The weekly macro review for w/c 13 July 2020 – One of the key themes this week is the potentially stalling/slowing recovery in jobs growth in the US. The high frequency data (initial, continuing, and PUA claims and the Household Pulse survey) is showing some signs of slowing.
Regional US manufacturing surveys mostly improved in Jul. There was at least improvement in the number of firms recording new orders growth across both surveys. The Philadelphia Fed survey indicated more stable activity across other key measures rather than a sharp resumption of activity. Unfilled orders across both the NY and Philly Fed surveys still indicate spare capacity across most firms. Most firms still reported no change to employment and hours. The diffusion indexes don’t show the scale of the change – it’s based on the proportion of firms reporting higher, lower or the same level of activity compared to the month prior.
The Jun US industrial production report showed improved production growth especially for manufacturing sectors. This was consistent with the Jun PMI’s and factory orders. Levels of activity are undoubtedly improving. But activity is yet to regain pre-shutdown levels. Capacity utilization is also improving but remains at levels on par with that of mid-2009. The current level of motor vehicle production capacity utilization (still 25% below a year ago) is a big influence on the result, but many other manufacturing industries are also experiencing lower capacity utilization.
Also of note in the industrial production report was that mining production and capacity utilization had fallen further in Jun.
The index for oil and gas well drilling fell 18.0 percent in June and was about 70 percent below its year-earlier level. For the second quarter, mining output declined 42.7 percent at an annual rate.
Survey data for manufacturing new orders growth indicates some further short-term increase in production. But it is unclear whether this will be strong enough to result in a faster recovery of production and capacity utilization. How quickly this spare capacity is reduced will have implications for how quickly employment, hours and investment improves.
With regard to services output, the question is how much disruption to activity/recovery will there be due to the latest increase in infections?
In Aus, consumer sentiment fell in Jul amid a larger outbreak in one of the most populous states:
There is likely some loss of confidence regarding the ability to contain the virus and “limiting the extent to which the economy can return to business as usual”.
The small “recovery” in US sentiment in Jun was also mostly reversed in the Jul prelim reading especially for expected conditions – citing the potential impact of increased infections on personal finances and the economy.
The US is now on the cusp of the higher unemployment benefit (Federal Pandemic Unemployment Compensation) expiring on 31 Jul without any clarity over an extension. This will affect approx. 25m recipients. Another stimulus bill is likely to be announced in the coming week and it is highly likely that benefits will be extended. The stimulus checks and enhanced benefits have helped to return US retail sales to annual growth in a short time. Retail sales in Jun were +1.1% ahead of the same month a year ago.
One other area that has continued to improve in the US is housing. The mortgage application data this week indicates that many are taking the chance to refinance based on record low mortgage rates. This obviously boosts income. Housing market conditions have improved across the nation and notably in the Northeast especially.
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 20 July 2020 – The focus this week will be on the US Congress negotiating an extension to the Federal Pandemic Unemployment Compensation payment as a part of another stimulus bill, the EU recovery package, rising case infections and the prelim PMI’s for Jul.
US highlights this week will be:
Initial and continuing claims will remain in focus. Last week, we noted that the reduction in claims appears to be stalling amid rising infection/cases.
The US prelim PMI for manufacturing and services for Jul. The services reading will be an important barometer of the potential impact of rising infections especially in the South and parts of the West and Midwest.
US existing home sales for Jun will be released.
The prelim PMI’s for manufacturing and services in Jul will be released for the Eurozone, UK, Japan, and Aus.
In Aus, the government will also announce changes to the crisis employment support programs of JobKeeper and JobSeeker. This will be announced ahead of the budget statement later in the week. This will be important in the context of the pace of the current rebound, unemployment levels and the new peaks in infections in one of the two most populous cities.
Purchases of Treasury and Mortgage securities will be larger this week and are back up to $20bn/week pace. This week, the NY Fed will purchase approx. $20.8bn in Treasury securities (last week $17.8bn, prior week before that $21.8bn) and approx. $23.8bn in MBS (prior week $22.8bn and week prior to that $22.8bn).
US Treasury issuance to be updated during 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
