There were signs at the end of last week that the stock market was beginning to react to the slow start of the economy's recovery. And, this reaction may continue into this week, particularly since the weekend protests in some cities work against the recovery. But, the market soon may be getting evidence of a speedup in the economy's re-opening. With GM moving to full production of trucks this week and New York City beginning to open the following week, both Initial and Continuing Claims should soon begin to fall at a more rapid pace. This week, the markets may get a boost from a stronger-than-consensus May Employment Report.
Consensus looks for -8.25 Mn m/m in May Payrolls and a 5.0% pt jump in the Unemployment Rate to 19.7% from 14.7% in April. The Claims data, however, suggest Payrolls risk falling by a smaller amount and the Unemployment Rate rising by less than consensus.
The table below shows the change in Continuing Claims between Payroll Survey Week. It also shows the cumulative change in Initial Claims between these weeks. Both April Payrolls and Unemployed People were more closely aligned with Continuing than Initial Claims. This makes sense, since Initial Claims do not capture re-hired workers while Continuing do.
Taking the May change for Continuing and adding the 4 Mn underestimate in April points to -7 Mn for May Payrolls. Continuing also points to a 2% pt increase in the May Unemployment Rate to 16.7%.
To be sure, historically the relationship between either Continuing or Initial Claims and Payrolls and Unemployed is not so exact. There are too many other labor market flows that the Claims data do not capture directly. So, these calculations should be viewed only as suggestive of the risk in Friday's prints.
The historical evidence is mixed whether Wednesday's ADP Estimate will underestimate Private Payrolls. The May ADP Estimate reversed direction of the April miss in each of the past 3 years, suggesting ADP will be too high (a smaller negative) in May after it was too low in April (-20.2 Mn versus actual -19.6 Mn). But, ADP was too low in both April and May in each of the prior 3 years, suggesting it will underestimate May Private Payrolls (be more negative than Payrolls).
The other important US economic data this week will be the May Mfg ISM. Most other mfg surveys showed a modest improvement this month. So, the consensus estimate of a small increase to 43.0 from 41.5 in April is reasonable. The one counter evidence was the further decline in the May Chicago PM. However, there are reasons to discount it. The two moved in the same direction in only 2 of the past 6 months, correct when the economic shutdown was dominant in March and April. The shutdown was probably more dominant in Chicago than the whole country in May. Chicago still hadn't re-opened businesses that month. Also, the Chicago PM covers non-mfg as well as mfg companies in the Chicago area.
(Change from the Prior Month's Level in the Payroll Survey Week)
Continuing Claims Initial Claims* Payrolls Unemployed
April 16.2 Mn 26.4 Mn -20.5 Mn 15.9 Mn
May 3.0 12.2 na na
* cumulative change between survey weeks.
Sunday, May 31, 2020
Sunday, May 24, 2020
What Stocks May Soon Need to See
Early evidence of the economy's re-opening supported the stock market last week, but the market is approaching resistance areas. To break above them, the market may need to see /1/ the re-opening making significant headway or /2/ additional fiscal stimulus. Neither seems likely immediately ahead, so a pause in the rally is the risk.
An upturn in the labor market would show the re-opening making significant headway. Businesses would have gained enough confidence in the sustainability of the re-opening to stop firing and bring back workers. There should be significant declines in Initial and Continuing Unemployment Claims as a result. But, it may be awhile before the Claims data show significant improvement, possibly only until the extra $600 in weekly benefits expire on July 31. The extra amount has made total unemployment benefits larger than the working-income of many laid-off people. So, they have little incentive to return to work until the extra benefits end.
The Administration apparently now is open to more fiscal stimulus. It is said to favor direct payments to people, independently of the unemployment insurance program. The Senate is on break until June 1, however. So, any movement toward passage presumably needs to wait until it returns.
The latest Claims data were not strong enough to signal an upturn in the labor market. While Initial Claims fell further, at 2.438 Mn they are way too high and probably have to fall to under 1 Mn to show significant improvement. Continuing Claims jumped in the latest week, undermining the import of their slowdown in the prior week. These data point to about a 20% Unemployment Rate in May, up from 14.7% in April.
Other "high frequency" data show a steady, gradual improvement in activity. But, they remain at very low levels.
