The stock market faces some big events this week, including earnings releases by major tech companies, an FOMC meeting, the Republican fiscal stimulus proposal, and the first print of Q220 Real GDP. While positive outcomes are conceivable, the market will probably trade cautiously into them.
News reports suggest the Republican proposal will add up to $1 Tn. This is at the low end of the expected range I mentioned last week, which could help explain the market sell-off late last week. But, it represents a starting point for negotiations with the Democrats. So, an eventually higher final stimulus figure cannot be ruled out. Some expect a final bill to be passed in the first week of August.
Hard evidence that the partial re-closings in some states are hurting economic growth could work to push Republicans to accept a larger stimulus package. Last week's release of the Unemployment Claims data showed the impact of the re-closings. Jumps in Initial Claims in Florida, Georgia, California and Washington more than accounted for the 109k w/w increase in the total. Continuing Claims need to rise to show that the increased layoffs in these states are exceeding re-hiring in the labor market.
The uptick in Initial Claims in the latest report will likely feed into the Fed's concerns about the sustainability of strong growth. While Powell may not mention them specifically in his post-meeting news conference, he will surely re-emphasize the Fed's intention to do what is necessary to support the recovery.
The Claims data and the first print of Q220 Real GDP are the most important US economic data this week. Another increase in Initial Claims would heighten concern about the sustainability of the recovery. In contrast, a substantial reversal of last week's jump would alleviate this concern. In either case, a parallel move in Continuing Claims would add significance. The consensus estimate of a dip in Initial to 1.400 Mn from 1.416 Mn would probably not be enough of a decline to unwind market concerns, although the direction is consistent with signs that the virus may have peaked in some of the heavily hit states.
Consensus looks for -35.0% (q/q, saar) in Q220 Real GDP. This is old news, as it is essentially the same as the Atlanta Fed model's forecast. Also, the bulk of the weakness occurred in the first half of the quarter. The question is whether this estimate under- or overstates the extent of the recovery that began in the second half. A higher-than-consensus print would suggest a stronger-than-expected recovery.
Sunday, July 26, 2020
Sunday, July 19, 2020
Hope for New Fiscal Stimulus Should Help Stocks
The stock market should continue to climb this week, if only in anticipation of additional fiscal stimulus by month end when the $600 bonus weekly payment to the unemployed is set to expire. Day-to-day volatility also should continue, as corporate earnings, infection rates, vaccine test results, renewed shutdowns, and still strong data assert themselves in the headlines. This week's US economic data calendar is light but are expected to feature strong June Home Sales.
As of now, it looks like Democrats and Republicans are moving toward a stimulus package between $1-2 Tn dollars. It would include help for state & local governments as well as for the unemployed. An amount toward the upper end of this range would probably elicit a positive response by the market.
Many Street economists are tracking daily and weekly data to get an early sense of a slowdown or speedup in growth. A number of these data suggest the surge in late May and early June is ending. But, so far the official economic data do not show an end to above-trend growth. The Claims data fell in the latest week, despite the possibility of a post-holiday increase. They show the improvement in labor market conditions is solid. While one more week's worth of the Claims data is needed for a complete read on what they suggest for July Payrolls, at this point they do not rule out another speedup in the latter. Also, even though the Philadelphia Fed Mfg Index fell a bit in July, it still leaves open the door for a 50+ level in the July Mfg ISM.
This week's US economic data are expected to provide more evidence of a strong comeback by the housing sector. Consensus looks for a 26% jump in Existing Home Sales to 4.71 Mn Units from 3.91 Mn in May. It expects +3.6% m/m in New Home Sales in June after the +16.6% surge in May. The July Markit Mfg and Services PMIs are seen breaking above 50. But, they would be just catching up to the Mfg Mfg and Non-Mfg ISMs, which were both above 50 in June.
As of now, it looks like Democrats and Republicans are moving toward a stimulus package between $1-2 Tn dollars. It would include help for state & local governments as well as for the unemployed. An amount toward the upper end of this range would probably elicit a positive response by the market.
Many Street economists are tracking daily and weekly data to get an early sense of a slowdown or speedup in growth. A number of these data suggest the surge in late May and early June is ending. But, so far the official economic data do not show an end to above-trend growth. The Claims data fell in the latest week, despite the possibility of a post-holiday increase. They show the improvement in labor market conditions is solid. While one more week's worth of the Claims data is needed for a complete read on what they suggest for July Payrolls, at this point they do not rule out another speedup in the latter. Also, even though the Philadelphia Fed Mfg Index fell a bit in July, it still leaves open the door for a 50+ level in the July Mfg ISM.
