The week ahead: US employment, Fed and services PMI's in focus

1) US employment report – 08/01 – one of the most encouraging things about the rebound in the US economy in recent months has been the slide in the unemployment rate from its peaks in April of 14.7%, to 6.7% in November. However, this rather disguises the fact that the participation rate has also fallen sharply to 61.5%, from 63.4% at the end of February. This number reflects the number of people who have more or less given up looking for a new role, and as such understates the actual number of people who are probably out of work. A more accurate measure is probably the underemployment rate which currently sits at 12%, which is still below the April peak of 22.8%, but still well above the low which we saw at the end of 2019 when it was at 6.7%. For several months now, there has been an underlying concern that the lack of a new US stimulus deal will start to act as a drag on the US economy. Up until the beginning of December this didn’t look like it was going to be too much of an issue with a fair degree of resilience among US consumers. This does appear to be starting to change after a big increase in weekly jobless claims at the beginning of December which saw a rise from 716k to 885k in the space of two weeks. An infection spike in the wake of the Thanksgiving break also appears to be weighing on US economic activity, with lower retail sales growth, while a weaker than expected November payrolls number also raised some concerns. Expectations were for 480k jobs to be added in November, but we only got 245k. There is a concern now that the December payrolls number could well see a slide back into negative territory as the winter months and rising infection rates weigh on economic activity. The slowdown in US jobs growth in the last few months has been quite stark, particularly since August when nearly 1.5m jobs were added back into the numbers. Since then, the pace of jobs growth has slowed sharply, with 672k, jobs added back in September, 610k in October and 245k in November. This is a sharp tap on the brakes, and December could well see that amplified as we close out 2020 for the US jobs market.

2) Fed minutes – 06/01 – the last Fed meeting of 2020 turned out to be a bit of a non-event coming as it did against a backdrop of continued bickering on Capitol Hill about a new stimulus bill. The US central bank did make it clear that they remained determined to support the US economy through and beyond 2023, as they continued their $120bn a month bond buying program. This determination contrasted with the more optimistic outlook the central bank had on the US economy, as they upgraded their GDP forecasts for 2020 and 2021. These upgrades didn’t exactly chime with the recent rises in weekly jobless claims, or slump in retail sales. This week’s minutes should give a greater insight into whether there was any sort of discussion about going further in terms of yield curve control or other such measures to keep a ceiling on the long end of the yield curve. 

3) UK PMIs (Dec) – 04/01-06/01 – the flash numbers in the middle of December were surprisingly encouraging, with manufacturing rising to 57.3, no doubt due to some pre-Brexit stockpiling. Services also managed to rebound a touch, coming in at 49.9, despite the tighter restrictions in the wake of coming out of lockdown in November. With the government seemingly determined to allow a certain amount of social mixing over the Christmas period these numbers could well remain fairly resilient, however if cases surge in the aftermath of Christmas, there is a concern that we could see tighter restrictions throughout the whole of January, which could limit the extent of any economic rebound in the New Year.  

4) Global manufacturing PMI (Dec) – 04/01 – one of the main bright spots in a quarter that has seen a continued tightening of economic restrictions has been the manufacturing sector that has managed to retain a degree of resilience that the services sector has not. For the most part the manufacturing sector is better able to implement the controls needed to manage any new restrictions that the services sector cannot. That doesn’t mean it isn’t without its challenges but nonetheless economic activity has managed to remain the right side of 50 and in expansion territory. The recent flash PMIs were encouraging for France and Germany, however that was before the stricter rules imposed mid-month by both the French and German governments. China in particular has led the way in this regard, with a decent rebound in economic activity, largely due to being able to so far avoid a second wave.

5) Global Services PMIs (Dec) – 06/01 – some decent numbers from China and the US aside the services sector has struggled the past few months, and it seems likely that this will continue for a while yet. A sharp rise in coronavirus cases across Europe has derailed the optimism of the summer that characterised the summer rebound in economic activity in France and Germany. In the recent flash PMIs last month, just before Christmas we saw a bit of a pickup in economic activity in both Germany and France. With German Chancellor implementing further harsh measures on the 16th December these flash numbers could see a deterioration this week. In November France services deteriorated to 38.8, while Germany saw a slide to 46. The flash numbers for December did see a pick up to 49.2 and 47.7 respectively, however the tougher restrictions in the second part of December could see these slip back. This week’s Spain and Italy numbers could see a modest improvement; however, a strong rebound looks unlikely given they face the same pressures as Germany and France. In November services activity in both slipped below the 40 level, and is unlikely to show any significant improvement. With restaurants and bars in France set to remain closed until mid to late January, and Germany still in a state of hard lockdown it is hard to see the case for any type of decent recovery any time soon, which means December is likely to see the fourth conservative month of contraction. Despite the positive vaccine news, lifting the mood from a markets point of view, it is clear that there will be no similar uptick in economic activity until such times as restrictions start to get eased, perhaps sometime in the spring. 

6) Morrisons Q3 21 – 05/01 – the first week of January generally tends to be a decent bellwether for economic activity over the Christmas and New Year period. This year is unlikely to be any different, and with the government seemingly wanting to allow a certain amount of social mixing over the holiday period, food expenditure is expected to hold up well. In the most recent Kantar numbers November saw £10.9 billion in UK grocery sales, with Morrison seeing the biggest jump in sales with a rise of 13.7%. This is likely to continue over the Christmas period, though the limits on household mixing might constrain some of the overall spend over the Christmas and New Year period.

7) Next PLC Q4 21 – 05/01 – high street retailers underwent another blow a week before Christmas as a whole host of new areas in England went into tier 3 restrictions, on top of the November lockdown. On the plus side on-line shopping has held up well, with the November retail sales numbers showing a 31.4% rise in digital sales. Next has always been strong in this area, and the business has seen a strong recovery since the March lockdown clobbered sales by 52%. Since then, Next managed to upscale its picking capacity of the warehouse operations in order to improve the on-line business, as well as delivery times, which had been suffering due to the extra workload. In October Next said full price sales were better than expected in Q3, and that full year profit before tax is expected to come in at £365m, an increase of £65m on the previous estimate. Risks to this forecast were several, with lockdowns throughout the country in Q4 a clear risk. The company set out three scenarios in the event of such a scenario for Q4 with a two-week lockdown suggesting a 20% decline in sales. The worry at the time was that a two-week lockdown would be the starting point, and not an end point, and given recent events these fears look set to be realised in spades, which means the risks are very much to the downside on the profits scenario as we head into year end, though we could see digital come to the rescue.

8) Marks and Spencer’s Q3 21 – 08/01 – it has not been a great 2020 for M&S, largely down to the fact that it has a much greater exposure to general merchandise which saw that side of the business take the greatest hit, with the March, April lockdown. Their food offering, along with the recent start of their deal with Ocado has already start to reap benefits, in their Q2 numbers, though that didn’t prevent them from slipping to a H1 loss of £17.4m. The Ocado deal did provide a significant boost in the first half, with a 47.9% increase in revenue in that particular channel. The one downside is that the Ocado deal only covers a limited 700 Home and Lifestyle product lines, compared to 4,400 food lines, which suggests there could be scope to expand this to general merchandise. The upcoming Q3 numbers should give an insight into whether the deal has given M&S some much needed Christmas cheer and returned the group to profit.