US stocks have been on the back foot since late August, as expected. The dollar has continued to strengthen, also as expected, with investors taking a more risk-off stance. Generally, there is a lack of confidence in the economy, with businesses looking to cut costs. Several major firms have warned of tough times ahead.
As the market heads in a particular direction, what traders will start to get interested in is how far this will go, and when could we start seeing a turn around. Or what would be a sign that things are going to keep going in this direction for a while.
Investment drives the markets
One of the things to keep in mind is what’s happening to cash. Those who have it, aren’t spending it. The reverse repo facility at the Fed last week hit a new record high. The facility is where banks put what’s considered “extra” money that depositors have in the bank. Basically, banks balance the amount of money they’ve loaned out, and the amount of money that has been deposited.
If loans drop, or deposits increase, they use the reverse repo facility. That there is so much money in the facility indicates that banks aren’t initiating loans, and those who have liquidity are not spending it. Naturally, this puts downward pressure on the stock market, and supports the dollar.
Where would the money be spent?
In a growing economy, businesses will try to spend as much as they can on growth opportunities. That means spending available cash in expansion, or borrowing money to buy new equipment, facilities, and other things to grow the business. Those are tracked as “durable goods”.
In other words, if businesses think that the economy is going to grow, they will spend more on durable goods. This ends up being something of a self-fulfilling prophecy, because if everyone is spending money, then the economy tends to naturally grow. But, if durable goods are slowing down – or worse, turn negative – then that indicates a recession is on its way. Or if it is already here, it won’t be going away soon.
What to look out for
US August durable goods orders are expected to come in at -0.5% compared to 0% in July. However, orders can be influenced by government spending, since the US government is the largest economic entity in the world. Durable goods excluding Defense are expected to come in at 0.3% compared to 1.2% in July.
In other words, durable goods are expected to show growth in the broader economy, but at a slower rate. US spending on defense is expected to continue to slow. But that can be significant since defense spending alone accounts for 3.5% of the US economy. Many firms have dual roles, such as Boeing, Textron, Palantir, etc. which could have further effects on the economy as well.