This week's US economic data are expected to provide more evidence of a strong comeback by the housing sector. Consensus looks for a 26% jump in Existing Home Sales to 4.71 Mn Units from 3.91 Mn in May. It expects +3.6% m/m in New Home Sales in June after the +16.6% surge in May. The July Markit Mfg and Services PMIs are seen breaking above 50. But, they would be just catching up to the Mfg Mfg and Non-Mfg ISMs, which were both above 50 in June.
Sunday, July 12, 2020
Q220 Corporate Earnings Bad, But Outlook More Important
Stocks could continue to trend upwards this week, despite the start of terrible earnings reports. They are old news, and comments about the May-June recovery and the outlook should be more important. These comments are likely to be cautiously optimistic, although this is not entirely certain. Expectations for this week's US economic data are somewhat mixed.
Corporate Earnings in Q220 should be terrible, a result of the economic shutdown. All the key macroeconomic evidence is bad (see table below). Real GDP Growth is expected to drop by more than 10% (y/y), based on the Atlanta Fed model's latest projection of -35.5% (q/q, saar). Oil company profits should be hurt by the drop in oil prices. The surge in the dollar, along with economic weakness abroad, will hurt overseas earnings. And, while the jump in Average Hourly Earnings likely reflects a compositional shift, as many low-wage workers lost their jobs, profit margins were likely hurt in many industries.
But, headline earnings will not likely be what the market focuses on. Instead, the focus should be on what companies say about the extent of the May-June improvement and what they expect ahead. The large drop in Q220 corporate earnings is old news. Some early corporate comments indicated better-than-expected gains in May and June. These may be heard again. But, they may be tempered by parts of the country having pulled back on some business activity in the last couple of weeks,
Consensus estimates of this week's US economic data are somewhat mixed. While they all look for growth, some data are not expected to be as strong as in the prior month. Speedups are seen in the June Core CPI, Industrial Production and Housing Starts. But, Retail Sales and Philadelphia Fed Mfg Index are seen slowing. Core CPI is expected to speed up to +0.1% m/m in June from -0.1% in May. The underlying Core PPI Ex Trade Services, released on Friday, already shows the start of recovery in some prices, like airfares and car rental rates. IP is seen accelerating to +4.3% m/m in June from +1.4% in May. It should be helped by the broadening in manufacturing re-openings, particularly motor vehicle factories. Housing Starts are expected to climb to 1.15 Mn Units in June from 0.97 Mn in May. In contrast, Ex Auto Retail Sales are seen slowing to a still-strong +4.5% m/m from +12.4% in May. A stronger print would seem to be the risk, however, given the jump in job growth that month. Phil Fed Mfg Index is expected to slow to 20 in July from 27 in June. This would still be a high level.
Consensus looks for Initial Claims to fall to 1.250 Mn from 1.314 Mn in the prior week. But, there is a risk that Initial will rise. This is because the prior week's decline could have resulted from faulty seaaonal adjustment of the holiday week (contained July 4th). If so, there could be an offsetting rebound in this week's report. And, if this is the case, Initial should fall in the subsequent report. All these w/w movements would be noise. But, if consensus is right and Initial Claims fall in this week's report, it would be important evidence that the recovery is moving ahead well.
Markit
Eurozone Real GDP Oil Prices Trade-Weighted Dollar AHE Core CPI PMI
[ y/y percent change ] (level)
Q117 1.9 +65.3 2.3 2.7 2.2 55.6
Q217 2.1 +13.1 3.1 2.5 1.8 56.8
Q317 2.3 +6.0 -1.9 2.5 1.7 57.4
Q417 2.5 +12.7 -4.1 2.5 1.7 59.7
Q118 2.6 +21.5 -6.6 2.7 1.9 59.1
Q218 2.9 +41.0 -1.8 2.7 2.2 55.9
Q318 3.0 +45.4 +5.1 2.8 2.2 54.3
Q418 3.0 +6.7 +6.5 3.3 2.2 51.7
Q119 3.2 -12.8 +7.9 3.2 2.1 51.9
Q219 2.7 -12.2 +5.9 3.1 2.1 47.8
Q319 2.1 -19.2 +3.6 3.2 2.3 46.4
Q419 2.4 -3.6 +1.7 3.2 2.3 46.2
Q120 -5.0 -16.5 +2.9 3.1 2.3 47.2
Q220 -10.6 * -53.5 +6.8 6.6 1.3 39.9
* Based on Atlanta Fed Model's latest projection
Corporate Earnings in Q220 should be terrible, a result of the economic shutdown. All the key macroeconomic evidence is bad (see table below). Real GDP Growth is expected to drop by more than 10% (y/y), based on the Atlanta Fed model's latest projection of -35.5% (q/q, saar). Oil company profits should be hurt by the drop in oil prices. The surge in the dollar, along with economic weakness abroad, will hurt overseas earnings. And, while the jump in Average Hourly Earnings likely reflects a compositional shift, as many low-wage workers lost their jobs, profit margins were likely hurt in many industries.
