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.