The weekly macro review for w/c 29 June 2020 – Sectors within the US economy have, so far, been affected by the pandemic in different ways.
US durable goods manufacturing has been most affected within transport equipment, specifically, motor vehicles and non-defense aircraft (which was already declining prior to the pandemic). That’s not to say that other durable goods sectors have not been affected by shutdowns, it’s that the extent of the impact on transport equipment production has been most severe – and this is a large part of industry.
The May US factory orders data showed that transport orders rebounded strongly – but half of that growth was due to the change from -$8bn in aircraft orders in Apr (net cancelled orders) to $3bn in orders in May resulting in +$11bn contribution to the headline growth between the two months. Orders for transports are still 41% below a year ago. Yet, orders for durable goods ex transports is “only” 6.7% below a year ago (which is still a large decline, but not as extreme).
Motor vehicle retail sales rebounded in May – led by SUV’s/light trucks. Sales of auto’s also increased, but off an extremely low base, and to a lesser degree than SUV’s. The pandemic appears to have accelerated the trend of the decline in auto/sedan sales – May auto sales on a SAAR basis was a mere 2.65m units, the second lowest on record after Apr 2020.
It is also worth noting that Japanese production of motor vehicles declined at an accelerated pace in May and production levels fell to 61% below a year ago. Retail sales of motor vehicles in Japan fell by 11% in May (and -34% compared to a year ago).
Non-durable goods shipments in May, excluding petroleum, are now only down 3.2% versus a year ago. Production across food and chemicals, especially, has been less affected throughout the pandemic. Petroleum production in the US has been impacted by severe price falls as well as a decline in demand. Petroleum shipments are 54% below a year ago (value). The Dallas Fed Survey for Jun noted that oil producers remained downbeat, despite a general improvement in manufacturing conditions in the region.
The broader forward view of manufacturing for Jun via the ISM manufacturing PMI highlighted that more manufacturing firms continue to recover across most industries. But within the detail of the ISM is that transportation equipment manufacture continued to worsen across every measure in the Jun PMI. Most concerning is the continued decline in orders for this segment as it suggest continued weaker output in the short-term.
Despite the improvements in shipments and orders, the ISM survey showed that firms, on net, continue to reduce employment.
We will cover services next week once the Jun data is released. For now, the non-farm payrolls for Jun increased by 4.8m jobs – of which 2.1m of the gains were in leisure and hospitality. The trend of improving payrolls is extremely positive – but there are another 14.5m jobs still to be recovered. Yet the weekly initial claims, continuing claims and pandemic unemployment assistance claims all remain extremely elevated and have been little changed. The concerning trend in the household employment survey was the continued rise in permanent layoffs (but temporary layoffs also declined).
The outbreak of infections across the US South and parts of the West and Midwest will likely derail some of this recovery, especially in the services hospitality sector. The unemployment claims data is likely to record further increases in these regions.
The global manufacturing PMI’s were consistent. The pace of decline slowed notably as more firms started to record improving conditions especially across Europe and Australia. Japanese manufacturing was the exception – almost half of the survey panel (48% of firms) recorded lower production, compared to 13% of firms that expanded output in June.
In most cases, growth is just starting to rebound, so excess capacity is still an issue and firms are continuing to reduce employment. The improvement in sentiment for the next twelve months was universal.
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 6 July 2020 – While it will be a relatively quiet week data-wise, the news flow will continue to focus on the growing number of Covid-19 infections, and not just in the US.
We are also approx. four months out from the next US general election and polling will also start to fill the news-cycle.
US highlights this week will be the ISM non-manufacturing PMI and the Markit Services PMI – which will help to round out our view on the recovery of services into Jun. The other important data release will be the initial and continuing claims data – especially now as we potentially start to see the impact of infections in the South and parts of the West on further trade restrictions and layoffs.
The RBA will meet on rates this week. Other important Aus data this week will be the housing finance data for May.
Highlights for Europe; retail sales for May and German industrial production and orders for May.
Purchases of Treasury and Mortgage securities will be larger this week and are back up to $20bn/week pace. The NY Fed will purchase approx. $21.8bn in Treasury Securities (last week $7.8bn, prior week $19.6bn) and approx. $22.8bn in MBS (last week $18.1bn and prior wk. $22.8bn).
There will be one term repo operation this week and overnight operations have been reduced to one per day.
This is the first week of Q3. The US Treasury estimate for Q3 borrowing is lower this quarter (compared to the significant increase in Q2). The Q3 estimate for total net new money raised is $677bn.
This week, the US Treasury will settle approx. $320bn in ST bills, raising approx. $20.4bn in new money.
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
