Wealth Watch: Markets Eager After Another Rate Increase, Are Brighter Days Ahead?

July 28, 2022

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From the desk of Vance Howard:

After having traded sideways for a few weeks, the market has now broken out of its short-term trading range and the HCM-BuyLine® has firmed up. In other words, a turn back up could be in the cards in the near future. There are some wonderful buys out there IF the markets hold, but some caution is still not a bad idea because there is a lot of unhealthy data on the current economy and inflation that keeps coming out. It does appear that the markets are trying to put in a bottom, and this could bode well for the last two quarters of the year. Even the bond market looks to be finding support and breaking out of a short-term basing pattern.

Officials agreed Wednesday to a 0.75-percentage-point rate rise, which will lift their benchmark federal-funds rate to a range between 2.25% and 2.5%. The rate increase won unanimous backing from the 12-member rate-setting committee.

Fed officials are raising rates at the most aggressive pace since the 1980s and have approved increases at four consecutive policy meetings, starting in March when they lifted rates from near zero. Until last month, the central bank hadn’t raised rates by 0.75 point since 1994.

Durable goods orders jumped 1.9% in June, the most in five months, and contrary to the consensus of -0.1%. The increase was led by a surge in defense aircraft orders, partly related to the support for Ukraine in its war with Russia. Excluding defense, durable goods orders rose a smaller 0.4%

The more narrow category of nondefense capital goods orders ex-aircraft, or core business orders, increased 0.5%, its fourth consecutive gain, and marginally better than the month before. It suggests that despite signs of softer factory activity from the ISM and S&P Global Manufacturing PMIs, capex demand is still growing. Components were mixed, with gains in computers and related products, electrical equipment, and vehicles that were partly offset by declines in primary metals and machinery orders

On a y/y trend basis, durable goods orders increased 11.3%, while core orders were up 8.6%. While off their cycle peaks in mid-2021, both series are growing at rates that are several times faster than the gain per annum historically, and show that capex demand is stronger than prior to the pandemic.

Durable goods inventories rose 0.4%, the least since March 2021. Shipments were up 0.3%, which implies that the inventory-to-shipments ratio was little changed near 1.80, range-bound for most of this expansion. Excluding the spike in the ratio in the early months of the pandemic, it shows that factories have kept their durable goods inventories broadly in line with demand.

Vance Howard

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