Trump's desire to begin unwinding the US shutdown by Easter (or more likely soon thereafter) has shifted the market focus somewhat regarding the coronavirus. Rather than trading just on the idea that the virus' impact will be long and deep, the markets are now also looking for evidence that support a decision to pull back from the work/business restrictions that have been put in place. Along these lines, Trump said officials will be discussing ways to reboot the
economy. And, he will probably bring them up at his daily news conferences this week. This week's economic data will be weak, however. While they may be discounted, at least for now, as temporary or already known, the juxtaposition of evidence of the currently bad situation against assertions of hopefully better times soon could result in further market volatility.
Such discounting of weak US economic data already was seen last week, as stocks rallied despite weak underlying Durable Goods Orders and the surge in Initial Claims. News commentators attributed the rally to the passage of the stimulus bill. But, that is probably not the only reason. The bill helps cushion companies and workers from the economy's shutdown, so it just a band aid. Ford's announcement of a re-opening of several plants in the first half of April may be a harbinger of other companies' re-openings. So, it may have been another catalyst of Thursday's rally.
The most important development that would support the start of a return to normalcy is evidence that a cure for the disease has been found. A cure would allay fears of returning to work as well as buy time to come up with a vaccine. With NYC and other locales presumably now testing the effectiveness of the combination of chloroquine and Zpac, as well as other medicines, such evidence -- either supportive or not -- should be available soon.
This week's US economic data should be weak, but may not show the full extent of the work stoppage. Consensus looks for a drop in the March Mfg ISM to 45.0 from 50.1 in February. But, virus-related supply disruptions could boost the Supplier Delivery component, holding up the Mfg ISM for the wrong reason (because of disruptions, not capacity constraints). Consensus expects -100k for March Total Nonfarm Payrolls and -175k for Private Payrolls (Total less government jobs). While Initial Claims jumped to 3.2 Mn in the latest week, it was for the week after the March Payroll Survey Week. So, it is possible that most of the newly laid off people worked part of the Survey Week. In this case, they would be included as employed in the Payroll data. Their partial workweek would depress the Nonfarm Average Workweek, however. Consensus looks for a drop to 34.1 Hours from 34.4 Hours in February. This would point to a further large decline in April Payrolls.
The most important economic data may be the March Chinese Caixin Mfg PMI, because it could confirm anecdotal evidence that the Chinese economy is beginning to recover from the effects of the coronavirus. From a US perspective, supply disruptions could be easing and sales in China could begin to grow again. Consensus looks for an increase to 45.6 from 40.3 in February. It will be released late Tuesday. Similarly, the Caixin Services PMI could be important. It is due late Thursday. It was 26.5 in February.
Sunday, March 29, 2020
Sunday, March 22, 2020
Coronovirus Developments Are Now the Whole Story
Coronavirus-related news is now the only thing that matters for the markets. While fiscal policy help should provide some relief to the economy and markets, it is just a band-aid. Progress in curtailing the disease -- either through its natural course or through effective medicines -- is needed to be seen before a sustained stock market rally can take hold.
A cure, along with a peaking of the infection rate, would buy time for the development of a vaccine. Both are not out of the question. There are some encouraging results from French and US doctors about a combination of drugs that may be effective against the virus. And, the rate of increase in the infection rate might slow once the backlog of tests is worked through, which is expected by the middle of this coming week (as mentioned in President Trump's new conference today).
From a market perspective, a cure or peaking of the infection rate would prompt expectations of re-openings of businesses and sporting events. In this regard, things to watch for near-term are /1/ if schools go back to class when Spring Break is over at the end of March, /2/ if professional sports and other entertainment re-open in April, /3/ if workers start returning to offices and factories. In particular, if GM and other auto manufacturers re-open factories at the end of their 2-week closure, and /4/ if Chinese supply disruptions end.
These returns to normalcy are not likely to happen quickly, however. For example, NY Post reports that Broadway producers now think their shows will not reopen in April, Instead, the earliest date could be this summer. And. some school systems plan to re-open at the earliest in May. But, there are signs the Chinese economy has begun to rebound.
