Morning Report: Defense spending boosts durable goods orders

Vital Statistics:

Stocks are higher this morning on stronger-than-expected durable goods orders. Bonds and MBS are flat.

Durable Goods orders rose 0.2% in August based on higher defense spending. If you strip out defense spending, durable goods orders fell 0.7%. July’s numbers were revised downward. Non-defense core capital goods orders (which is a proxy for business capital investment) fell 2.9%.

Minneapolis Fed President Neel Kashkari said that a government shutdown / drawn-out strike with the UAW could act to lower inflation and reduce the need for the Fed to hike further. “If these downside scenarios hit the U.S. economy, we might then have to do less with our monetary policy to bring inflation back down to 2% because the government shutdown or the auto strike may slow the economy for us,” he said in an interview. “I’m not hoping for that, but there’s an interaction there.”

The Senate advanced legislation which could help prevent a government shutdown, however House Speaker Kevin McCarthy is still dealing with members who want increased funding for the border. Another major sticking point is funding for Ukraine.

Generally speaking these government shutdowns are more show than substance. The Park Service will close off some monuments in DC and that will be about it. They usually have little to no economic effect beyond pushing some growth from one quarter to the next.

Mortgage Applications fell 1.3% last week as purchases decreased 2% and refis fell 1%. “Mortgage rates moved to their highest levels in over 20 years as Treasury yields increased late last week. The 30-year fixed mortgage rate increased to 7.41 percent, the highest rate since December 2000, and the 30-year fixed jumbo mortgage rate increased to 7.34 percent, the highest rate in the history of the jumbo rate series dating back to 2011,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Based on the FOMC’s most recent projections, rates are expected to be higher for longer, which drove the increase in Treasury yields. Overall applications declined, as both prospective homebuyers and homeowners continue to feel the impact of these elevated rates. The purchase market, which is still facing limited for-sale inventory and eroded purchasing power, saw applications down over the week and 27 percent behind last year’s pace. Refinance activity was down over 20 percent from last year and accounted for approximately one third of applications. Many homeowners have little incentive to refinance.”

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