July 28, 2014

• Buyers Dream of Draghi as U.S – Europe Divide Bolsters Treasuries
• As the Federal Reserve moves to end its debt purchases, U.S bond-market bulls are discovering new ally; European Central Bank president Mario Drghi.
• For the first time since 2007, treasuries offer higher yields than government debt in Europe
• Draghi pushed the region’s borrowing costs to record low after announcing an unprecedented set of stimulus measures to prevent deflation (negative i.r.)
• Fed Skeptics
• Now, as the Fed shifts from buying bonds to debate how soon to raise interest rate, sustaining demand from foreigners has never been more important
• Since 2008, the Fed inundated the U.S economy with more than $3 trillion cheap cash with debt purchases aimed at suppressing borrowing costs and restoring demand crippled by financial crisis
• Might have created asset bubbles and unnecessary risks to the economy
• ECB Impact
• Not only ▼interest rate, ECB will start working on quantitative-easing-style plan to purchase asset-backed debt, and introduce a program to encourage banks to lend that may reach 1 trillion euros.

• Orders for U.S capital goods rose after revised May drop
• Orders for U.S businesses equipment rose in June after falling the prior month
• Forming an inconsistent pattern that indicates corporate investment lacks the momentum needed to propel economic growth to a higher level
• Booking for non-military capital goods excluding aircraft (Core Durable Goods Orders)
• ▲1.4% after 1.2% decrease in May.
• Such demand, considered a proxy for future business spending, declined 0.9% over the past three months, dimming the third-quarter outlook.
• Companies are waiting to expand capacity until they believe sales increase will be sustained. However, capital investment decisions are based on longer-term expectations for final demand; so they are probably going to remain cautions.

• U.S. business spending data gives mixed signals on growth
• A mixed reading on the health of U.S business investment on Friday suggested the economy may not have rebounded as strongly in the second quarter as previously believed, but it offered hope for the rest of 2014.
• Core Durable Goods Orders excluding aircraft and non-military goods ▲1.4% after 1.2% decline in May
• However, shipments of these core durable goods ▼1.0%, which is calculated equipment spending in the GDP measurement.
• Decline in shipments of core durable goods suggests that this segment of the economy is unlikely to contribute much to economic activity.
• The economy contracted at a 2.9% in the first quarter, with business spending on equipment at a 2.8%. Consensus of GDP is 2.6% (JPMorgan)
• However, the swing back in core capital goods orders last month offered hope for growth in the third quarter. That trend, if sustained, would be a boost to growth.
• Orders for long-lasting manufactured goods ▲0.7% in June
• Demand increased from transportation to machinery and computers and electronic product, followed a 1.0% drop in May.
• Unfilled orders for durable goods ▲0.8% last month after rising 0.7% in May
• Showing a building up of backlogs that will keep the nation’s factories busy for a while
• Durable goods inventories ▲0.4%.
• A slow pace of inventory accumulation was behind the sharp contraction in output in the first quarter.