The Markit and ISM manufacturing PMI reports released on Monday indicated another positive change in July comparing to June: the ISM index rose from 52.6 to 54.2 points, Markit PMI climbed to 50.9 points, finally leaving contraction zone. Index readings above 50 indicate that more than half of respondents saw positive changes in comparison with the previous period and vice versa.
Breaking down the index into components we can see that new orders strengthened (sharp rise in the sub-index from 56.4 to 61.5 points), inflation pressures rose (the sub-index has increased from 51.3 to 53.2 points), but key demand for labor declined. The corresponding component edged up from 42.1 to 44.3 points (the forecast was 48.3 points), i.e. manufacturing sector continued to lose jobs in July, albeit at a slightly slower pace than in June. This reinforces our hypothesis that the change in US employment will disappoint markets in July.
The PMIs only report the proportion of firms that reported worsening or improvement in the situation. It is reasonable to assume that due to lifting of lockdowns, most will report an improvement over the previous period (when lockdowns were in effect). The indices were not very informative in May and June, however, in the data for July, I highlighted the employment component as a key one for expectations, since the ADP report is due on Wednesday, and the Labor Department’s July unemployment report (NFP) is due on Friday.
As for the other indicators preceding release of NFP, the focus should be on the high-impact non-manufacturing PMI employment sub-index (where 80% of US workers employed), initial and continuing jobless claims on Wednesday and Thursday. Weak data may reinforce doubts about Friday figures which does not rule out a vigorous move towards safety.
Chicago Fed chief Evans said in a speech on Monday that as the government’s consumer income support program draws to a close, “demand trouble is brewing.” I have been writing about this for the last two weeks, and indeed, warnings about this have gradually begun to appear in the rhetoric of US Central Bank officials. Obviously, the Fed is trying to prepare market expectations that a cut in social transfers will lead to a consumer shock and I think it’s reasonable to expect that US equities will begin to price this outcome soon if the Congress won’t deliver satisfactory solution.
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