Monday Market Review June 8, 2020
Economic data released last week continued to show broad shutdown-based weakness over the past several months, in manufacturing, services, construction, and employment. However, some signs of improvement are being seen on the margin, which have been taken positively by financial markets.
U.S. equity markets gained with signs of economic recovery and a strong jobs report later in the week; foreign markets moved higher to an even greater degree. Bonds lagged with interest rates ticking higher on this same strength. Commodities rose with another strong recovery in crude oil, as producing nations discussed further supply cuts and demand is up.
U.S. stocks gained sharply last week with reopenings steadily increasing across the country, and no ominous signs of spikes in reinfections so far. Prices peaked on Friday as the jobs report was not nearly as bad as expected; improvement in segments such as manufacturing sentiment also appeared to help. By sector, energy stocks gained over 15% with production cuts helping normalize oil prices, followed by cyclical industries financials and industrials up over 10%—in a bit of a ‘value’ rally. Real estate gained by a similar amount, upon an expected improving environment. Defensive sectors health care, staples, utilities experienced minimal, but still positive, gains.
Foreign stocks gained to an even greater degree than U.S. markets, with lockdown restrictions similarly easing, and an influx of fresh government stimulus slated to aid in the effort. This included a doubling in the size of the ECB’s emergency pandemic bond purchase program to over €1.3 tril., and additional fiscal stimulus from the German government toward a variety of projects, as well as tax cuts. Emerging markets outperformed developed nations in U.S. dollar terms, especially in regions such as Latin America, when tend to be more sensitive to globally-cyclical forces and commodity extraction activities. This was despite growing protests and social unrest in Brazil, as economic reopening despite higher virus rates than in other regions led to currency appreciation.
U.S. treasury bond prices experienced a rougher week as interest rates ticked up sharply Friday in response to the strong jobs report. However, high yield corporates and bank loans bucked the trend with positive returns, with high yield spreads having tightened sharply since the late March wides. Foreign developed and emerging market bonds both gained, largely due to a return to risk and weaker U.S. dollar.
Commodities gained last week with a weaker dollar and sentiment boost toward pro-cyclical assets, including energy and industrial metals, while precious metals lost ground. The price of crude oil rose by another 10%+ to just under $40/barrel upon news of further production cuts by OPEC+ nations, as well as Chinese import growth. The anomaly of giving away oil at negative prices appears to be a distant memory for now.
(0/-) The ISM manufacturing index for May improved by 1.6 points to 43.1, but did not quite reach the 43.8 level expected by consensus. The underlying components of production, new orders, and employment all rose by around 5 points, but remained deep in contraction. Supplier deliveries fell by -8 points, but remained solidly in expansion, due to supply chain bottlenecks, while inventories ticked back up into expansion over 50. Prices paid also rose a bit. Overall, the manufacturing sector remains battered by widespread stoppages in activity, although there was some improvement on a marginal level compared to the prior month, which provided hope that perhaps the worst is over.
(0/-) The ISM non-manufacturing index for May also recovered, by 3.6 points to 45.4, about a point above the consensus forecast. Under the hood, new orders rose sharply, yet remained in contraction. Business activity also strengthened, experiencing the strongest gain in the nearly-25-year history of the index (15 points), but remained in contraction in the low 40’s. Employment also rose slightly, but stayed near recent trough levels in the low 30’s. Prices paid rose slightly, remaining expansionary in the mid-50’s, due to supply chain pricing pressures, seen with supplier deliveries at a still-high 67 reading.
(-) Factory orders fell by -13.0% in April, just slightly above the -13.4% decline expected. Core capital goods orders was revised down a bit, as were shipments.
(0/-) Construction spending fell -2.9% in April, but was a stronger showing than the -7.0% drop expected. Private and public construction activity experienced similar trends, falling roughly -5% in residential for each, offsetting smaller single-digit declines in non-residential.
(-/0) The trade balance for April saw a widening of the deficit to -$49.4 bil., which was on par with expectations, as trade activity generally declined significantly. Exports fell by -21%, with goods falling a bit more than services, especially in the non-petroleum segment. Imports fell by -14%, accounting for the differential.
(0) The private sector ADP employment report showed a drop of -2.760 mil. jobs in May, which was far less than the -9.000 mil. decline expected, and a sharp deceleration of job loss compared to April’s loss of -20 million. Services jobs were down -1.97 mil., led by trade/transports/utilities and goods-producing jobs. This shows some signs of life that layoffs have significantly slowed and some rehiring activity was occurring. Additionally, smaller firms experienced lower levels of job loss than larger firms, which was an interesting result.
(-) Initial jobless claims for the May 30 ending week fell by -246k to 1.877 mil., which was just above the 1.833 mil. forecast. Continuing claims for the May 23 week rose by 435k to 21.487 mil., higher than the 20.000 mil. expected, and a bit of a surprise. However, some of the differential appeared to be due to adjustments for several large states with file biweekly. The overall levels of initial claims appear to be settling down, as states process claims and regions/companies rehire, while the continuing claims levels remain historically immense.
(-) The employment situation report for May was expected to also be quite negative, if not to the same degree as last month. However, forecasters were way off-base. There is some question over how accurate these figures are, however, based on how respondents classified their own situations in the survey (‘employed but absent’ versus ‘unemployed on temporary layoff’). This may be a seemingly minor distinction, but matters a lot for the unemployment statistics.
Nonfarm payrolls rose by 2.509 million, surprising forecasters calling for a -7.5 mil. decline to piggyback on the over -20 mil. jobs lost in April. Job gains were widespread, but strongest in leisure/hospitality (1.2 mil.), construction (464k), retail trade (368k), and manufacturing (225k)—all on the more cyclical end and most heavily affected by nationwide reopenings. Government employment fell sharply, by -585k.
The unemployment rate fell by -1.4% to 13.3%, in the opposite direction of the consensus expected increase to 19%. There did appear to be measurement issues with worker classifications (technically employed but not actually working) that may cause that number to be artificially low by a few percent, as noted above. Part-time work also declined. About three-quarters of overall respondents described their layoff situations being ‘temporary’ in nature, in keeping with Covid-related shutdowns. Household employment in this metric showed a 3.8 mil. gain, in line with the magnitude of the nonfarm report. The labor force participation rate also fell a few percent to 60.8%, as job search activities have been largely cut back.
Average hourly earnings fell -1.0% in the month, however, in contrast to an expected 1.0% increase, bringing the year-over-year rate of increase down to 6.7%. Average weekly hours rose by 0.5 to 34.7.
In other data releases last week, nonfarm productivity improved to an annualized rate of -0.9% in the final Q1 report, versus expectations for a two-tenths deterioration to -2.7%. The year-over-year rate ticked up by four-tenths to 0.7%. Unit labor costs for Q1 rose by an annualized 5.1%, 0.3% over the prior quarter, and a tenth above expectations. The year-over-year rate rose to 1.9%, as the Covid experience and impacts of job furloughs and government transfer payments affecting the rates of change.
Have a good week.
Ryan M. Long, CFA
Director of Investments
FocusPoint Solutions, Inc.
Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, First Trust, Goldman Sachs, Invesco, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.