New Data Points Show Economic Devastation in April
Economic Report Monitor #15
Midway through April, a slew of data points was introduced updating on the devastation spreading across the economy. Markets fell today as well in what looked like one of the first bearish trading sessions in awhile. Oil production cut hopes also unsuccessfully wielded off further declines in the futures market as front-month prices play with the $20 level. Meanwhile, the COVID-19 outbreak continues at pace showing only minor signs of slowing. It feels inevitable that pessimistic economic reports and earnings events will ultimately quash optimism in the market.
MBA Mortgage Applications index was released in the morning and did little to startle the early risers. More as a result of low rates, the Composite Index rose 7.3% as the Refinancing Index grew 10.0% to offset the -2.0% drop in the Purchase Index. While the movement might easily be written off as a reaction to the prevalence of low interest rates, it is slightly comforting to see some signs of individuals feeling economically secure enough to consider the refinancing step.
Just an hour before the market opened, two monster reports were released providing the first look into how the lockdown effects in April. Retail sales produced a punishing -8.7% as business closures shed -$46.2 billion off of retail sales in March. Nonessential industries were hit the hardest: motor vehicle & parts dealers were down -25.6%, furniture stores were down -26.8%, electronics were slightly better but down -15.1%, sporting good stores were down -23.3%, food and drink service places were down -26.5%, and finally, clothing and accessories stores were destroyed, down -50.5%. Of course, these data points only capture half a month of closures, so these numbers are likely to be worse in April. The bright spot was food and beverages, up 25.6%, as the industry was the obvious benefactor of stockpiling and being labelled essential.
At the same time, the April version of the Empire State Manufacturing Survey delivered a stunning -78.2 general business conditions reading as the composite index fell -56.7 pts to the lowest level in history. Most current condition indicators fell at record place, including employment, new orders, and shipments. Price movement was less severe as both prices paid and prices received dropped around -18.0 pts but lingered around 2016 levels suggesting deflation hasn't spiralled out of control yet. Responses about economic expectations 6 months out were muted as firms are not convinced of a V-shaped recovery yet. Higher new order and shipment expectations decreased -5.9 pts and -7.4 pts. Inventory responses turned negative as responses suggested inventories wouldn't improve in 6 months. Prices paid and received fell at a pace similar to its current counterparts. Employment expectations were mixed with number of employees falling slightly and average workweek slightly up. Most striking were sever drops in business spending as capital expenditures and technology spending crashed to new five year lows at -29.7 and -25.4, both down -11.0 pts.
What's more worrying about these reports is that both printed numbers worse than what estimates expected. Retail sales at -8.7% was lower than Econoday's consensus at -7.3% and Reuter's consensus at -8.0%. The Empire State general business activity index at -78.2 was way worst than Dow Jones' consensus of -32.5 and Econoday's consensus of -35.0 (for comparison, the worst the index saw during the financial crisis was -34.3). The market knew that the effects would be bad, but initial numbers like this suggest the devastation is worse than expected. If expectations are wrong, and it begins to look like policymakers don't have this under control, that's when negative surprises occur and push bearishness.
The industrial production data point for March was another that missed expectations today. The Federal Reserve announced a -5.4% drop in industrial production. Consumer goods production fell -5.9% on the back of a -18.9% drop in consumer durables. The steep drop was balanced by consumer non-energy nondurables which fell only -0.9% as stockpiling held it up. As seen in retail sales, travel and automotive industries saw pain as evidenced by a drop of -27.2% in automotive products and a drop of -22.8% in transit equipment. Both categories are likely to continue to be hit by a combination of a freeze, official and unofficial, on travel plans and a decrease in personal income that will weigh on consumer's discretionary income. Capacity utilizations fell below long-run averages as demand was squashed. Manufacturing capacity fell 7.9% below the long-run average to 70.3% with durables softer than nondurables. Both production and utilization have yet to fall to 2008-2009 levels but are likely to continue to worsen.
