The stock market is being pulled in opposite directions by fear of the virus' impact on the economy and evidence of a V-shaped recovery. This week's key US economic data -- particularly the June Mfg ISM and Employment Report -- could play an important role in this battle. Evidence suggests they will support the idea of a strong recovery, but there are some caveats. Strong prints should boost stocks. But, a significant market rally may need to see signs that the coronavirus infection rate has stopped rising. And, then, concerns about the outcome of the Presidential election will likely be a restraint.
The June Mfg ISM risks printing above 50.0, above the 49.0 consensus estimate. The Phil Fed Mfg Index jumped to +27 this month, a level that was consistent with 50+ prints in the Mfg ISM. Also, while the June Markit Mfg PMI barely missed a "5" handle with a 49.6 print, it has been lower than the Mfg ISM in each of the past 3 months. To be sure, it is not a reliable predictor, evenly split between being higher or lower than the Mfg ISM in the prior 14 months.
The June Employment Report risks showing a speedup in Payrolls and a decline in the Unemployment Rate, with one caveat. The Claims data suggest that layoffs slowed while re-hirings rose since May. This combination presumably was behind the decline in Continuing Claims between the May and June Payroll Survey Weeks. It should show up in a speedup in jobs and a decline in unemployment. Consensus is consistent with this expectation. It looks for +3.0 Mn Payrolls versus 2.5 Mn in May and a decline in the Unemployment Rate to 12.3% from 13.3%.
A caveat is that the May Employment Report was stronger than Claims data had suggested. Claims correctly predicted a stronger Payroll print in May than in April. But, the +2.5 Mn m/m jump was out-sized relative to the Claims data, suggesting these data did not fully reflect all the flows in the labor market. It is conceivable that these unmeasured flows could unwind in June, thereby holding down the Payroll gain.
Similarly, the Claims data predicted a smaller increase in the Unemployment Rate in May than in April. It did not predict the decline that printed. BLS argued that some furloughed workers were incorrectly classified as employed rather than unemployed, which may explain the surprising decline in the Rate. But, adjusting for this possible mistake did not make the Unemployment Rate closer to Continuing Claims in March or April (see my June 14 blog). So, again there may have been labor market flows not captured by the Claims data that were behind the decline in the May Unemployment Rate. These unmeasured flows could reverse in June, thereby lifting the Rate.
Another possibility is that BLS could try to educate its surveyors to classify furloughed workers as unemployed. If so, it could add to the June Unemployment Rate. Generally, BLS does not revise past months' Unemployment Rates until December and January (the latter of the following year).
Sunday, June 28, 2020
Sunday, June 21, 2020
Coronavirus Fears, But A V-Shape Recovery Still Possible
The stock market now fears a resurgence of the coronavirus will interfere with the re-opening of the economy. As a result, evidence of a strong economic bounce-back could provide only a fleeting boost to the market on concern the strength will not persist. Reports of renewed downturns in the infection rates in the few states that recently had an upturn could be more important positives for the market than strong economic data.
Alternatively, the market may become comfortable that the increase in infections arising from renewed business activity will not stop the re-openings. With medical treatment of the virus improving, including reducing deadly virus-induced inflammation, this shift in market view cannot be ruled out.
Although coronavirus cases are rising in some states and the Unemployment Claims remain stubbornly high, there are hints of a V-shaped economic recovery. The surge in May Retail Sales shows the consumer is leading the way. Manufacturing is coming back, with motor vehicle plants back to full operations. And early indicators of the housing sector show strong demand re-surfacing.
A manufacturing comeback was seen in last week's release of the Philadelphia Fed Mfg Survey. It rebounded into positive territory in June, with the Index climbing to +26.3 after three sharply negative months. New Orders and Shipments turned positive, while Employment was less negative than in May. Another Phil Fed release, the ADS Index -- a measure of many high-frequency indicators -- has moved to all-time highs. It indicates that economic growth is now well above trend.
