Daily Global Perspectives

Reflation is the good kind of inflation, and its presence means the economy is getting back to normal. The biggest worry during this severe recession is that prices could continue to drop, creating deflation, which is another word for “depression.” Fortunately, the Consumer Price Index inflation number surged 0.6% in July for both headline CPI and its more important cousin, “core” CPI, which excludes the volatile categories of energy and food prices. This marks the biggest rebound since August 2012; it puts year-over-year CPI at a reasonably healthy 1.6% and core CPI at 1.0%. This is good news indeed, and is likely responsible for U.S. Treasury ten-year yields popping up to nearly 0.70%. Meanwhile, in another good sign for the U.S. economy, weekly initial unemployment claims continue to plummet — 228,000 fewer unemployed — for the week ended August 8.

The July ISM Non-Manufacturing PMI increased to 58.1, up from 57.1 in its second straight month of services sector growth after declining in April and May. Meanwhile, the ADP Employment Report show private payrolls increased by 167,000, dramatically below expectations of 1 million. Although the ADP report is far from a perfect predictor of the official payroll figures, it may be a harbinger of a weaker than expected employment report on Friday, for which consensus estimates are that the unemployment rate will fall to 10.2% from the current 11.1%.

The U.S. ISM manufacturing index rose 1.6 points to 54.2 in July. This stronger than expected print followed the 9.5 point jump to 52.6 in June, which was the largest gain since August 1980. The index has continued to improve since the dive to 41.5 in April, the lowest reading since April 2009. Gains were broad-based with the new orders component, a strong leading economic indicator, climbing another 5.1 ticks to 61.5 after the 24.6 point surge to 56.4 in June.

Second quarter 2020 U.S. real gross domestic product (GDP) decreased at an annual rate of 32.9%, the biggest quarterly decline on record. With the U.S. economy in the midst of its deepest recession since the Great Depression, it is difficult for some investors to understand how the S&P 500, the United States’ most commonly followed broad market index, can be less than 5% off its all-time high. There are several factors contributing to this perceived disconnect, but the driving force holding up markets has been government support — both monetary and fiscal.

Equities continue to move uphill, and all signs point towards a successful reopening and a revived economy. Right? That certainly is the assessment of stocks as the benchmarks continue to rise and the S&P 500 now sits about 100 points away from its 52-week high $3,373. But the direction of stocks is not the only arbiter of market and economic health. Let’s look at the bond market, which certainly does not support a “bull market” scenario. At the start of the year, the yield for the 10-year U.S. Treasury — a bellwether of investor sentiment towards the economy — stood near 2%. On Thursday, the 10-year Treasury yield broke below its support and is down to 0.58%. In other words, bonds are signaling bad economy and bad markets ahead.

We continue to monitor the effects increasing Covid-19 cases are having on economic data. In aggregate, we see a flattening out rather than a dramatic decline in a number of indicators, as backtracked reopening plans have focused on high-risk activities and enforcing mask requirements rather than broad-based shutdowns. Real-time measures of employment from HomeBase, along with restaurant and travel data from OpenTable and TSA checkpoints, confirm these trends.

July 4, 1776 marks the birth of the United States as a sovereign nation, the day the Continental Congress formally adopted the Declaration of Independence — though the actual vote for independence took place on July 2. Every now and then many Americans, me included, need a refresher on what led the colonies to declare independence from Britain, and the eight years of war that won it. Below is the broad arc of the story.

The markets had their day in the sun with a V-shaped recovery in 2Q20, but now it is the economy’s turn. The National Association of Realtors Pending Home Sales index jumped a record 44.3% to 99.6 in May, the largest monthly increase since the index began in 2001. The index stood at 105.0 last May. The strong gain in the housing sector was a catalyst that the market needed after last week’s slump. Two important June economic releases to watch for this week are ISM Manufacturing, which is expected to continue its comeback; and the U.S. nonfarm payrolls, aka the jobs, report — the unemployment rate is expected to drop to a 12-handle. Nonfarm payrolls will be released a day early on Thursday, since markets will be closed on July 3 in observance of Independence Day. It is good to see positive economic data and would be a lot better seeing Covid-19 cases drop across all states. Expect more volatility but with positive surprises. It is a welcome sign, albeit early in the early innings of the game.

The standout performer in June has been emerging markets (EM) both during market surges and pullbacks. One month does not make a trend, but it is worth looking into the drivers of a purportedly “risky” trade that has featured both positive upside and downside capture ratios. Who would have thought that EM was the place to be, with all the “fits and starts” of re-opening the world’s economies? One thing for sure is that emerging markets are not “your father’s Oldsmobile.” The original BRIC — Brazil, Russia, India and China — which put Brazil first and China last is long gone.

The Conference Board Leading Economic Index (LEI) for the United States increased by 2.8% for the month of May. According to Action Economics!, this is a record increase in a series extending back to 1959, and reminds us that in March an LEI reading of -7.5% marked the series’ record decline. More good news in manufacturing as the U.S. Philly Fed manufacturing index rocketed 70.6 points to +27.5 in June. Meanwhile, global central banks continue massive stimulus, led by the Bank of Japan. Credit markets are the big beneficiaries, continuing to “catch a bid” from better economic news but especially the Federal Reserve’s corporate buying in the secondary markets.