Economic Week Ahead: U.S. Housing, Employment and Factories Data

Data out this week is likely to signal economy is getting better, but pace of improvement is slowing.

Tuesday: The U.S. housing market has been a bright spot this summer, with July existing-home sales surging to the highest level since the waning days of the housing bubble in 2006. Figures for August are expected to show another gain—though smaller than June or July’s—as Americans take advantage of low mortgage rates while continuing to seek out more living space.

Wednesday: Surveys of purchasing managers in the U.S., Europe, and Japan are expected to show that the pace of the economic recovery steadied in September, after strong rebounds in the previous months.

Thursday: U.S. weekly jobless claims have remained elevated in recent weeks, showing that layoffs remain historically high, suggesting the labor market is losing some momentum as the summer winds down. Figures for the week ended September 19 are expected to tick down slightly from a week earlier. U.S. Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin appear before the U.S. Senate Banking Committee to present a quarterly report to Congress on the Cares Act. The White House favours another round of stimulus spending and Mr. Powell has urged lawmakers to pump more fiscal aid into the economy, but Democrats and Republicans have been at loggerheads on the size and scope of any new relief bill.

Friday: U.S. manufacturers have staged a partial rebound from shutdowns and supply-chain disruptions related to the pandemic. That is expected to continue in August, with new orders for durable goods likely posting their fourth consecutive monthly gain. But economists are forecasting a slowdown in the pace of improvement in overall demand and underlying business investment amid uncertainty about the path of COVID-19.

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

China’s retail sales rise for the first time in 2020

Chinese consumers stepped up their spending in August, in a sign of further economic recovery from the shock of the coronavirus pandemic. Retail sales rose 0.5% in August from a year ago, the first positive report for the year so far, China’s National Bureau of Statistics said Tuesday. Notably, sales of communication equipment rose 25.1% from a year ago and that of autos rose 11.8%. Retail sales for the first eight months of the year were down 8.6% from a year ago but online retail sales of physical goods grew by 15.8% during that time, the data showed. The unemployment rate as measured by the official survey of cities was 5.6%, 0.1 percentage points lower than July, the bureau said.

Japan’s exports fall for 9th straight month as global demand falters

Japan’s exports slipped for a ninth straight month in August as international trade tensions ramped up risks for the world’s third-largest economy, although the decline was slightly smaller than expected. The negative reading adds some pressure on the Bank of Japan to expand stimulus at its policy meeting on Thursday to prop up business sentiment and manufacturing activity, which have been hit by global economic weakness.

Exports in August slumped 8.2% from a year earlier, Ministry of Finance data showed on Wednesday, dragged down by autos, car parts, and semiconductor production equipment. The fall was smaller than a 10.9% drop expected by economists but marked the longest run of declines in exports since a 14 month stretch from October 2015 to November 2016.

U.S. manufacturing production rebounds strongly in August

U.S. manufacturing output increased more than expected in August, boosted by a surge in machinery and primary metals production, but the outlook for factories remains weak against the backdrop of trade tensions and slowing global economies. The U.S. Federal Reserve said manufacturing production rose 0.6% last month after an unrevised 0.4% drop in July. Economists had forecast manufacturing output rising 0.2% in August. Production at factories fell 0.4% in August on a year-on-year basis. Manufacturing, which accounts for about 11% of the U.S. economy, is being hobbled by a year-old trade war between the United States and China as well as slowing global economic growth.

U.S. retail sales rose more than expected in August as auto buying jumped

U.S. retail sales rose moderately in August, driven higher by a jump in auto buying and healthy online sales. But there were also signs that consumers have become more cautious. The U.S. Commerce Department says retail sales increased 0.4% last month, down from a healthy 0.8% in July. Excluding autos, sales were unchanged for the first time since February. The modest slowdown follows signs that consumer confidence, while still strong, has slipped a bit as the U.S.-China trade war has intensified. U.S. businesses have cut back on their investment and expansion plans amid the trade war’s uncertainty and exports have declined. That has left consumers as a key source of growth.

Fed holds rates steady near zero and indicates it will stay there for years

The U.S. Federal Reserve concluded its two-day policy meeting by voting to keep short-term interest rates anchored near zero. In addition to the expected move to hold the line, the Fed also provided specific language about its intent to hold rates low until inflation increases. The Federal Open Market Committee (FOMC) also adjusted its projections for GDP, unemployment and inflation. The Fed officials also addressed a new policy regime in which the Fed will allow inflation to run somewhat above the 2% target rate before hiking rates to control inflation.

Jobless claims were lower than expected but employment growth is still sluggish

U.S. claims for unemployment insurance beat Wall Street estimates last week as the U.S. economy enters a critical new stage. Filings totalled 860,000 for the week ended September 12, according to the U.S. Labor Department. Economists had expected 875,000, against the previous week’s upwardly revised 893,000. The number represents a modest downshift in claims which had hit a peak of 6.9 million in late March as the economy shut down in an effort to slow the spread of the coronavirus pandemic. Since then, the labor market has recovered though millions remain displaced from job closures associated with the virus containment measures.

In conclusion

19 vaccine optimism being offset by worries that the U.S. Federal Reserve’s monetary policy was becoming less effective in supporting the recovery. Value stocks and small-caps outperformed, as investors continued to reduce bets on technology giants that have led the market in recent months. Energy stocks led the gains within the S&P 500 Index, helped by a large and unexpected drawdown in domestic oil inventories and Saudi Arabia’s efforts to force production cuts by other major oil exporters.

Investors will now become more focused on Congress and a possible resolution of the coronavirus relief bill. Market observers feel the equity markets will jump sharply if Congress approves another coronavirus relief bill. While an outcome seems unlikely any time soon and the stimulus package will be very hard to achieve, that said, if a resolution is found, investors will most likely rush to get into the equity market. Democrats and Republicans in Washington have been locked in a stalemate since late July after key provisions of the March US$2.2 trillion rescue package expired. The two sides are largely at odds over the scale and scope of an additional relief package. Investors are well aware that without additional stimulus for the U.S. economy, devastated by business restrictions designed to limit the spread of COVID-19, the stock market’s rally from its March 23 pandemic low could be put at risk.

China has been in recovery mode for months now, with the latest data showing industrial output growth accelerated to 5.6% in August when compared to a year earlier. It bolsters the view that Beijing’s demand recovery continues to gather pace, with government stimulus helping to fuel a rebound.

Commodity prices have been rising over the past few months. Spot iron ore prices for example climbed to fresh six-and-a-half-year highs recently, trading close to US$129/tonne on the back of a construction boom in China. Iron ore prices have climbed more than 37% year-to-date. Copper prices have also risen sharply over the past few months.

Some market observers are predicting an infrastructure driven recovery globally over the next twelve months. This would be regarded as good news for Australian resources companies and commodity investors who will no doubt be banking on the strength of China’s economic recovery to lead an overall global infrastructure recovery.

Authored by Kevin McKay – Research Associate at Bell Potter Securities, 22 September 2020
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