Restaurant reservations have continued to improve, as well. The Open Table Index is about 40% pts higher than the March low point. But, restaurant capacity utilization is only about 60% of last year's level, showing the impact of social distancing. Eating-out should climb further in the next few weeks as New York City implements its phase 2 re-opening that permits outside dining.
This week's US economic data should continue to build a case for a V-shaped recovery. Consensus expects an increase in the Markit US Mfg PMI to 44.0 in June from 39.8 in May. But, the Mfg ISM risks printing above 50, based on the jump in the Phil Fed Mfg Index. Consensus looks for a drop in Initial Claims to 1.275 Mn from 1.508 Mn in the prior week. A similar forecast missed last week, but with a growing number of areas reopening, there may be a better chance this week. May Durable Goods Orders are expected to reverse part of April's plunge. The risk is the rebound will exceed the consensus estimates of +10.3% m/m Total and +2.8% Ex Transportation. May Consumer Spending is seen bouncing a large 9.0% m/m after -13.6% in April, reflecting the surge in Retail Sales.
Alternatively, the market may become comfortable that the increase in infections arising from renewed business activity will not stop the re-openings. With medical treatment of the virus improving, including reducing deadly virus-induced inflammation, this shift in market view cannot be ruled out.
Although coronavirus cases are rising in some states and the Unemployment Claims remain stubbornly high, there are hints of a V-shaped economic recovery. The surge in May Retail Sales shows the consumer is leading the way. Manufacturing is coming back, with motor vehicle plants back to full operations. And early indicators of the housing sector show strong demand re-surfacing.
A manufacturing comeback was seen in last week's release of the Philadelphia Fed Mfg Survey. It rebounded into positive territory in June, with the Index climbing to +26.3 after three sharply negative months. New Orders and Shipments turned positive, while Employment was less negative than in May. Another Phil Fed release, the ADS Index -- a measure of many high-frequency indicators -- has moved to all-time highs. It indicates that economic growth is now well above trend.
Restaurant reservations have continued to improve, as well. The Open Table Index is about 40% pts higher than the March low point. But, restaurant capacity utilization is only about 60% of last year's level, showing the impact of social distancing. Eating-out should climb further in the next few weeks as New York City implements its phase 2 re-opening that permits outside dining.
This week's US economic data should continue to build a case for a V-shaped recovery. Consensus expects an increase in the Markit US Mfg PMI to 44.0 in June from 39.8 in May. But, the Mfg ISM risks printing above 50, based on the jump in the Phil Fed Mfg Index. Consensus looks for a drop in Initial Claims to 1.275 Mn from 1.508 Mn in the prior week. A similar forecast missed last week, but with a growing number of areas reopening, there may be a better chance this week. May Durable Goods Orders are expected to reverse part of April's plunge. The risk is the rebound will exceed the consensus estimates of +10.3% m/m Total and +2.8% Ex Transportation. May Consumer Spending is seen bouncing a large 9.0% m/m after -13.6% in April, reflecting the surge in Retail Sales.
Sunday, June 14, 2020
Why the Stock Market Sold Off
The stock market is likely to trade cautiously over the next couple of weeks as it awaits more evidence regarding the extent of re-opening of the economy. Upcoming data are for May and should show a partial recovery from their April plunges. But, substantial strength in the key data due the first week of July -- the June Mfg ISM and Employment Report -- may be needed to reignite the market rally.
The latest stock market sell-off was explained a number of ways. They included: /1/ news of a spike in coronavirus infections in some states that had opened up, raising the risk of a second economy shutdown, /2/ a pullback from technical resistance, exacerbated by algorithmic trading, /3/ the stock market had gone up too much too fast, and /4/ disappointment that the economy's bounce-back is not as strong as expected.
The market is jittery about the possibility of a 2nd wave of the coronavirus. But, not all is bleak.
