The Weekly Macro Review and Outlook for w/c 25 May 2020

by Kim | May 25, 2020

The weekly macro review for w/c 18 May 2020 – The prelim PMI’s for May suggest that the pace of the falls in output may have started to abate across the US, Eurozone, and UK.

The ‘slower pace of decline’ in this case means that more firms are starting to record increases in output (from a low base) and less firms are recording declines in output. But for the moment, the firms reporting declines still outnumber the firms reporting increases. Those declines are also on top of the severe Apr contraction.

In the US, output across services declined at a slightly slower pace than in manufacturing. The weekly initial claims data is yet to show any recovery. The initial claims for wk ending 15 May remained extremely elevated with 2.4m new initial claims recorded. There was a similarly large increase in the number of continuing claims for the prior week. While existing home sales fell sharply in Apr, housing market conditions, and mortgage applications data suggests that the market likely stabilized in May.

This “improvement” in the PMI’s in the form of a slower pace of decline was far less pronounced in Japan and Australia.

The prelim Japanese PMI for May indicated that activity continued to decline at a similar severe pace as in Apr. The services output index remained in the 20’s, indicating that services activity continues to contract at an extremely sharp pace. Manufacturing output continued to decline at an accelerated pace. The decline in Q1 GDP indicates that in all likelihood, Japan is already in a recession. So far Q2 performance appears to be worse. Exports declined by over 20% in Apr (value). The PMI’s for Apr and May indicate an even more severe contraction in output. The National emergency was issued in Apr and it’s likely that this will end by early Jun. Stimulus payments were approved in Apr and its likely that a further round of support will be announced shortly.

The prelim PMI for Australia was also concerning with the composite output index remaining in the 20’s. Services output recorded a slightly slower pace of decline, from a low output index level of 19 in Apr. But manufacturing output continued to decline at an accelerated pace. High frequency payrolls data indicates that employment declined at a slightly faster pace in the first week of May. The prelim Apr retail turnover shifted sharply negative in the month with retail sales likely declining across most segments. Quarantine restrictions continue to be eased across the country in late May and are planned to ease further from early Jun.

A further blow to the Aus economy will the exports impacted by measures recently announced by China on barley tariffs, beef export restrictions, and slower thermal coal exports. This week the Aus government also announced that benefits of the JobKeeper program had been significantly overstated – more like 3.5m rather than 6m recipients or a $60bn spend rather than a $130m spend. Whilst that might reflect a “saving” to the budget, it also means less people receiving support during a significant economic downturn.

Since the GFC especially, spending by China had been an important driver of global growth. At the National People’s Congress over the weekend, and for the first time since 1994, the growth target was omitted. In a speech, Premier Li Keqiang explained why;

“because our country will face some factors that are difficult to predict,” pointing to the coronavirus and uncertainties around trade. But Mr. Li said the lack of a target “will enable all of us to concentrate on ensuring stability…and security.”

This comes at a time when China has been increasingly singled out for its role in the spread of Covid-19, as well as now for the renewed security crackdown on Hong Kong.

There are more data releases covered in the review document. Use the links on the contents page to navigate to different country sections. Download the review here;

The outlook for w/c 25 May 2020 – A short week this week due to the US Memorial Day holiday. Expect to hear some anecdotal information regarding activity over the US holiday weekend. Tensions regarding China are likely to continue.

Important highlights for this week –   

US data will be in focus this week. The important highlights providing some early insight into May activity; initial and continuing jobless claims, several important regional manufacturing surveys for May, and the final University of Michigan consumer sentiment survey for May.

The US advance durable goods orders data for Apr will help to confirm the scale and scope of the contraction in orders as indicated by the PMI’s. The personal income and expenditure data for Apr will provide some insight into income impacts and shifts in expenditure and saving.

So far, a somewhat quieter week for US Federal Reserve speeches. US Fed Chairman Powell will speak on Fri.

In Japan, the first view of Apr industrial production will be released. Again, this will provide confirmation of the level of impact on production in Japan during one of the worst months as measured by the PMI’s.

Aus data of note this week will be Q1 capex in preparation for the GDP release. As well, the month end private sector credit data for Apr will be released – also providing some insight into the scale of contraction in spending and investment across business, housing, and personal expenditure.

The US Fed will continue to reduce purchases of Treasury and Mortgage securities (shorter week also).  This week, the NY Fed will purchase approx. $20bn in Treasury Securities (last week $30bn, prior week $35bn) and approx. $18bn in MBS (last week $22.5bn and prior wk. $25bn).

There will be one term repo operation this week and overnight operations have been reduced to one per day.

US Treasury issuance remains heavy amid increased fiscal spending. The offer amounts, across the CMB’s especially, have started to increase as more of the earlier issuance matures. The US Treasury will settle approx. $509bn in ST Bills, TIPS and FRN’s this week. This includes, so far, five (5) Cash Management Bills (CMB’s). The US Treasury will raise approx. $228bnbn in new money for the week. The US Treasury Q2 borrowing requirement is $2.999 trillion USD in new money. The quarter to date value of new money raised currently stands at $1.825 trillion USD. This is 61% of the requirement for the quarter and we are 61% of the way through the quarter (in weeks).

