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The U.S. Week Ahead (May 18-22): State Mandates Set to Drive Services PMI

By:

Senior Market Analyst at Interactive Brokers

Growth in the U.S. service sector will most likely continue to be tied to the varying severity levels and easing schedules of state-mandated restrictions to contain the spread of Covid-19.

While businesses such as restaurants, bars, movie theaters, barber shops and nail salons have remained hostage to state-led containment measures, unemployment has spiked and gross domestic product (GDP) has plunged.

IHS Markit Services & Manufacturing PMIs suffer through pandemic

Retailers, for example, have generally been reeling from revenue losses under the restrictions, which have also forced a record wave of furloughs, as physical stores have either closed or filed for bankruptcy across the country.

In fact, the mammoth drop of 20.5m total nonfarm payrolls in April was underscored by a 7.7m plunge in leisure and hospitality jobs, as well as a decline of 2.1m retail employment, representing nearly half of all losses, according to the U.S. Bureau of Labor Statistics.

Initial claims for unemployment benefits also continue to rise, with nearly 36.5m filings since the week of March 20, according to advance figures from the U.S. Department of Labor.

Top US States with Highest contributions to advance initial jobless claims

Connecticut topped the list of states with the most insurance claims in the latest week, with nearly 300k filings, comprising almost 11.5% of the advanced, unadjusted nationwide total of more than 2.6m.

Although Connecticut governor Ned Lamont’s lifting of lockdowns on restaurants, retail shops and malls, hair salons and barbershops, offices, as well as museums and zoos, are set for May 20, control measures appear to remain debilitating to many of the businesses.

Operations at restaurants, for instance, will be restricted to outdoor areas only, while a 50% capacity limit on all businesses will be imposed, and social gatherings will be limited to a maximum of five people.

Many other states, with a more accelerated schedule for easing containment measures such as Texas, contributed far less to initial jobless claims in the latest week.

Top US states with lowest contributions to advance initial jobless claims

Texas governor Greg Abbott had removed his statewide ‘stay-at-home’ policy at the end of April and permitted reopening of  all retail stores, malls, restaurants, movie theaters, museums, and libraries on May 1, with a cap on capacity of 25% of their listed occupancy.

The latest figures for unemployment insurance claims in the state fell by over 102k week-over-week to a little more than 141.5k, contributing roughly 5% to the advanced, unadjusted total in the U.S.

To date, more than 1.42m cases of the novel coronavirus have been identified in the U.S., with around 3% of that total having hit Texas, and almost 2.5% in Connecticut., while fatalities in those states comprise around 3% and 9% of their cases, respectively, according to data compiled by the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University.

Essential Services

Meanwhile, over the course of the first quarter of 2020, the estimated pace of real GDP expansion fell 4.8% from an increase of 2.1% in Q4 2019.

While staggering, the figure is unsurprising, given consumer spending accounts for more than two-thirds of U.S. GDP; and considering retail sales in April plummeted 16.4% from the prior month and 21.6% year-on-year, second-quarter growth seems set for another downward spiral.

Against this backdrop, analysts generally foresee material financial decay in several retail sector companies’ earnings reports in the week ahead, with negative quarterly EPS outlooks on J.C. Penney (NYSE: JCP), Nordstrom (NYSE: JWN), L Brands (NYSE: LB) and TJX Cos (NYSE: TJX), to name a few.

Traditional retailers struggle, while online consumerism compounds problems

Moreover, while traditional retail shops have long been threatened by on-line consumerism (non-store retail sales climbed 21.6% year-over-year in April), many in the market fear the psychological and emotional fallout from social distancing and ‘stay-at-home’ policies may pose greater challenges for physical stores even after restrictions are lifted.

Travel bans and a related drop in tourism, as well as recent store closures and bankruptcy filings, such as J. Crew, Neiman Marcus, and Papyrus, only seem to compound the adverse impacts for retail and the broader service industry.

Retail carnage turns catastrophic in April 2020

IHS Markit chief business economist Chris Williamson recently noted that measures to combat the Covid-19 outbreak “mean vast swathes of the service sector has been especially hard hit by travel restrictions and social distancing, with temporary company closures and dramatically reduced demand resulting in an overall drop in activity of even greater magnitude than seen during the height of global financial crisis.”

He continued that “while manufacturing may see a rebound in production as increasing numbers of factories are allowed to re-open, prospects look bleaker for many parts of the services economy, especially where businesses rely on travel, social gatherings or close contact with customers.

“Businesses such as airlines, bars, restaurants, cinemas, sports arenas and other recreational activities will likely be at the back of the line in terms of being able to re-open to anything like previous capacity levels, meaning the recovery will be long and slow.”

Investors will be eyeing the preliminary May figures for IHS Markit’s services and manufacturing PMIs Thursday, which economists surveyed by Bloomberg think could rise to 32.5 and 37.5, respectively, from the prior month’s levels of 26.7 and 36.1 – likely in response to the easing of Covid-19-related restrictions in many states.

Market participants will also receive a slew of salient updates on the domestic housing market in the week ahead, as well as a long list of retail sector earnings.

On the Calendar:

Mon, May 18

  • NAHB Housing Market Index (May)

Tue, May 19

  • Building Permits (Apr)
  • Housing Starts (Apr)
  • American Petroleum Institute (API) Crude Oil Stocks
  • Earnings
    • J C Penney
    • Kohls (NYSE: KSS)
    • Nordstrom
    • Walmart (NYSE: WMT)

Wed, May 20

  • MBA Mortgage Applications (Apr)
  • U.S. Energy Information Administration (EIA) Crude Oil Stocks
  • Federal Open Market Committee Meeting Minutes (April 28-29)
  • Earnings
    • Expedia Group (NASDAQ: EXPE)
    • L Brands
    • Lowe’s (NYSE: LOW)
    • Target (NYSE: TGT)

Thu, May 21

  • Initial Jobless Claims (Weekly)
  • IHS Markit U.S. Manufacturing PMI (Prelim – May)
  • IHS Markit U.S. Services PMI (Prelim – May)
  • IHS Markit U.S. Composite PMI (Prelim – May)
  • Existing Home Sales (Apr)
  • Earnings
    • Best Buy (NYSE: BBY)
    • Groupon (NASDQ: GRPN)
    • Lions Gate Entertainment (NYSE: LGF.A)
    • Ross Stores (NASDAQ: ROST)
    • TJX Companies

Fri, May 22

  • Earnings
    • Foot Locker (NYSE: FL)

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

IBKR TWS Event Calendar
Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Author Security Holding: No Positions

The author does not hold any positions in the financial instruments referenced in the materials provided.

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