The NAHB Housing Market Index outlined more devastation in the economy the index more than halving going into April. From 72 in March, a tumble of 42 pts saw the April preliminary number at 30. Present and future sales fell steeply to 36 as the real estate market looks to have dried up. Prospective buyers disappeared as well, falling from 56 to 13. The pronounced drop is likely to have been caused by a freeze of appointments and meetings as agents and buyers aren't able to see homes. However, a recovery in these numbers will depend on a lot of consumer data and how wealthy individuals feel. Regional trends in the data appear to follow where the most stringent lockdown procedures are, the Northeast sees a deep drop to 19 while the South and West regions were better at 34 and 32. This suggests the movements are probably more of a result of social distancing than wealth effects.
Touching another important data point, inflation, is the April report on the Atlanta Fed Business Inflation Expectations. Firms see inflation slowing to 1.4% on average lagging behind the movement in Treasuries yields seen in the past weeks. Year-over-year cost growth fell as well, down to 1.2%, but profit margins responses were not optimistic as 53% of respondents report them lower than normal times. Overall, severe disruptions in the normal flow of business are expected. Over 50% of respondents saw a "severe disruption" in sales activity and just under 40% saw a "severe disruption" in business operations.
Finally, the latest version of US crude oil stockpiles came in after the latest OPEC meeting resulted in a production cut. Overall storage added 19.2 million barrels as commercial storage balloons to 10.6% above the previous year. The Strategic Petroleum Reserve remains unused despite President Trump citing the possibility of using it. Total motor gasoline oil grew 4.9 million barrels with shrinking demand limiting consumption. That stockpile is 15% above a year ago. Domestic production continued to cut but only by 100k b/d, 200k b/d higher than a year ago. This number should continue to decrease at energy companies feel compressed margins and a massive reduction in refinery inputs. Those inputs fell another -969k b/d last week. The new 4-week average is -10.7% below a year ago as products supplied also gets crushed, down -640k b/d, the 4-week average now -18.5% below a year ago. Traders hoping for a bullish boost from OPEC are not likely to get it as consumption figures in the US are extremely pessimistic. It will likely take a coordinated oil production cut from every major producer across the globe to make any type of push towards stabilizing oil prices.
April 15th, 2020
Midway through April, a slew of data points was introduced updating on the devastation spreading across the economy. Markets fell today as well in what looked like one of the first bearish trading sessions in awhile. Oil production cut hopes also unsuccessfully wielded off further declines in the futures market as front-month prices play with the $20 level. Meanwhile, the COVID-19 outbreak continues at pace showing only minor signs of slowing. It feels inevitable that pessimistic economic reports and earnings events will ultimately quash optimism in the market.
MBA Mortgage Applications index was released in the morning and did little to startle the early risers. More as a result of low rates, the Composite Index rose 7.3% as the Refinancing Index grew 10.0% to offset the -2.0% drop in the Purchase Index. While the movement might easily be written off as a reaction to the prevalence of low interest rates, it is slightly comforting to see some signs of individuals feeling economically secure enough to consider the refinancing step.
Just an hour before the market opened, two monster reports were released providing the first look into how the lockdown effects in April. Retail sales produced a punishing -8.7% as business closures shed -$46.2 billion off of retail sales in March. Nonessential industries were hit the hardest: motor vehicle & parts dealers were down -25.6%, furniture stores were down -26.8%, electronics were slightly better but down -15.1%, sporting good stores were down -23.3%, food and drink service places were down -26.5%, and finally, clothing and accessories stores were destroyed, down -50.5%. Of course, these data points only capture half a month of closures, so these numbers are likely to be worse in April. The bright spot was food and beverages, up 25.6%, as the industry was the obvious benefactor of stockpiling and being labelled essential.
At the same time, the April version of the Empire State Manufacturing Survey delivered a stunning -78.2 general business conditions reading as the composite index fell -56.7 pts to the lowest level in history. Most current condition indicators fell at record place, including employment, new orders, and shipments. Price movement was less severe as both prices paid and prices received dropped around -18.0 pts but lingered around 2016 levels suggesting deflation hasn't spiralled out of control yet. Responses about economic expectations 6 months out were muted as firms are not convinced of a V-shaped recovery yet. Higher new order and shipment expectations decreased -5.9 pts and -7.4 pts. Inventory responses turned negative as responses suggested inventories wouldn't improve in 6 months. Prices paid and received fell at a pace similar to its current counterparts. Employment expectations were mixed with number of employees falling slightly and average workweek slightly up. Most striking were sever drops in business spending as capital expenditures and technology spending crashed to new five year lows at -29.7 and -25.4, both down -11.0 pts.
