Fathom Consulting:
(…) daily new cases appear to be rising throughout Europe following fairly comprehensive economic reopenings implemented over the past couple of months. Over the past month the average number of daily cases has increased by double-digit rates or much more in many large economies. The WHO has pinned some of the blame on youngsters, who presumably are less fearful of the virus and have larger networks than older people. They are probably making more use of newfound freedoms in the wake of reopenings. The risk is that they then pass it on to more vulnerable members of society.
The increase in cases in many European countries during summer, when outdoor activities are much easier to accommodate, does not bode well for the months ahead. At the moment, cases, and their rates of growth, remain well below where they were in spring, and authorities have responded with targeted lockdowns of affected areas, both in Spain and in the UK. In Leicester, these have shown signs of working. But the need for them so soon after national lockdowns were eased is a concern. It is not clear why European systems to test, trace, and isolate so far appear to be much less effective in containing the virus than Korea’s, despite having had much more time to prepare. It cannot be ruled out that Korea’s more intrusive methods including enforced quarantine and access to spending data to track movement offer a competitive edge. More broadly, it raises questions about the feasibility of the vaunted goal of widespread reopening while containing the virus. Difficult choices may lie ahead.
There are few countries that have been able to conquer COVID-19 and keep cases extremely low, with previous success stories such as Australia and Israel back in partial or full lockdown. The better news is that there are also few that have suffered indefinite large outbreaks either. The number of new cases each day stateside has continued to ease, with populous states that suffered large outbreaks recently leading the decline (Arizona, California, Florida and Texas account for 29.6% of the US population). Hospitalisations and positivity rates have also dropped, suggesting that the improvement is real and not related to a lower number of tests.
But the WaPo warns:
More than 51,000 new U.S. coronavirus infections were reported nationwide Wednesday, as the daily caseload average continued to trend downward. But the drop has been driven by steep declines in Florida, where Hurricane Isaias shut down dozens of testing sites, and California, where officials said technical problems with the state’s reporting system were leading to inaccurate tallies.
NORTHEAST
SOUTH
WEST
MIDWEST
- Last week, schools in Corinth, Miss., welcomed back hundreds of students. By Friday, one high-schooler tested positive. By early this week, the count rose to six students and one staffer infected. Now, 116 students have been sent home to quarantine, CNN reported Wednesday.
- Los Angeles will cut off water and electricity at houses that repeatedly host “egregious” parties, Mayor Eric Garcetti announced Wednesday. With bars and nightclubs closed to stop the spread of the coronavirus, hundreds of young people have flocked to large parties held at private homes and rental properties in the Hollywood Hills, the Los Angeles Times reported.
- Fifty-five percent of U.S. adults agree that the United States has been “worse than most other countries” in handling the coronavirus outbreak, marking the highest point since Morning Consult began tracking in April. Read More.
- Tens of millions of vaccine doses could be available early next year, with a billion ready by the end of 2021, Anthony S. Fauci, the country’s top infectious-disease expert, predicted Wednesday.
- France records highest number of daily cases since May
- Neighboring Spain also recorded an uptick in new cases, further fueling concerns of a severe second outbreak in Europe — likely a result of countries attempting to emerge from lockdown limitations and return to normal life.
Trump’s Trillion-Dollar Choice Another Pelosi-Mnuchin blowout isn’t needed and will divide the GOP.
As negotiations for another giant spending bill proceed in Washington, President Trump faces a choice. Does he do another deal giving Speaker Nancy Pelosi most of what she wants, perhaps splitting the GOP in the process? Or does he press his own economic agenda and, if the Speaker blocks it, take that to the voters in November?
On present trend Mr. Trump is headed for the first choice. (…) Even if the final number ends up somewhere between $1.5 trillion and $2 trillion, the Speaker would get most of what she wants. (…)
Treasury Secretary Steven Mnuchin seems to have convinced Mr. Trump that this is necessary to get a grand deal and help the economy through Election Day. We’d say the opposite is closer to the truth. The jobless payments will keep unemployment higher than it would otherwise be, as University of Chicago economist Casey Mulligan has shown. If schools stay closed, fewer parents will be able to return to work.
Another $300 billion or more for the states would be counterproductive in encouraging more states to keep their economies locked down for longer. (…)
But the economy is now growing again, with most economists predicting a 20% increase in third quarter GDP. Housing is strong, motor vehicle sales are rising, and manufacturing indexes are back in growth territory. No one knows why equity markets are as buoyant as they are, but one reason may be that they see a stronger recovery than does the political class. It wouldn’t be the first time. (…)
If Mr. Trump makes this deal with Mrs. Pelosi, he will divide his party on the eve of an election and on an issue that millions of conservatives suspect the President may not share their principles. That won’t help voter enthusiasm going into an election in which he is already trailing.
