US durable goods orders fell -1.0% m/m in June from a revised -0.8% m/m in May, on consensus expectations of +1.0%.  Durable goods ex-transportation fell -0.6% m/m in June from a revised +1.2% m/m in May, on consensus expectations of +0.4%.  Upward historical revisions did little to offset the report’s negative surprise.  May durable goods was revised to -0.8% from -1.1%, while ex-transportation was revised to 1.2% from 0.9%.  Transportation fell -2.4% m/m from -6.6% in May, driven by a -25.6% m/m drop in commercial aircraft orders in June from -30.2% in May.  Defense orders also undermined headline durable goods, falling a further -6.8% in June from -3.2% in May.  However, non-defense ex-aircraft capital goods orders, the true core measure of this report, gained 0.6% m/m in June from an upwardly revised 4.6% in May (originally 2.1%), leaving the year-on-year level at a remarkable 15.2% compared to June 2009.  The devil continues to be in the detail of this report, as large swings in commercial aircraft and defense orders cause the headline to consistently miss consensus expectations.  This month’s absence of commercial aircraft orders and dip in defense orders were once again responsible for the negative headline surprise.  However, both should rebound again later this summer, supporting trend growth for the economy in the area of 3.0%.

Over the past 12 months, durable goods are up a laudable 15.9% y/y, with orders ex transportation up 15.0% y/y and orders ex-defense up 17.0% y/y.  Commercial aircraft orders are up 42.2% y/y compared to last June, while defense orders are up 5.4% y/y.  Core non-defense, ex-aircraft capital goods orders have also surged higher  to 15.2% y/y, while the 3-month annualized rate is running at 9.6%.  While base effects continue to support these numbers, last year’s recovery was already well under way by June.  Elsewhere in the report, computer and electronics fell -1.9% m/m and rose 7.6% y/y, electrical equipment rose 3.7% m/m and 20.5% y/y, machinery fell -0.7% m/m and rose 21.1% y/y, primary metals fell -2.0% m/m and rose 40.6% y/y and fabricated metals rose 1.2% m/m and 13.8% y/y.  At the same time, shipments were down -0.3% m/m and up 10.3% y/y, while inventories were up 0.9% m/m and 0.4% y/y.  At the macro level, the credit crisis has made it increasingly difficult for manufacturers to invest in new equipment despite the rebound in production.  However, core durable goods is a good proxy for business investment, which continues to recover nicely.  If sustained, the US economic outlook should once again show signs of improvement despite the vagaries of consumer confidence and market sentiment.

Durable goods fed into further USD weakness as Dow futures fell 35 points ahead of the market open.  The EUR/USD rose to 1.3015 from 1.2990 following the report and an overnight low of 1.2967.  Similarly GBP/USD rose to a session high of 1.5637 from 1.5580 following the report and an overnight low of 1.5545.  USD/JPY fell to a session low of 87.47 from 87.70 following the report and from an overnight high of 88.12, while USD/CAD traded around the 1.0320 level after falling from an overnight high of 1.0390.  While the JPY crosses have been consistently strong gainers this month, particularly against high yielding currencies, this morning has seen some consolidation on independent JPY strength.  Amidst the summer doldrums of July and August, not only has liquidity dried up but so has volatility.  Interestingly, with global investors weary of committing to fresh long positions, the preferred strategy this summer has been the management of cash.  As volatility has continued to ease, the carry trade has returned revealing the AUD and ZAR as clear favorites.  Even more interestingly, the USD is being increasingly used as a funding currency for the carry trade with the Fed committed to a zero interest rate policy for the indefinite future.

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