Market Week in Review: What do the latest PMI surveys suggest about the state of the economy?
On the latest edition of Market Week in Review, Senior Portfolio Manager Megan Roach and Head of AIS Business Solutions Sophie Antal Gilbert discussed the latest economic data and the ongoing global response to the coronavirus pandemic, as well as recent equity market performance.
New PMI data indicates slowing rate of contraction
Weekly jobless claims in the U.S. for the week ending May 16 totaled 2.4 million, Roach said, bringing the total number of jobless applications filed since mid-March to approximately 39 million. While staggering in scope, she noted that the weekly number of claims filed has steadily dropped over the past several weeks, after peaking at nearly 7 million in late March.
Meanwhile, IHS Markit’s flash PMI (purchasing managers’ index) surveys for May rose slightly in the U.S., an indication that while the nation’s economy is still in pretty bad shape, it might be in slightly less bad shape than in April. For instance, May’s preliminary manufacturing PMI came in at 39—up from 36 in April—while the U.S. services PMI jumped from 26 to 37, Roach said. Meanwhile, in Europe, the eurozone composite PMI climbed to a reading near 30 in May—up from April’s record low of 13.6.
“Granted, any number below 50 indicates contractionary conditions—in other words, that things are worsening. However, the rate of contraction in both the services and manufacturing sectors appears to have slowed a bit from April,” Roach explained.
As to whether or not the improvement in PMI readings may signal the start of a trend, she said it largely hinges on the progression of economic reopenings around the world. Countries are currently laser-focused on how quickly and safely they can bring individuals back to work, Roach said, noting that in the U.S., a large portion of the job losses are considered to be temporary.
“In my opinion, economic progress will continue to be tied to individuals returning to work, as well as to the percentage of job losses that turn out to be temporary, as opposed to permanent,” she stated. This is why, Roach said, there’s been such a strong motivation globally to reopen battered industries like restaurants, auto manufacturing, tourism and casinos—even in a limited capacity.
Europe weighs more aid, while China-U.S. tensions rise
Turning to the response to the pandemic, Roach said that governments and policymakers around the world continue to demonstrate additional signs of support. A case in point was U.S. Federal Reserve (the Fed) Chair Jerome Powell’s May 17 remarks that the Fed is “not out of ammunition by a long shot,” as it pertains to the remaining capital the central bank has to backstop the U.S. economy, she said. In addition, the Canadian government recently announced an extension of wage subsidies and small business loans, Roach noted, while the European Union is laying plans for a €500 billion recovery fund—on top of a €540 billion coronavirus aid package already agreed upon in April.
These positive developments came amid news of further setbacks in China-U.S. relations, Roach said, including the Senate’s May 20 passage of a bill that may bar some Chinese companies from being listed on U.S. stock exchanges. This bill marks the latest example of growing tensions between the two countries, she noted, explaining that issues relating to the coronavirus outbreak, Hong Kong, global supply chains and last December’s phase 1 trade deal have all brought China-U.S. relations back into the spotlight.
Equity market update
On balance, the week of May 18 was generally positive for global equity markets, Roach said. “A lot of the gains came at the beginning of the week, when news of a successful early vaccine trial for the coronavirus broke,” she stated, adding that those gains largely held despite moderate volatility later in the week.
As of midday Pacific time on May 22, global developed markets were up approximately 4% on the week, Roach said—led by small and mid-cap stocks, which were up even more. Oil prices also increased the week of May 18, with U.S. West Texas Intermediate crude climbing above $30 a barrel for the first time since early March, she added. Notably, market leadership was geared toward more cyclical sectors such as energy, industrials and consumer discretionary stocks, Roach said. “As economic activity slowly returns to normal, sectors like these are expected to benefit the most,” she concluded.
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