Investors are pining to see
A rebound that’s shaped like a “V”
But data of late
Could well extirpate
Those views midst a wake of debris
For everyone who remains convinced that a V-shaped recovery is the most likely outcome, recent data must be somewhat disconcerting. There is no question that June data will look better than May’s, which was substantially better than April’s, but if one takes a few steps back to gain perspective, the current situation remains dire. One of the features of most economic statistical series is that they tend to measure both monthly and annual changes. The idea is that the monthly data offer’s a picture of the latest activity while the annual data gives a view of the longer-term trend. The problem for the bulls to overcome right now is that while June’s monthly data is showing record-breaking monthly gains, the annual numbers remain horrific. This morning’s German IP data is a perfect example of the situation. While this was actually data from May, it is the latest reading. During the month, Industrial Production rose 7.8%, the largest monthly gain on record, and arguably good news. Alas, expectations were for an even greater 11.1% rebound, and more importantly, the annual data showed a still terrible 19.3% decline from 2019’s levels. So, while there is no question that May’s numbers were an improvement over April’s, it is hardly sounding an all-clear signal.
This has been the pattern we have seen consistently for the past two months and is likely to continue to be the case for quite a while. Ergo, it is fair to state that the economy is rebounding from its worst levels, but to imply that things are even approaching the pre-Covid economy is completely erroneous. This is especially so in the survey data, which, if you recall, simply asks if this month was better than last. We saw some incredible PMI data at the nadir, with readings in the low teens and even single digits in a few countries, indicating that more than 80% of respondents saw things decline from the previous month. As such, it is no surprise that things got better from there, but does a rebound to a reading above 50 on a monthly series, with no annual analog, actually mean the same thing today as it did in January? I contend it is not a reasonable comparison and to imply that the economy is doing anything but slowly climbing back from a historic decline is just plain wrong.
The European Commission clearly understands this issue as they reduced their outlook for the EU’s economic growth in 2020 by a full percentage point to -8.7%, with most member nations seeing a substantial downgrade. A key reason for this downgrade has been the recent uptick in infections and the sporadic second closures of areas within the economies. The second wave of infections is dreaded for exactly this reason, it is preventing economies around the world from gaining growth momentum, something that comes as confidence builds that things will get better. Every interruption just extends the timeline for a full recovery, a prospect that none of us welcome. Alas, it appears that the most likely outcome right now is a very slow, drawn out recovery with a continued high rate of unemployment and ongoing fiscal and monetary support abetting every economy on the planet while simultaneously preventing markets from clearing and thus insuring slower growth ahead when it finally returns.
With that as preamble, a look at today’s markets shows essentially a full reversal from yesterday’s price action. Yesterday was always a bit odd as there was no clear rationale for the risk rally, yet there it was, around the world. However, this morning, the data continues to demonstrate just how far things are from the pre-Covid world, and it seems the risk bulls are having a tougher time. Starting in Asia, we saw weakness in Japan (-0.45%) and Hong Kong (-1.4% and long overdue given what is happening there) although Shanghai (+0.4%) has managed to keep the positive momentum going for yet another day. While there were no articles exhorting share ownership in the papers there last night, it remains a key feature of the Chinese government’s strategy, encourage individuals to buy stocks to support both markets and confidence. We shall see how long it can continue. European bourses have reversed much of yesterday’s gains as well, down a bit more than 1.0% on average and US futures are trading at similar levels, -1.0%. Bond markets continue to prove to be irrelevant at this stage, no longer seen as haven assets given the fact that there is no yield available but unwilling to be sold by traders as central banks have promised to buy them all if they deem it necessary. So, for the time being, it is extremely difficult to gain any credible price signals from these markets.
Commodity markets are under a bit of pressure, with oil prices lower by 1.5% and gold falling 0.5%, while the dollar is today’s big winner. Yesterday it fell against all its G10 counterparts and most EMG ones as well. This morning, it is just the opposite, with only the pound, essentially unchanged on the day, not declining while AUD and NOK lead the way lower with 0.55% and 0.45% declines respectively. The data situation continues to show that the early signs of a rebound are leveling off, so investing based on a brighter outlook is not in the cards.
In the EMG space, MXN is today’s big loser, down 1.25%, but here, too, it is nearly universal as only IDR (+0.35%) has managed to eke out a gain, ostensibly on the back of views that the central bank’s debt monetization plan will draw inward investment. We shall see.
On the data front, yesterday’s ISM Non-Manufacturing number was a much better than expected 57.1, but as I discuss above, I don’t believe that is indicative of growth so much as a rebound from the worst conditions in the series history. This morning we only see the JOLTS Job Openings data, (exp 4.5M), but this is a delayed number as it represents May openings. Remember, too, this is down from more than 7.5M in early 2019 and 7.0M earlier this year.
Yesterday we heard from Atlanta Fed President Bostic who sounded a warning that the second wave, if it expands, would have a significantly detrimental impact on the US economy, and thus he was quite concerned with the future trajectory of growth. Remember, it is the Atlanta Fed that calculates the widely watched GDPNow number, which is currently reading an extremely precise -35.18% decline for Q2. It is no surprise he is worried.
Overall, risk is on the back foot today and appears set to continue this move. Barring some overly upbeat commentary from the White House, something that is always possible on a down day, I expect the dollar to drift slightly higher from here.
Good luck and stay safe