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Economic Week Ahead: U.S. Factories, Trade and Jobs

Monday: China releases its official purchasing-managers index for manufacturing. Economists expect activity to expand at a slightly faster pace in August than in July, underscoring the durability of China’s recovery.

Tuesday: Private surveys of purchasing managers from Asia, Europe and the Americas are expected to show a continued, but patchy, increase in manufacturing activity during August, with a revival in export orders pointing to a further recovery of supply chains that were disrupted by pandemic lockdowns. However, the surveys are also likely to point to continued job losses worldwide, which would weigh on the recovery.

Thursday: U.S. applications for unemployment benefits are projected to fall slightly in the week ending Aug. 29. Even so, layoffs are likely to remain historically elevated amid continuing pandemic fallout.
The U.S. trade deficit in goods and services is expected to widen in July, reflecting a rise in demand for overseas products as the economy reopened.
The Institute for Supply Management’s survey of service-sector purchasing managers is likely to show another significant pickup in U.S. activity during August. Service industries were especially hard-hit by the Covid-19 crisis, but even with rapid gains, sector-wide output and employment aren’t likely to return to pre-pandemic levels for some time.

Friday: U.S. employers are expected to add more than 1 million jobs in August, the fourth straight month of historically large gains across the labor market. Economists caution that temporary government hiring for the census could raise the headline figure by about 250,000. But even with that short-lived boost, employment would remain well below pre-pandemic levels.

Last week’s economic data and what does it mean?

July home sales spike a record 24.7% as prices set a new high

U.S. sales of existing homes soared 24.7% in July from June, according to the National Association of Realtors. The supply of existing homes plummeted 21.1% annually, with just 1.5 million homes for sale at the end of July. The median price of a home sold in July rose 8.5% annually to US$304,100. The increase in sales came as supply fell, prices rose and mortgage rates stayed low.

U.S. core capital goods orders slow in July from prior month, while durable goods orders surge 11.2%

U.S. new orders for key made capital goods slowed in July, suggesting the rebound in business investment could become more gradual amid uncertainty about the course of the Covid-19 pandemic. Orders for non-defence capital goods excluding aircraft, a closely watched proxy for business spending plans, increased 1.9% last month. These so-called core capital goods orders jumped 4.3% in June. Economists had forecast such orders climbing 1.9% in July. Overall durable goods surged 11.2% in July, compared with expectations of an increase of 4.3% and a 7.6% increase a month earlier.

Another million applied for jobless benefits as coronavirus pandemic’s economic toll rises

Initial U.S. jobless claims totalled just over 1 million for the week ending Aug. 22, down from 1.104 million in the previous week. Economists had expected initial jobless claims to come in right at 1 million. Initial claims have been above 1 million 22 times in 23 weeks. Since the pandemic began initial jobless claims have jumped by more than 58 million. Wall Street is also keeping an eye on the unemployment data as lawmakers have yet to move forward on a new coronavirus stimulus package.

A flexible Fed most likely means higher inflation

Last week’s speech by Fed Chairman Jerome Powell gave the Fed a license to do pretty much whatever it wants. In his speech he set out a new target for average inflation of 2%. But because he ruled out any mathematical definition of the average, anything from serious deflation up to inflation of 3.2% over the next five years could count as success. This isn’t really a problem. The broad thrust of the Fed’s new strategy is that it will be even more dovish, and interest rates will stay low for even longer. But—and it is a vital point—what the Fed is really saying is that we should trust that it won’t let inflation spiral out of control, so any overshoots of 2% won’t last long. The Fed wants people to believe inflation will be roughly 2% in the long run, and more precision than that it seems, isn’t really necessary.

U.S. consumer spending rises for second straight month, income drops further

U.S. consumer spending increased for a second straight month in June, setting up consumption for a rebound in the third quarter, though the recovery could be limited by a resurgence in COVID-19 cases and the end of expanded unemployment benefits. U.S. consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 5.6% last month after a record 8.5% jump in May as more businesses reopened. Consumers stepped up purchases of clothing and footwear. They also spent more on healthcare, dining out and on hotel and motel accommodation. Economists had forecast consumer spending would advance 5.5% in June.

In conclusion

The U.S. major equity averages continued to trend higher last week and the S&P 500 is now up 7.2% month to date, putting the broader-market index on track for its biggest August gain since 1984. The Dow has rallied more than 8% this month and is also headed for its best August in 36 years. This month’s gains have pushed the S&P 500 to record levels, while the Dow has erased its 2020 losses on Friday, closing the session with a year-to-date gain of 0.4%. The August rally built on the market’s sharp rebound off the March 23 intraday lows. Since then, the Dow and S&P 500 are up 57% and 60.1%, respectively.

Many investors had hoped that the market would consolidate its gains since March 23, giving earnings a chance to rebound, however, the U.S. Federal Reserve continue to drive up stock prices by committing to keeping interest rates close to zero. Investor optimism is being driven by the belief that the Fed will do whatever it takes to see the U.S. economy though the Covid-19 pandemic.
In an apparent long-term bet on the global economy, Warren Buffett announced Sunday that his Berkshire Hathaway conglomerate had acquired stakes of more than 5% in Japan’s five leading trading companies. Those companies are Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co., and Sumitomo Corp. The five businesses import everything from metals to food into Japan and provide services to manufacturers.

Gold futures marked time last week, however prices remain near record levels and up about 28% for the year. Silver has more than doubled since hitting a multiyear low in March.
There has been a lot of concern recently about the stock market being top-heavy, dominated by just a handful of companies, and if this might spell trouble for future returns. But really what we should worry about isn’t that the market is reliant on a few stocks, it’s that the market is reliant on a few very similar stocks. The five biggest companies today—Apple, which passed US$2 trillion in market value last week , Amazon ,Microsoft, Alphabet and Facebook make up 25% of the market value of the S&P 500.

The danger now is that the U.S. equity market is overly reliant on a group of companies that are all a bet on disruptive innovation—the big five and a wider circle including other fast-expanding growth companies such as Netflix and Nvidia. They have thrived since the pandemic began because so much of their lifetime profits lie far in the future, meaning their valuations benefit from low rates while short-term pandemic-related hits matter less. Anything that hurts this group could drag down the wider market, even if other stocks are fine. And because this group has done so well from low bond yields, it should be especially susceptible to pain if those yields were to rise.

Authored by Kevin McKay – Research Associate at Bell Potter Securities, 1 September 2020
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