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March 6, 2020 By Peter Boockvar

Succinct Summation of the Week’s Events – 3/6


Positives

1)Business activity in China is slowly coming back. In a BN story, online travel company Tongcheng-Elong Holdings said “Hotel bookings in the week to March 1 surged 40% from the previous week, while peak daily bookings for domestic flights soared 230% from the lowest level recorded in February…Bookings for domestic flights in June jumped 250% in the last week of February from the previous week…The overall hotel operating rate in major cities across the country is projected to reach 90% by the end of March.” Emerson Electric this week said “At this point we’re running all our China facilities full out.” Reuters reported this week that “Nearly 300mm people have gone back to work in China since the Lunar New Year…18 regions in mainland China have cut the emergency response level as of Monday.” Starbucks said they’ve reopened 90% of their China stores. And lastly, in terms of the cargo shipments that could be ahead, the TAC index is showing a spike in airfreight rates between China and Singapore and China to South Korea.

2)Payrolls in February grew by 273k, well above the estimate of 175k and there were net upward revisions of 85k. A lot of this came from the government as the private sector exceeded expectations by a more modest but good 68k to 228k and the prior two months were revised up by 33k combined. A mile winter was the help to construction and leisure/hospitality. The government jump in hiring was census related and due to a jump in state government education. The household survey saw a more modest job increase of 45k and when combined with a drop in the size of the labor force of 60k saw the unemployment rate tick down by one tenth to 3.5%. The U6 rate in contrast rose by one tenth to 7%, the highest since last year. The participation rate held at 63.4% but the employment to population ratio fell one tenth to 61.1%. Average hourly earnings rose .3% m/o/m as expected with the y/o/y increase at 3% vs 3.1% in January. As the workweek did improve to 34.4 from 34.3, average weekly earnings rose by .6% m/o/m and 3% y/o/y after a slowdown to 2.5% in January and 2.4% in December.

3)Initial jobless claims totaled 216k, about as expected and down from 219k last week. As a print of 203k dropped out, the 4 week average rose to 213k from 210k last week. Continuing claims, delayed by a week, rose by 7k after falling by 11k in the week prior.

4)The February ISM services index unexpectedly rose to 57.3 from 55.5. The estimate was for a decline of 54.8. Of the 18 industries surveyed, 16 saw growth vs 12 in January. ISM said “The non manufacturing sector reflected continued growth in February. Most respondents are concerned about the coronavirus and its supply chain impact. They also continue to have difficulty with labor resources. They do remain positive about business conditions and the overall economy.”

5)The sharp w/o/w drop in mortgage rates to just 3.57% on average saw the immediate impact on refi’s as they jumped by 26% w/o/w and are now up 224% y/o/y. Likely due to the paralyzing impact of the stock market drop, purchases fell by 2.7% w/o/w but are still up 10.3% y/o/y (but on still easy comparisons).

6)The Eurozone February manufacturing PMI actually rose by 1.3 pts to a still below 50 print of 49.2 but we know the challenges ahead in coming months. Markit said that while the print was good to see in terms of the improvement, “The concern is that coronavirus related delays in shipments threaten to constrain production in the coming months, prolonging a downturn that already extends to over a year. Supply chains are lengthening to an extent not seen since 2018 and inventories are being depleted at a rate rarely seen over the past decade as companies struggle to produce enough to satisfy order books.”

7)The Eurozone construction PMI for the Eurozone in February rose to 52.5 from 51.9 which was the best in a year but with a caveat. Markit said “Despite activity rising at the quickest rate for a year, new business growth decelerated to the slowest in the current 5 month sequence of expansion. Such a reading indicates softening underlying demand and can act as a prelude to slower activity growth.” 

8)The Eurozone February CPI rose 1.2% at both the headline level and core and both were as expected.

9)German factory orders rose 5.5% m/o/m in January, well better than the estimate of up 1.3%. The Economy Ministry did say some of this is post holiday catch up and some bulk orders “Yet the impact from the new coronavirus risks remain to be seen.”

10)Japan’s wage growth finally surprised to the upside in January with a 1.4% y/o/y increase in regular pay, the fastest since 1997. The big caveat though is there could be methodology issues that have been impacting some data.

11)India’s services PMI for February rose to 57.6 from 56.3. Indonesia’s PMI rose to 51.9 from 49.3 and the Philippines was up to 52.3 from 52.1. 


Negatives

1)The pace of the virus spread in Europe and the US is now the growing concern.