What’s the alternative? Mr. Trump can stop taking Mrs. Pelosi’s dictation and make the case for his own agenda to revive the economy in the fall and into 2021. As he noted himself this week, Mr. Trump doesn’t need Congress’s approval to defer the collection of payroll taxes for up to a year. This isn’t a great economic stimulus, but it would lift weekly American paychecks immediately without paying a $1 trillion negotiating fee to Democrats.
On jobless insurance, Mr. Trump and Republicans can keep offering an alternative of $200 a week plus the current state benefits; this is still generous. Extend the duration of enhanced benefits for those who can’t find a job, rather than increasing the disincentive not to work for those who can get a job.
These could become part of a larger Trump economic and reform agenda for a second term. The polls show the economy is the one issue on which a majority trusts Mr. Trump more than it does Joe Biden. But if he signs another Nancy Pelosi special, voters can be forgiven if they wonder what the economic policy difference is between Republicans and Democrats.
Composite PMIs show that the U.S. is trailing most other large economies:
USA: Business activity stabilizes but demand conditions deteriorate
July PMI data signalled a stabilization in business activity across the U.S. service sector as businesses continued to reopen following coronavirus disease 2019 (COVID-19) lockdowns in prior months. New orders declined at a slightly quicker rate, however, as domestic and foreign client demand remained muted, which was often attributed to ongoing virus-related restrictions. Nonetheless, operational restrictions led to constraints on capacity, with firms increasing their workforce numbers to process unfinished business. At the same time, output expectations improved to the strongest since March 2019 amid hopes of an end to lockdown measures over the longer term.
On the price front, input costs and output charges rose at sharper rates as there were some reports of PPE-related costs rising, and supplier price hikes were partially passed on to customers.
The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 50.0 at the start of the third quarter, up from 47.9 in June and improving on the ‘flash’ estimate of 49.6, to signal a stabilization in service sector business activity. The latest data brought to an end a five-month sequence of contraction, with the Business Activity index rising for a third successive month from April’s record low (26.7). Although some firms remained closed or noted weak client demand and disrupted working practices due to the pandemic, others stated that the resumption of business had boosted output.
In contrast, new business continued to decrease in July. Service providers registered a marginal rate of decline which was slightly greater than seen in June. The drop in new order inflows was often linked to customer hesitancy and social distancing measures stemming from the COVID-19 pandemic. At the same time, foreign client demand softened following a fractional expansion in June. New export orders were broadly unchanged as firms continued to note difficulties attracting sales due to the pandemic.
Input costs at service providers rose for the second month running in July, with the rate of inflation accelerating to the sharpest since October 2018. The increase in cost burdens was commonly associated with supplier price hikes, with some highlighting greater costs for sanitising and PPE products especially.
In response, services firms raised their selling prices at the start of the third quarter, despite challenging demand conditions. The increase in output charges was the quickest since October 2018. Firms stated that higher output prices were linked to the partial pass-through of greater cost burdens.
Service providers recorded the first increase in employment since February in July, as pressure on capacity due to COVID-19 restrictions on business processes causing delays to the handling of order books. Although only marginal, the expansion in payroll numbers signalled a turnaround from the marked contractions seen in April and May. Backlogs of work rose marginally, but at the fastest pace for a year.
Finally, business confidence improved in July to the strongest since March 2019. Expectations were buoyed by hopes of a relaxation in lockdown measures and a return to pre-pandemic business practices over the next 12 months. That said, the degree of confidence was below the series average, as some remained concerned about the longevity of the pandemic. (…)
The US was the only major economy to see COVID-19 containment measures tighten again in July , and this is reflected in the data, with new business inflows falling at an increased rate to hint at the possible start of a double dip in business activity. (…)
The NY Fed WEI:
Eurozone PMI signals fastest growth in over two years
The IHS Markit Eurozone PMI® Composite Output Index maintained its recent upward trend during July, rising by over six points on the month to a reach a level of 54.9. That compared to June’s 48.5 and slightly higher than the earlier flash reading (54.8).
Moreover, it was the first time that the index has posted above the 50.0 no-change mark since February and represented the fastest rate of growth since June 2018.
Both the goods-producing and service sectors recorded marked rates of growth during July, with manufacturing registering the slightly stronger pace of expansion. Whilst the increase in service sector activity was the first in five months, July data represented the first increase in manufacturing production since the start of 2019.