While Initial Unemployment Claims have just begun to surge (with some forecasters expecting an unheard of 2-3 Mn filings in this week's report), their peaking would be early evidence of a stabilization in the economic contraction. To be sure, the contraction is expected to be bad. Some Street Economists look for a 20+% (annualized) drop in Q220 Real GDP Growth. But, there is no hard evidence yet available, so the extent of a Q220 drop remains an open question.
A cure, along with a peaking of the infection rate, would buy time for the development of a vaccine. Both are not out of the question. There are some encouraging results from French and US doctors about a combination of drugs that may be effective against the virus. And, the rate of increase in the infection rate might slow once the backlog of tests is worked through, which is expected by the middle of this coming week (as mentioned in President Trump's new conference today).
From a market perspective, a cure or peaking of the infection rate would prompt expectations of re-openings of businesses and sporting events. In this regard, things to watch for near-term are /1/ if schools go back to class when Spring Break is over at the end of March, /2/ if professional sports and other entertainment re-open in April, /3/ if workers start returning to offices and factories. In particular, if GM and other auto manufacturers re-open factories at the end of their 2-week closure, and /4/ if Chinese supply disruptions end.
These returns to normalcy are not likely to happen quickly, however. For example, NY Post reports that Broadway producers now think their shows will not reopen in April, Instead, the earliest date could be this summer. And. some school systems plan to re-open at the earliest in May. But, there are signs the Chinese economy has begun to rebound.
While Initial Unemployment Claims have just begun to surge (with some forecasters expecting an unheard of 2-3 Mn filings in this week's report), their peaking would be early evidence of a stabilization in the economic contraction. To be sure, the contraction is expected to be bad. Some Street Economists look for a 20+% (annualized) drop in Q220 Real GDP Growth. But, there is no hard evidence yet available, so the extent of a Q220 drop remains an open question.
Sunday, March 15, 2020
What Will Stop the Stock Market Bloodbath?
The massive coordinated easing by the Fed and other central banks sets the stage for an eventual recovery in the economy and stock market. But, the knee-jerk stock market sell-off shows that the central bank action may have stoked fears that the near-term economic situation is worse than thought. (The evidence is not yet clear cut, however, as discussed below.) Whether this interpretation of the policy moves will persist is hard to say. The stock market could be in for wild swings again this week.
A sustained market recovery probably requires evidence that the virus' spread has peaked. This would spark expectations that the extraordinary actions by governments, sports organizations and companies to restrict group activities and global travel will end soon. And, as an added bonus, the extraordinary fiscal and monetary stimulus would fuel the snap-back of pent-up demand. To be sure, a return to normalcy could take several weeks or months, presumably. But the market would likely rally before then in anticipation of a recovery in economic activity. Similarly, an announcement of a vaccine also could trigger a rally, even though its availability would probably be months away.
The economic impact of the coronavirus should show up in March data. But, these data are, for the most part, several weeks away from being released. Curiously, a negative impact is not yet seen in the latest Unemployment Claims data, which are the broadest of the high frequency data. Both Initial and Continuing Claims still indicate a strong labor market in early March. Some large companies are continuing to pay workers despite the drop-off of business, which is helping to hold down Claims while keeping the labor market tight.
This week's US economic data are mostly for February and are expected to be strong. Consensus looks for +0.3% m/m in Ex Auto Retail Sales. They could be boosted by hoarding of food and household supplies in anticipation of the virus. And, people may not have curtailed going to restaurants as yet. Consensus expects a solid 0.4% m/m increase in February Industrial Production, but the risk is that it will be even stronger (based on Total Hours Worked in Manufacturing). February Housing Starts/Permits are expected to be little changed from the high January levels. And, February Existing Home Sales are seen rising. The one March report will be the Philadelphia Fed Manufacturing Index. Consensus looks for a pullback, but to a still-high 28 from 36.7 in February. This would not signal a major hit to this sector.
A significant contraction in consumer spending would push Real GDP Growth into recession. The table below shows the main components of consumption that would seem to be directly affected by actions to avoid the virus. A 20% drop in this spending would subtract $220.3 Bn from consumption, resulting in a 4.5% pt subtraction from annualized Q220 GDP Growth. A 30% drop would subtract 6.7% pts from Q220 GDP Growth. To be sure, there could be offsets. For example, if people eat out less, they would buy more food for consumption at home (hoarding is still going on in March, according to anecdotal evidence). And, there could be a shift to more on-line purchases if people are afraid to go to the malls. So, these calculations could be on the high side with respect to what will actually occur.
