Durable goods orders and consumer confidence data both rose above expectation in May while sales of new homes also shot up. This strong data may point to the avoidance of a recession for now.
Strong economic data calms recession fears
Tuesday marked the end of more than a week of straight losses for US markets.
This came after the publication of strong economic data yesterday, which contrasts with concerns that the next Federal Reserve (Fed) rate hikes, which are expected in accordance with Chairman Jerome Powell's most recent comments, could trigger a recession or what is known as a "hard landing."
Durable goods orders, a measure of the economy's capacity for investment, outweighed concerns about a potential future recession. Orders for durable goods increased 1.7% in May, far above the predicted 1% decline. Beyond forecasts, basic goods orders climbed by 0.6%.
Additionally, the statistics on consumer confidence surged to 109.7, far above the 104.0 predicted and new house sales in the real estate industry grew by 12.7% in May.
In conclusion, very solid data in areas like consumption, real estate, and investment help to avert the danger of an economic downturn, at least in the short to medium term.
Interest curve remains unchanged
However, these facts offer solid justifications for the Fed to keep hiking rates, by at least 50 basis points more, as predicted in the most recent dot plot by Fed officials.
After the release of the positive economic data, Treasury yields were fairly restrained in the bond market, in part because the interest rate curve already reflects these expected rate hikes.
Because market interest rates did not increase, the Dollar was able to maintain its downward trend that started three weeks ago, particularly when compared to the Euro.
Euro rose on Lagarde’s words
In the forex market, the comments by the European Central Bank (ECB) drove the Euro higher.
At the symposium held in the Portuguese city of Sintra yesterday, ECB President, Christine Lagarde, was firm in her statement that interest rates would increase in July and that the end of rate hikes is still far off. Lagarde’s words painted a confrontational speech that has shifted the ECB's previous tone and –prepares the market for higher interest rates in Europe.
With this, the EUR/USD has resumed its upward trend and is poised to break through the 1.1000 level.
EUR/USD monthly chart. Sources: Bloomberg, Reuters
Key Takeaways
- US durable goods orders, consumer confidence data, and sales of new homes were up for May
- Robust data could mean the avoidance of a recession for now
- Treasury yields were largely muted after the release of the strong economic data
- President Lagarde stated that rates will rise in July for the Euro zone
- EUR/USD resumed its bullish trend
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