The Weekly Macro Review and Outlook for w/c 5 October 2020

by Kim | Oct 5, 2020

The weekly macro review for w/c 28 September 2020 – Data last week indicated some slowdown in the momentum of the US economic rebound.

There was a notably slower pace in the rebound of non-farm payrolls in Sep. In the last five months (May-Sep), there have been 11.417m jobs recovered in the US. A large deficit of -10.734m jobs remains – and this just accounts for the number of jobs lost during Mar and Apr.

The slower employment growth was mirrored by the employment report from the Household Survey. The decline in the unemployment rate was the result of a fall in participation. The number of permanent layoffs has continued to increase (but remains well down on the GFC). Employment growth slowed more substantially in Sep and most of the employment growth was part-time in nature. The employ to population ratio has increased from the Apr low of 51.3% to 56.6% in Sep (only slightly higher than in Aug). The last time in history when the employment to population ratio was this low was back in Feb 1976.

Initial claims were little changed in the latest week – still around the 1.4m level for both state and federal programs. But California has put its reporting on hold to clear the backlog of claims and application modifications – so data reflects last week data for California.

Income and disposable personal income declined in Aug. The decline was the result of a large fall from the expiration of the $600 additional payment on 31 Jul. Employee compensation growth was consistent compared to Jul but there was no acceleration in compensation growth. Expenditures increased at a slower pace. Given the decrease in disposable income, the level of savings fell by 23% compared to Jul. The saving rate is still almost double that of Jan levels.

Without extension of stimulus or benefits, further reductions in transfer payments will commence from late Dec as 39 weeks of PUA starts to expire. Another wave of reductions will likely start from Mar 2021 (26 weeks of state unemployment, 13 weeks of extended benefits, and 13 weeks of PEUC).

The annual PCE inflation rate increased at a faster pace in Aug. The core measure, excluding food and energy, indicates faster growth in underlying consumer prices of +1.8%. This acceleration will be important to watch, especially given the Fed average target of 2%.

Consumer sentiment firmed in the second half of Sep. This improvement was led mostly by higher income households. Levels remain well below those recorded at the start of the year.

There was some indication of slowing momentum in manufacturing growth. The headline ISM manufacturing PMI indicated that the pace of growth recorded in Aug was mostly maintained in Sep. Across key demand indicators, firms were reporting slower growth from the prior month. Of note was the slower pace of growth in new orders. The proportion of firms reporting higher/growth in new orders (compared to the prior month) has been falling and, in Sep, the number of firms reporting higher orders, was the lowest in the last four months. More firms also started reporting a decline in new orders. This will likely have implications for the pace of growth in production growth in the short-term. The production index also points to some levelling out of the growth momentum.

The US Markit PMI indicated a similar pace of growth in activity compared to the prior month – which remained moderate overall.

Outside of the US, the one highlight in the growth story was Germany. The increase in German manufacturing activity was a key driver of the overall improvement in the Eurozone manufacturing PMI.

The prelim annual Euro area CPI continued to decline in Sep by -0.3%. The month on month pace though remained positive at +0.1%. The main contributor to the annual decline was the continued fall in energy prices and price growth also slowed across services and non-energy industrial goods.

Retail sales in Japan rebounded in Aug but remain below a year ago. Manufacturing production continued to improve. The rebound in production remains uneven and led by a small group of industries. Most industries continued to record declines in finished goods inventories for the month of Aug.

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 macro outlook for w/c 5 October 2020 – In focus this week will be US domestic politics, in particular, tracking the health of President Trump after he contracted Covid-19, FOMC Minutes, RBA meeting, and US and global services PMI performance.

This week US Fed Chairman Powell will give a speech on the economic outlook at the National Association of Business Economics annual meeting. Link to viewing: https://www.youtube.com/watch?v=AxFVQJG_Wbk&feature=youtu.be

US domestic politics will likely continue to dominate in the lead up to the Presidential election. So far, President Trump has played down the severity of the infection on his health. With the first debate out of the way last week, the question is whether the second debate will go ahead on 15 Oct. News of further stimulus talks continue. The confirmation process for US Supreme Court Justice is also underway.

The key data points this week include:

US – ISM Services PMI, initial and continuing jobless claims, and the Aug JOLTS data. The focus in the JOLTS data will be on the pace of growth in job openings as well as separations/layoffs.

Global services PMI’s will be released early in the week providing some insight into the momentum behind service sector rebounds after/during these times of restricted trade.

It is a big week in Aus with the RBA meeting early in the week on rates and policy. This will be before the Federal government hands down the annual budget. There is some expectation that the overnight cash rate may be lowered further by the RBA (possibly by the end of the year) – as of Friday that was a 67% implied expectation of a further rate cut at the next meeting (down from 77% in the week prior). The Federal Budget is expected to include significant spending increases and tax cuts.

The US Fed will increase Treasury and MBS purchases this week. Treasury purchases are expected to be $29bn and MBS purchases are expected to be $26bn this week.

US Treasury issuance will be lighter this week. The US Treasury will settle approx. $319bn in ST Bills this week raising approx. $3bn in new money.

This week, approx. $27bn in Bills will mature on the Fed balance sheet and will be rolled over.

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