The upturn in growth was broad-based by country, and led by the region’s biggest two economies. France registered a considerable increase in activity, with growth here the sharpest for nearly two-and-a-half years. Germany enjoyed its best increase in activity for just under two years. Meanwhile, solid growth was seen in Spain and Italy.
Overall activity rose at a considerably quicker rate than volumes of incoming new business during July. Whilst the continued easing of lockdown restrictions helped to support a first increase in new business for five months, demand was undermined by continued weakness in international trade.
Latest data showed that new export business declined for a twenty-second successive month in July, although the rate of contraction was only marginal.
Despite the upturns in activity and new business, companies continue to operate with a considerable degree of spare capacity. Backlogs of work were again reduced during July, falling for a seventeenth successive month (albeit relatively modestly).
Subsequently, firms made further cuts to their workforce numbers, with staffing levels reduced for a fifth month in succession. Whilst the degree of job shedding weakened to the lowest in that sequence, the decline was again marked. Country level data showed that the sharpest falls in employment were seen in Italy, Spain and then Germany.
On the price front, there was a modest increase in operating expenses despite ongoing falls in input costs for goods producers. Competitive pressures and the challenging business environment nonetheless led to further discounting of output charges across both sectors.
Looking ahead to the coming 12 months, private sector companies on average expect activity to rise from present levels. Sentiment was also the highest recorded since February.
July’s IHS Markit Eurozone PMI® Services Business Activity Index returned to growth territory, posting a reading comfortably above the 50.0 no-change mark. After accounting for seasonal factors, the index recorded 54.7, up from 48.3 in the previous month and the highest level for nearly two years.
In contrast, despite increasing for the first time in five months, levels of incoming new business rose at a relatively modest pace. Moreover, growth was primarily driven by domestic markets as export trade remained weak. Latest data showed that foreign sales declined for a twenty-third successive month.
With activity rising at a noticeably faster rate than new work, service providers were again able to comfortably deal with overall workloads. According to the latest data, backlogs of work continued to fall (albeit modestly) and helped to explain another round of job shedding in the sector. Jobs have now fallen for five months in succession, although the latest contraction was the weakest in that sequence.
Operating expenses crept higher during July, rising for a second successive month and at a solid pace. In contrast, output charges declined for a fifth month in a row as a challenging business environment and efforts to support sales led to another period of discounting.
Finally, business confidence about the year ahead strengthened further during July, reaching the highest level for five months. Confidence picked up across the euro area region, with positive sentiment the highest amongst Italian services providers.
Chris Williamson, Chief Business Economist at IHS Markit:
(…) Whether the recovery can be sustained will be determined first and foremost by virus case numbers, and the recent signs of a resurgence pose a particular risk to many parts of the service sector, such as travel, tourism and hospitality. However, even without a significant increase in infections, social distancing measures will need to be in place until an effective treatment or vaccine is available, dampening the ability of many firms to operate at anything like pre-pandemic capacity, and representing a major constraint on longer-run economic recovery prospects.
China: Service sector growth sustained at marked rate in July
Growth of the Chinese service sector remained elevated during July as the economy maintained its recent recovery from the coronavirus disease 2019 (COVID-19) pandemic. Although easing from June’s highs, growth rates of new business and activity remained strong which helped to support business confidence. Sentiment about the forthcoming 12 months was the highest in over five years.
However, less positive, was another fall in employment as firms sought to boost productivity at a time of mildly rising costs but further falls in output charges.
The headline seasonally adjusted Business Activity Index recorded 54.1 in July, down from 58.4 in June. Whilst down on the previous month’s more than 10-year record, the index again signalled a marked rise in activity that was in line with the survey’s long-term trend. The result extended the current sequence of growth to three months as the economy continues to recover from the effects of the COVID-19 pandemic.
The continued resumption of economic activities in July helped to drive another month of new business growth. Although the rate of expansion eased from June’s near decade high, levels of incoming new work placed with Chinese service sector companies rose markedly (and for the third month in succession). Growth was, however, predominately driven by domestic markets. Ongoing challenges related to COVID-19 was reported to have undermined foreign sales.
Mild capacity pressures were signalled by the latest data, as backlogs of work increased for a second month in succession. Growth was linked by panellists to the latest gains in incoming new work.
However, firms chose to focus on increasing productivity to deal with higher workloads rather than adding to their workforce numbers. Latest data showed a slight decline in staffing levels during July, which marked the sixth successive month in which employee numbers have fallen.
