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Do US Economic Indicators Support a Rate Hike?

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US economic indicators

US economic growth was revised to 0.8% in the second reading of GDP for 1Q16 compared to the previous month’s 0.5%. US GDP was revised upward due to a rebound in corporate profits and an upward revision of income growth.

Initial claims for unemployment benefits fell by 10,000 to 268,000 in the week ended May 21, 2016. However, sustained falls in the amount of claims were mainly due to transitory events such as spring break at schools in New York and the closure of an automobile plant in Michigan.

New home sales jumped 16.6% in April to a seasonally adjusted rate of 619,000 units, the highest level since January 2008. Housing stocks such as Toll Brothers (TOL), D.R. Horton (DHI), and Lennar (LEN) rallied. Treasury yields rose following the release of solid housing data.

Meanwhile, durable goods orders rose by 3.4% in April due to a rise in new orders for commercial jet planes. This rise beat March’s upwardly revised 1.9% rise.

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However, non-defense capital goods orders excluding aircraft, which are a closely watched proxy for businesses’ spending plans, fell by 0.8% in April from an upwardly revised 0.1% fall in March. Companies have been reluctant to invest due to the global economic slowdown and the approaching US election.

US economy picks up steam

Reports on retail sales, housing, inflation, and industrial production offered favorable views of the US economy at the beginning of the second quarter. Strong income and improving positive corporate results have hinted that the economy is picking up steam, which could give the Federal Reserve enough confidence to raise interest rates as early as June.

If you’re interested in making directional bets on interest rates, you could consider funds such as the iShares 20+ Year Treasury Bond ETF (TLT) and the T. Rowe Price US Treasury Long-Term Fund (PRULX).

In the next article, we’ll look at how US Treasury auctions fared last week.

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