Restaurant reservations are up 13% from their April lows, better than the 7% improvement seen at the end of the prior week, according to Open Table. But, they are still 87% below the year-ago level.
The Phil Fed's ADS Business Conditions Index continues to improve gradually since it hit bottom in April (see chart below). It is consistent with the careful approach being taken to re-open factories, stores and restaurants. But, it still shows a very depressed economy. The Index is "designed to track real macroeconomic activity at high frequency."
This week's US economic data contain mostly backward-looking data. In particular, consensus looks for -25.8% m/m drop in April New Home Sales, a small downward revision to Q120 Real GDP Growth to -5.0% (q/q, saar) from the advance -4.8% print, -18.1% m/m in April Durable Goods Orders, -6.0% m/m in April Personal Income, and -12.0% m/m in April Consumer Spending.
There are reasons to ignore or discount most of these data. The drop in home sales should be ignored, as housing demand appears to be rebounding. Mortgage Applications for Home Purchase rose for the 5th straight week in last week's report. While the economic shutdown would be expected to hurt Durable Goods Orders, some of these orders resulted from business decisions made earlier and, in addition to the surge in demand for ventilators, stand as upside risk to the consensus estimate. The expected drops in April Personal Income and Consumption stem from the already-known plunges in Payrolls and Retail Sales.
ADS Business Conditions Index (level)
Jan 1, 2020 May 16, 2020
The average value of the ADS index is zero. Progressively bigger positive values indicate progressively better-than-average conditions, whereas progressively more negative values indicate progressively worse-than-average conditions.
An upturn in the labor market would show the re-opening making significant headway. Businesses would have gained enough confidence in the sustainability of the re-opening to stop firing and bring back workers. There should be significant declines in Initial and Continuing Unemployment Claims as a result. But, it may be awhile before the Claims data show significant improvement, possibly only until the extra $600 in weekly benefits expire on July 31. The extra amount has made total unemployment benefits larger than the working-income of many laid-off people. So, they have little incentive to return to work until the extra benefits end.
The Administration apparently now is open to more fiscal stimulus. It is said to favor direct payments to people, independently of the unemployment insurance program. The Senate is on break until June 1, however. So, any movement toward passage presumably needs to wait until it returns.
The latest Claims data were not strong enough to signal an upturn in the labor market. While Initial Claims fell further, at 2.438 Mn they are way too high and probably have to fall to under 1 Mn to show significant improvement. Continuing Claims jumped in the latest week, undermining the import of their slowdown in the prior week. These data point to about a 20% Unemployment Rate in May, up from 14.7% in April.
Other "high frequency" data show a steady, gradual improvement in activity. But, they remain at very low levels.
Restaurant reservations are up 13% from their April lows, better than the 7% improvement seen at the end of the prior week, according to Open Table. But, they are still 87% below the year-ago level.
The Phil Fed's ADS Business Conditions Index continues to improve gradually since it hit bottom in April (see chart below). It is consistent with the careful approach being taken to re-open factories, stores and restaurants. But, it still shows a very depressed economy. The Index is "designed to track real macroeconomic activity at high frequency."
This week's US economic data contain mostly backward-looking data. In particular, consensus looks for -25.8% m/m drop in April New Home Sales, a small downward revision to Q120 Real GDP Growth to -5.0% (q/q, saar) from the advance -4.8% print, -18.1% m/m in April Durable Goods Orders, -6.0% m/m in April Personal Income, and -12.0% m/m in April Consumer Spending.
There are reasons to ignore or discount most of these data. The drop in home sales should be ignored, as housing demand appears to be rebounding. Mortgage Applications for Home Purchase rose for the 5th straight week in last week's report. While the economic shutdown would be expected to hurt Durable Goods Orders, some of these orders resulted from business decisions made earlier and, in addition to the surge in demand for ventilators, stand as upside risk to the consensus estimate. The expected drops in April Personal Income and Consumption stem from the already-known plunges in Payrolls and Retail Sales.
ADS Business Conditions Index (level)
Jan 1, 2020 May 16, 2020
The average value of the ADS index is zero. Progressively bigger positive values indicate progressively better-than-average conditions, whereas progressively more negative values indicate progressively worse-than-average conditions.