But, headline earnings will not likely be what the market focuses on. Instead, the focus should be on what companies say about the extent of the May-June improvement and what they expect ahead. The large drop in Q220 corporate earnings is old news. Some early corporate comments indicated better-than-expected gains in May and June. These may be heard again. But, they may be tempered by parts of the country having pulled back on some business activity in the last couple of weeks,
Consensus estimates of this week's US economic data are somewhat mixed. While they all look for growth, some data are not expected to be as strong as in the prior month. Speedups are seen in the June Core CPI, Industrial Production and Housing Starts. But, Retail Sales and Philadelphia Fed Mfg Index are seen slowing. Core CPI is expected to speed up to +0.1% m/m in June from -0.1% in May. The underlying Core PPI Ex Trade Services, released on Friday, already shows the start of recovery in some prices, like airfares and car rental rates. IP is seen accelerating to +4.3% m/m in June from +1.4% in May. It should be helped by the broadening in manufacturing re-openings, particularly motor vehicle factories. Housing Starts are expected to climb to 1.15 Mn Units in June from 0.97 Mn in May. In contrast, Ex Auto Retail Sales are seen slowing to a still-strong +4.5% m/m from +12.4% in May. A stronger print would seem to be the risk, however, given the jump in job growth that month. Phil Fed Mfg Index is expected to slow to 20 in July from 27 in June. This would still be a high level.
Consensus looks for Initial Claims to fall to 1.250 Mn from 1.314 Mn in the prior week. But, there is a risk that Initial will rise. This is because the prior week's decline could have resulted from faulty seaaonal adjustment of the holiday week (contained July 4th). If so, there could be an offsetting rebound in this week's report. And, if this is the case, Initial should fall in the subsequent report. All these w/w movements would be noise. But, if consensus is right and Initial Claims fall in this week's report, it would be important evidence that the recovery is moving ahead well.
Markit
Eurozone Real GDP Oil Prices Trade-Weighted Dollar AHE Core CPI PMI
[ y/y percent change ] (level)
Q117 1.9 +65.3 2.3 2.7 2.2 55.6
Q217 2.1 +13.1 3.1 2.5 1.8 56.8
Q317 2.3 +6.0 -1.9 2.5 1.7 57.4
Q417 2.5 +12.7 -4.1 2.5 1.7 59.7
Q118 2.6 +21.5 -6.6 2.7 1.9 59.1
Q218 2.9 +41.0 -1.8 2.7 2.2 55.9
Q318 3.0 +45.4 +5.1 2.8 2.2 54.3
Q418 3.0 +6.7 +6.5 3.3 2.2 51.7
Q119 3.2 -12.8 +7.9 3.2 2.1 51.9
Q219 2.7 -12.2 +5.9 3.1 2.1 47.8
Q319 2.1 -19.2 +3.6 3.2 2.3 46.4
Q419 2.4 -3.6 +1.7 3.2 2.3 46.2
Q120 -5.0 -16.5 +2.9 3.1 2.3 47.2
Q220 -10.6 * -53.5 +6.8 6.6 1.3 39.9
* Based on Atlanta Fed Model's latest projection
Sunday, July 5, 2020
Economic Strength Versus the Virus
The stock market continues to struggle between evidence of a strong V-shaped recovery and news of a resurgence of the virus. As a result, rallies on strong data, like the June Employment Report, are dampened by concern the strength won't persist. And, news of an expanding virus' resurgence could undercut the market rally. The infection rate may have to peak before stocks break through resistance.
