ON DECK FOR THURSDAY, JULY 16
KEY POINTS:
- Risk off with IT and energy stocks leading S&P lower
- US retail sales exceed expectations….
- …as high frequency tracking is picking up
- Recovery deniers take note...
- ...US consumers have up to US$2.5 trillion in pent-up demand
- ECB stands pat as expected
- EU actions on data sharing, voice assistants knock tech lower…
- ...and may add to US-EU trade irritants
- Mixed China readings and interpretations
- Australia’s job market weakly rebounds
- UK job market does better than feared
- BI cuts as expected
- Canadian ADP payrolls confirm expectations
INTERNATIONAL
A mild risk-off tone is reversing yesterday’s equity gains. An EU Court ruling against data sharing by tech companies between the US and Europe and an EU antitrust action launched against voice assistants (‘hey Siri’, ‘Alexa’) aren’t helping the mood. I’m not sure I buy the argument that mixed overnight Chinese releases will slow policy stimulus as opposed to the impact of tightened regulation on cooling Chinese equities being one of the culprits here. The ECB changed nothing in its statement this morning—as generally expected—with the press conference unfolding. Overnight releases saw better than feared UK readings, a pathetic ‘rebound’ in Australian jobs and an expected cut from Bank Indonesia. US bank earnings beats continue to soar especially on trading revenues. US retail sales were strong and there is more to come (see below), claims likely stalled due to prior holiday distortions Philly is still v-shaped.
- US equities are down by about ½% to 1% with the TSX off by about ½%. Asian equities led selling with mainland China down by about 5%. European cash markets are down by around ½% or slightly less on average.
- Sovereign curves are mildly rallying on average. The US Treasury curve is slightly bull flattening across 2s10s with the long end down 2bps. Canada’s curve is outperforming US Ts at the long end following the BoC’s actions yesterday. Gilts are outperforming with yields down 2–3bps across the curve. Ten year EGBs are about 1–2bps lower.
- Oil prices are down by about 1%.
- The USD is flat on balance. Most major currencies are little changed on the day.
The ECB left policy unchanged as expected this morning. The 7:45amET statement (here) read as practically identical to the June statement that had expanded the size of the Pandemic Emergency Purchase Program. They retained the same language on reinvestment plans, horizons and flexibility. President Lagarde’s press conference yielded no material surprises. The ECB retains an enormous amount of runway as it implements the PEPP; of the €1.35 trillion potential size, about three-quarters of the facility remains untapped.
China offered a mixed bag of readings on the economy. GDP beat expectations with growth of 11.5% q/q SA (9.6% consensus) and 3.2% y/y (2.4% consensus). It did so on the strength of industrial output (+4.8% y/y in June) as factories resumed production following the covid-19 shock and extended Lunar new year, and the primary sector’s weighted contribution. Retail sales remain weak and are down 1.8% y/y (consensus 0.5%). Some argue the better GDP figures will slow policy stimulus, others argue not so fast on the basis of the composition of growth and forward risks.
Australia somewhat beat the consensus guess for job growth last month net of negative revisions. About 211k jobs were regained (100k consensus) and the prior month was revised to a bigger drop of 264k (-227k prior). Quality was poor as all of the gain was in part-time jobs with full-time falling. The country is still down a net 663k since February.
The UK fared better than feared in a batch of job market readings. May’s three month rolling change in total employment was down 125k, or less than half of the consensus estimate. Jobless claims in June fell by 28l following the massive increases over the prior two months.
Bank Indonesia cut by 25bps as expected by about two-thirds of economists and as generally guided at the conclusion of the prior meeting.
UNITED STATES
The US recovery is well on track. A trio of releases combined with bank earnings beats were generally positive.
BofA posted Q2 EPS of US$0.37 (consensus $0.25) and Morgan Stanley clocked in with adjusted EPS of US$2.04 (consensus $1.14). Netflix releases in the after-market.
US retail sales, m/m % change, headline / ex-autos, SA, June:
Actual: 7.5 / 7.3
Scotia: 6.0 / 6.5
Consensus: 5.0 / 5.0
Prior: 18.2 / 12.1 (revised from 17.7 / 12.4)
US retail sales beat expectations through upward revisions to the prior month of May and above-consensus readings for June. Chart 1 shows the powerful rebound. The perennial lesson is not to discount the capacity of the US consumer to spend. Take signs of crowding on beaches and bars as disturbing in some ways, but revealing consumer attitudes that are willing to take the risk and spend. The job of economists is to offer a dispassionate assessment of the willingness to spend which has to take precedence over a filtered normative bias toward what they should be doing while nevertheless cognizant of forward looking risks. Chart 2 shows a daily high frequency spending indicator that suggests consumption slipped for about a week in late June, but is rebounding again through July.
Where are US consumers getting the money? It’s patently false that spending has to evaporate as pandemic stimulus cheques run out, but a second round wouldn’t hurt especially to counter the highly regressive way in which this shock has hit the economy. A combination of precautionary saving, saving due to having nowhere to spend when the economy was shut, and saving stimulus is now being redeployed from a record high 32% of disposable income in April (chart 3). If that saving rate to return toward the much lower pre-covid-19 levels applied to current disposable income, then the resulting over US$2.5 trillion in additional spending would restore nominal consumer spending to not only where it was pre-covid from US$13.2 trillion in May to the pre-covid amount of US$14.9T in February, but well past it above the US$15T threshold. In reality that’s unlikely to happen as some amount of precautionary saving is likely to continue and as further shocks get absorbed, but it sets out an argument for how further material consumption growth can easily unfold. Then add in the positive impact upon income growth stemming from regaining 7.5 million jobs over the past two months that nevertheless still leaves nonfarm payrolls down about a net 14 million jobs pending where July’s reading lands into the dog days of August.
The retail sales details were broadly positive. Chart 4 shows weighted contributions to overall retail growth by sector. Sales of autos and parts were up another 8.2% m/m (48.7% prior month gain). Furniture sales were up 32.5% after a prior 79% rise. Electronics sales were up 37.4% (36.5% prior). Apparently not everyone is sitting around in pyjamas all day these days, or they are buying an awful lot of them as clothing sales were up 105% after a prior 177% gain. Sporting goods sales were up 26.5% (78% prior). Soft spots were food and beverages that have really only had one decent month March when pandemic related spending was the driver, as well as building materials that were flat after a 12% prior gain.
Weekly jobless claims stalled at 1.3 million last week (consensus 1.25 million, prior 1.31 million). A caution is that this might have reflected claims punted forward into last week from the prior holiday-interrupted week. The July 3rd holiday ahead of Independence Day moves across different days of the week and can affect placement in a particular week. Whether seasonal adjustment factors appropriately control for this is unclear. The test will come in subsequent weeks.
The US Philly Fed regional measure slipped a touch to 24.1 (27.5 prior) but is retaining the v-shaped rebound that saw this volatile reading go from 36.7 in February to a low of –56.6 in April and back up to +24 now.
CANADA
ADP registered a 1.04 million rise in jobs during June which was similar to the Labour Force Survey’s estimate of payroll and self-employed job gains of 953k. It never really impacts Canadian markets.
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