Sunday, May 17, 2020
Markets Need Evidence of Economic Recovery (And Should Get Some)
Last week, Fed Chair Powell's speech regarding significant downside risks to the outlook undercut the market's emphasis on eventual recovery as the economy reopens. But, the speech was not quite a forecast. And, in fact, he said Sunday evening that the US economy should "recover steadily through the second half of the year," although a vaccine is needed for a full recovery. Moreover, there already are signs of an incipient improvement in economic activity.
The markets took Powell's speech as a forecast of a worsening economy. But, that's not what he said. He emphasized downside risks to the outlook and discussed some longer-term bad consequences if the economy does not recovery quickly. These observations were reasons why additional policy stimulus might be needed, which he acknowledged as possible. In that sense, his speech was more about keeping open the door for more fiscal and monetary stimulus than a forecast of a dire outcome. It may not be surprising that the Administration softened its opposition to more fiscal stimulus after this speech. This week's release of the FOMC Minutes will contain discussions of the Fed staff's and FOMC members' economic outlook. And, like Powell's comments on Sunday, they should show an expected pickup in economic activity during H220.
There are straws of evidence that the re-opening of businesses in some states is beginning to show up in the data. Restaurant reservations appear to be about 7% pts off their March-April lows so far in May, according to Open Table. Unemployment Insurance Claims data were mixed in last week's report. Layoffs remained high, but re-hiring may be picking up. Initial Claims fell only slightly w/w, staying at a high 2.981 Mn level. This shows layoffs are still extensive. But, Continuing Claims may have begun to level off. They rose only 456k to 22.833 Mn, suggesting more re-hiring largely offset the increase in layoffs. To be sure, the leveling of Continuing could reflect processing constraints at State offices, although there was no mention of this in the official report.
Regarding this week's US economic data, the markets should distinguish between those for April and those for May. April data should be weak but are history. May data should begin to show improvement and be a precursor of a fuller recovery. April Housing Starts/Permits and Existing Home Sales are not surprisingly expected to fall. But, the May Markit Mfg and Services PMIs, as well as the Philadelphia Fed Mfg Index, are seen improving, although remaining negative. The May NY Empire State Mfg Index supports this expectation, having improved to -48.5 in May from -78.2 in April. Markit European PMIs for May also could be important. The Johnson Redbook, a weekly survey of general merchandise store sales, may be worth watching, as well. It improved in the prior week. Consensus looks for Initial Unemployment Claims to fall to 2.45 Mn.
The markets took Powell's speech as a forecast of a worsening economy. But, that's not what he said. He emphasized downside risks to the outlook and discussed some longer-term bad consequences if the economy does not recovery quickly. These observations were reasons why additional policy stimulus might be needed, which he acknowledged as possible. In that sense, his speech was more about keeping open the door for more fiscal and monetary stimulus than a forecast of a dire outcome. It may not be surprising that the Administration softened its opposition to more fiscal stimulus after this speech. This week's release of the FOMC Minutes will contain discussions of the Fed staff's and FOMC members' economic outlook. And, like Powell's comments on Sunday, they should show an expected pickup in economic activity during H220.
There are straws of evidence that the re-opening of businesses in some states is beginning to show up in the data. Restaurant reservations appear to be about 7% pts off their March-April lows so far in May, according to Open Table. Unemployment Insurance Claims data were mixed in last week's report. Layoffs remained high, but re-hiring may be picking up. Initial Claims fell only slightly w/w, staying at a high 2.981 Mn level. This shows layoffs are still extensive. But, Continuing Claims may have begun to level off. They rose only 456k to 22.833 Mn, suggesting more re-hiring largely offset the increase in layoffs. To be sure, the leveling of Continuing could reflect processing constraints at State offices, although there was no mention of this in the official report.
Regarding this week's US economic data, the markets should distinguish between those for April and those for May. April data should be weak but are history. May data should begin to show improvement and be a precursor of a fuller recovery. April Housing Starts/Permits and Existing Home Sales are not surprisingly expected to fall. But, the May Markit Mfg and Services PMIs, as well as the Philadelphia Fed Mfg Index, are seen improving, although remaining negative. The May NY Empire State Mfg Index supports this expectation, having improved to -48.5 in May from -78.2 in April. Markit European PMIs for May also could be important. The Johnson Redbook, a weekly survey of general merchandise store sales, may be worth watching, as well. It improved in the prior week. Consensus looks for Initial Unemployment Claims to fall to 2.45 Mn.
