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US Durable Goods and the Elusive Fed Rate Cut

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US Durable Goods and the Elusive Fed Rate Cut

The markets appear to be becoming increasingly comfortable with the idea that the US has avoided a recession, and it’s now on a firm upward trajectory. That explains the recent highs in the stock market, despite yields generally rising through the week. The dollar has been one of the major beneficiaries of this, as the index climbed over the last several days.

Later today some key economic data could continue to play into that narrative. And the market reaction could be more profound as the US and UK head into an extended weekend. That could mean that the already growing trend of profit taking could be exacerbated.

Down, but Not Much

There have been several all-time records this week, with a diverse range of market reactions. Gold hit its highest price ever on Monday, but was dragged down by a stronger dollar. Copper’s record high followed a similar pattern seen in the S&P 500 and Nasdaq: A new record high followed by a drop in what analysts suggest is profit taking.

The recent inflation data from the US, which came in lower than the prior month, seems to have buoyed investor sentiment, giving the recent highs. If we recall the last time there were a series of new highs was in March. That also coincided with earnings season, which saw a majority of firms beating analyst estimates. Q1 was also largely positive, with over 80% of companies reporting earnings above analyst forecasts. But, we should also recall those new highs were followed by the April pullback in markets.

Following the Pattern

While US data has generally been positive of late, there are some pockets of disappointing news. That could serve as a reminder for traders that the yield curve is still inverted. With a somewhat fickle market sentiment, often it doesn’t take much  to push the market over into a slight correction, particularly as investors might see it as an opportunity to lock in the recent gains.

One of the catalysts of a potential move like that could be the durable goods orders coming out later today, as they are expected to fall back into negative territory. This is a key indicator for business sentiment, since companies invest in large machinery and infrastructure when they think the economy will be improving. And will delay spending if they think their sales prospects won’t be good in the coming months.

What to Look Out For

US April Durable goods Orders is expected to reverse course and fall -0.5% compared to the 2.6% growth seen in March. But the prior month’s data was a bit distorted thanks to a large number of aircraft orders placed as part of quarter-end purchasing reviews by airlines. Core durable orders, on the other hand, are expected to decline to 0.1% from 0.2%. That relatively low number opens up the possibility of a higher risk that it could easily disappoint by turning negative and spooking the market.

On the other hand, better than expected the durable goods could add to the tailwinds the markets are experiencing. Those are thanks to forecasts that the US economy will surge ahead in the second quarter, coupled with expectations that the Fed will start easing in September.

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