The latest take on the coronavirus appears to be that the virus has mutated to being more infectious but less lethal. This change may help explain the resurgence of the infection rate in the country. But, virus-related deaths as a percent of infections should decline. From a market perspective, a rising infection rate could be a significant negative in itself if it results in renewed caution on the part of consumers. Restaurants, shopping malls and other such economic activities that bring people together could suffer. In the longer run, there could be a shift toward alternative ways of doing business. This is already seen in the jump in internet buying. Conceivably, restaurants could transform themselves into primarily delivering meals rather than serving them in-house. Delivery people could take the place of waiters and waitresses.
To be sure, there is still a lot of room for the economy to recover at a fast pace. Broad measures of the labor market -- Payrolls and Unemployment Rate -- have recovered only about 1/3 of their virus-related drop through June. Retail Sales have recovered the most, which is not surprising given that enhanced unemployment benefits and stimulus payments more than offset the drop in wage income. Manufacturing and Housing Output barely began to recover in May, but should post strong gains in June.
Percentage of Virus-Related Drop Recovered
Payrolls 33.8 June
Unemployment Rate 32.1 June
Ex Auto/Gas Retail Sales 62.3 May
Durable Goods Orders 33.4 May
Mfg Output 15.2 May
Housing Starts 5.9 May
New Home Sales 49.5 May
Existing Home Sales 0.0 May
It's too soon to get a handle on the July Employment Report. Some observers think the June 30th deadline for the Paycheck Protection Program (now extended to August 8) may have been responsible for the surge in June Payrolls. The Program gives small businesses loans if they kept their workers. The loans would be forgiven if all employee retention criteria are met and the funds are used for eligible expenses. This explanation seems plausible, but can't be proved. It could show up in July Payrolls again if there was a jump in small business hiring in the two weeks between the June Payroll Survey Week and month end -- and continuing into July thanks to the new deadline.
This week's calendar of US economic data is light and should not change the story of a strong recovery. Consensus estimates an increase in the June Non-Mfg ISM to 49.5 from 45.4 in May. Initial Unemployment Claims are seen falling to 1.375 Mn from 1.427 Mn in the prior week. The June Core PPI is expected to rise 0.1% m/m.
The latest take on the coronavirus appears to be that the virus has mutated to being more infectious but less lethal. This change may help explain the resurgence of the infection rate in the country. But, virus-related deaths as a percent of infections should decline. From a market perspective, a rising infection rate could be a significant negative in itself if it results in renewed caution on the part of consumers. Restaurants, shopping malls and other such economic activities that bring people together could suffer. In the longer run, there could be a shift toward alternative ways of doing business. This is already seen in the jump in internet buying. Conceivably, restaurants could transform themselves into primarily delivering meals rather than serving them in-house. Delivery people could take the place of waiters and waitresses.
To be sure, there is still a lot of room for the economy to recover at a fast pace. Broad measures of the labor market -- Payrolls and Unemployment Rate -- have recovered only about 1/3 of their virus-related drop through June. Retail Sales have recovered the most, which is not surprising given that enhanced unemployment benefits and stimulus payments more than offset the drop in wage income. Manufacturing and Housing Output barely began to recover in May, but should post strong gains in June.
Percentage of Virus-Related Drop Recovered
Payrolls 33.8 June
Unemployment Rate 32.1 June
Ex Auto/Gas Retail Sales 62.3 May
Durable Goods Orders 33.4 May
Mfg Output 15.2 May
Housing Starts 5.9 May
New Home Sales 49.5 May
Existing Home Sales 0.0 May
It's too soon to get a handle on the July Employment Report. Some observers think the June 30th deadline for the Paycheck Protection Program (now extended to August 8) may have been responsible for the surge in June Payrolls. The Program gives small businesses loans if they kept their workers. The loans would be forgiven if all employee retention criteria are met and the funds are used for eligible expenses. This explanation seems plausible, but can't be proved. It could show up in July Payrolls again if there was a jump in small business hiring in the two weeks between the June Payroll Survey Week and month end -- and continuing into July thanks to the new deadline.
This week's calendar of US economic data is light and should not change the story of a strong recovery. Consensus estimates an increase in the June Non-Mfg ISM to 49.5 from 45.4 in May. Initial Unemployment Claims are seen falling to 1.375 Mn from 1.427 Mn in the prior week. The June Core PPI is expected to rise 0.1% m/m.
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