Real Consumer Spending
(annualized level, bn of constant $)
Q419 -20% -30%
Air Transportation 104.9
Food Services 608.3
Hotels 103.8
Admission to Spectator Amusements 67.8
Amusement Parks 60.4
Foreign Travel to the US 156.2
Total 1101.4 -220.3 -330.4
A sustained market recovery probably requires evidence that the virus' spread has peaked. This would spark expectations that the extraordinary actions by governments, sports organizations and companies to restrict group activities and global travel will end soon. And, as an added bonus, the extraordinary fiscal and monetary stimulus would fuel the snap-back of pent-up demand. To be sure, a return to normalcy could take several weeks or months, presumably. But the market would likely rally before then in anticipation of a recovery in economic activity. Similarly, an announcement of a vaccine also could trigger a rally, even though its availability would probably be months away.
The economic impact of the coronavirus should show up in March data. But, these data are, for the most part, several weeks away from being released. Curiously, a negative impact is not yet seen in the latest Unemployment Claims data, which are the broadest of the high frequency data. Both Initial and Continuing Claims still indicate a strong labor market in early March. Some large companies are continuing to pay workers despite the drop-off of business, which is helping to hold down Claims while keeping the labor market tight.
This week's US economic data are mostly for February and are expected to be strong. Consensus looks for +0.3% m/m in Ex Auto Retail Sales. They could be boosted by hoarding of food and household supplies in anticipation of the virus. And, people may not have curtailed going to restaurants as yet. Consensus expects a solid 0.4% m/m increase in February Industrial Production, but the risk is that it will be even stronger (based on Total Hours Worked in Manufacturing). February Housing Starts/Permits are expected to be little changed from the high January levels. And, February Existing Home Sales are seen rising. The one March report will be the Philadelphia Fed Manufacturing Index. Consensus looks for a pullback, but to a still-high 28 from 36.7 in February. This would not signal a major hit to this sector.
A significant contraction in consumer spending would push Real GDP Growth into recession. The table below shows the main components of consumption that would seem to be directly affected by actions to avoid the virus. A 20% drop in this spending would subtract $220.3 Bn from consumption, resulting in a 4.5% pt subtraction from annualized Q220 GDP Growth. A 30% drop would subtract 6.7% pts from Q220 GDP Growth. To be sure, there could be offsets. For example, if people eat out less, they would buy more food for consumption at home (hoarding is still going on in March, according to anecdotal evidence). And, there could be a shift to more on-line purchases if people are afraid to go to the malls. So, these calculations could be on the high side with respect to what will actually occur.
Real Consumer Spending
(annualized level, bn of constant $)
Q419 -20% -30%
Air Transportation 104.9
Food Services 608.3
Hotels 103.8
Admission to Spectator Amusements 67.8
Amusement Parks 60.4
Foreign Travel to the US 156.2
Total 1101.4 -220.3 -330.4
Sunday, March 8, 2020
This Week's Focus: Coronovirus, Oil and ECB
The stock market is plunging at the start of the week on fears of the coronavirus' economic impact and the drop in oil prices. But, there is still little, if any, evidence that US economic growth is slowing. And, the latest drop in oil prices is supply-related and thus of a different nature than the recent decline. The ECB could ease on Thursday.
Coronavirus
While the overall economic impact of the coronavirus in the US appears to be minor so far, the fear is that this will not be the case for long. If and when this hit to the economy happens is difficult to say. Companies are not standing still but making adjustments, which in the future could improve efficiency as well as make businesses less sensitive to the disease as well as to developments in China. The Chinese currency remains below its weakest levels, suggesting the worst may be over there.
Oil Prices
The current drop in oil prices is supply related, as it reflects a breakdown in the Saudi-Russian negotiations regarding an oil production cutback. The drop should be viewed as different from the recent weakness in oil prices that reflected an expected slowdown in economic growth. And, as such, it should be less of a negative (if not a positive) for the stock market, except for oil companies' shares. It should be a positive to the overall market because the drop in oil prices is equivalent to a tax cut -- it should add about $100 Bn to consumer purchasing power. But, there will be an offset in GDP from the hit to US domestic oil production. Note that the Saudi-Russian split could change on a dime, if they respond to the latest price drop by agreeing to cut production.
