THE DAILY EDGE: 7 JULY 2020

Coronavirus cases in the U.S. increased 2% as compared to the same time yesterday to 2.91 million, as of 3:32 p.m. New York time, according to data collected by Johns Hopkins University and Bloomberg News. That topped the average daily increase of 1.8% over the past week. Deaths rose to 130,090.

• Florida reported 206,447 cases, up 3.2% from a day earlier, compared with an average increase of 5.1% in the previous seven days.
• Arizona cases rose by 3,352 to 101,441, a 3.4% jump that was below the seven-day average of 4.1%, the state Department of Health Services reported Monday.
• Cases in North Carolina rose 4.3% to 74,775.
• California Governor Gavin Newsom said 6.8% percent of people receiving coronavirus tests in his state have the disease, up 39% in the last two weeks. The state recorded 5,699 new infections Sunday and is averaging 7,876 new cases per day.
• New Jersey’s governor called the gain there an “early warning sign.” Meanwhile, the Miami-Dade mayor said he plans to re-close restaurants and gyms starting Wednesday. Elsewhere in the U.S., Harvard and Princeton universities announced plans to bring back portions of their undergraduates for the fall semester.
• Over the past several days, the estimated effective reproductive number Rt, which is adjusted for increases in testing, has stabilized at around 1.10, indicating case growth is still accelerating nationwide.

Changes in select states’ COVID-19 testing and new cases since June

Globally, the pace of new infections in Tokyo, Iran and elsewhere is raising concerns about a fresh virus wave. India’s epidemic grew to the third-biggest in the world, surpassing Russia. In Israel, bars and gyms have been closed, and capacity at restaurants and on buses have been limited.

Australia places Melbourne under 6-week coronavirus lockdown Authorities to reimpose measures after rise in new Covid-19 cases

PANDENOMICS

SERVICES PMIs

USA: Business activity contraction slows in June as new business nears stabilization

June PMI^TM data signalled a notably softer rate of contraction in business activity across the U.S. service sector as many companies began to reopen following the easing of coronavirus disease 2019 (COVID-19) restrictions. The loosening of lockdown measures also led to the broad stabilization of new orders, while export sales rose for the first time so far in 2020. As a result, the rate of job shedding softened markedly as some firms highlighted the hiring of new employees to help fulfil new business inflows. Excess capacity also eased as backlogs fell only fractionally. Although business confidence was historically muted, it signalled renewed optimism as hopes of stronger demand drove sentiment higher.

Meanwhile, inflationary pressure returned as both input prices and output charges rose for the first time since February, with both increasing at solid rates.

The seasonally adjusted final IHS Markit US Services Business Activity Index registered 47.9 at the end of the second quarter, up significantly from 37.5 in May and above the earlier released ‘flash’ figure of 46.7. The marked easing in the rate of output contraction was in part linked to the reopening of service providers and the gradual return of customer demand. The pace of decline was the slowest in the current four-month sequence of decline.

New business inflows meanwhile broadly stabilized in June following three successive monthly contractions. The rate of decline eased notably from April’s record as a number of firms reported an uptick in customer demand following the gradual reopening of the economy. At the same time, new export orders for services expanded at the sharpest rate in almost a year, although the rate of growth was only fractional.

Inflationary pressures intensified for the first time since February at the end of the second quarter, as both input prices and output charges increased. Companies registered a solid rise in cost burdens as some suppliers hiked prices following the resumption of operations at service providers. The rate of input price inflation was the fastest since February 2019.

In response to higher input costs, firms partially passed on higher supplier prices to clients through greater selling prices. The increase was solid overall and the sharpest for 16 months.

Meanwhile, service providers continued to cut their workforce numbers, but at a much reduced pace. Although some companies noted that lay offs stemmed from ongoing closures and subdued demand, others resumed hiring as new order inflows stabilized.

Excess capacity remained evident in June, albeit to a lesser extent than prior months. The latest reduction in backlogs of work was only fractional as firms processed unfinished business upon the resumption of operations. Some respondents also stated that strengthening client demand had put pressure on capacity.

Finally, business confidence returned to positive territory at the end of the second quarter, amid hopes of further boosts to new sales. Optimism towards the outlook for output follows two consecutive months of pessimism. Although positive, sentiment remained historically subdued.

