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June Data Solid, But COVID Rebound Looms

The US data for June have been generally positive, with a solid gain in nonfarm payrolls and the above-50 ISM readings for both the manufacturing and nonmanufacturing sectors.

Of course, much of this was before several large states reported rebounds in their COVID-19 cases, so the silver cloud comes a with darkened lining.

Still, there should be further gains in retail sales, industrial production, and consumer inflation to finish off will ultimately be reported as the worst second quarter performance in decades.

Consumer prices should get an energy boost, but core still tame

After Friday’s 0.2% decline in the overall June PPI and the 0.3% drop in core business prices, Tuesday’s CPI report will be a key metric to watch.

In May, energy prices surged at the business level, but did not make it through to the consumer price level. Now that people are more comfortable (in some places, maybe too comfortable) emerging from their isolation, the increased demand for gasoline should allow pump prices at the consumer level to move higher.

At the same time, food prices fell sharply at the business level in June after surging on a spike in meat prices in May, suggesting consumer food prices could snap their string of gains.

Core consumer price inflation is likely to be soft again, keeping the year/year rate in check.

June retail sales driven by vehicles, but other components mixed

After a sharp 14.7% decline in April and a 17.7% rebound in May, the June retail sales report released on Thursday is likely to be less dramatic. Vehicle sales recovered further in June, but the 44.1% jump in May retail auto sales will not be matched. Still, the rebound in industry sales will be enough to lift headline retail sales.

Outside of motor vehicles though, the picture will be less clear. Gasoline station sales will benefit from a further price increase, but other categories will not be able to improve drastically on their May gains, and some will see a pullback in sales as pent-up demand from the shutdown dissipated.

At the end of the month, retailers offered pre-Independence Day sales to lure in shoppers, but it may have been too little given the uncertainty around the resurgence of COVID-19 cases.

This is not to say that retail sales will lose all of the May progress, and in fact the overall trend should remain decidedly upward. But any hope that a repeat of the May spike in June could partially save second quarter PCE was likely dashed by continued COVID concerns.

Business inventories down, sales up sharply in May

May business inventories are on track to fall by 2.3% when they are released later Thursday, pending a revision to the retail inventories number, currently at a 6.1% decline. Wholesale inventories fell by 1.2%, while factory inventories rose by 0.2%.

Based on data already released, business sales are on track to surge by 8.3%. Retail trade sales rebounded by 16.8% in May, but are subject to revision with the retail sales release. Wholesale sales rose by 5.4% and factory shipments rose by 3.1%.

Manufacturing readings should indicate further gains in July

The first manufacturing conditions readings for July will show a continuation of the growth seen in previous months.

The New York Fed’s Empire State reading, released on Wednesday, is expected to finally rise above the breakeven point after coming extremely close to it with a -0.2 reading in June.

The Philadelphia Fed’s manufacturing index, released on Thursday, had no trouble moving into positive territory in June and should continue that upward movement in July.

These two regions were initially the hardest hit by COVID infections but have seen their case numbers plunge over the last two months, allowing for long-awaited state reopenings. This should translate to more factory activity.

Warmer weather, manufacturing to lift industrial production

The positive June ISM readings suggest that manufacturing production could post another increase in Wednesday’s release after a 3.8% rebound in May.

Motor vehicle production alone rose by 121% in May as factories reopened. The conditions data in June suggest that further reopening will lift vehicle production to meet increased demand.

As for utilities and mining, a rebound is likely from their April and May dips, when the weather was milder. Even accounting for seasonal adjustment, increased driving and air conditioning use in June will translate to improvements in these two categories.

Initial claims level remains stubbornly above 1 million

The level of initial claims has been used as a beacon by many analysts to illustrate that despite payrolls gains in the millions and explosive retail sales and production rebounds in May and likely June, we are still not out of the woods yet.

With over a million new people still filing each week for unemployment assistance, it is obvious that not only are businesses still struggling to remain open, they are also finding it difficult to keep their workers on staff.

After 1.314 million claims filings in the most recent week, down 99,000 from the previous week, it appears that these levels are the new normal for a while. Many businesses likely rehired workers with help from government stimulus money, then needed to release them back onto unemployment again.

The extended unemployment benefits expire at the end of July, barring any new action on the part of the federal government, so it is possible that claims filings will slow later in the month, but that would be a drop in the bucket compared to the current backlog.

Low rates supporting new home building, mortgage borrowing

The weekly MBA data have pointed to continued gains in new mortgage application activity, supported by declining mortgage rates to record lows in June. While concerns about a resurgence of COVID may dissuade some buyers, it is likely that home building will remain on an upward trend as builders prepare for a further increase in demand in the fall.

Friday’s release of data on building permits and housing starts will look to build on May’s increases.

The NAHB housing market index surged in June to a reading of 58 from 37 in May, with both the present conditions and six-month outlook up sharply. A further increase in expected for the July reading on Thursday.

Preliminary Michigan sentiment to reflect COVID rebound

While many states are loosening COVID-related restrictions, others are being forced to tighten up again. The preliminary sentiment reading from Michigan is likely to reflect this turmoil, at least in the current conditions reading.

Whether the COVID numbers can be reversed adequately to prevent a deterioration in the expectation reading as well, or a dent in July consumption itself, remains to be seen.

Treasury budget deficits as far as the eye can see

The June Treasury budget released on Monday will echo what has been seen since the crisis began – reduced tax receipts due to the slower economy and an extremely high level of outlays due to government stimulus measures.

With millions still out of work, businesses remaining closed to the recent COVID resurgence, and talk of further stimulus measures, deficits will continue to mount for the remainder of the year and beyond.

The Beige Book – improved overall, but watch the regions

While the FOMC has all but disavowed data dependency, Wednesday’s Beige Book will provide the members, and the public, an idea of how the various regions are faring. No doubt the overall assessment will show significant improvement over the last six weeks, but it will be interesting to see how each region contributed – or contrasted with – the improved overall picture.

Kevin Kastner

Julie Ros

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