Curve Watchers Anonymous notes the rally in treasuries continues in the wake of the third decline in four months in factory orders and expectations of renewed Quantitative Easing by the Fed.

Yield Curve July 2008 – Present

click on chart for sharper image

Two-year (not shown above) and five-year treasuries are at record lows.

Factory Orders Drop More Than Expected

The Wall Street Journal reports Factory Orders Decline

U.S. factory orders dropped more than expected in August, marking the third decline in the last four months.

U.S. manufactured goods orders decreased by 0.5% to $408.94 billion, the Commerce Department said Monday.

Commercial airplanes drove the decline; excluding transportation, all other factory orders rose.

The report had positive data. A barometer of business capital spending increased; non-defense capital goods orders excluding airplanes rose by 5.1%.

Economists surveyed by Dow Jones Newswires had expected overall factory orders would decrease by 0.4% in August. July orders rose 0.5%, revised from a previously reported 0.1% increase.

Factory orders are either durable or non-durable. Durables are designed to last at least three years — things such as cars. The Commerce report Monday said durables dropped by 1.5%, revised from a previously reported 1.3% decrease. Nondurables rose by 0.3%.

Capital goods orders fell 0.1%. Non-defense capital goods orders rose 0.1%.

Meanwhile, defense-related capital goods dropped by 1.8%. Excluding defense, all other factory orders decreased 0.5%.

Among industries, orders rose for electrical equipment, machinery, and computers. Demand fell for primary metals.

Transportation equipment fell 10.2% as orders for cars and commercial airplanes dropped. Orders for manufactured goods excluding transportation rose 0.9%. This was the first increase in the last five months.

Manufacturers’ inventories were up by 0.1% in August, after increasing 0.9% in July.

Shipments declined 0.6%. Unfilled orders, a sign of future demand, were flat.

That is a very weak report with inventories rising and nearly everything important falling or flat.

Durable Goods Drop Should Not Have Surprised Anyone

The drop in durable goods may have surprised some but it is consistent with my July 7th post Expect Second-Half Housing and Durable Goods Crash

This should have been pretty easy to figure out. If people stop buying houses, and they have, then people will not be buying many appliances for the houses they did not buy.

Moreover, autos are big ticket items and with sentiment souring on job prospects, one might have anticipated the auto recovery (as weak as it was), would also stall.

Rear View Mirror Look

Please note that today’s report is a look in the rear view mirror. Today’s factory orders report reflects August data.

October ISM Recap – Looking Ahead

Let’s recap a few charts from Manufacturing ISM Expands, Rate Slows, Internals Weak

September ISM Manufacturing at a Glance

New Orders June Thu September

Falloff in the rate of growth of new orders is persistent and dramatic.

Inventories June Thu September

The backlog of orders is now contracting, and judging from the persistent trend in orders, it is highly likely orders will contract next month. Meanwhile inventories continue to rise.

This situation cannot last. Production is headed for a plunge if orders and backlog start contracting in a meaningful way, as appears likely.

Manufacturing ISM has likely peaked.

More Downward Surprises Coming

Today’s Factory Orders report (for August) along with the October ISM report (September data as shown above) is further evidence the glowing September ISM report (August data) was an outlier.

Expect to see more downward surprises as the vast majority of economists do not understand the implications of the recent ISM data, or the meaninglessness of the Fed’s renewed quantitative easing plans.

Mike “Mish” Shedlock
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