The IHS Markit Composite PMI Output Index posted 47.9 in June, up significantly from 37.0 in May, and was also higher than the earlier released ‘flash’ figure of 46.8. The slower overall decline in output was linked to the resumption of operations at manufacturers and many service providers.

The softer overall contraction also stemmed from reports of stronger demand conditions relative to those seen earlier in the pandemic. The uptick in sales led to the stabilization of new order inflows during June. Although export sales in the service sector increased during the month, a modest decline in manufacturing foreign client demand led to a further overall fall.

Manufacturers and service providers alike registered notably slower rates of job shedding in June, as strengthening demand pushed some firms to increase their staffing numbers. That said, evidence of excess capacity remained as backlogs of work fell further.

Supplier price hikes drove the first increase in cost burdens since February, with private sector firms partly passing on higher costs to clients.

Finally, companies expressed optimism towards the outlook for output over the coming year for the first time since March.

Chris Williamson, Chief Business Economist at IHS Markit:

June saw a record surge in the PMI’s main gauge of business activity in the US as increasing numbers of companies returned to work and expanded their operations amid the reopening of the economy. The survey points to a strong initial rebound from the low point seen at the height of the pandemic lockdown in April, with indicators of output, demand, exports and employment all showing steep gains. Financial services and technology companies are now reporting improved demand, as are many consumer-facing companies. Many, however, remain constrained by social distancing measures.

With business confidence in the outlook picking up again in June, a return to growth for the economy in the third quarter looks likely, though this will very much depend on the extent to which demand continues to strengthen. There remains a strong possibility that growth could tail off after the initial rebound due to weak demand and persistent virus containment measures. The need to reintroduce lockdowns to fight off second waves of coronavirus infections will pose a particular threat to recovery momentum, and could drive a return of the recession.

Eurozone PMI improves markedly to reach four-month high in June

The IHS Markit Eurozone PMI® Composite Output Index rebounded for a second successive month, and to a considerable extent during June. Rising to 48.5, up nearly 17 points since May’s 31.9, the index was at its best level in four months and also higher than the earlier flash reading of 47.5.

Despite the sharp improvement since May, the index was nonetheless indicative of challenging economic conditions across the region. Both manufacturing output and service sector activity continued to fall according to the latest data as the coronavirus disease 2019 (COVID-19) pandemic again weighed on wider economic activity.

Country level data for June showed that all countries enjoyed their best Composite PMI readings since February. Of note, growth was seen in France, which was the best-performing country overall.

Spain moved close to stabilisation, but activity continued to fall at solid rates in Italy and Germany. Ireland was the worst-performing nation.

Consistent with the trend seen for activity, levels of incoming new business continued to decline in June, but at a much slower rate. Underlying demand was reported to have remained weak, both at home and abroad. Levels of new export business continued to fall at a severe pace in June, according to the latest data.

Private sector companies continued to cut staffing levels during June, extending the current period of contraction to four months. Despite easing further since April’s record, the rate of contraction remained historically sharp. Latest data showed job losses across all countries that composite data are available for. The sharpest cuts to employment were seen in Germany, followed by Italy and then Ireland.

In spite of another reduction in labour capacity, companies were again comfortably able to keep on top of existing workloads. Backlogs of work declined for a sixteenth successive month, albeit in line with other survey data, at a much slower rate.

Meanwhile, operating expenses were little-changed during June as falling input prices for manufacturers were offset by higher employment expenses for service providers. In line with the challenging

business environment, companies chose to lower their own output charges for a fourth successive month.

Confidence amongst private sector companies returned to positive territory in June and hit its highest level for four months. There were hopes that the continual easing of lockdown restrictions will pave the way for stronger demand and sales growth in the next 12 months.

The IHS Markit Eurozone PMI® Services Business Activity Index continued to recover ground from April’s record low during June. Rising to 48.3, from 30.5 in May, the index posted its highest level since February. That said, by remaining below the 50.0 no-change mark, the index continued to indicate a challenging business environment for service providers.

Levels of incoming new business followed a similar trend to activity as demand struggled to gain meaningful traction despite the easing of lockdown restrictions across the region.

