US Macro: Signs of a shift in covid-19 surge response – Since our last update on this topic, the unsustainable rise in covid-19 cases in southern US states has continued. In particular, Texas hospitalisations continue to grow at a 5%+ daily rate, while in California hospitalisations have started to grow at a similarly alarming pace. Hospital capacity remains ample for the time being, but we are now seeing a shift in tone from governors in their response to the surge. California governor Newsom said that he would be prepared to ‘revert back’ to more stringent restrictions if necessary, and is threatening a withdrawal of funds from counties that fail to follow state guidelines on slowing the spread of covid-19. Texas governor Abbott also shifted language, urging residents “unless you do need to go out, the safest place for you is at your home.” As we argued in our last note, we do not expect a return to full, state-wide lockdowns, but we do see a significant risk of localised lockdowns – concentrated in the urban areas most affected. For instance, in California, the surge in cases is mostly concentrated in Los Angeles and the surrounding areas, with San Francisco and surrounding areas largely unaffected. In Texas the surge is more generalised, but still largely in heavily urbanised areas, with Houston the hardest hit. As yet, we do not view the resurgent pandemic as a reason to change our growth outlook for the US, but the downside risks are significant. (Bill Diviney)
Euro Macro: Germany far from ‘back to normal’ – Germany’s business and consumer confidence indicators, as well as high-frequency early indicators for industrial activity, show that the economic situation has clearly improved since April, but that it is still well below pre-corona levels. To begin with, business confidence remained at relatively low levels in June. The manufacturing PMI (up to 44.6 in June, from 36.6 in May) and the services sector PMI (to 45.8 from 32.6) each remained at levels that are consistent with contraction. Next, the Ifo business climate indicator rose to 86.2 in June, up from 79.5 in May, which is well below the long-term average, while the expectations part of the survey also remained below-average from a historical perspective. Moreover, the details of the Ifo report show that sentiment in the car industry picked up modestly in May and June and also remained close to all-time low levels.
Consumer confidence has also remained subdued. The GfK institute has published the final outcome for consumer confidence in June, which includes a forward-looking estimate for confidence in July. In June, consumer confidence increased to -18.6, up from -23.1 in May, and the expectation is that it will improve further to -9.6 in July. For the sake of comparison, this is well below the trough of 1.5 that was reached during the GFC of 2008-09. According to the statement by GfK, the recently announced (temporary) cut in the VAT rate has had a positive impact on sentiment, but the overall picture remains gloomy, with consumers particularly downbeat about the labour market. Employment dropped by 0.6% mom in April. We expect the number of jobs to remain on a downward path during the rest of this year, although there might have been a temporary pick-up in May and June on the back of the easing of lockdown measures. Ongoing declines in employment were also suggested by the levels of the employment component of the composite PMI and Ifo’s labour market indicator in June. By the end of the year, we expect the total number of jobs to be almost 1% below the level of the end of 2019.
Early indicators for industrial activity also suggest that activity remained well below pre-corona levels. One of the new high-frequency indicators published by Germany’s Statistisches Bundesambt is the Truck toll mileage index, which provides indications of the development of industrial production in Germany at an early stage. It traces the development of the mileage of large trucks (with four or more axles) on German motorways on a daily basis and are calendar and seasonally adjusted. As the graph below shows, the index has risen in May and June, but the 7-day moving average was around 6% below the average level in the months before the corona crisis. (Aline Schuiling)