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Ahead of the outbreak of COVID-19, core durable goods orders showed some signs of firming, but capex spending is set to remain weak, explained analysts at Wells Fargo, looking at the Durable Goods Orders report. 

Key Quotes: 

“As soon as the risk of a further escalation in the trade war with China cooled with the signing of the Phase I trade deal, the COVID-19 virus emerged. The outbreak has brought the potential for severe disruptions to supply chains and, depending on the path of the virus and measures taken to contain its spread, demand. Uncertainty remains a major headwind to capex spending as a result.”

“Durable goods orders in January edged down 0.2%, beating consensus expectations of a 1.4% decline. Orders for December also looked slightly stronger, revised up from 2.4% to 2.9%. The better-than-expected print stemmed in part from a jump in aircraft orders (after seasonal adjustment at least). Notably, however, there were signs that the underlying trend in capital spending was at least beginning to improve through January, likely helped by waning trade tensions.”

“The better orders numbers in January may not be in time to save capex spending for the current quarter, however. Nondefense capital goods shipments, which feed into the BEA’s estimates of equipment spending, started the quarter on an abysmal footing, dropping 1.7%. That points to some risk of a third straight quarterly decline in real equipment outlays, even before the potential for capex spending to be hit by production disruptions and added uncertainty for businesses in light of the fluid COVID-19 situation.”