Market news 6 July 2020

Fed confirms state-contingent (rather than time-contingent) approach to policymaking...

• Minutes from the FOMC meeting on 9 – 10 June suggest that there is growing consensus in the Fed that they should “further clarify” future intentions for monetary policy including fed funds rates, asset purchase programmes and yield curve control. Powell noted in March (when the fed fund range was moved to 0 – 0.25%) that the FOMC would leave rates on hold until they are “confident that the economy has weathered recent events”. Whilst the move towards outcome-based guidance has been widely supported (formerly calendar-based), there is increasing pressure to give more clarity on near term intentions based on metrics such as employment or inflation. The committee also discussed in further detail the implementation of yield curve control, which has only recently been discussed as a mechanism to support economic recovery but hasn’t been adopted since the second world war

Survey data still upbeat; payrolls surprise positively again...

• European manufacturing PMIs for June were revised upwards from earlier flash reports, though France remained the only area to report expected expansion. The Euro area reading was revised from 46.9 to 47.4, Germany +0.6 points to 45.2 and France +0.2 to 52.3. Italy manufacturing PMIs just missed expectations, 47.5 (consensus: 47.8, May: 45.4) and Spain manufacturing PMI read 49.0 (consensus: 45.1, May: 38.3)
• Chinese data reflected the continued recovery, with both the official NBS and private sector Caixin manufacturing surveys implying a faster recovery in manufacturing than was expected. The Caixin Manufacturing PMI increased from 50.7 to 51.2 in June (consensus: 50.5) - the highest reading since December 2019. New orders and export sub-indices improved over the month, from 49.7 to 52.1 and 41.7 to 47.0 respectively, whilst labour market conditions continued to deteriorate (49.2 to 48.6). The Caixin Services PMI continued its sharp increase, reaching an all-time high of 58.4 in June (May: 55.0), having recorded an all-time low of just 26.5 in February
• The NBS June Manufacturing PMI similarly showed a slightly smaller uptick in survey readings from 50.6 to 50.9 in June, helped by a strong recovery in new export orders (May: 35.3, June: 42.6). Weaker areas in the data were employment (sub index -0.3 to 49.1) and divergence of SMEs where surveys dropped into contractionary territory for the first time since February (to 48.9). Non-manufacturing PMI improved by +0.8 to 54.4, led by improvements in production-related services, logistics, IT and financial services
• The US ISM survey rose from 43.1 to 52.6 in June – reaching positive territory for the first time since February. All manufacturing sub-indices were up over the month with the exception of supplier deliveries (68.0 to 56.9), with the biggest improvements seen in new orders (31.8 to 56.4) and production (33.2 to 57.3). Services demand remains a concern for the economic recovery, although the employment index rose notably over the month (32.1 to 42.1), providing some signs of hope for household incomes
• The US Conference Board Confidence Index jumped 12.2 points in June to 98.1, retracing ~25% of its recent decline (now 34.5 points below February reading). The report showed both upgraded consumer assessments of current conditions and improved optimism for the future (one caveat is that the cut-off for the survey pre-dated the recent spike in Covid cases, particularly in southwestern states
• US nonfarm payrolls beat expectations for the second month in a row, +4.8m in June (May: +2.7m, consensus: +3.2m). The scale and pace of monthly adjustments is unprecedented, but there is still scope for further improvement as temporary layoffs trend down from present c. 10.6m. Permanent losses ticked up over the month to 2.83m, and economists challenged the classification of previous unemployment figures, which could mean that unemployment was likely c.2% higher than the reported 11.1%. Average hourly earnings fell by 1.2% to $29.37 from May as more low-wage workers returned to work

Markets keep melting up

• The “unloved” rally in equities continues; despite an acceleration in Covid infection rates in the “sunshine states”, the S&P 500 rallied 4% during a holiday-shortened week. The firm tone was reflected globally, with the MSCI ACWI index gaining over 3%
• Gold held near the recent highs just below $1,800/oz. Government bond yields rose a few basis points and the trade-weighted dollar was slightly lower