The Weekly Macro Review and Outlook for w/c 8 June 2020

by Kim | Jun 8, 2020

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

The Weekly Macro Review and Outlook for w/c 1 June 2020

by Kim | Jun 1, 2020

The weekly macro review for w/c 25 May 2020 – Consumer sentiment in the US barely improved in May despite most states now starting to lift stay-at-home restrictions. Consumer assessment of current conditions improved, while expectations of future conditions actually continued to worsen.

The small improvement in current conditions was likely due, in part, to the receipt of stimulus payments and the start of unemployment insurance payments. The headline +10.5% growth in personal income in Apr hides the underlying performance issues – that over the last two months, US wages and salaries income has declined by over US$1 trillion. The income growth in Apr came from government transfer payments – mostly the CARES ACT payments. The CARES ACT payments are only a one-time payment. The reality is that for many people, that payment will need to cover the period of time until they can get back to work. The expectation of weaker future conditions is one driver of the larger fall in consumption expenditure (across both goods and services) and the subsequent significant increase in the savings rate this month.

As for recoveries, another 2 million+ people in the US filed an initial unemployment claim last week. The ten-week total of initial unemployment claims has now reached 40 million people.

The first US regional surveys for May show some improvement in manufacturing conditions. Most measures indicate that the pace of decline has eased from the shutdown in Apr. But the proportion of firms reporting further weaker conditions in May still outnumber those starting to see improvements. Outlooks remain pessimistic.

The advance durable goods report revealed severe declines in Apr for orders and shipments. This was the worst monthly decline in shipments by a large margin. The main drivers of the falls were transport – led by motor vehicles and non-defense aircraft. Orders for non-defense aircraft were again cancelled this month and the value of shipments in Apr fell to a mere $4.4bn which is now 70% below the peak reached in Nov 2018. Most other sectors also recorded declines in orders and shipments.

Outside of the US, Japanese industrial production data confirmed the scale of the decline in manufacturing activity in Apr as telegraphed by the weaker PMI’s. The declines in production and shipments have been led mostly by larger falls in transport equipment manufacturing.

Germany Q1 GDP decline of -2.2% was confirmed in the second estimate. This is the second consecutive quarter of GDP decline for Germany.

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 1 June 2020 – The focus this week will be on US non-farm payrolls for May, ECB and RBA meetings and global PMI’s for May.

Global PMI’s for May will be released this week. This should provide some insight as to how economies and regions are performing as restrictions start to lift – especially for services sectors.

Important US data this week will focus on non-farm payrolls for May, initial and continuing jobless claims and the ISM manufacturing and non-manufacturing PMI’s for May. The final release of factory orders data for Apr will also be released this week.

The RBA and ECB meet this week. It will be a quiet week for the US Fed ahead of the FOMC meeting next week.

In Aus, Q1 GDP will be released on Wed. The expectation is for a slight decline in GDP for Q1 as most of the economic impact was in the latter half of Mar. Inventory components will be released on Tue which could tip the scale. Retail sales for Apr will also be released – the prelim retail turnover released last week indicated a severe decline in sales in Apr.

Purchases of Treasury and Mortgage securities remain at a similar pace as the week prior.  This week, the NY Fed will purchase approx. $22.5bn in Treasury Securities (last week $20bn, prior week $30bn) and approx. $22.5bn in MBS (last week $18bn and prior wk. $22.5bn).

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 US Treasury will settle approx. $600bn in ST Bills, Notes and the new 20-year Bond this week. This includes four (4)  Cash Management Bills (CMB’s). The US Treasury will raise approx. $223bnbn 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 $2.048 trillion USD. This is 68% of the requirement for the quarter and we are 69% 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