The Weekly Macro Review and Outlook for w/c 10 August 2020

by Kim | Aug 10, 2020

The weekly macro review for w/c 3 August 2020 – In the US, there was a more notable improvement/reduction in the number of new and continuing claims across both state and federal programs this week. Similarly, non-farm payrolls also recorded further growth in new jobs. But that pace of job growth slowed notably compared to the prior two months – and the levels of continuing claims, despite some improvement, remain extremely elevated.

On the broader tally, 22.16m payroll jobs were lost in Mar and Apr this year. So far, 9.28m payroll jobs have been regained during May-Jul. This month, most of the growth in employment was in part-time rather than full-time jobs.

To provide some context, the proportion of the US population now employed is back down to levels last seen in the 1960’s. The employment to population ratio highlights just how much damage has been done to the US labour market – and how critical ongoing fiscal support is for the recovery process.

With no clear resolution on new stimulus from the US congress, President Trump signed executive orders (EO’s) for a greatly reduced level ($300/wk) and extension (maybe 6wks) of the PUA benefit (utilizing FEMA funds), deferring some payroll tax, extending the eviction moratorium and continuing the zero-interest for student loans. At this point, its not clear whether these EO’s have an enforceable impact – the measures have been described as small, complex and temporary. But at least it might be a short term stop gap as negotiations continue.

Across all PMI’s for Jul, firms remain cautious about hiring, despite some headline month on month improvement in output and orders. Growth has been driven by domestic markets, while exports mostly remain weak.

US Manufacturing – the ISM report was quite positive for Jul. The Markit report indicated only marginal growth at best compared to the month prior. Production of motor vehicles has now appeared to gather more pace and this was a highlight of the Factory Orders & Shipments data for Jun. Durable goods ex transport orders were also stronger in Jun. Shipments of durable goods excluding transports is interesting – the decline due to the Covid shutdown was not as severe (as say the contraction in motor vehicle production) – and now shipments are ‘only’ 4.2% below a year ago (at the worst level, shipments were down by 8.7% in Apr). But shipment growth across durables ex transports was slowing notably in the 18-months leading up to the pandemic – which makes expectations for the recovery unclear.

Non-durable goods performance was likely impacted by higher oil prices this month. But excluding that, shipment growth of chemicals was stronger, and shipment growth of food remains steady.

As supply chains come back on-line, the next few months results will be important barometers of where final demand is at.

US Services – reports this month were lacklustre. Services accounted for most of the job growth this month, but there was little in either the ISM or Markit PMI’s that suggested acceleration in growth despite several months now of reopening. The ISM index remained elevated, but the underlying shift in firms reporting higher, no change or lower output suggests that firms, on net, are seeing at best more steady conditions this month, rather than accelerating growth. The Markit index also reflect no change in activity this month compared to the prior month.

Across the other regions, the UK and Aus services PMI’s were at levels more consistent with a broader reopening.

Eurozone services PMI recorded stronger month on month growth. Manufacturing growth was only moderate. For context, manufacturing output increased on a month on month basis for the first time this month since the start of 2019, while new orders increased in Jul, month on month for the first time in two years.

In Japan, both services and manufacturing PMI’s indicated a continued contraction in activity, although manufacturing contracted at a slower pace in Jul. The industrial production forecasts were for much higher growth in production for Jul – which has not been reflected in the PMI result.

In Australia, price has played a large factor in the return of retail sales in Q2. The trend in the underlying real (volume) of retail sales indicates that sales (versus the same quarter a year ago) have declined notably in Q2 while nominal growth remained positive, albeit slowed. Of note are the severe declines in Q2 volumes in NSW (-4.3%) and VIC (-6.2%) – well before the latest lock-down in Vic. Aus PMI’s continued to show further month on month growth in activity in Jul. For now, though, this momentum is likely to stall as severe restrictions are reimposed in Vic due to increased infections.

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 10 August 2020 – The focus will likely remain on progress of US Congress negotiations for further fiscal stimulus.

Data highlights this week:

US – initial claims data, retail sales for Jul, and the prelim consumer sentiment reading for early Aug. Also, Jul industrial production will be released – an important ‘hard datapoint’ to support the manufacturing PMI’s. It remains a good barometer for how manufacturing production and capacity is recovering.

Most of the Chinese economic data for Jul is out this week – including CPI, PPI, retail sales and industrial production.

Australia – the labour market survey for Jul will be released this week. The Q2 wage price index will also be released.

The schedule of US Fed purchases of Treasury and Mortgage-Backed Securities for this week is incomplete – the next schedule will be released during the week on 13 Aug. Treasury Security purchases by the Fed until Wed this week will be $7.8bn (last week total $9bn). The purchase of MBS so far, will be $17.04bn this week (last week $24.23bn).

