Fed should lean over backwards to put off the First Rate Hike this year

Outlook:

Durable goods orders yesterday got everyone confused, partly because of errors in the initial reporting but also because the categories can be hard to tease apart. Durables are things that are supposed to last three years or more, so freight cars and dishwashers. Total new durables orders rose a splendid 3.4% m/m in June, more than 2.7% forecast and the first rise since March. Ordinary capital goods rose only 0.9% when you exclude defense and aircraft. The difference, as usual, comes from Boeing, which sold 161 new plane orders in June after getting 11 in May. Excluding Boeing and other transportation, new orders rose 0.8%, the best in over a year but not actually a very good number in its own right. Fortunately, you wouldn’t want to exclude transportation, anyway. We have a very big country. Transportation is integral to plans and outcomes alike.

Okay, here’s the bad news: total new orders were 2% lower in the first half from the first half of 2014. This does not scream “robust recovery.” And core capital goods, i.e., ex-transportation and ex-defense, were down 3.4% in the first half. So, great news on the monthly basis and lousy news on the 6-month year-over-year basis.

What does this mean for GDP or even the Fed’s evaluation of the economy? Nobody knows. We are inclined to put more weight on the 6-month y/y of core capital good down 3.4% than the single month rise. We guess it means one hike this year but not two, but we seem to be alone in drawing that conclusion.

We continue to think the Fed would have to lean over backwards to put off the First Rate Hike this year. Today we get the Case Shiller house price index, the Markit flash services PMI and consumer confidence. None of these are market-movers unless they diverge deeply from expectations. Besides, the Fed staff writers have no doubt already prepared the Statement to be delivered tomorrow.

Here’s what we think is important: The NYT reports the Five German Wise Men, who have been silent for a very long time, published a report today saying the eurozone should devise a “sovereign insolvency mechanism” that allows a member to leave the eurozone (as a last resort). A key point is that it makes no sense to have a no-bailout clause but then no way to enforce it. An insolvency/exit mechanism would make real that rich countries won’t subsidize debtors and force investors to have a realistic idea of sovereign risk. Remember when all the members’ government bond yields converged in 1999? We joked about it at the time but convergence was a serious goal, and not just in yields—in inflation and other measures, too. The Wise Men initiative does major damage to the convergence goal.

While an “uncooperative member state should not be able to threaten the existence of the euro," the eurozone shouldn’t rush into dumb quickie solutions, either, like “a euro zone treasury, a Euro-pean unemployment insurance scheme or an economic government for the bloc.” According to the NYT, the Wise Men spoke out after Der Spiegel reported “that Germany was willing to discuss the creation of a euro zone finance minister who would have his own budget and the power to raise extra taxes.”

Oh, dear. That’s exactly what the eurozone should have. You don’t need a full transfer union, as in the US, to mitigate the effects of divergence in competitiveness and other aspects of one-size-does-not-fit-all. A great deal of transfer union in the US is pure charity, as when the North subsidizes vast swathes of the South. Nobody says Greece does not need humanitarian aid, aka charity. Who, exactly, do the Ger-mans think should provide it?

We do not know why the euro splashed out to the upside and whether it will last, or slide right back down into the slough of despond. There is a distinct absence of analytical insight out there in the commentary world. This highlights one of the more serious drawbacks of the FX market—not only do we not have volume statistics to accompany price changes, we don’t have a big public forum of well-informed commentators. If you go to the various broker sites, you see such muddled thinking and bias from young whippersnappers that it’s honestly not worth the risk of contaminating your brain. In equities, you can find multiple brainy types with data and experience and sometimes real prose skills. In currencies, the quality of the commentary is dismally low.

That leaves us with the chart. If past is prologue, the euro “should” test support and then turn around and test the previous intermediate high at 1.1215. A move in place tends to stay in place until something comes along to upset the apple cart. We see no bumps in the road to do that. We don’t understand it, but there it is.

Note to Readers: We will not publish any reports the week of Aug 3-7. Cape Cod beckons.