Central Banks
The Fed's preemptive easing, and presumably the ECB's this week, means that strong economic data should now be a positive for stocks, while weak data a negative. Future risks are again dominating Fed policy, so near-term strength will not necessarily stop further easing. Importantly, strong underlying growth, with the Fed in easing mode, will reduce the odds of a coronavirus-precipitated recession -- the impact would reduce economic activity but not by enough to push its trajectory into negative territory. This is a positive for stocks.
US Economic Performance So Far
US economic growth is turning out to have been strong in Q120. The jump in Total Hours Worked in February brought them better in line with the Atlanta Fed model's latest projection of 3.1% for Q120 Real GDP Growth. Some of the strength may have resulted from the mild winter weather. To some extent this could be pulling ahead activity normally done in Q2. But, even if is, the strength bolsters the economy's underlying momentum -- which should help it counter the virus assault.
While many in the market dismissed the strong February Employment Report as pre-coronavirus, Unemployment Claims show little, if any, impact of the coronavirus on the labor market after the Employment Report's survey week. Initial Claims were 216k in the latest week, keeping them within their recent range. Continuing Claims were 1.729 Mn, staying below the 1.744 Mn December-January average. They remain important to monitor.
Besides Claims, the other important release this week is the February Consumer Price Index. Consensus looks for a market-neutral 0.2% m/m Core CPI, keeping the y/y at 2.3%. Virus-related risks are mixed. Any price gouging on items being stockpiled by consumers could show up in the CPI. But, consumer pullbacks on other goods and services could have prompted discounting.
Presidential Race
The Presidential race will now likely take a backseat in terms of market importance. With most Democratic contenders having dropped out and Biden looking to eventually be the candidate, the consequence of a Trump loss should not be viewed as market-unfriendly as when Sanders looked to be in the lead.
Coronavirus
While the overall economic impact of the coronavirus in the US appears to be minor so far, the fear is that this will not be the case for long. If and when this hit to the economy happens is difficult to say. Companies are not standing still but making adjustments, which in the future could improve efficiency as well as make businesses less sensitive to the disease as well as to developments in China. The Chinese currency remains below its weakest levels, suggesting the worst may be over there.
Oil Prices
The current drop in oil prices is supply related, as it reflects a breakdown in the Saudi-Russian negotiations regarding an oil production cutback. The drop should be viewed as different from the recent weakness in oil prices that reflected an expected slowdown in economic growth. And, as such, it should be less of a negative (if not a positive) for the stock market, except for oil companies' shares. It should be a positive to the overall market because the drop in oil prices is equivalent to a tax cut -- it should add about $100 Bn to consumer purchasing power. But, there will be an offset in GDP from the hit to US domestic oil production. Note that the Saudi-Russian split could change on a dime, if they respond to the latest price drop by agreeing to cut production.
Central Banks
The Fed's preemptive easing, and presumably the ECB's this week, means that strong economic data should now be a positive for stocks, while weak data a negative. Future risks are again dominating Fed policy, so near-term strength will not necessarily stop further easing. Importantly, strong underlying growth, with the Fed in easing mode, will reduce the odds of a coronavirus-precipitated recession -- the impact would reduce economic activity but not by enough to push its trajectory into negative territory. This is a positive for stocks.
US Economic Performance So Far
US economic growth is turning out to have been strong in Q120. The jump in Total Hours Worked in February brought them better in line with the Atlanta Fed model's latest projection of 3.1% for Q120 Real GDP Growth. Some of the strength may have resulted from the mild winter weather. To some extent this could be pulling ahead activity normally done in Q2. But, even if is, the strength bolsters the economy's underlying momentum -- which should help it counter the virus assault.
While many in the market dismissed the strong February Employment Report as pre-coronavirus, Unemployment Claims show little, if any, impact of the coronavirus on the labor market after the Employment Report's survey week. Initial Claims were 216k in the latest week, keeping them within their recent range. Continuing Claims were 1.729 Mn, staying below the 1.744 Mn December-January average. They remain important to monitor.