What's more worrying about these reports is that both printed numbers worse than what estimates expected. Retail sales at -8.7% was lower than Econoday's consensus at -7.3% and Reuter's consensus at -8.0%. The Empire State general business activity index at -78.2 was way worst than Dow Jones' consensus of -32.5 and Econoday's consensus of -35.0 (for comparison, the worst the index saw during the financial crisis was -34.3). The market knew that the effects would be bad, but initial numbers like this suggest the devastation is worse than expected. If expectations are wrong, and it begins to look like policymakers don't have this under control, that's when negative surprises occur and push bearishness.
The industrial production data point for March was another that missed expectations today. The Federal Reserve announced a -5.4% drop in industrial production. Consumer goods production fell -5.9% on the back of a -18.9% drop in consumer durables. The steep drop was balanced by consumer non-energy nondurables which fell only -0.9% as stockpiling held it up. As seen in retail sales, travel and automotive industries saw pain as evidenced by a drop of -27.2% in automotive products and a drop of -22.8% in transit equipment. Both categories are likely to continue to be hit by a combination of a freeze, official and unofficial, on travel plans and a decrease in personal income that will weigh on consumer's discretionary income. Capacity utilizations fell below long-run averages as demand was squashed. Manufacturing capacity fell 7.9% below the long-run average to 70.3% with durables softer than nondurables. Both production and utilization have yet to fall to 2008-2009 levels but are likely to continue to worsen.
The NAHB Housing Market Index outlined more devastation in the economy the index more than halving going into April. From 72 in March, a tumble of 42 pts saw the April preliminary number at 30. Present and future sales fell steeply to 36 as the real estate market looks to have dried up. Prospective buyers disappeared as well, falling from 56 to 13. The pronounced drop is likely to have been caused by a freeze of appointments and meetings as agents and buyers aren't able to see homes. However, a recovery in these numbers will depend on a lot of consumer data and how wealthy individuals feel. Regional trends in the data appear to follow where the most stringent lockdown procedures are, the Northeast sees a deep drop to 19 while the South and West regions were better at 34 and 32. This suggests the movements are probably more of a result of social distancing than wealth effects.
Touching another important data point, inflation, is the April report on the Atlanta Fed Business Inflation Expectations. Firms see inflation slowing to 1.4% on average lagging behind the movement in Treasuries yields seen in the past weeks. Year-over-year cost growth fell as well, down to 1.2%, but profit margins responses were not optimistic as 53% of respondents report them lower than normal times. Overall, severe disruptions in the normal flow of business are expected. Over 50% of respondents saw a "severe disruption" in sales activity and just under 40% saw a "severe disruption" in business operations.
Finally, the latest version of US crude oil stockpiles came in after the latest OPEC meeting resulted in a production cut. Overall storage added 19.2 million barrels as commercial storage balloons to 10.6% above the previous year. The Strategic Petroleum Reserve remains unused despite President Trump citing the possibility of using it. Total motor gasoline oil grew 4.9 million barrels with shrinking demand limiting consumption. That stockpile is 15% above a year ago. Domestic production continued to cut but only by 100k b/d, 200k b/d higher than a year ago. This number should continue to decrease at energy companies feel compressed margins and a massive reduction in refinery inputs. Those inputs fell another -969k b/d last week. The new 4-week average is -10.7% below a year ago as products supplied also gets crushed, down -640k b/d, the 4-week average now -18.5% below a year ago. Traders hoping for a bullish boost from OPEC are not likely to get it as consumption figures in the US are extremely pessimistic. It will likely take a coordinated oil production cut from every major producer across the globe to make any type of push towards stabilizing oil prices.
Comments
Post a Comment