- US durable goods orders and Germany’s Ifo both turned out better than expected …
- … but mood in markets remains risk averse, with emerging market currencies in the weak spot …
- … especially the Brazilian real
US durable goods better than expected…
After two strong months, US durable goods orders declined by 2% mom in August. This was slightly better than consensus expected (-2.3%) and was mainly the result of a fall in non-defense aircraft orders, which fell by 5.9%. Excluding transportation, core orders were unchanged. Vehicles fell 1.6% from a sharp increase of 4.9% the previous month, while there was also some slowdown in demand for computers and electrical equipment. The 3-month annualized growth rate of durable orders increased 8.5%, up from 4.1% in July.
…trend in US investment to remain stable in third quarter
Meanwhile non-defense capital goods shipments ex. aircrafts, which are used by the BEA to estimate investment in durable equipment in the National Accounts, declined by 0.2%, while the three month annualized growth rate remained high, at 4.2%. Although the durable goods report is volatile, the manufacturing sector is having a bumpy recovery, partly as a result of a strong dollar. All in all, we expect the trend in capital goods orders and shipments to remain stable in Q3.
Germany’s Ifo business climate positive
Germany’s Ifo business climate indicator unexpectedly rose in September. It increased to 108.5, up from 108.4 in August. The expectations component rose to 103.2 from 102.2, reaching its highest level since April. The current conditions component declined to 114.0 from 114.8, partly reversing its jump in August. The details of the report underline that the German economy is in healthy shape and relatively resilient against the slowdown in China and other EM.
Markets turn more risk averse
Despite the better than expected data for the US and Germany, investor sentiment in financial markets deteriorated sharply on Thursday. Assets that have safe-haven characteristics such as US Treasuries, German bonds, the Japanese yen, the US dollar and to a lesser extent gold all benefitted. Meanwhile, equities and commodity prices have declined and emerging market currencies were aggressively sold off; most the South African rand and the Brazilian real (more on this below).
Volatile ride in Brazilian real
The Brazilian real fell sharply this week; close to 6% and set a new all-time low versus the US dollar. At some point USD/BRL almost reached 4.25. Afterwards the real recovered, but the situation remains very fluid. This steep decline further increases inflationary pressures. As a result, the central bank is between a rock (deep recession) and a hard place (inflation) in an environment of political turmoil and risk of further downgrades.
The central bank will probably continue to intervene in FX markets to dampen the slide in the real, but this will unlikely be very aggressive. In the near-term, it is likely that weakness in the real will persist. In the current environment USD/BRL may overshoot to 4.5. Meanwhile, CDS spreads of Brazil have risen sharply. They have surpassed the levels seen at the height of the global financial crisis, but they are still far away from the 2002 crisis levels.