Fed Signals Re-Think; Durable Goods Orders Up

Wednesday, September 27, 2017

Ahead of the opening bell this morning, we see new results for August Durable Goods Orders – which were much better than expected: the headline preliminary read of 1.7% nearly doubled the 0.9% expected by analysts. This also represents a healthy swing from the previous month’s weak -6.8% in durable goods orders.

When we talk durable goods, most people tend to think automobiles, washing machines, and the like. But aircraft, other transportation and defense spending often take up a large percentage of monthly durable goods orders, so sub-headline reads strip out these results to give a more clear read on “regular” durable goods. After all, a few planes or missiles here or there can really shift monthly totals.

In that vein, Non-Defense, ex-Aircraft Capital Goods came in at 0.9% – obviously demonstrating a dip from the overall headline, but still more than 3x the expected 0.3%. Ex-transportation was 0.2%, which was in-line with expectations. Ex-defense reached 2.2%, and shipments versus order was 0.7%. These are pleasingly higher than were expected, pointing to economic growth and inflation metrics rising somewhat toward the Fed’s optimum levels of 2% for the full year.

Speaking of the Fed, Chairwoman Janet Yellen spoke yesterday, indicating that Fed forecasts may have overstated the effects of labor market growth and the resultant rate of inflation. (This morning’s Durable Goods report seems to point toward the Fed being somewhat more correct than Yellen admitted yesterday, but these metrics are always very malleable in the near-term.) What Yellen has admitted is that wage and price-pressure trends, especially in relation with consistent jobs growth over the  past few years, have shifted away from Fed forecasts.

What this suggests is that the Federal Open Market Committee (FOMC) may rethink its positions going forward. Many market participants are eyeing a December hike to a 1.25-1.5% rate; this represents the low-end of the range of estimates following the surprise election of President Trump more than 10 months ago. But in the wake of Yellen’s statements yesterday, even this rate hike looks less likely. Clearly the Fed would like to see more economic and inflation growth before tightening the screws on interest rates. The committee is already putting forth plans to unravel its multi-trillion-dollar balance sheet, for which higher rates would help greatly.

Nike Beats, but Stock Falls

Nike NKE reported fiscal Q1 2018 earnings after yesterday’s closing bell, and while the company typically topped earnings estimates and the quarter brought more sales than expected, shares of the Zacks Rank #4 (Sell) retailer fell more than 3% following the report. The soft outlook for full-year 2018, combined with weaker year-over-year results on both top and bottom lines (despite beating consensus estimates on both), helped investors decide to engage in this modest sell-off. Nike shares are up just slightly year-to-date.

Mark Vickery
Senior Editor

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