market news 7 september 2020

Surveys show ongoing recovery; trends in employment bear watching though

• The Chinese Caixin manufacturing PMI increased further into expansionary territory in August, reading 53.1 (consensus: 52.5, July: 52.8). Among the sub-components, new orders increased +0.2 to 54.6, export orders rose by a notable 2.4 points to an expansionary reading of 50.7 and the output reading was the strongest since 2011 at 56.2. The employment component increased 0.3 over the month, although remaining in contraction territory at 49.8. The NBS reading, with less of a focus on the private sector, produced an overall PMI reading of 51.0 and similar patterns in the subcomponents.

• The Caixin Services Business Activity Index fell by just 0.1 point to 54.0 (consensus: 53.9). Sub-components suggested that exports drove strong new business, with the overall new business index at 52.9 and new export business increasing from 46.6 to 49.1 over the month. The employment sub-index produced its first positive reading since pre-COVID at 50.8 and the output price sub-index indicated a pickup in inflation (51.2, previous: 49.4) among reports of higher staffing costs and raw materials prices. The future expectations index came down from a spike last month to 57.8 (July: 62.7) as expectations for the recovery normalised.

• The final Euro composite PMI reading was revised up by 0.3 points in August to 51.9 (July: 54.9). The upward revision in the German composite (+0.7 points) was the main reason for the increase since flash estimates, driven by a revision of the services PMI to 52.5 as business chains including Hotels and Restaurants recover from the drop-off in demand seen earlier in the summer. Among the final readings, France and Germany produced expansionary readings of 51.6 and 54.4 respectively. Spain and Italy produced contractionary readings of 48.4 and 49.5 as weak foreign demand continues to stifle tourism within the services industry.

• The US ISM index continued on its path to recovery in August, although the pace of growth eased. The manufacturing index rose to 56.0 (July: 54.2, consensus: 54.8), far from the levels experienced just a few months ago of 41.5 at its worst. The underlying composition showed a broad-based recovery in the manufacturing sector, as both production and new orders indices increased over the month. However, some concerns remain over the weak employment index (46.4). The pace of growth was slower in the services industry, with the overall index reading at 56.9 (July: 58.1). Business activity and new order components remained in growth territory at 62.4 and 56.8 respectively, although both readings were lower over the month. Inventories contracted in August and again the employment index caused concern within services, producing a slower contractionary reading of 47.9 (July: 42.1). The share of respondents reporting lower employment was 28% within the services sector, raising concerns for the downside risks to the economy associated with permanent layoffs and business consolidations. 

• US nonfarm payrolls rose 1.4m in August and the unemployment rate fell sharply to 8.4% (vs 10.2% in July), as furloughed staff levels fell by over 3m. However, the number of permanent job losses rose by 500,000 to a new cycle high.

Tech stocks crash into holiday weekend

• US tech abruptly halted its stellar recent run, with Nasdaq futures describing a peak-to-trough decline of over 10% between Wednesday and Friday before rebounding modestly. Position squaring ahead of the Labor Day weekend was one of the theories posited for the move. Another theory related to a story in the FT claiming that SoftBank has bought large amounts of call options on bellwether tech stocks from the major investment banks in recent times. It has been speculated that the modest initial decline in Nasdaq mid-week then snowballed as dealers scrambled to rebalance their hedges on these option positions.

• The Nasdaq move did not, however, lead to a broader liquidation of “popular trades” as might have been expected. Precious metals were only moderately weaker and the US dollar moderately stronger, whilst bets on steeper government bond yield curves remained intact and stocks ex Tech mixed (e.g. financials actually rallied).