More detail (including a calendar of key data releases) is provided in the briefing document – download the file here;

Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net

The Weekly Macro Review and Outlook for w/c 18 May 2020

by Kim | May 18, 2020

The weekly macro review for w/c 11 May 2020 – Data this week provided more robust confirmation of the scale of the decline in economic activity – especially in Apr. The Apr data reflects at least one full month of restrictions across most countries, except China where restrictions have been lifted since Mar.

“The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II. We are seeing a severe decline in economic activity and in employment, and already the job gains of the past decade have been erased.” US Fed Chairman Powell

In the US, the 11% decline in industrial production in Apr was led by all areas of manufacturing. Manufacturing production levels fell to the lowest levels recorded during the GFC. Motor vehicle production all but stopped in Apr with production falling 70% in the month.

Regional manufacturing activity in NY for May recorded a slower pace of decline. There at least appears to be some slow down in the decline of employment. Firms also expected stronger growth in six months, albeit from this low base of activity.

US initial unemployment claims continued to be measured in the millions. Now eight weeks since the beginning of restrictions, over 36m people have filed an initial unemployment claim.

Retail sales were extremely weak for Apr with sales declining by $80bn versus the $43bn decline in Mar. Only one segment in retail recorded a month-on-month increase – non-store sales. Sales in segments such as clothing stores are now down by 90%.

Prelim consumer sentiment in the US for May was little changed overall, increasing by a few points.  Sentiment around current conditions improved as income support started to make its way through to households. Consumers noted that health remained their largest concern. But that social isolation had overtaken concerns over personal finances (finances became less of an issue due to support received). Yet expectations about future economic conditions continued to deteriorate.

In Europe, Q1 data reflected accelerated declines in activity. Industrial production across the Eurozone fell sharply in Mar and PMI’s indicate that this is likely to be even worse in Apr. The Eurozone GDP contracted in Q1 by 3.3%. The German economy is likely already in recession as Q4 GDP growth was revised to negative and Q1 GDP declined by 2.2%.

In Aus, the Apr labour force report provided the first view of the impact of restrictions on the labour market. The sharp increase in unemployment was moderated by a large decline in participation as workers were limited in their ability to look for work. Significant labour market slack now exists. Despite that, consumer sentiment in May rebounded strongly (but still negative) due to fiscal support but also the “worst fears” for the virus have not been realised.

The focus will start to shift to recovery as many countries commence lifting domestic restrictions. In some cases, sovereign borders will remain closed for the meantime. In the US, the vast majority of states are now reopening (as of 18 May 2020), regardless of the status of new case counts. Domestic restrictions are being relaxed across Europe, Australia, and parts of Asia.

Recoveries will rely heavily on; the number of countries (especially larger trading partners with interconnected supply chains) relaxing restrictions, maintaining low case counts to enable further easing of restrictions and the extent to which fiscal support is available and maintained.

Data from late May (high frequency) and June will likely start to provide insight on the pace of recovery for most countries from a production and consumption perspective. It will be a process.

 “Returning to normal lives as workers versus returning to normal lives as consumers” , M.Pettis https://twitter.com/michaelxpettis/status/1262055347365138432

Activity in China for Apr saw few signs of improvement. Firms noted that the global nature of weaker demand, as well as weaker domestic conditions, were still impacting the Chinese economy.

There are more data releases covered in the review document. Use the links on the contents page to navigate to different country sections. Download the review here;

The outlook for w/c 18 May 2020 – It will be a busy week of central bank minutes, US Fed speeches and the prelim PMI’s for May.

Important highlights for this week –   

Central bank meetings minutes this week for the US FOMC, RBA, and ECB.

Speeches and testimony by US Fed Chairman Powell and Vice Chair Clarida.

The prelim PMI’s for May will be released for the US, Europe, Japan, and Australia. This will provide some insight into how manufacturing and services activity is rebounding as some markets start to ease restrictions.

Late in the week, the annual Chinese National Peoples Congress will commence. This will occur with the backdrop of rising trade and diplomatic tensions among China and some of its trade partners.

The US Fed will continue to reduce purchases of Treasury and Mortgage securities.  This week, the NY Fed will purchase approx. $30bn in Treasury Securities (last week $35bn, prior week $40bn) and approx. $22bn in MBS (last week $25bn and prior wk. $30bn).

There will be one term repo operation this week and overnight operations have been reduced to one per day.

US Treasury issuance remains heavy amid increased fiscal spending. The offer amounts, across the CMB’s especially, have started to increase as more of the earlier issuance matures. The US Treasury will settle approx. $478bn in ST Bills this week. This includes, so far, four (4) Cash Management Bills (CMB’s). The US Treasury will raise approx. $149bn in new money for the week.