2)From my point of view, the Fed wasted another 50 bps of easing in an attempt to relieve pressures on financial conditions and to “boost household and consumer confidence.” Financial conditions won’t ease until this virus flames out and investors are comfortable with the direction of cash flows and instead of lifting confidence, their action reflected panic and did the exact opposite. Any temporary financial condition relief is offset by profit pressure now on the entire banking system. Targeted fiscal measures like a payroll tax holiday is what the focus should be on along with the obvious, more test kits and more needs for self quarantine, whether individually, with companies and schools that should be done ASAP rather than waiting.

3)The Bank of Canada and Reserve Bank of Australia also use up more of what little they have left.

4)Markit’s measure of the ISM services sector saw their index fall to 49.4 from 53.4. Markit said “February data signaled the first contraction of US service sector business activity for four years. The decrease in output stemmed from only a fractional rise in client demand and a further contraction in new business from abroad as customers held back from placing orders amid global economic uncertainty and the coronavirus outbreak.” In terms of hiring, “service providers expanded their workforce numbers at the slowest rate for 3 months.” Further, “Business sectors such as travel and tourism are reporting weakened activity due to the virus outbreak, most notably in terms of foreign visitors and overseas sales. However, other sectors such as financial services and business services are reporting virus related hits to demand, suggesting a more broad based weakening of demand across the economy, exacerbating the supply shock that is constraining manufacturing.”

5)The February ISM manufacturing index fell to 50.1 from 50.9 and that was a touch below the estimate of 50.5. While the headline number did fall, the breadth of growth did improve a lot with 14 industries seeing growth vs 8 in January and just 3 in December. The ISM said “Comments from the panel were generally positive, with sentiment cautious compared to January.” The ISM also said “Global supply chains are impacting most, if not all, of the manufacturing industry sectors.”

6)The China state sector weighted manufacturing PMI fell to 35.7 from 50 while the services component plunged to 29.6 from 54.1. The private sector weighted Caixin manufacturing index fell to 40.3 from 51.1. The estimate based on wild guesses was 46. 

7)China’s private sector Caixin services index for February collapsed to 26.5 from 51.8.

8)Japan’s services PMI fell to 46.8 from 51. Hong Kong’s was a disaster, dropping to 33.1 from 46.8. Singapore’s fell to 47 from 51.4. Australia’s services PMI fell just 1.6 pts to 49. Vietnam’s manufacturing PMI fell to 49 from 50.6, Japan’s was lower by 1 pt to 47.8, Malaysia’s down to 48.5 from 48.8, South Korea’s dropped to 48.7 from 49.8 while Taiwan’s fell to 49.9 from 51.8, Thailand’s to 49.5 from 49.9 and India’s dropped to 54.5 from 55.3.

9)The Eurozone services PMI was revised to 52.6 from 52.8 initially. That is still up .1 pt from January. This was all about domestic growth “as export sales declined at the greatest rate for 5 months.” And for both goods and services the region is seeing “increasingly widespread delivery delays threaten future production. In the service sector, growing numbers of companies are reporting lost business due to the virus spread, notably in sectors such as hotels, travel, transport and tourism but also even in areas such as financial services.”

10)The UK services February PMI was 53.2 vs 53.9 in January but up from 50 in December. Markit said “The post-election rebound in service sector growth lost some of its bounce in February, in part due to coronavirus related disruptions to sectors such as travel and tourism, but continued to expand at an encouragingly robust pace.”

11)The UK manufacturing PMI rose to 51.7 from 50 but that was slightly below the initial print. Supply chain issues are piling up “as the Covid 19 outbreak led to a substantial lengthening of supplier lead times, raw material shortages, reduced inventories of inputs, rising input costs and reduced export orders from Asia and China in particular.”

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About Peter

Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.

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Disclaimer - Peter Boockvar is an independent economist and market strategist. The Boock Report is independently produced by Peter Boockvar. Peter Boockvar is also the Chief Investment Officer of Bleakley Financial Group, LLC a Registered Investment Adviser. The Boock Report and Bleakley Financial Group, LLC are separate entities. Content contained in The Boock Report newsletters should not be construed as investment advice offered by Bleakley Financial Group, LLC or Peter Boockvar. This market commentary is for informational purposes only and is not meant to constitute a recommendation of any particular investment, security, portfolio of securities, transaction or investment strategy. The views expressed in this commentary should not be taken as advice to buy, sell or hold any security. To the extent any of the content published as part of this commentary may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. No chart, graph, or other figure provided should be used to determine which securities to buy or sell. Consult your advisor about what is best for you.

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