Overcapacity also remained evident as levels of work outstanding continued to decline, albeit at a slower pace. Companies responded by cutting their staffing levels for a fourth month in a row. Although easing since May, the rate of contraction remained historically sharp.

Nonetheless, with the reopening of units, firms were able to welcome back some staff from furlough schemes. This served, however, to raise overall operating expenses for the first time since February.

Margins were subsequently under some pressure as firms chose to discount their own charges in response to the challenging business environment and as part of efforts to support sales.

Finally, looking ahead to the coming year, service sector firms were at their most confident since February, with sentiment also returning to positive territory during the month.

Chris Williamson, Chief Business Economist at IHS Markit:

The headline eurozone PMI surged some 17 points in June, a rise beaten over the survey’s 22-year history only by the 18-point gain seen in May. The upturn signals a remarkably swift turnaround in the eurozone economy’s plight amid the COVID-19 pandemic. Having sunk to an unprecedented low in April amid widespread business closures to fight the virus outbreak, the PMI has risen to a level indicative of GDP contracting at a quarterly rate of just 0.2%, suggestive of strong monthly GDP gains in both May and June.

An improvement in business sentiment meanwhile adds to hopes that GDP growth will resume in the third quarter.

However, despite the vigour of the return to work following COVID-19 business closures, we remain cautious as to the strength of any longer-term recovery after the immediate rebound. Companies continued to report weak underlying demand in June. Many remained risk averse, being reticent to commit to spending and hiring due to persistent uncertainty as to the economic outlook, and in particular the likely sustained weakness of demand for many goods and services due to the need to retain many social distancing measures. While confidence in the future has improved, it remains well below levels seen at the start of the year, reflecting how many businesses are far from back to normal.

China: Service sector activity expands at quickest rate for over a decade in June

Chinese service providers signalled the sharpest increase in activity for over a decade in June. Furthermore, total new orders rose at the quickest pace since August 2010 and new export work expanded for the first time since January. Firms widely reported that overall market conditions had continued to improve following an easing of measures related to the coronavirus disease 2019 (COVID-19) pandemic.

Meanwhile, employment fell again, albeit modestly, with some firms noting that staff had left roles voluntarily. Encouragingly, business confidence hit a three-year high in June amid forecasts of further increases in customer demand.

The seasonally adjusted headline Business Activity Index picked up from 55.0 in May to 58.4 in June, to signal a substantial increase in service sector activity. Notably, the rate of expansion was the quickest recorded since April 2010. The upturn was widely attributed to the recent easing of virus-related restrictions and stronger demand conditions.

Total new business increased at the sharpest rate since August 2010, as companies reported that greater customer numbers were resuming more normal business operations. Furthermore, new export business increased for the first time since January, albeit modestly.

Chinese service providers meanwhile signalled a further drop in workforce numbers during June. The rate of reduction was modest, however. Where lower staffing levels were reported, this was generally linked to voluntary leavers.

Higher amounts of new business led to a renewed increase in outstanding workloads in June. Though marginal, it was the first time that backlogs had increased for four months.

While operating expenses were broadly stable in April and May, latest data pointed to a slight drop in input prices at the end of the second quarter. Some panel members noted that lower staff-related costs had helped to reduce overall cost burdens in June.

Prices charged by services companies were broadly unchanged in June, thereby ending a six-month period of decline. According to respondents, competition for new work continued to limit overall pricing power.

Chinese service providers expressed stronger optimism towards the 12-month outlook for business activity in June. Moreover, the level of positive sentiment hit a three-year high, with a number of firms forecasting further increases in client demand in the months ahead.

The Composite Output Index rose from 54.5 in May to 55.7 in June, to signal a sharp and accelerated increase in overall Chinese business activity. Notably, the rate of expansion was the strongest since November 2010. Output rose across both the manufacturing and service sectors, with the latter noting the sharper rate of growth.

New business also expanded at a quicker pace, with the rate of increase the steepest since January 2011. Sales rose sharply across the service sector, while manufacturers noted the first increase in total orders since January. However, employment remained on a downward trend, with both manufacturers and service providers recording modest falls in payroll numbers.

Input costs faced by Chinese companies meanwhile rose only slightly, while prices charged increased at a fractional pace.