/1/ The latest spike in coronavirus infections may have reflected an increase in testing to some extent rather than a post-opening spread of the virus, according to state officials. It is too soon to say for sure, although it is noteworthy that not all states that re-opened early experienced an increase in infections. /2/ News about advances in treatment and vaccinations seem to be very promising. The consequences of being infected should become much less severe than what they've been. As a result, a pickup in the infection rate may not prompt a second economy shutdown. /3/ Curiously, the change in social behavior, including washing hands and social distancing, could reduce the incidence of other diseases, like the flu, making them less disruptive of economic activity in the fall and winter than is typically the case.
A pullback from technical resistance triggered by disappointment about the speed of recovery makes the most sense as an explanation of the sell-off. The Fed's Central Tendency Forecasts, released on Wednesday, call for a moderate above-trend pace of Real GDP Growth from H220 through 2022. But, the market might have been disappointed they did not build in a more pronounced V-shaped recovery. Economists at the Fed (and, for the most part, on the Street) would likely be cautious in doing so at this point, however. Also, these forecasts were done before the May Employment Report was released. Note that a V-shaped forecast would throw doubt on the need for additional Fed easing -- a reason the Fed would not make such a forecast at this point.
Fed Chair Powell's congressional testimony this week should repeat the message from the Statement and his post-FOMC Meeting news briefing. It should acknowledge the damage done by the coronavirus and keep open the door for more monetary policy easing. He will make positive comments about the May Employment Report, but likely express the Fed's goal of ensuring that job gains continue. If asked about the shape of the recovery, he'll stick to the Central Tendency Forecasts.
The surprisingly strong May Employment Report seemed to allay fears of a weak recovery. But, a technical question about the calculation of the Unemployment Rate and the need for confirmation of the job improvement may have caused the market to pull back from its initially exuberant reaction. When Thursday's weekly data showed that Initial and Continuing Claims remained high, the market sold off. Further declines in Initial Claims to under 1 Mn per week may be needed to start pulling down Continuing Claims significantly.
The Bureau of Labor Statistics raised a technical question regarding the March, April and May Unemployment Rates. It believes that some of the responses to the Household Survey were incorrectly recorded as employed rather than unemployed. BLS said, "As was the case in March and April, household survey interviewers were instructed to classify employed persons absent from work due to coronavirus-related business closures as unemployed on temporary layoff. However, it is apparent |that not all such workers were so classified." BLS estimated how much higher the Unemployment Rate would be if these workers were classified as unemployed (called BLS-Adjusted in the table below). In May, the Rate would have been 3% pts higher than the reported 13.8%.
One way to evaluate the significance of the BLS concern is to compare the official and BLS-Adjusted unemployment measures to an independent measure, such as Continuing Claims. The one more closely related to the independent measure may be the more accurate, although the relationship between Continuing Claims and Unemployment is not exact. It turns out the Official Unemployment measure moved more closely with Continuing Claims than did the BLS-Adjusted measure in April while the opposite was true in May (see table below). Over the entire March-May period, the Official measure was closer than the BLS-Adjusted measure to Continuing Claims. So, this comparison throws some doubt on the BLS concern.
Measures of Unemployment
(m/m change, mn)
Continuing Claims * Official BLS-Adjusted
March 0.1 1.4 3.0
April 16.2 15.9 19.3
May 2.8 -2.1 2.6
March-May 19.1 15.2 24.9
* change between survey weeks.
The latest stock market sell-off was explained a number of ways. They included: /1/ news of a spike in coronavirus infections in some states that had opened up, raising the risk of a second economy shutdown, /2/ a pullback from technical resistance, exacerbated by algorithmic trading, /3/ the stock market had gone up too much too fast, and /4/ disappointment that the economy's bounce-back is not as strong as expected.
The market is jittery about the possibility of a 2nd wave of the coronavirus. But, not all is bleak.
