Moment Is Here
The moment is finally here. A country fully recovered from COVID-19. Yes, it’s Germany, but this is still important. It’s a potential leading indicator for America. To be clear, Germany had less of an impact from coronavirus than America did. Germany had 103 deaths per 1 million people and America had 321 deaths per 1 million people.
It’s still great to see the chart below though. As you can see, OpenTable bookings in Germany were up 0.34% yearly on May 31st. This has been a V-shaped recovery as yearly growth was -67% on May 28th, -44% on the 29th, and -33% on the 30th. That’s before it went positive on the last day of May.
There are 3 factors in play when it comes to eating at restaurants. They are the pent up demand, the containment of coronavirus, and the consumer’s ability to spend money. Because of pent up demand, you’d expect when the economy is back to normal that more people will go out than usual because they are tired of staying indoors.
Arguably, this is only the beginning of the growth we will see in Germany. We could see double digit growth in June. It seems like COVID-19 is contained in Germany. Cases have been going down steadily in New York. That’s why the entire state is open except for NYC which will open on Monday.
Percentage of people testing positive for COVID-19 in America has been declining rapidly. As you can see from the chart above, opinion is split on whether the number of new cases will increase in the next 7 months. It’s common for investors to see a modest change either way.
An exceptional current rate of testing means that the 2nd wave is likely to be contained if there is one. Worst part of a 2nd wave would be the decline of in person economic activity for a few weeks.
Finally, the consumer should have the money to spend in America because savings and income are elevated. A main concern is that the $600 weekly unemployment benefits will expire by the end of July before people get their jobs back. Americans are hoping a solution is discovered. It’s doubtful the unemployment rate will fall below 10% by August. We’re expecting a quick recovery, but not that quick. While this is a negative catalyst, it’s not as if all unemployment benefits are going away. It won’t be the end of the world.
In America, the yearly growth of bookings at restaurants was -83% which matches the global growth rate. It wouldn’t be surprising if there was an impact from the riots. Riots could cause a delayed recovery. They are coming at the exact worst possible time. A weak economy is also part of the reason why the riots are this bad. When people don’t have jobs, they have more time to spend in the streets and less to lose.
ISM Manufacturing Report Was Weak But It Improved
May ISM manufacturing PMI rose from 41.5 to 43.1 which beat estimates for 42.7. This report was much better than the April reading because it rose even though supplier deliveries fell sharply. Remember, in April the report was terrible but the headline reading wasn’t bad because deliveries spiked to 76 which was the highest reading ever. In May, supplier deliveries fell 8 points to 68. This report is still weaker than the headline PMI indicates, but the divergence isn’t as bad.
Specifically, this PMI is consistent with 0.1% GDP growth which is way too high. GDP growth isn’t going to be as bad as the Atlanta Fed Nowcast indicates because the May and June reports will be better. However, it will be much closer to the -52.8% growth the nowcast has than the 0.1% growth the ISM has.
New orders index rose 4.7 points to 31.8 and the production index rose 5.7 points to 33.2 which is still anemic. Anything that improves is good enough for the market because it means the economy is headed in the right direction. In this case, it is contracting slower. Employment index was up 4.6 points to 32.1. Among the big 6 industries, only food, beverage, and tobacco products expanded. To be clear, this is 1 industry.
As the top chart above shows, orders less inventory improved faster than the headline index. Inventories were up 0.7 to 50.4. That’s not an extreme reading. It’s the only category near 50. The 3rd chart shows new orders minus inventories in relation to the S&P 500 has never been weaker. We know that the May economy and stock market were on 2 different planets. The stock market has gotten way out ahead of the economy. If the economy falters, we could see a major correction.
With the national riots going on, COVID-19 is starting to seem like old news. Biggest risk went from the trade war to COVID-19 to the riots. A problem is they are all still in play. In this ISM report, 2 firms directly mentioned COVID-19 out of 10. Their tone was much more positive than in April.
A fabricated metallic products firm stated, “Returning to full production for automotive, ramp-up will still depend on speed of automotive start-ups. We have built up inventory to stock. Ready to ship.” A non-metallic mineral products firm stated, “We see a lot of positive signs, despite what’s going on. People seem to continue to be building and looking to projects for fall of 2020 and beyond. There is good optimism out there.”
German restaurant bookings are finally showing positive growth. Let’s see if America can get there in a few weeks. Unfortunately, just as the economy is starting to recover, national riots have broken out. They might be the next big risk to equities. ISM manufacturing PMI was very weak, but under the surface it showed significant improvement from last month. The comments section showed optimism.
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