Dr. Wang Zhe, Senior Economist at Caixin Insight Group:

(…) Both supply and domestic and overseas demand recovered. Despite flare-ups in some places, the epidemic remained largely under control in China. Work resumption in the services sector accelerated. The business activity index hit a 10-year high, and the gauge for total new business also reached its highest level since August 2010, indicating a good recovery of services activities. Despite uncertainties over the pandemic overseas, the measure for new export business returned to expansionary territory, meaning that external demand has not been a drag for the first time in five months. (…)

Japan: Headline PMI reaches four-month high in June

Following unprecedented and survey-record contractions in
service sector output in April and May, latest PMI data revealed
a substantial easing of the service sector downturn caused by
coronavirus disease 2019 (COVID-19) disruptions. With the state
of emergency being lifted, some businesses returned to work
and reported a tentative improvement in their order books.
However, conditions remained fragile amid low customer
numbers and operating rates, alongside still-weak economic
conditions.

The seasonally adjusted Japan Services Business Activity Index
recorded a sizeable month-on-month rise of 18.5 points in June.
The headline figure recorded 45.0, up from 26.5 in May. While still
remaining beneath the 50.0 mark which separates growth from
contraction, latest survey data signalled a substantial slowing
in the downturn as the state of emergency being lifted allowed
for a resumption in economic activity. However, where output
did rise, panel comments suggest that growth was limited due
to below-capacity operations and low customer numbers.

Nevertheless, the broad trend remained negative in June.
According to panel comments, levels of activity and new orders
were pulled lower by the ongoing adverse economic effects of
COVID-19. Demand for Japanese services continued to fall in
June, although the decline moderated from those seen in the
two previous months. Improved social mobility reportedly
benefited order books at some companies, but the majority of
businesses observed either no change or a further drop in new
workloads.

Spare capacity was once again apparent during June as
volumes of outstanding business fell solidly. According to firms,
operating requirements remained low due to weak demand
conditions.

Service sector employment was down only marginally during
June, and the majority of companies (88%) recorded no change.
Of the small group that saw workforces shrink, panel members
often linked this to retirements.

Looking ahead, businesses expect activity levels to remain
constrained over the coming year by heightened economic
uncertainty, a further shrinking in client numbers and below capacity
operating rates. That said, the level of confidence
improved to a four-month high as some firms were optimistic
that the worst of the downturn had passed. (…)

SUMMING IT UP:

June PMIs, particularly Services PMIs, provide the first tangible indications of things to come. Services businesses and employees were the hardest hit by lockdowns and Services account for the largest part of consumption across the world. Gradual re-openings along with gradual easing in C-19 cases allow economies to snap back (the “V”) as businesses rehire and rebuild inventories. What is key in gauging the sustainability of the recovery is the trend in new orders and in employment.

China was the first hit and the first to re-open. It has also been successful in stopping the pandemic, so far at least. Chinese service providers are reporting rising new orders and the first increase in backlogs. Employment is still declining but mostly from voluntary leavers. It looks like China’s economy is back in sustainable growth mode.

Japan is experiencing a continued erosion in new orders and backlogs. Employment seems to have stabilized.

The Eurozone also reports that “demand struggled to gain meaningful traction” in June and backlogs keep falling. The rate of contraction in employment remained historically sharp.

The USA reports a “broad stabilization of new orders” following 3 months of contraction, meaning that new orders have stopped declining but remain low. Backlogs eased some more but “only fractionally” although excess capacity remains evident. Service providers “continued to cut their workforce numbers, but at a much reduced pace”.

My take is that in spite of the normal snap back in demand from re-openings, with the  exception of China, we are still not seeing indications of a sustained solid turn in new orders (business demand) that would then solidly lift employment (consumer demand) that would fuel more new orders and create the typical post-recession self-feeding recovery. This is particularly worrisome for the U.S. where C-19 cases are increasing again in many parts of the country.