More detail (including a calendar of key data releases) is provided in the briefing document – download the file here;

Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net

The Weekly Macro Review and Outlook for w/c 11 May 2020

by Kim | May 11, 2020

The weekly macro review for w/c 4 May 2020 – Even though it was expected, the extremely large decline in employment and increase in unemployment in the US jobs report was still alarming. The initial and continuing unemployment claims data indicate that this is likely to continue.

The detail on unemployment is important. While unemployment increased substantially, the vast majority (87%) of those people identified as having lost jobs this month, were classified as “on temporary layoff” and expecting to be recalled to their jobs once restrictions are lifted. The pace of permanent job losses has so far been much smaller and is tracking well below that of the GFC levels. The dynamic between temporary and permanent layoff is one of the more important datapoints to watch in order to see if/when these jobs come back and how future employment expectations are changing.

Consumers remained more cautious regarding expenditure on larger items such as vehicles. Retail sales of vehicles in Apr (on a SAAR basis) continued to fall to new lows. Consumer credit also declined in Mar, led by a decline in revolving credit (credit cards). This fits with the income and outlays report from the prior week – while income declined as a result of job losses, the value of expenditure declined by a greater degree. Stimulus checks around mid-Apr are likely to show up as higher expenditure but it will worth noting the impact on “saving” (as measured by the income/expenditure report), and/or outstanding consumer credit.

The weaker demand in areas such as vehicles impacted factory orders and shipments in Mar. The overall decline in US factory shipments and orders was in line with the weaker PMI data from Mar. The decline in shipments and orders was led by transport equipment, as well as petroleum shipments. The largest impact on new orders was the -$16bn print in total orders for non-defense aircraft for the month (not the change, the total value) – which indicates that orders may have been cancelled. There were modest declines in orders and shipments across other industries, the exception was food manufacturing shipments.  

Germany industrial production for Mar declined severely – led by manufacturing. The index of manufacturing production fell back to 2010 levels. This is consistent with the weak Mar PMI report. Only construction activity continued to grow. The Apr manufacturing PMI has indicated that manufacturing output in Germany has declined even further.

This week, the view of Apr activity was completed with the release of the services PMIs. The countries/regions covered here all recorded faster declines in activity in Apr. In many cases, the business activity index reached all-time lows. The exception was China. The China Caixin services activity index still indicated that activity contracted in Apr, but at a similar pace as in Mar. Underlying conditions appear mixed with new work declining and employment declining at an accelerated pace but some small improvements were recorded in the outlook.

There appears to be more news of various restrictions starting to be lifted as of early May. This could start to be reflected as improvements in activity levels next month (depending on the reference week for surveys).

There are more data releases covered in the review document. Use the links on the contents page to navigate to different country sections. Download the review here;

The outlook for w/c 11 May 2020 – The focus this week will be on US retail, industrial and sentiment data, including two May data releases and Q1 GDP for the UK, Europe, and Germany.

Important highlights for this week include –   

US: the first data out for May will be the prelim University of Michigan consumer sentiment survey and the NY Empire State Manufacturing Survey. The NY Fed manufacturing survey reference week will likely be the first week of May, so there might be some small lift in activity. Last month, the general business conditions index in the survey fell 57pts to -78.2.

The advance retail sales for Apr will be released. Note that stimulus checks were sent starting mid-Apr.

Initial and continuing claims will remain a key focus. So far, over 33m new unemployment claims have been made over the last seven weeks. Weekly claims remain in the millions.

Finally, US industrial production for Apr will be released. The Apr PMI’s indicated severe declines in output were experienced.

Prelim Q1 GDP will be released for the UK and Germany. The more detailed Q1 Eurozone GDP will be released.

Aussie employment data for Apr will be released along with the Q1 wage price index and consumer and business sentiment for May.

More data out for China this week including retail sales, industrial production, CPI, and PPI for Apr. This will be an important marker to see how the Chinese economy is performing so far.

The US Fed will continue to reduce purchases of Treasury and Mortgage securities.  This week, the NY Fed will purchase approx. $35bn in Treasury Securities (last week $40bn, prior week $50bn) and approx. $25bn in MBS (last week $30bn and prior wk $40bn).

There will be one term repo operation this week. The new repo schedule will be release mid-week.

US Treasury issuance remains heavy amid increased fiscal spending. This week w/c 11 May, the US Treasury will settle approx. $528bn in ST Bills, Notes and Bonds raising approx. $157bn in new money for the week, still somewhat lower than in recent weeks. It is possible that additional Cash Management Bill’s will be added this week. Last week the US Treasury released its funding requirements for Q2 which totalled $2.999trillion in new money. So far this quarter, new money raised is $1.447 trillion.

More detail (including a calendar of key data releases) is provided in the briefing document – download the file here;

Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net