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Dentalfloss · Jun 5, 2020

Dentalfloss · Jun 5, 2020

Good Morning: The Long & the Short of it and The Bigger Picture - 5 June 2020 - ADM ISI

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Ostwald, Marc

08:46 (4 minutes ago)

to Marc

- Digesting worse than expected German Orders and Singapore Retail Sales
slide, upward revisions to Norway GDP forecasts; awaiting US and Canada
labour data, UK and EU Brexit talks press conferences

- German Factory Orders: worse than expected slide probably marks nadir,
but recovery road like to be long and sluggish

- US Payrolls: better than expected ADP prompts downward revision to
forecasts, still totally dire; Continued Claims point to risk of
rebound in job losses

- US Unemployment Rate seen surging to close to 20.0%; Average Hourly
Earnings meaningless given compositional deficiencies

- Fed Balance sheet rise not as large as it appears

- Charts: US Treasury Cash balance at Fed vs. Fed Balance sheet total;
US 10/30 yr spread; MOVE US Treasury Volatility Index

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** EVENTS PREVIEW **
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The week ends with the focus on the US and Canadian labour data, with the other points of interest being the overnight run of UK GfK Consumer Confidence, Japan Household Spending, Singapore Retail Sales, German Factory Orders and Norwegian monthly GDP, with the rest of the schedule unlikely to attract much market attention. The week long UK/EU Brexit talks end today, and both sides will hold press conferences to brief on whether any progress has been made in the previously stalled talks. The rest of the events schedule is also very light, with nothing more than a press conference by Bank Rossi governor Nabiullina. Markets appear to be at something of a crossroads, on the one hand still buoyed by the high octane liquidity from central banks and govts' fiscal stimulus already delivered and its dampening of volatility, and on the other concerned by US/China tensions, conflicted by activity and labour data inputs, i.e. bad data implying more stimulus, and good data implying a potential withdrawal of said stimulus, though as noted in yesterday's post ECB thoughts, the ECB has effectively ruled out any withdrawal over the next 12 months, and may indeed see fit to do more. On the Fed side, it is worth noting a couple of points in regards to this week's $67 Bln rise to 7.165 Trln; a) last week's surge in corporate bond purchase volumes slowed sharply to $1.3 Bln (total now $36.2 Bln); b) Bank usage of the Fed's repo facility picked up for the first time in a while up $24.8 Bln on the week, not enormous, but hinting at some pressure perhaps; c) the Treasury's Cash Balance rose just over $100 Bln (this drains liquidity from the banking system.

** Germany - Apr Factory Orders **
- Factory Orders were already dire in March at an upwardly revised -15.0% m/m -15.4% y/y, and a lot worse in April at -25.8% m/m -36.6% y/y as compared with a projection of -19.9% / -29.7%, with the slide led by a drop of 37.4% m/m in Capital Goods, with Consumer Durables down 18.1% m/m and Intermediate Goods -13.7% m/m. As the Bundesbank suggested this morning, this probably marks the low point, but it should still be remembered that this is even with 'favourable base' effects, i.e. April 2019 Orders fell 5.3% y/y, which leans heavily against chatter about PMIs and Ifo implying a bounce in coming months.

** U.S.A. - May Non-farm Payrolls / labour report **
- The biggest question about today's labour report is how markets will react to it, given the nonchalance accorded to the April report. The much better than expected ADP report (-2.76 Mln) clearly skewed expectations to the downside of the downwardly revised consensus for a drop of 7.50 Mln (Private Payrolls -6.75 Mln), and while the April ADP reading was as reliable a guide to Private Payrolls as could be expected in the circumstances, that convergence may have been as much coincidental as it has been historically. On the other hand, the rebound in yesterday's Continued Claims also serve as a reminder that a better than expected outturn does not preclude a rebound in June or beyond (hopefully not, but the risk is nevertheless real), and that it remains unclear how many job losses will be permanent. Be that as it may the Unemployment Rate is expected to climb to 19.5% from April's 14.7%, but as important will be how much higher the Underemployment Rate climbs from April's 22.8%. Average Hourly Earnings are expected to be somewhat less distorted by compositional effects (high levels of low income job losses heavily skewing average rates), slowing in m/m to 1.0% m/m from April's 4.7%, though this would still see the y/y rate climb to 8.5% from 7.9%.