Wednesday, August 24, 2011
The July Durable Goods report came in better than expected this morning, which should lessen some of the anxieties that have been building up due to the recent run of soft regional manufacturing surveys. Recall that the Empire State and Philly Fed surveys last week were in negative territory.
The bears may dismiss today’s positive number as old news (it pertains to July) and not reflective of what is in store for the economy. But irrespective of how the Durable Goods report is received by the market today, it is nevertheless positive news and reflective of the underlying positive momentum in the economy. The ‘core’ durable goods number, which is a proxy for business capital spending came inline with expectations, while the prior month’s tally was revised upwards.
Business spending remained strong in the first half of the year even as other GDP components were revised downwards. It is very unlikely for the economy to slip into a recession as long as businesses and households sustain the current spending trend.
The market appears to be looking to Bernanke for a positive indication in his Friday speech at the Jackson Hole conference. But I am skeptical that he will tip his hand at this juncture. The current objective conditions are materially different from last year when the Fed chief indicated his intentions at the same venue.
Deflation was the worry last year, but we have the opposite issue at present given the recent hot run of inflation readings. And more importantly, Bernanke does not have the full backing of his FOMC members, as the dissenting votes in the last meeting indicate. Given this, I would expect the market to be disappointed on Friday.
In corporate news, we got mixed results from Toll Brothers (TOL), with the luxury homebuilder beating earnings expectations but coming short on the top line. BHP Billiton (BHP) came out with better-than-expected quarterly results as the mining giant benefited from strong copper and iron ore prices. The company provided a cautious outlook for the coming quarters as high input costs are expected to weigh on results. BHP is in the process of expanding its U.S. footprint, having recently announced the acquisition of shale natural gas producer, Petrohawk Energy (HK) for $12.1 billion.
Sheraz Mian
Director of Research
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