Factory Orders Jump; Bernanke Raises Inflation Concerns

MBA (6/4/2008 ) Velz, Orawin
New orders for manufactured goods advanced 1.1 percent in April, following a 1.5 percent increase in March, as a 2.8 percent jump in nondurable goods shipments outweighed a 0.6 percent decline in durable goods orders.
The report included a revision of durable goods data released last week and contained new data on nondurable goods manufacturing shipments, inventories and unfilled orders. Revisions to the previously released durable goods data were minor and thus the report did not change the anticipated outlook for business investment following the durable goods orders report.

The jump in new orders was on the strength of nondurable goods shipments. Petroleum shipments led the increase as a result of the increase in crude prices during the month. Food products shipments, petroleum and coal products shipments, and chemical products shipments were also up strongly.

Durable goods orders were revised down to show a 0.6 percent decline from the 0.5 percent drop reported earlier. Nondefense capital goods orders excluding aircraft—a proxy for future business investment in equipment and software—rose by 4.0 percent, slightly down from a 4.2 percent increase in the earlier report. Shipments for nondefense capital goods excluding aircraft—a component used in the calculation of economic growth in the current quarter—rose by 0.2 percent, compared with 0.5 percent reported earlier.

Speaking via satellite to the International Monetary Conference in Barcelona, Spain, Federal Reserve Chairman Ben Bernanke described economic activity in the current quarter as “relatively weak.” He expected “better economic conditions” in the second half of the year. He argued that until home prices stabilized, downside risks to growth will remain. Although he noted recent improvement in financial markets, he cautioned that “conditions remain strained and some key funding and securitization markets have shown only tentative signs of recovery.”

Bernanke described inflation as high but expected it to moderate as commodity prices stabilized. He noted the impact of the dollar's decline, which has contributed to increases in import prices and consumer price inflation and, if sustained, could lead to higher inflation expectations. Bernanke said the Fed's commitment to its mandate of ensuing price and growth stability will result in a strong and stable dollar. It’s rare that Federal Reserve officials defend the value of the dollar. In general, the Fed tends to defer to the Treasury on any discussion of the dollar.

The speech confirmed the view that the Fed is done cutting interest rates as more rate cuts would likely cause a further decline in the dollar, creating negative feedback effects to inflation and inflation expectations. The financial markets expected the next Fed’s move to be a rate hike: fed funds futures indicated more than a 60 percent probability that the Fed will raise the target rate by 25 basis points in December.

The dollar rose to a two-week high against the euro following Bernanke’s speech. Stock markets declined, led by falling financial shares. As investors’ appetite for risk decreased, increasing demand for safe-haven Treasuries, Treasury prices rose and yields dropped. The yield on 10-year Treasuries fell six basis points and hovered around 3.89 percent by mid-Tuesday afternoon.