orders — a proxy for “normal” business spending, excluding some of the biggest purchases which could distort patterns — blossomed way up to +0.9% from the +0.1% analysts were expecting. This is the highest print since January. Shipments at +0.7% is also very strong, +0.7% — the second-highest of the year, behind January’s +1.1%.

While these are heartening results for the health of the economy overall — business investment normally illustrates confidence among business owners that the future is bright enough to build-out company infrastructure, inventory, etc. — they do not assist the Fed in deciding that all rate hikes to the Fed funds are over for the time being. The market has already been pricing in another 25 basis-point (bps) rate hike at either the November or December meeting. These Durable Goods numbers do not help erase them.

The big economic report this week will be Friday’s Personal Consumer Expenditures (PCE) report for August, which is expected to come down below +4% on core year over year, a rate we haven’t seen since mid-2021, when inflation had temporarily plateau’d before driving higher through the first couple months of 2022. Assuming this metric comes in as expected, this should be a check-mark in the ”hold” column for the Fed.

The PCE is the Fed’s preferred gauge for inflation, and anything that brings us roughly 1.5% below peak levels we saw a year and a half ago should be good for the economy. That said, projections currently being sub-4% are already expected, thus — even though it may not seem like it — are already somewhat priced in. This would mute any positive aspect of lower core PCE numbers.

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