More on the U.S. employment scene:

• Two months of gains, but a huge jobs deficit remains, and deepening pain is on the horizon

(…) Payroll employment remains 14.7 million lower than it was in February, and the unemployment rate is 7.6 percentage points higher than it was in February. And, the unemployment rate is undercounting the extent of economic pain. In June, there were 17.8 million workers who were officially unemployed, but there were an additional 2.0 million workers who were temporarily unemployed but who were being misclassified as “employed not at work,” (see questions 11-14 here for more explanation). And 5.0 million who were out of work as a result of the virus were being counted as having dropped out of the labor force. Altogether, that is 24.5 million workers who are either officially unemployed or otherwise out of work as a result of the virus. If all these workers were taken into account, the unemployment rate would be a whopping 15.0%. Further, only about a third of these workers can reasonably expect to be called back to a prior job; the unemployment rate that includes only those who don’t have a reasonable chance of being called back to a prior job was 9.3%. (The methodology for the numbers in this paragraph can be found here).

How do June’s jobs numbers square with June’s unemployment insurance (UI) claims? As mentioned above, the June jobs data show that as of mid-June, there were 24.5 million workers who were either officially unemployed or otherwise out of work as a result of the virus. The unemployment insurance claims data out today show that as of June 13, there were 31.5 million workers claiming unemployment benefits in all programs. Comparing those two figures suggests that more than 100% of people out of work as a result of the virus are claiming unemployment benefits. However, this direct comparison is problematic. For example, some part-time workers are receiving unemployment benefits, but they aren’t counted in the 24.5 million because that figure only includes people who aren’t working. It is also likely that there is some double-counting of benefits claims. But nevertheless, it clear that a large share of people who are out of work as a result of the virus are on unemployment insurance, and that is good news.

Unfortunately, deepening pain is on the horizon. As bad as the labor market is, it’s likely that June is a temporary respite from the storm. Given the increase in coronavirus over the last couple of weeks along with re-shuttering of businesses as well as the pending expiration (on July 25th) of the $600 enhanced weekly unemployment insurance benefits, June’s labor market—as weak as it is—is the best we can expect for a while. With the hit to incomes from the loss of the $600 per week UI benefit and the increasing spread of the coronavirus, economic activity will soften because people don’t have the money to spend and they are afraid to go out.

The reference period for the jobs survey was mid-June, just before COVID-19 cases began to spike. We are already hearing reports of people being laid off for the second time. As mentioned above, unemployment Insurance data since the mid-June reference week continue to show historically high initial claims—2.3 million for the week ending June 27 (including both regular state UI and Pandemic Unemployment Assistance). These are initial claims, less and less likely to be residual claims from pent up demand from the initial weeks of overloaded state unemployment insurance offices.

Further, without massive additional federal aid, austerity is certainly on the horizon for state and local governments, because state and local tax revenues are plummeting. This means losses in public sector services, including cuts to school budgets at a time when schools are already struggling with the increased need for creative options for students. (…)

• The recovery in small business employment has stalled.

Source: Pantheon Macroeconomics

• Permanent job losers continued to rise in June. Last time, it took three years for permanent job losses to peak.

• Another perspective from CalculatedRisk:

• In just four months, the number of people who characterize their layoff as permanent has jumped by over 1.6 million. By contrast, after the official start of the recession during the last crisis, it took 11 months to see more than 1.6 million permanent layoffs. As Jed Kolko of Indeed explained to me, this category (which is of course difficult and subjective) is arrived at by asking workers whether they expect to get their old job back within six months. If they say no, they’re described as permanent. Jed’s own measure of what he calls the “Core Unemployment Rate” has risen two points in just the last four months, also faster than at the start of the Great Recession. (Bloomberg)

Economists at Jefferies write in a note to clients that their in-house economic activity index has “flat-lined” and “has now been moving sideways for the past three weeks.” (Axios)

• “The loss of momentum is broad-based, spanning small business activity, discretionary footfall, restaurant bookings, traffic congestion, and web traffic to state unemployment portals.”
• “Regional data show particular weakness in virus-hit states, where V-shaped recoveries are morphing into Ws.”
• “Given the timing of the hit, official June data are likely to be spared, but there is clear downside for July data.”

Trump Preparing Orders on China and Manufacturing, Top Aide Says

(…) “We’ve got a number of executive orders,” Meadows told Fox. “We’re looking at how we make sure that China is addressed, how we bring manufacturing back from overseas to make sure the American worker is supported. We’re also going to look at a number of issues as it relates to immigration, we’re going to look at a number of issues as it relates to prescription drug prices — and we’re going to get them done when Congress couldn’t get them done.” (…)

Shortly after Meadows’s televised remarks, Trump tweeted, “China has caused great damage to the United States and the rest of the World!” (…)

It’s important for Trump to “provide incentives for American manufacturing to be brought back from abroad,” he told reporters. Trump also still favors a payroll tax, calling it and the manufacturing incentive “critical components” of the White House’s position.

