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Friday’s US Durable Goods: A Negative Sign for Recovery?

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Yesterday’s Flash PMIs for September marginally disappointed analysts, lending credence to worries that there might be a slowing in the pace of the recovery.

The figures also affirmed a trend among developed nations, with manufacturing surveys outperforming expectations while services missed.

The explanation seems logical at first.

The retail sector is most affected by COVID. But that is also being taken into account by analysts.

The implication is that forecasts for economic growth for this year might be overestimating how much recovery there will be in the service sector.

On the plus side, the industry remains resilient despite the pandemic. And we ought to see that reflected in the durable goods orders.

The Swoosh is On

The drop in the stocks at the start of the week showed that the recovery is still subject to revaluations.

A Bloomberg article early on Tuesday issued a warning sign, showing a record outflow of funds from the market during the latest correction.

This, very often, precipitated underperformance in the stock market (and a stronger dollar) over the next several months, with tech-heavy Nasdaq the most affected.

After the Fed boosted their projections for growth next year, an adjustment to their bond-buying program is becoming increasingly imminent.

The Fed’s balance sheet peaked at $7.17T on June 9th and has remained generally stable at the $7.0T mark since.

We\d expect the slowing flow of liquidity in the markets to put the brakes on tech stocks in particular.

Does that Mean Buying is Slowing Down?

The Durable Good Orders data we are expecting is from August, which is important to situate in context.

July marked the peak of the “second wave” of new COVID cases, with several states re-issuing containment rules. It would be logical to have a slow down in expectations in the industry, as they put major investment on hold until there was more certainty about the outlook.

Towards the end of the month, it became clear the peak had passed, which would encourage a return to buying.

Also, we got more clarity on the vaccine progress, with expectations that at least one vaccine will be available before the end of the year.

Durable goods as their definition says, are for long-term investments, and many wouldn’t be delivered this year. So, it’s a more accurate representation of business expectations.

What Goes Up Must Come Down

Durable goods orders spiked in June and July, recovering lost ground from the prior months.

At this point, it would be expected for it to “normalize”, and return to a growth range in the single digits. Thus, a significant drop from prior months’ growth is likely not to affect the markets too much.

Durable Goods Orders are expected to show a growth of just 1.5% compared to 11.2% in the prior month.

Excluding defense, they are expected to only have grown 0.1% compared to 9.9% in July. A drop into negative territory might shake up the markets a bit, strengthening the dollar and hurting the stock market.

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