Market Momentum Waning Ahead of Thanksgiving Holiday

Market Trends - 23/11/2016

With US holiday hours just around the corner, financial markets are experiencing their least volatile session in weeks ahead of the upcoming FOMC minutes due later in the session.  As a result, it is unwise to get too aggressive amid weak volumes and lower turnover across asset classes.  In a positive development, durable goods orders released just moments ago showed that US economic activity continues to experience a pickup, with the headline figure rising at the fastest pace since October of 2015.  For the latest monthly measure, new orders for US manufactured goods rose by 4.80%, beating expectations of 1.50% by a wide margin.  There were also notable gains in the core figure which rose to 1.00% from 0.20% during September.  Nevertheless, the biggest driver of gains was transportation equipment which is subject to massive seasonal fluctuations.  For a clearer picture of durable goods orders and how they evolved over the period measured, is by reviewing the figure while excluding defense spending and aircraft spending which have a tendency to skew the data.

According to the more stripped down figure, capital goods orders for the month of October edged higher by 0.40%.  While still not a bad reading considering the challenges facing the US manufacturing and industrial sector, the headline figures mask significant weakness in the real economy.  The core durable goods figure measured on an annualized basis has now contracted for 15-straight months.  This is an important figure because it shows that actual capital expenditures, or investment in assets with longer-lives has continued to decline.  The predominant driver of gains has been aircraft orders, both civilian and military. Besides marking the longest streak of contractions without a recession, it also shows that American companies are still hesitant to invest in the current business environment.  Inventories of manufactured durable goods were unchanged for the period in mention, highlighting the unstable outlook for the sector as it copes with stumbling international trade and a stronger US dollar.  While not enough to derail a rate hike next month, the figures should give some pause for concern amid the exuberant momentum in equities.

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