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.
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