Markets and the economy get little respite as the second quarter begins 

Brian Nick

The last week’s market highlights:

Quote of the week:

“Ring the bells that still can ring
Forget your perfect offering
There is a crack, a crack in everything
That’s how the light gets in.” ̶̶  Leonard Cohen

U.S., Chinese manufacturing activity tops forecasts in March, but we’re wary       

Global service-sector activity contracted sharply in March due to the COVID-19 outbreak, with IHS Markit’s Purchasing Managers’ Indexes (PMIs) in many major economies diving to record lows. Consumer-facing industries such as hotels, travel and restaurants were especially hard hit. Against that somber backdrop, investors hoped for improved manufacturing data from the U.S. and China and they got it—with caveats.
China's official manufacturing PMI, which focuses on large, state-owned firms, rose to 52 from  35.7 in February, when the coronavirus brought work to a halt. (Readings above 50 indicate expansion.) And the Caixin index, a PMI of mostly small, privately owned manufacturers, also returned to expansion territory, jumping to 50.1 from 40.3.6
While these surveys signal that China’s economy may be healing, we think it’s far too early to assume the coast is clear there. For one thing, it’s possible the virus could resurface, derailing a nascent recovery. Moreover, we expect China’s export growth to suffer in the near- to medium- term amid the shutdown of the country’s global trading partners—Europe in particular. Indeed, China’s National Bureau of Statistics (the source of the official PMI) stated that the PMI reading “reflects that more than half of the surveyed enterprises have resumed production, better than last month, but it does not mean that China’s economic operation has returned to normal.”
Far more telling, in our view, will be data scheduled for mid-April release, including Chinese retail sales, industrial production and first-quarter GDP. (Interestingly, Beijing has yet to officially lower its 2020 GDP growth target of around 6%.)
U.S. manufacturing data also topped forecasts in March, even as the PMI from the Institute for Supply Management (ISM) dipped slightly, to 49.1. But a look beyond the headline figure revealed an unsettling picture. New orders and employment, two important leading indicators, fell sharply. Even a big boost from the supplier deliveries subindex exposed weakness. Normally, long delivery lines indicate rising demand, reflecting suppliers’ inability to keep up with orders. But in this case, the higher reading was a product of coronavirus-related supply problems, which led to bottlenecks.
We expect U.S. manufacturers to continue to struggle, both because of the devastating effect of the virus on the economy and because of collapsing oil prices. Despite a late-week rally on hopes that Russia and OPEC may agree to reduce their output, Brent crude, the international oil price benchmark, has tumbled 48% thus far in 2020 amid plunging demand and higher production from Saudi Arabia.7 With oil prices so low, energy-related investment is likely to dry up.

A “tip of the iceberg” jobs report 

The U.S. economy shed 701,000 payrolls in March, far more than the expected decline of around 100,000 and the biggest one-month drop in 11 years.8
The headline unemployment rate, which matched a 50-year low of 3.5% in February, jumped to 4.4%.9 We expect this rate to eventually top its most-recent 2009 peak of 10% for two reasons:
  • First, people are being laid off or furloughed at an unprecedented pace, while few new jobs are being created.
  • Second, more generous unemployment benefits are likely to prevent those who have lost their positions from leaving the labor force altogether. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, workers eligible for unemployment insurance will receive an extra $600 per week in addition to the normal state benefits.
Also moving higher in March was the U-6 unemployment rate, which climbed to 8.7%, from 7% in February.10 The U-6 rate encompasses both unemployed workers who have looked for a job in the last year and part-time employees seeking full-time work. Many people, especially those in service industries like restaurants, were shifted from full time to part-time status.
As dismal as these March job numbers are, April’s will likely be far worse. That’s because the survey period for March ended at mid-month, before the full effect of business closures stopped the economy in its tracks. Weekly data, such as first-time unemployment claims, provide a view that’s closer to “real time.” For the week ended March 28, claims reached a staggering 6.6 million, on top of the 3.3 million from the prior week.
Just a few months ago, with the U.S. jobs engine in full gear, investors searched for evidence of rising wage growth and debated whether and when the Fed should raise interest rates. We didn’t know then that those were the good old days.
  1. Morningstar
  2. Marketwatch, Haver
  3. Haver, BLS
  4. Bloomberg
  5. Haver
  6. Trading Economics, NBS
  7. Bloomberg
  8. BLS, Marketwatch, Haver
  9. Haver
  10. Haver
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