US Treasury issuance will be slightly heavier this week. The US Treasury will settle approx. $319bn in ST bills this week, raising approx. +$8.3bn in new money. The US Treasury will also auction approx. $112bn in Notes and Bonds this week that will settle next week – raising approx. $62.5bn in new money. The latest US Treasury financing schedule for Q3 has a revised higher forecast for net cash raised for this quarter of $947bn, up from the initial $677bn estimate. Final numbers will depend on the shape of the final agreed stimulus bill. So far, $42bn (of a forecast $947bn) in new money has been raised this quarter – which means that there could be a significant increase in issuance over the next seven 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 3 August 2020

by Kim | Aug 3, 2020

The weekly macro review for w/c 27 July 2020 – US headline consumer sentiment and sentiment around expected conditions have both fallen back to the lows reached at the start of pandemic.

The Expectations Index fell back to 65.9 in July, tied with the six-year low recorded in May, providing no indication that consumers expect the recession to end anytime soon.

There was even some unusually downbeat commentary from the Mortgage Bankers Association this week regarding mortgage applications:

“Homebuyers stepped back slightly, and there was a larger drop in purchase application volume for FHA, VA, and USDA loans. This trend, along with the fact that average loan sizes are increasing, indicate that prospective first-time buyers are being impacted more by the rising economic stress caused by the resurgence in COVID-19 cases, as well as the uncertainty on how the next round of government support will take shape.”

Sentiment indicators are likely to worsen as additional benefits expire and if housing forbearance programs are not extended.

So far there has been no resolution regarding the extension for the expiring CARES Act benefits. The funding bill continues to be debated among Republicans. Some Republicans suggest enough stimulus has already been delivered and the Whitehouse wants to boost the economy prior to the election. The Democrats have an alternative set of priorities. There will likely be some resolution/compromise, but the Federal benefits have now started to expire.

The Federal Pandemic Unemployment Assistance program currently has over twelve million people on continuing claims. There are over 30 million people claiming ongoing unemployment insurance (at wk ending 11 Jul) across both state and federal programs.

The high frequency employment data (the regular state-based programs) is providing some mixed signals – the more recent data indicates that the small improvement in initial claims appears to be stalling and continuing claims also increased.

Regional manufacturing reports for July indicate at least a low level of momentum in production and shipments growth. Employment growth remains low, but there was improvement in hours worked. The advance durable goods report for Jun also indicated stronger growth for the month – except for non-defense airline orders. There appears now to be some greater momentum behind motor vehicle production and orders.

The decline in personal income in Jun was mostly due to the one-off CARES Act payments going through in the prior two months. In Jun there was an increase in wages and salaries, but levels remain well below a year ago. Incomes were boosted by unemployment insurance. Expenditures increased in Jun. But the year on year comparison highlights the severe decline in expenditure on Services – usually a very stable component. Any impact on expenditure and income from the current outbreak in infections in the US will likely start to show up from Jul.

In Australia, one of the largest states, Victoria, will go into a more severe shutdown for an estimated six (6) weeks due to the increase in infections. This will be another hit to the Australian economy, impacting business output, expenditure and employment at the state and National levels. At this stage, there is no indication of any renewed fiscal support for the state.

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 3 August 2020 – This will be another big week of data and several central bank meetings. Focus also remains on the ongoing negotiation of the extension of the US CARES Act/Federal unemployment insurance funding and stimulus.

Data highlights this week:

US – non-farm payrolls for Jul, the ISM PMI reports for Jul and the latest initial, continuing, and Pandemic unemployment insurance claims.

The final Markit PMI’s for Jul will be released for the major economies including – the US, Eurozone, UK, Japan, China, and Australia.

Australia – the RBA will meet this week on interest rates. Retail sales and housing finance data for Jun will be released this week. There is a possibility for further federal stimulus announcements due to the shutdown in Victoria.

The Bank of England will also meet this week.

The schedule of US Fed purchases of Treasury and Mortgage-Backed Securities has now been updated. There will be a reduction in the pace of Treasury security purchases by the Fed this week, down to $9bn (last week $25.15bn). The purchase of MBS will remain steady at $24.23bn this week (last week $26.15bn).

US Treasury issuance will be lighter this week – and there will be a net paydown. The US Treasury will settle approx. $285bn in ST bills this week, with a paydown of approx. -$33.6bn. This reduces the amount of new money raised this quarter to date to $34bn – the estimated requirement for new money raised this quarter is $677bn.

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