Sunday, May 10, 2020
Rally Mode?
Last week demonstrated that expectations of a re-opening
of the economy dominate current economic weakness as the motivating
factor behind the stock market now. So, news about steps toward
re-opening will be important while weak economic data will be ignored
or discounted unless the market has overshot on the upside and needs to correct. This
week's data, expected to show weak inflation and retail sales for
April, should not derail the market's rally.
This way of understanding the driving forces behind the market is likely to be in effect into the summer. With states only beginning to re-open businesses, and doing so slowly, the economic data are likely to remain weak at least for May and June. But, the weakness should diminish over this time frame. For example, at this point, the Claims data argue for a smaller decline in Payrolls in May than in April (-20.5 Mn). Diminishing weakness should support expectations of a return to a fully operational economy at some point.
Problems, however, are conceivable for late in the summer. Stocks could become impatient with the speed of economic recovery, particularly if the rally has run too far. By August or September, there should be evidence whether growth has turned up in Q320. In addition, there could be two other concerns that will begin to take center stage then -- /1/ the risk of a resurgence of the coronavirus in the fall and /2/ uncertainty about the outcome of the Presidential election. While these two concerns could stop the rally, they may not be enough to push the market down sharply at that point, partly because these concerns should be well publicized. A significant hit to the market may require a bad realization of one of these concerns, which will not be known until October/November.
This week's US economic data should continue to reflect the extreme weakness stemming from the shutdown. Consensus looks for huge declines in the April CPI (-0.7% m/m Total and -0.2% Core), Retail Sales (-12.0% m/m Total and -8.6% Ex Auto), and Industrial Production (-11.0% m/m). These should be discounted. Motor Vehicle companies are scheduled to re-open their plants in May, and manufacturing in general is a sector amenable to early re-opening. Their resumption of production will add to May IP and moreso in June. The weakness in Retail Sales may have more to do with the shutdown of stores than with the loss of income stemming from unemployment. The majority of job losses were in low-wage industries. For the laid-off in many of them, the combination of Unemployment Insurance Benefits and the $600/week stimulus check exceeds what had been their wage income. So, when the stores re-open, spending could bounce back.
This way of understanding the driving forces behind the market is likely to be in effect into the summer. With states only beginning to re-open businesses, and doing so slowly, the economic data are likely to remain weak at least for May and June. But, the weakness should diminish over this time frame. For example, at this point, the Claims data argue for a smaller decline in Payrolls in May than in April (-20.5 Mn). Diminishing weakness should support expectations of a return to a fully operational economy at some point.
Problems, however, are conceivable for late in the summer. Stocks could become impatient with the speed of economic recovery, particularly if the rally has run too far. By August or September, there should be evidence whether growth has turned up in Q320. In addition, there could be two other concerns that will begin to take center stage then -- /1/ the risk of a resurgence of the coronavirus in the fall and /2/ uncertainty about the outcome of the Presidential election. While these two concerns could stop the rally, they may not be enough to push the market down sharply at that point, partly because these concerns should be well publicized. A significant hit to the market may require a bad realization of one of these concerns, which will not be known until October/November.
This week's US economic data should continue to reflect the extreme weakness stemming from the shutdown. Consensus looks for huge declines in the April CPI (-0.7% m/m Total and -0.2% Core), Retail Sales (-12.0% m/m Total and -8.6% Ex Auto), and Industrial Production (-11.0% m/m). These should be discounted. Motor Vehicle companies are scheduled to re-open their plants in May, and manufacturing in general is a sector amenable to early re-opening. Their resumption of production will add to May IP and moreso in June. The weakness in Retail Sales may have more to do with the shutdown of stores than with the loss of income stemming from unemployment. The majority of job losses were in low-wage industries. For the laid-off in many of them, the combination of Unemployment Insurance Benefits and the $600/week stimulus check exceeds what had been their wage income. So, when the stores re-open, spending could bounce back.
Sunday, May 3, 2020
Disastrous April Employment Report This Week
The stock market is likely to trade cautiously this week with many corporate earnings releases due and ahead of Friday's April Employment Report. Although in some sense "old news," the latter will underscore the deep hole into which the economy has fallen. An upside breakout in the market may require evidence of significant movement in the economy toward re-opening. Currently, there are positive developments toward this goal, but they may not be sufficient as yet to outweigh all the disastrous news regarding the impact already coming from the shutdown.
