Head of Macroeconomic Research
Summary: This is another day of headline-watching on multiple fronts, with the release this afternoon of the U.S. initial jobless claims and the Philadelphia Fed manufacturing sentiment index. There is nothing really good about today's data. Initial jobless claims rise above 1 million again, after two weeks of declines, and the Philly Fed's downside disappointment suggests that the ISM manufacturing index will move downward in August too.
After the Empire Fed’s slowdown in August (-13.5pts at 3.7), all eyes were on the Philly Fed release. It is out at 17.2 vs est. 20.8 and prior 24.1. It is the third time in a row that it is in positive territory since the lockdown. About 28% of survey respondents reported an increase in activity (compared to 52% in February before the lockdown, and 45% in July) and 11% reported a decline in activity (compared to 21% in July). These figures tend to confirm that the economic recovery is plateauing in August, which has been observed in the U.S. but also in many other developed countries, and corroborated by high-frequency data (such as mobility and electricity consumption, see here our analysis on the French economy).
Today’s Philly Fed also suggests that the upcoming ISM index for August, that is due on September 1, is likely to move downward too, in line with market expectations (the consensus for September is at 53.6 vs 54.2 in July).
Digging into details, we look at the indexes that usually better reflects current underlying manufacturing conditions than the headline index and are closely tracked by economists, namely new orders, shipments, delivery time and inventory. New orders and shipments are still in positive territory but softened in August (– 4pts at 19.0 and -5.9pts at 9.4, respectively). By contrast, the inventory index is still in negative territory, but moving fast upward (+9.9pts at -1.9) and the supply delivery time is finally back above zero again (+13.7 at 7.3), indicating a revival in demand. These indexes provide a contrasted overview of the state of the U.S. economy which is still struggling with the resurgence of the virus in many states, further social distancing measures and sluggish global demand.
Without much surprise considering the impact of the pandemic, manufacturers in the Philly region continue to reduce CAPEX plans, which is usually a reliable way to forecast investment in business equipment. Future capital expenditures are still in positive territory, but decreasing from 26.6 to 23. In addition, the current and future employment indexes are down. Current employment is shrinking -11.1pts at 9.0 while the six-month forecast is decreasing by -2.9pts at 29.5. As we have repeatedly stated at Saxo, we think the worst is yet to come in terms of unemployment. We need to get prepared for a prolonged period of mass unemployment at the global level as companies will have no other choice but to cut costs to survive in this uncertain time.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
