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MARKET TRENDS: Unexpected Gains in Durable Goods Orders, Business Investments Still

July 28, 2015

Orders for durable goods, which include heavy and bulky goods such as trains, planes and automobiles, increased more than expected in June. The gain in durable goods orders was the largest since March, driven by a surge in demand for commercial aircraft.

The growth in core orders, a gauge of the level of business activities for U.S. manufacturers, was the best in the past 10 months. Durable goods orders climbed 3.4% in June, while orders excluding transportation and defense, i.e., core durable goods orders, gained 0.8%.

The rise in durable goods orders was slightly higher than market expectations of a jump of 3% in June, after a 2.1% decline in the previous month. Core orders were expected to rise 0.5%, following a 0.1% decline in May.

Business investments rebounded after declining for the last couple of months, suggesting the drag on manufacturing from capital spending cuts is starting to dissipate. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, increased 0.9% last month, versus the expected increase of 0.4%. Non-defense capital goods orders dropped 0.4% in May.

For June, demand for aircraft soared 66.1%, recovering from a 31.6% plunge in May. Overall demand for transportation goods increased 8.9%. Orders for machinery were up 1.4%, while demand for computers and related products shot up 9.1%.

The June results indicate growing confidence among manufacturers, as consumers boost their spending. A stronger dollar and lower oil prices created a setback for the U.S. manufacturers this year.

The rising dollar against foreign currencies makes U.S. goods costlier and less competitive in major export markets, while lower oil prices have led energy companies to scale back investment plans. The overall economy slowed down in the January-March quarter, with the Gross Domestic Product shrinking at an annual rate of 0.2%. However, the economy is expected to rebound with GDP growth of around 2.6% in the second quarter of the year.

U.S. government bonds gained on Monday, following better-than-expected U.S. durable goods orders. The yield on the benchmark 10-year Treasury notes was at 2.158%, down 5.6 basis points on the day. Yield on five-year notes was down 3.2 basis points at 1.5637% and 30-year yields fell 4.5 basis points to 2.9257%.

When a bond’s yield falls, its price rises. However, the U.S. Federal Reserve meeting, as well as the June flash purchasing managers’ index (PMI) for the services sector on Tuesday, which will also have an impact on the bond markets. The Fed meeting this week could impart some clarity on whether the central bank is hiking short term interest rates in September, while the PMI will provide clues about the U.S. economic outlook.

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