April Durable Goods Orders and May Consumer Confidence

KEY DATA: Orders: -0.5%; Excluding Aircraft: +0.1%; Capital Spending: +1%/ Confidence: +1.1 points: Present Conditions: +3 points: Expectations: -0.2 point

IN A NUTSHELL: “You know how business were supposedly no longer investing? Well forgeddaboutit!”

WHAT IT MEANS: If the Fed is data driven, then it must have been driven crazy by the weak data we got for several months. That is no longer the case. Now I am not saying that conditions have started to boom, but they are getting better. A clear sign that companies are once again moving forward comes from the April durable goods orders report. Yes, overall demand fell, but since aircraft orders are in this number, it is crucial to remove them. Basically, there is a long lag time between when Boeing or other civilian or defense aircraft companies get new orders and production ramps up – if it even does. Excluding aircraft, orders were up, though modestly. The details were somewhat mixed. Demand for metals, machinery and vehicles was up while orders for electrical equipment, computers and communications equipment fell. But the real story was in the capital goods category. Excluding defense and aircraft, the best measure of private sector investment activity, capital spending jumped for the second consecutive month. It appears that businesses are getting more confident about the future.

Problems remain in the oil patch and the Dallas Fed’s manufacturing index declined in May. However, there was a rebound in expectations, which may be following the price of oil. Cut backs in energy companies have been a key factor in the recent slowdown and any turnaround would be good news.

The winter weather and continued disappointing wage increases had put a lid on consumer sentiment, which is why the rise in the Conference Board’s Consumer Confidence Index was nice to see. It wasn’t a large increase, but maybe the decline is over. While views about current conditions improved, there was some slippage in the outlook for the future. With the attitude toward future labor market conditions brightening, that too could reverse itself soon.

MARKETS AND FED POLICY IMPLICATIONS: The foundation for the first Fed rate hike is being built one number at a time and today’s data, be it the capital goods orders, consumer confidence, new home sales or housing prices, all added to the structure. But the base is going up slowly and the Fed members will need a lot more solid reports before we can assume they will move. Next week we get April spending and income data, May supply managers’ numbers, job openings and help wanted reports. And most importantly, the next employment release is Friday, June 5th. A lot can happen in ten days so buckle up. Indeed, I suspect investors will get more and more worried as we approach the jobs numbers. Nothing would change views on when the Fed will hike rates first than a strong report. Right now, I am not sure the markets are prepared for one and given the frequency of large swings in the payroll growth data, that cannot be ruled out.