/1/ The latest spike in coronavirus infections may have reflected an increase in testing to some extent rather than a post-opening spread of the virus, according to state officials. It is too soon to say for sure, although it is noteworthy that not all states that re-opened early experienced an increase in infections. /2/ News about advances in treatment and vaccinations seem to be very promising. The consequences of being infected should become much less severe than what they've been. As a result, a pickup in the infection rate may not prompt a second economy shutdown. /3/ Curiously, the change in social behavior, including washing hands and social distancing, could reduce the incidence of other diseases, like the flu, making them less disruptive of economic activity in the fall and winter than is typically the case.
A pullback from technical resistance triggered by disappointment about the speed of recovery makes the most sense as an explanation of the sell-off. The Fed's Central Tendency Forecasts, released on Wednesday, call for a moderate above-trend pace of Real GDP Growth from H220 through 2022. But, the market might have been disappointed they did not build in a more pronounced V-shaped recovery. Economists at the Fed (and, for the most part, on the Street) would likely be cautious in doing so at this point, however. Also, these forecasts were done before the May Employment Report was released. Note that a V-shaped forecast would throw doubt on the need for additional Fed easing -- a reason the Fed would not make such a forecast at this point.
Fed Chair Powell's congressional testimony this week should repeat the message from the Statement and his post-FOMC Meeting news briefing. It should acknowledge the damage done by the coronavirus and keep open the door for more monetary policy easing. He will make positive comments about the May Employment Report, but likely express the Fed's goal of ensuring that job gains continue. If asked about the shape of the recovery, he'll stick to the Central Tendency Forecasts.
The surprisingly strong May Employment Report seemed to allay fears of a weak recovery. But, a technical question about the calculation of the Unemployment Rate and the need for confirmation of the job improvement may have caused the market to pull back from its initially exuberant reaction. When Thursday's weekly data showed that Initial and Continuing Claims remained high, the market sold off. Further declines in Initial Claims to under 1 Mn per week may be needed to start pulling down Continuing Claims significantly.
The Bureau of Labor Statistics raised a technical question regarding the March, April and May Unemployment Rates. It believes that some of the responses to the Household Survey were incorrectly recorded as employed rather than unemployed. BLS said, "As was the case in March and April, household survey interviewers were instructed to classify employed persons absent from work due to coronavirus-related business closures as unemployed on temporary layoff. However, it is apparent |that not all such workers were so classified." BLS estimated how much higher the Unemployment Rate would be if these workers were classified as unemployed (called BLS-Adjusted in the table below). In May, the Rate would have been 3% pts higher than the reported 13.8%.
One way to evaluate the significance of the BLS concern is to compare the official and BLS-Adjusted unemployment measures to an independent measure, such as Continuing Claims. The one more closely related to the independent measure may be the more accurate, although the relationship between Continuing Claims and Unemployment is not exact. It turns out the Official Unemployment measure moved more closely with Continuing Claims than did the BLS-Adjusted measure in April while the opposite was true in May (see table below). Over the entire March-May period, the Official measure was closer than the BLS-Adjusted measure to Continuing Claims. So, this comparison throws some doubt on the BLS concern.
Measures of Unemployment
(m/m change, mn)
Continuing Claims * Official BLS-Adjusted
March 0.1 1.4 3.0
April 16.2 15.9 19.3
May 2.8 -2.1 2.6
March-May 19.1 15.2 24.9
* change between survey weeks.
Sunday, June 7, 2020
Fed on Stage This Week
The stock market will now be looking for evidence of a
V-shaped recovery after the May Employment Report surprised to the
upside. While there are few data releases this week, the Fed's FOMC Statement should encourage this expectation as it promises a continuation of easy monetary policy. Although the Statement will likely acknowledge the
job bounce and decline in the Unemployment Rate last month, it
may put them into context by emphasizing how they didn't fully undo the
substantial damage done to the economy by the virus. This would maintain the rationale for continuing an easy policy. So, with Fed
stimulus remaining and the economy improving, stocks
have more room to rally.