Besides Claims, the other important release this week is the February Consumer Price Index. Consensus looks for a market-neutral 0.2% m/m Core CPI, keeping the y/y at 2.3%. Virus-related risks are mixed. Any price gouging on items being stockpiled by consumers could show up in the CPI. But, consumer pullbacks on other goods and services could have prompted discounting.
Presidential Race
The Presidential race will now likely take a backseat in terms of market importance. With most Democratic contenders having dropped out and Biden looking to eventually be the candidate, the consequence of a Trump loss should not be viewed as market-unfriendly as when Sanders looked to be in the lead.
Sunday, March 1, 2020
Stock Market Bounce?
The stock market is still contending with the uncertainties regarding the spread and impact of the coronavirus. But, there are reasons to hope the market will begin to stabilize this week: /1/ The major indices held their support levels on Friday, /2/ Fed Chair Powell corrected the mistake of several officials by reiterating the Fed's readiness to ease if needed, and /3/ maybe the worst of the coronavirus impact on Chinese production may be behind us. The results of Super Tuesday primary elections may be a hurdle, however.
The Fed
The Fed will have an opportunity to ease at the March 17-18 FOMC meeting. A sooner move, if not a coordinated rate cut with other central banks, as suggested by former Fed Governor Walsh, can't be ruled out.
There is precedence for an inter-meeting Fed rate cut in response to a plunge in the stock market stemming from an outside development. During September-November 1998, the Fed cut the funds rate by 25 BPs 3 times after the market lost more than 10% over August and September as a result of the Southeast Asia financial crisis. Stocks turned around in October (after the 2nd cut) and rose for almost another two years, making up the entire August-September loss by December 1998.
To be sure, a 25 BP rate cut could be dismissed as too little too late, given how far Treasury yields have fallen. Or it could be viewed as ineffective when the problem is supply-side and not demand-side related. It would nonetheless signal that the Fed is there as backup if needed -- correcting the mistake some Fed officials made just before the sell-off. This message should help calm the markets.
China
The Chinese Manufacturing Surveys, the NBS Mfg PMI and Caxin, released over the weekend, plunged to a record lows in February. They clearly reflect the impact of the coronavirus (and maybe the Chinese New Year?). However, these survey results are not a surprise and should be reflected in stock prices already. Instead, what is intriguing is the strengthening of the Chinese currency over the past several days. This may be noise or something other than a reflection of the state of the Chinese economy, but it at least raises the possibility that the worst is behind us.
Signs that Chinese economic activity has begun to recover from the impact of the virus are probably the most important fundamental news that would help stocks stabilize. Hard data, such as coal and electricity usage in China, will likely be more important than official pronouncements.
US Politics
Bernie Sander's success so far is a market negative, given his left-wing views. It may have had an oversized market impact since his chance of being nominated has been being talked up so much by news analysts. The market impact of this week's Super Tuesday elections could depend on how many delegates he acquires. If it looks like he is not a shoe-in after Tuesday, the stock market should react positively. If Sanders still looks to be the front-runner, stocks may pull back.
This Week's Key US Economic Data
After Powell's promise, weaker US economic data will become a positive for the stock market -- as they won't stand in the way of Fed easing -- while stronger data could be a negative or dismissed as too early to reflect the coronavirus. The consensus expectations are for some softening in this week's key US economic data, although what prints could be a different matter as the evidence is mixed in some cases.
1. The February Mfg ISM (due Monday) is expected to dip to 50.2 from 50.9 in January. The evidence from other surveys is mixed, although none is reliable. Phil Fed and Chicago PM suggest an increase, but the Markit Mfg PMI suggests a decline.
2. February Non-Mfg ISM (due Wednesday) will likely be important, after the sub-50 print of the Markit Flash Services PMI. However, the Markit Services PMI and the Non-Mfg ISM moved in the same direction in only 4 of the past 12 months. Consensus looks for a decline to 54.5 from 55.5 in January.