Chinese service providers also faced some mild margin pressure in July. According to the latest data, average input costs rose for the first time in three months amid reports of higher employee costs. In contrast, output charges were reduced following a slight increase in June. There were reports from the survey panel that the mild reduction in output charges was linked to efforts to support sales during the ongoing recovery from the pandemic.
Finally, confidence surrounding future activity continued to strengthen during July. Latest data showed that sentiment was the highest recorded by the survey since March 2015. There were reports from panellists that the worst effects of the pandemic should now have passed, with firms widely expecting market and economic activity to continue on a positive growth path over the next 12 months.
July’s Composite Output Index fell slightly to 54.5, from June’s 55.7, but nonetheless continued to signal a marked rate of growth in Chinese business activity. The milder expansion reflected a weaker gain in services activity compared to June. Manufacturing output in contrast rose to the strongest degree since January 2011.
The rate of increase in aggregate new work was also the best since the start of 2011, with similarly marked gains in sales recorded across both monitored sectors. However, ongoing growth failed to encourage firms to take on additional staff, with employment levels falling slightly across both manufacturing and service sectors.
Meanwhile, prices data showed that input costs rose solidly, and at the strongest pace since November 2018. Output price inflation accelerated, though remained at a marginal level.
Japan: New orders fall at slowest pace since the current downturn began in February
Service providers in Japan indicated another tentative turnaround from disruptions due to the coronavirus disease 2019 (COVID-19) pandemic in July. While business activity and new orders continued to fall, the rates of contraction eased since June and remained much less severe than those seen in April.
At 45.4 in July, up slightly from 45.0 in June, the seasonally adjusted Japan Services Business Activity Index reached a five-month high. The latest reading also compared favourably with the survey-record low of 21.5 in April.
Around one-in-four survey respondents (26%) reported a drop in business activity during July, while 21% signalled an expansion. Among the minority reporting growth, this was primarily attributed to a gradual recovery in domestic demand since the state of emergency had been lifted.
July data indicated only a modest overall reduction in new work across the service sector, with the rate of decline the slowest in the current six-month period of contraction. Where a fall in new orders was reported, service providers often commented on low tourism numbers, event cancellations and other factors related to the pandemic.
Export sales remained especially subdued amid ongoing international travel restrictions, with the latest survey signalling a steep and accelerated reduction in new orders from abroad.
Backlogs of work decreased in July, which continued the downward trend seen since December 2019. Despite a lack of pressure on business capacity, employment numbers fell only slightly. (…)
Average cost burdens were broadly unchanged in July. Service providers noted a preference for cutting fixed overheads where possible, to help offset pressures on costs in other areas. Latest data indicated a sustained fall in prices charged by service sector companies. Discounting strategies have been signalled in each month since March amid intense competition for new work, but the latest fall was the slowest over this period.
Business expectations for the next 12 months meanwhile returned to positive territory, with the proportion of firms expecting growth (28%) exceeding those forecasting a reduction (26%). This represented the strongest degree of confidence since February. Anecdotal evidence mostly cited hopes of an improvement in the pandemic situation and a subsequent rebound in domestic economic conditions.
The au Jibun Bank Japan Composite Output Index – which measures combined output in the manufacturing and service sectors – registered 44.9 in July, up from 40.8 in June and the highest reading since February. However, the index has now remained below the crucial 50.0 no-change threshold for six consecutive months.
Manufacturing production (index at 43.9) decreased to a greater extent than service sector activity in July (45.4). The performance gap nonetheless narrowed since June, reflecting a much softer drop in manufacturing output than in the previous month.
Both manufacturers and service providers are optimistic that business activity will rise in the coming 12 months. At 52.8 in July, up from 49.4 in June, the composite index signalled the strongest business expectations since January.
(…) While there were some positive signs in terms of domestic sales, large parts of the service sector remained impacted by fragile customer demand and the cancellation of projects due to the pandemic. As a result, service providers commented on the need to reduce fixed overheads and an aversion to replacing departing staff. (…)
Small Business Employment Rebound Moderates in July
The latest Paychex | IHS Markit Small Business Employment Watch shows that employment growth moderated as new COVID-19 hot spots emerged in the South and West regions of the U.S. At 94.59, the national index has slowed 3.65 percent since last year.