The FOMC Statement should be little changed from the May Statement:
/1/ The target funds rate range will be kept at 0-1/4%, with officials sticking with the idea that the virus "will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term."
/2/ Quantitative easing will continue. "To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations."
The Fed also will be releasing its Central Tendency Forecasts at this meeting. They should reflect the expectation of an economic recovery in H220 discussed in the April FOMC Minutes. The Central Tendency Forecasts are based on the forecasts from the twelve Fed District Banks and Fed Governors. However, they tend not to diverge much from the Fed staff forecast, which, as described in the April Minutes, looks for a good-sized recovery in H220:
"Under the staff’s baseline assumptions that the current restrictions on social interactions and business operations would ease gradually this year, real GDP was forecast to rise appreciably and the unemployment rate to decline considerably in the second half of the year, although a complete recovery was not expected by year-end. Inflation was projected to weaken this year, reflecting both the deterioration in resource utilization and sizable expected declines in consumer energy prices. Under the baseline assumptions, economic conditions were projected to continue to improve, and inflation to pick back up, over the next two years."
This week's calendar of US economic data is light, with the Claims data the main new piece of evidence. While a correct analysis of these data gave the right idea that consensus for the May Employment Report was too weak, the data did not predict the increase in Payrolls and decline in the Unemployment Rate. This damages their usefulness to some extent.
Besides Claims, US inflation data for May will be released this week. But, it is probably too soon to see a print that would boost inflation fears in the market. Consensus looks for 0.0% m/m for both Total and Core CPI. The less important May PPI also is expected to hover around 0.0% m/m for both Total and Core. Consensus looks for Initial Unemployment Claims to edge down to 1.50 Mn from 1.877 Mn in the prior week, still an extraordinary high level. It will be interesting to see if the University of Michigan Consumer Sentiment improves, in light of the May Employment Report. A good-sized increase would provide some confirmation of the latter's strength.
The FOMC Statement should be little changed from the May Statement:
/1/ The target funds rate range will be kept at 0-1/4%, with officials sticking with the idea that the virus "will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term."
/2/ Quantitative easing will continue. "To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations."
The Fed also will be releasing its Central Tendency Forecasts at this meeting. They should reflect the expectation of an economic recovery in H220 discussed in the April FOMC Minutes. The Central Tendency Forecasts are based on the forecasts from the twelve Fed District Banks and Fed Governors. However, they tend not to diverge much from the Fed staff forecast, which, as described in the April Minutes, looks for a good-sized recovery in H220:
"Under the staff’s baseline assumptions that the current restrictions on social interactions and business operations would ease gradually this year, real GDP was forecast to rise appreciably and the unemployment rate to decline considerably in the second half of the year, although a complete recovery was not expected by year-end. Inflation was projected to weaken this year, reflecting both the deterioration in resource utilization and sizable expected declines in consumer energy prices. Under the baseline assumptions, economic conditions were projected to continue to improve, and inflation to pick back up, over the next two years."
This week's calendar of US economic data is light, with the Claims data the main new piece of evidence. While a correct analysis of these data gave the right idea that consensus for the May Employment Report was too weak, the data did not predict the increase in Payrolls and decline in the Unemployment Rate. This damages their usefulness to some extent.
Besides Claims, US inflation data for May will be released this week. But, it is probably too soon to see a print that would boost inflation fears in the market. Consensus looks for 0.0% m/m for both Total and Core CPI. The less important May PPI also is expected to hover around 0.0% m/m for both Total and Core. Consensus looks for Initial Unemployment Claims to edge down to 1.50 Mn from 1.877 Mn in the prior week, still an extraordinary high level. It will be interesting to see if the University of Michigan Consumer Sentiment improves, in light of the May Employment Report. A good-sized increase would provide some confirmation of the latter's strength.
Subscribe to:
Posts (Atom)