3. February Payrolls are seen slowing to +175k m/m from +225k in January. The estimate is consistent with the Claims data, which point to a slowdown. It equals the 2019 average, but is slower than the +211k prior 3-month average. Any print within this range should be viewed as strong. A print below this range should be considered weak, above very strong.
a. There is a risk that Census Workers will boost the Payroll figure. There were 20k Census Workers in February, but it is not clear whether some were counted as employed in January. The bulk of the Census hiring is expected to begin in March. The markets will likely subtract Census Workers in evaluating the Payroll figure.
b. Calendar considerations support the consensus estimate of a high 0.3% m/m Average Hourly Earnings. The y/y would fall to 3.0% from 3.1%, however, showing that wage inflation remains contained.
The Fed
The Fed will have an opportunity to ease at the March 17-18 FOMC meeting. A sooner move, if not a coordinated rate cut with other central banks, as suggested by former Fed Governor Walsh, can't be ruled out.
There is precedence for an inter-meeting Fed rate cut in response to a plunge in the stock market stemming from an outside development. During September-November 1998, the Fed cut the funds rate by 25 BPs 3 times after the market lost more than 10% over August and September as a result of the Southeast Asia financial crisis. Stocks turned around in October (after the 2nd cut) and rose for almost another two years, making up the entire August-September loss by December 1998.
To be sure, a 25 BP rate cut could be dismissed as too little too late, given how far Treasury yields have fallen. Or it could be viewed as ineffective when the problem is supply-side and not demand-side related. It would nonetheless signal that the Fed is there as backup if needed -- correcting the mistake some Fed officials made just before the sell-off. This message should help calm the markets.
China
The Chinese Manufacturing Surveys, the NBS Mfg PMI and Caxin, released over the weekend, plunged to a record lows in February. They clearly reflect the impact of the coronavirus (and maybe the Chinese New Year?). However, these survey results are not a surprise and should be reflected in stock prices already. Instead, what is intriguing is the strengthening of the Chinese currency over the past several days. This may be noise or something other than a reflection of the state of the Chinese economy, but it at least raises the possibility that the worst is behind us.
Signs that Chinese economic activity has begun to recover from the impact of the virus are probably the most important fundamental news that would help stocks stabilize. Hard data, such as coal and electricity usage in China, will likely be more important than official pronouncements.
US Politics
Bernie Sander's success so far is a market negative, given his left-wing views. It may have had an oversized market impact since his chance of being nominated has been being talked up so much by news analysts. The market impact of this week's Super Tuesday elections could depend on how many delegates he acquires. If it looks like he is not a shoe-in after Tuesday, the stock market should react positively. If Sanders still looks to be the front-runner, stocks may pull back.
This Week's Key US Economic Data
After Powell's promise, weaker US economic data will become a positive for the stock market -- as they won't stand in the way of Fed easing -- while stronger data could be a negative or dismissed as too early to reflect the coronavirus. The consensus expectations are for some softening in this week's key US economic data, although what prints could be a different matter as the evidence is mixed in some cases.
1. The February Mfg ISM (due Monday) is expected to dip to 50.2 from 50.9 in January. The evidence from other surveys is mixed, although none is reliable. Phil Fed and Chicago PM suggest an increase, but the Markit Mfg PMI suggests a decline.
2. February Non-Mfg ISM (due Wednesday) will likely be important, after the sub-50 print of the Markit Flash Services PMI. However, the Markit Services PMI and the Non-Mfg ISM moved in the same direction in only 4 of the past 12 months. Consensus looks for a decline to 54.5 from 55.5 in January.
3. February Payrolls are seen slowing to +175k m/m from +225k in January. The estimate is consistent with the Claims data, which point to a slowdown. It equals the 2019 average, but is slower than the +211k prior 3-month average. Any print within this range should be viewed as strong. A print below this range should be considered weak, above very strong.
a. There is a risk that Census Workers will boost the Payroll figure. There were 20k Census Workers in February, but it is not clear whether some were counted as employed in January. The bulk of the Census hiring is expected to begin in March. The markets will likely subtract Census Workers in evaluating the Payroll figure.
b. Calendar considerations support the consensus estimate of a high 0.3% m/m Average Hourly Earnings. The y/y would fall to 3.0% from 3.1%, however, showing that wage inflation remains contained.
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