The bulls are clearly in control of US markets at the moment, but do the economic fundamentals support the current market conditions? The first quarter is shaping up to be quite weak, with today's Durable Goods Orders report reflecting weak orders, weak shipments, and weak inventories. The headline number wasn't bad at plus 4%, but the bulk of that came from large airplane orders. Non-defense capital goods were down -0.5%, with this decline following on February's revised -2.2%. Inventories were up a quite modest 0.1%, and durable goods shipments, a direct input into GDP, were down -0.4% with the underlying trend weak. Are these soft numbers concerning?
Certainly such weakness will bring revisions to first quarter GDP estimates, which will require stronger subsequent quarters to reach current Wall Street estimates of GDP for 2015. However, the trend for the last several years has been a weak Q1 followed by stronger Q2-Q4. We will certainly need this trend to continue this year.
Of more concern to us is the worsening situation in Europe vis a vis Greece. International Monetary Fund officials, and particularly German officials have begun speaking publicly about Greece not only defaulting, but also exiting the Eurozone. We have written of our feelings towards German intransigence in this matter before so we'll not rehash, but it is worth considering possible consequences.
There are many in Europe who view a possible Greek exit with a ho-hum attitude, with German officials saying that it is already priced into markets and claiming that any shocks could be easily contained. Indeed, Eurozone officials may be quite prepared to handle the problems they can foresee, it's the unforeseen problems that are, well, a problem. Following the collapse of Bear Stearns, US officials were scrambling, but felt they were prepared for the contagion and the next collapse. The collapse of Lehman Brothers proved them wrong. This was further exacerbated when Congress rejected the bailout plan put together by Hank Paulson, the Secretary of the Treasury, and by the time Congress changed its mind it was too late.
The Germans are claiming a Greek exit can be handled because they've studied all the interconnections related to Greece, the contagion won't spread because other weak countries such as Spain and Italy are a bit stronger now, and there will be a strong unified Eurozone political response. They may be correct, but there is plenty of potential for nasty surprises buried in all those financial interconnections that Greece has with the rest of the Eurozone, and further, the Eurozone is not known for its rah-rah-sis-boom-bah political unity.
Next week we will be watching the following data reports: Wednesday's GDP report; Thursday's Jobless Claims, and Personal Income and Outlays; and Friday's ISM Manufacturing Index.