The weekly macro review for w/c 1 June 2020 – The first view of May activity, via the PMI’s, showed manufacturing and service sectors beginning the recovery from widespread shut-downs and stay at home orders. The decline in activity eased across the US, Europe, UK, Japan, and Australia, but activity continued to contract. Activity will likely continue to improve from these low levels, but how much and how quickly remains highly uncertain.
There was a welcome lift in US non-farms payrolls (compared to the prior month) after two months of significant declines. The increase in May was linked mostly to leisure and hospitality, construction, education and health services, and retail trade.
Considering the reference week 10-16 May, the lift in payrolls appears consistent with the (large) reduction in continuing claims for that same week. There has been some commentary that payrolls lifted in that week because firms needed to keep people on the payrolls in order to qualify and receive government PPP loans – whether people are working or not. But the growth in payrolls is consistent with the economy starting to lift restrictions. The average weekly hours worked also increased in the reference week.
So while there was a lift in non-farm payrolls for May, the level of unemployment remains historically high at 13.3%. And the pace of growth in weekly initial claims remained extreme at just under 2 million people in the week, while continuing claims increased to 21m people. Both are indicative of continued weakness in demand.
Of note this month was the historically large decline in the value of outstanding US consumer credit. In May, this declined by over $68bn in the month – led by a $58bn decline in revolving credit. This suggests that US consumers opted to pay down debt rather than increase consumption.
The US ISM PMI’s reflected some easing in the pace of decline in manufacturing and non-manufacturing activity. But overall activity remained firmly in contraction in May with both sectors reporting only a limited rebound in demand so far. Across manufacturing, just over 50% of firms reported continued lower orders and production in May versus Apr. There was only a slight improvement in the number of firms reporting higher employment and this was well outnumbered by the proportion of firms still reducing employment. The non-manufacturing PMI reflected a similar situation – only one industry reported an increase in new orders in May and no industries (overall) reported an increase in employment.
The Markit PMI’s for the US, Europe, and the UK, indicated a slower pace of decline across manufacturing and services in May, compared to the extremely low levels recorded in Apr. But overall, private sector activity still continued to decline, and in some cases, at an historically fast pace.
In Japan, the manufacturing PMI for May indicated that conditions worsened and the pace of decline accelerated. Services business activity improved somewhat but the headline index remained extremely low in the 20’s.
In Aus, GDP declined in Q1 for the first time since 2011 – led by weaker household consumption. The PMI’s for May indicated limited rebound so far with manufacturing activity declining in May at the same pace as in Apr. Services business activity declined at a slower pace, but the headline index remained extremely low, also in the 20’s. Further restrictions have been lifted as of the start of Jun which includes some intra-state travel – likely helping to lift activity levels in the coming months.
Finally, the manufacturing and non-manufacturing PMI’s in China reflected further month on month growth. The detail highlights some continued weakness especially in global demand with the export index contracting at a faster pace.
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 8 June 2020 – A quieter week on the data front. The highlight this week will be the US FOMC meeting. The FOMC announcement and press conference will be held on Wed.
US data of note this week will be initial and continuing jobless claims, CPI and PPI for May and the first view of consumer confidence for Jun.
Data out of China this week includes trade, new loans, CPI and PPI for May.
Europe data highlights will include industrial production for Apr and the detailed view of Q1 GDP.
Finally, Aus housing lending data for Apr will be released along with the NAB business conditions and confidence report for May. We will also get the first view of consumer confidence for Jun.
Purchases of Treasury and Mortgage securities remain at a similar pace as the week prior. This week, the NY Fed will purchase approx. $20bn in Treasury Securities (last week $22.5bn, prior week $20bn) and approx. $22.5bn in MBS (last week $22.5bn and prior wk. $18bn).
There will be one term repo operation this week and overnight operations have been reduced to one per day.
US Treasury issuance will remain heavy, but there will be a lower amount of new money raised this week as more of the CMB’s mature. The US Treasury will settle approx. $447bn in ST Bills this week. This includes four (4) Cash Management Bills (CMB’s). The US Treasury will raise approx. $104bn 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 $2.153 trillion USD. This is 72% of the requirement for the quarter and we are 76% of the way through the quarter (in weeks). Over the last three weeks of the quarter, the US Treasury will need to raise approx. $846bn in new money in order to meet the $2.999 trillion target. This would represent a significant increase in issuance over the coming 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