The April Employment Report is expected to show a massive drop in Payrolls and a surge in the Unemployment Rate. Consensus looks for a 21.4 Mn m/m plunge in Nonfarm Payrolls and a jump in the Unemployment Rate to 16.0% from 4.4% in March. The markets will get an advance hint in Wednesday's ADP Estimate, which consensus sees printing -20.0 Mn m/m. While I think the risks are for somewhat less gruesome prints, they still would show the huge damage done to the labor market.
Nevertheless, a close-to-full recovery in the labor market over H220 is conceivable if there is a near-full re-opening of the economy during that time. Early evidence of whether a significant recovery has begun will be if Continuing Claims start falling. A decline in the latter would mean re-hires are exceeding newly laid-off workers. Initial Claims probably need to fall to under 1 Mn per week for this to happen. This is not expected in this Thursday's Claims report. Consensus looks for Initial to fall to 3.0 Mn from 3.8 Mn in the prior week. Continuing are seen rising to 19.550 Mn from 17.992 Mn.
There are positive developments pointing to a gradual re-opening of the economy. The regulatory approval of Gilead's Remdesivir drug will hopefully lead to a faster decline in virus-related hospitalizations. A number of different testing procedures appear promising. Virus-killing UV emitting robots/machines are being produced and put into action at hospitals and hotels. And, a vaccine might be ready by September.
Meanwhile, some states have begun to slowly re-open businesses. Motor vehicle factories are scheduled to re-start operations during the first half of May. And, Macy's plans to re-open all its US stores over the next 6 weeks. A re-opening of retail stores, restaurants, amusement parks and hotels will be an important development that would result in a large number of re-hiring.
But, New York City and environs are likely to remain in closure mode for awhile longer. With Governor Cuomo deciding to keep schools closed through June, the start of re-opening there may not begin until July. The markets will likely move sharply higher when they do move toward re-opening.
In addition to a start of business re-openings, anecdotal evidence suggests consumer demand has turned up. GM and other motor vehicle companies saw a pickup in vehicle sales in the second half of April. Apple also saw improvement in sales then. And, oil demand may have bottomed.
The April Employment Report is expected to show a massive drop in Payrolls and a surge in the Unemployment Rate. Consensus looks for a 21.4 Mn m/m plunge in Nonfarm Payrolls and a jump in the Unemployment Rate to 16.0% from 4.4% in March. The markets will get an advance hint in Wednesday's ADP Estimate, which consensus sees printing -20.0 Mn m/m. While I think the risks are for somewhat less gruesome prints, they still would show the huge damage done to the labor market.
Nevertheless, a close-to-full recovery in the labor market over H220 is conceivable if there is a near-full re-opening of the economy during that time. Early evidence of whether a significant recovery has begun will be if Continuing Claims start falling. A decline in the latter would mean re-hires are exceeding newly laid-off workers. Initial Claims probably need to fall to under 1 Mn per week for this to happen. This is not expected in this Thursday's Claims report. Consensus looks for Initial to fall to 3.0 Mn from 3.8 Mn in the prior week. Continuing are seen rising to 19.550 Mn from 17.992 Mn.
There are positive developments pointing to a gradual re-opening of the economy. The regulatory approval of Gilead's Remdesivir drug will hopefully lead to a faster decline in virus-related hospitalizations. A number of different testing procedures appear promising. Virus-killing UV emitting robots/machines are being produced and put into action at hospitals and hotels. And, a vaccine might be ready by September.
Meanwhile, some states have begun to slowly re-open businesses. Motor vehicle factories are scheduled to re-start operations during the first half of May. And, Macy's plans to re-open all its US stores over the next 6 weeks. A re-opening of retail stores, restaurants, amusement parks and hotels will be an important development that would result in a large number of re-hiring.
But, New York City and environs are likely to remain in closure mode for awhile longer. With Governor Cuomo deciding to keep schools closed through June, the start of re-opening there may not begin until July. The markets will likely move sharply higher when they do move toward re-opening.
In addition to a start of business re-openings, anecdotal evidence suggests consumer demand has turned up. GM and other motor vehicle companies saw a pickup in vehicle sales in the second half of April. Apple also saw improvement in sales then. And, oil demand may have bottomed.
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