FYI:

• Airline passenger numbers in the U.S. exceeded 700,000 on July 2 for the first time since the pandemic began, according to the Transportation Security Administration. More than 2.6 million passengers were screened by TSA from July 2-5. There were roughly 730,000 airline passengers on Sunday, down from about 2.8 million the same day a year earlier.

US voters more pessimistic on chances of economic rebound FT-Peterson poll shows rising fears pandemic will get worse and recovery take longer

  

Bank of Canada surveys finds consumer, business confidence slump, raising concerns about COVID-19 recovery

(…) “Overall, consumers are cautious because of the risk of contracting the virus as well as the economic impact of the pandemic and related containment measures,” the bank said. “Consumers have changed their behaviour; they reported shopping less often, cancelling or postponing major purchases and lowering their spending compared with before the pandemic.”

This consumer caution is translating into sharply lower sales expectations and investment plans among businesses. The bank’s business outlook survey indicator dropped to its lowest reading since the 2008-2009 financial crisis and Great Recession.

“Firms reported that, while capacity could resume quickly as the economy reopens and containment measures are lifted, the recovery in demand is expected to be more gradual. Across the response categories, businesses commonly referred to elevated uncertainty regarding future demand,” the bank said. (…)

“Not everyone’s job will come back and uncertainty will linger,” Mr. Macklem said. “As a result, we expect the quick rebound of the reopening phase of the recovery will give way to a more gradual recuperation phase, with weak demand. If, as we expect, supply is restored more quickly than demand, this could lead to a large gap between the two, putting a lot of downward pressure on inflation.” (…)

EU sees deeper recession, less steep rebound for euro zone

The euro zone economy will drop deeper into recession this year and rebound less steeply in 2021 than previously thought, the European Commission forecast on Tuesday, with France, Italy and Spain struggling the most due to the COVID-19 pandemic. The EU executive said the 19-nation single currency area would contract by a record 8.7% this year before growing by 6.1% in 2021. In early May, the Commission had forecast a 2020 downturn of 7.7% and a 2021 rebound of 6.3%. (…)

• German Orders Bounce Sharply Higher After a Devastating Run of Weakness Even with the sharp rebound of orders in May, the trends remain astonishingly weak.

Over the last three months, 80% of S&P 500 companies failed to provide guidance. That’s a record going back to 2001.

Explaining the 2020 Stock Market

• Considering the median stock in the index is down 11% on the year, the fact that the market is more or less flat can be explained exclusively by the biggest companies holding the highest weights in the S&P.
• There is a clear pattern at work here. The biggest companies by market cap are the most expensive by traditional valuation metrics and they also have the best returns this year.
• The smallest companies by market cap are the least expensive by traditional valuation metrics and they also have the worst returns this year.

BTW:

PANDEMONIUM

US increasingly excludes China from coronavirus research projects

• In April, the National Institutes of Health announced a public-private partnership to develop research strategy for treatments – China was not part of the group
• NIH also cut off funding for a coronavirus project New York-based EcoHealth Alliance had with Chinese research entities
  

White House “Looking Into” Banning TikTok, Pompeo Says

Colleges Brace for Sharp Drop in Chinese Students

Coronavirus concerns have prompted broad travel restrictions and visa-processing delays that are unlikely to resolve before the start of the fall semester. On top of that, deteriorating U.S.-China relations are threatening what has been by far the biggest pipeline of foreign students to U.S. campuses. (…)

At some U.S. universities, international students account for upward of 15% of enrollment—and an even higher share of tuition revenue. There were nearly 370,000 Chinese nationals, or 34% of all foreign students, enrolled in U.S. higher-education institutions during the 2018-19 academic year, according to the Institute of International Education, or IIE.

Chinese students account for one-third, or nearly $15 billion, of the $44.7 billion that foreign students in the U.S. spent on tuition and other costs, including living expenses and books in 2018, according to Commerce Department data. (…)