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.