Recovery Rally After Strong Durable Goods Report and Revised Housing Data

Ahead of the afternoon policy statement from the Federal Reserve, markets are recovering from losses over the past week, led by an unexpectedly positive report on durable goods.

Roughly 90 minutes into the session, the Nasdaq is leading the way with a 2.22% surge to 1805, while the S&P is back above 900 at with a 1.59% gain to 909, and the Dow is up 1.08% o to 8413.  

Driving the early morning gains was the 8:30 am Durable Goods release, which came in far above forecasts with a 1.8% increase in May, following an equivalent advance in April. Markets were looking for the index to fall 0.5%.

“The strong gain in durable goods orders is another encouraging sign that the economy is gradually moving towards recovery,” said Brian Bethune from IHS Global Insight. “Export orders have been improving for several months, driven by improving growth prospects in Brazil, Russia, India and China.  This was probably a major driver of the jump in machinery orders and likely provided a boost to civilian aircraft orders as well.”

By contrast, the New Home Sales survey was a mixed bag. Sales of new single-family homes fell 0.6% in May, in contrast to expectations of a 2.3% increase. Knee-jerk panic was tempered by the huge upward revision in April, which revised a 0.3% gain up to +2.7%, yet that upward revision was mostly owing to downward revisions to data in March.  Yes, it’s confusing.

Point is, the annual pace of new home sales is now 342,000, which is 23k below the consensus forecast prior to the release, and a whopping 32.8% below the rate in May 2008. So all in all the report was bad news.

Markets are forward-looking, however, and the downward revisions in March probably indicate less decline going forward.

On the other hand, Deutsche Bank’s Joseph LaVorgna pointed out, “the latest data could be evidence that housing demand is succumbing to pressure from higher mortgage rates.”

One thing we can all be happily agree on is that the inventory overhang fell from 10.4-months of supply to 10.2 months. That's far from healthy, but it's quite an improvement from the 12.4-month supply recorded in January.

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