Homebase data suggest employment peaked early July (% deviation since January) (ING)
- From experimental data produced by the Census Bureau. https://www.census.gov/programs-surveys/household-pulse-survey/data.html
52% of U.S. Air Travelers Now Uncomfortable Flying
Indicating how severely COVID-19 has disrupted the airline industry in its peak travel season, about half of American adults who flew at least once a year before the pandemic (52%) currently say they would not be comfortable flying. This figure varies significantly by age and political affiliation; most notably, 69% of American air travelers aged 55 and older say they would not be comfortable flying, compared with 33% of those aged 18 to 34. (…)
(…) Firms anticipate slashing their annual travel expenditures by nearly 30 percent when concerns over the virus subside (see chart 3). The expected decline in travel expenditures is particularly severe for information, finance, insurance, and professional and business services. Firms in these industries are marking in a nearly 40 percent reduction in travel spending after the pandemic is over. Overall, these results paint a fairly pessimistic view going forward.
Firms in our survey are not alone in their pessimism. A recent forecast from the International Air Transport Association projects air travel will remain below its prepandemic trend through 2024. (…) After the pandemic ends, firms anticipate conducting roughly half of all meetings with external clients, customers, patients, and suppliers by videoconference. Said another way, they expect the share of virtual meetings to triple relative to prepandemic averages.
More Farmers Declare Bankruptcy Despite Record Levels of Federal Aid More U.S. farmers are filing for bankruptcy, as federal payments projected to reach record levels this year fall short of compensating for the coronavirus pandemic and a years long slump in the agricultural economy.
About 580 farmers filed for chapter 12 bankruptcy protection in the 12-month period ended June 30, according to federal data. That was 8% more than a year earlier, though bankruptcies slowed slightly in the first half of 2020 partly because of an infusion of federal aid and hurdles to filing during the pandemic, according to agricultural economists and attorneys. (…)
The Trump administration is expected to dole out a record $33 billion in payments to farmers this year, according to the University of Missouri’s Food and Agricultural Policy Research Institute. The funds, including those intended to help farmers hurt by trade conflicts and the coronavirus, would push government payments to 36% of farm income, the highest share in nearly two decades, the institute said. (…)
Buoyed by $16 billion in direct payments to farmers to mitigate pandemic-related losses, farm income might tick down just 3% this year to $90.6 billion, the Food and Agricultural Policy Research Institute predicted in June. As of this week, less than $7 billion of the funds had been distributed, according to USDA. (…)
If more aid isn’t extended, farm income is expected to fall 12% to $79.4 billion in 2021, according to the Food and Agricultural Policy Research Institute. Government payments would drop by half to less than $17 billion. (…)
Consumers across the country grew less confident in the economy over the course of July, with the largest decreases coming primarily in the South and West. Read More.
EARNINGS WATCH
We now have 384 reports in, an 83% beat rate and a +23.5% surprise factor!
Q2 earnings are now seen down 32.1% (-25.6% ex-Energy) vs -43.0% on July 1. Pre-announcements are also positive vs at the same time during Q2:
Q3 earnings are expected down 22.2% (-18.8% ex-E) while Q4 are seen down 12.9% (-10.3% ex-E).
Trailing EPS are now $143.81 with full year 2020 at %124.79 and full year 2021 at $163.31.
Goldman Says Covid-19 Vaccine Approval Could Upend Markets
(…) The increased probability of an approved vaccine by the end of November is underpriced by equity markets, wrote strategists including Kamakshya Trivedi in a note Wednesday. Over the next few months, the ramifications of the U.S. election and the evolution of the virus — in part as schools reopen — are also likely to be key drivers of the market, they said.
Approval of a vaccine could “challenge market assumptions both about cyclicality and about eternally negative real rates,” the team wrote, adding such a scenario may support steeper yield curves, traditional cyclicals and banks, while challenging the leadership of technology stocks.
If this happened along with a change in the U.S. administration, emerging market equities could benefit “if trade policy risks diminish while U.S. tax risks rise,” according to the note. (…)
STOXX 600:
Eurozone companies continues to substantially underperform U.S. companies per Refinitiv:
- 198 companies in the STOXX 600 have reported earnings to date for Q2 2020. Of these, 61.1% reported results exceeding analyst estimates. In a typical quarter 50% beat analyst EPS estimates. The surprise factor is -39.0% (Financials: -128.9%!). These 198 companies showed aggregate earnings down 83.4% on revenues down 27.7%.
- 223 companies in the STOXX 600 have reported revenue to date for Q2 2020. Of these, 61.4% reported revenue exceeding analyst estimates. In a typical quarter 55% beat analyst revenue estimates. The surprise factor is -5.4%.
- Second quarter earnings are expected to decrease 67.5% from Q2 2019. Excluding the Energy sector, earnings are expected to decrease 58.3%.
- Second quarter revenue is expected to decrease 20.7% from Q2 2019. Excluding the Energy sector, revenues are expected to decrease 13.3%
Based on the above, better not hold your breadth on the forecast below:
