Friday, November 6, 2020

Macro Update: Fuggetabout Tomorrow

Our proprietary macro index (-6.12) broke even on the week; with two inputs improving, two deteriorating:

Positive needle-movers...

Capex (business capital expenditures). Rises when companies are buying equipment/expanding capacity (shaded areas denote past recessions):

Businesses have picked up their rate of spending on equipment the past several weeks, which is unambiguously positive. As it denotes optimism over the future. 

Now, we have to remain cognizant of the fact that the government, via a number of covid-related programs has provided a not-small amount of very low-interest, or free, capital with which companies can ultimately use to update and/or expand their production facilities. Which is of course a scenario that is subject to the pull-forward phenomenon I keep writing about. 

I.e., if, through government incentives, purchases are made today that otherwise would've been made tomorrow, well, we're going to have to deal with tomorrow's numbers when we experience the let-down from today's liquidity-induced surge.

Remember the "Cash for Clunkers" program of the last great recession? It's represented by the red-circled area on the U.S. auto sales graph below. Note the huge surge, followed immediately by a huge decline (I.e., let's aggressively pull sales forward to today; fuggetabout tomorrow). Also note the slight rolling over of the most-recent numbers:

Staples/Discretionary Stock Ratio. Declines when consumer staples stocks (economically defensive) are underperforming consumer discretionary stocks:

Essentially, that (discretionary outperforming staples) is traders anticipating that the companies that produce the goods that folks spend their extra money on are relatively well-positioned going forward. The assumption of course being that folks will have extra money to spend going forward. If the assumption's correct, then that's good news. 

Of course it's safe for you and I to assume that traders assume that there's more stimulus coming. And I believe that's a safe assumption. And of course we can have that same pull-forward conversation on this data point as well.

Negative needle-movers...

Institute for Supply Management (ISM) Non-Manufacturing (services) Index. A gauge of services sector activity and sentiment:

While still above 50 (denoting expansion from the prior month), the pace slowed notably. The following respondent comment featured in the report speaks to the reality of present conditions:
“While the economy is getting better, there is still very much uncertainty about the future. We are putting capital expenditures on hold until we gain additional confidence and certainty.” 

Weekly Mortgage Purchase Applications:

While the fundamentals of housing remain positive, weekly mortgage apps have trended lower over the past month; as has their rate of change (second panel in the graph featured above), steadily, since the March/April surge.

Other inputs worth mentioning...

ISM Manufacturing Index: Unlike the ISM's October services sector survey, the manufacturer's survey scored a strong 59.3 month over month.

Respondent's comments -- in terms of hope and optimism, as well as caution -- so reflect the current state of affairs that I decided to include all of those featured in the report below. I'll highlight a few key points:
“COVID-19 continues to have an effect on supplier support and operations, more from a decreased labor perspective rather than unavailable material.” (Computer & Electronic Products)

“Business continues to be robust. Sales are greater than expectations, and cost pressures are modest. There is posturing by suppliers on market price increases for corrugated and polypropylene, yet no firm price increases at this time. We expect a strong finish to 2020 and a solid start in 2021.” (Chemical Products)

“Sales continue to be strong — up 4 percent this September compared to September 2019. The year-to-date level is still 21 percent below last year due to the [COVID-19] shutdown, but sales are stronger than expected and forecast to stay strong through the first quarter of 2021.” (Transportation Equipment)

“Increased production due to stores stocking up for the second wave of COVID-19.” (Food, Beverage & Tobacco Products)

“Continue to see increases in customer demand. We still are not back to pre-COVID-19 levels but are continually improving.” (Fabricated Metal Products)

“Construction materials have leveled off but continue to be at an all-time high. Mills for board sheet stock have pushed out lead times citing increasing backlogs related to the pandemic and increased supply in the housing market.” (Furniture & Related Products)

“Business is almost back to normal levels; however, customers are still cautious with capital spending.” (Machinery)

“Business levels have just about returned to pre-COVID-19 levels. Our company is remaining conservative with fixed-cost spending, knowing the uncertainties that lie ahead with COVID-19 and its potential impact globally.” (Miscellaneous Manufacturing)

“October order books are the strongest we have seen in the past six months.” (Paper Products)

“We continue to see stronger month-over-month orders in plastic injection molding.” (Plastics & Rubber Products)
Chemical Activity Barometer: On a less optimistic note, this is way too soon for comfort to see the CAB begin to rollover. 

Representing the most ubiquitous input to the across the board manufacturing process (there's chemicals in virtually all manufactured goods), the CAB is one of the best forward-looking indicators of overall health in the economy. 

Here's a closeup (note the declining rate of change in the 2nd panel):

And, lastly, as for the October jobs data released this morning:

Well, they were good, better than anticipated even: 638k new jobs vs 580k expected. And the two prior months were revised up by a net 15k. Average hourly earnings grew by 5.7% year-over-year, the labor force participation rate, 61.7%, retraced all of September's decline and the unemployment rate fell to 6.9%. 

Keeping our index's employment component from moving the needle closer to the green were other jobs data; per yesterday's morning note:
Silenced by more pressing issues yesterday was ADP's private payrolls report (the private sector's report on employment conditions), which showed 365k new jobs created in October, compared to an estimate of 643k. That's what you call a miss. Goods producers saw merely 17k new jobs created. That would be another hint that the stimulus-fueled surge off the depths may be losing some steam. Friday we'll get the government's number.

This morning's weekly initial jobless claims report came in at 751k vs a 735k estimate. 7.29 million folks remain on the unemployment rolls, which is down from 7.82 million the previous week.

There are also the special additional programs titled "Pandemic Emergency Unemployment Compensation" and "Pandemic Unemployment Assistance." The former rose to a new high of 3.96 million folks, the latter declined to 9.33 million. All told, over 20 million people remain on unemployment.
Bottom line: While, clearly, things are on balance looking up relative to the depths (per our index) of June, there remains much macro improvement to be had before we sound the all-clear. As only 24% of the data points we crunch presently garner a +1 (positive) score, 31% earn a -1 (negative) and 45% score 0 (neutral). And, not to mention, a number of the neutrals, like the Chemical Activity Barometer, are threatening to roll over.
Stay tuned...

Have a great weekend!

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