THE WEEK AHEAD: US ISM MANUFACTURING & JOBS REPORT
Mark Lister, 31 August 2020
The US sharemarket had another very strong week, with the S&P 500 rising 3.3% to finish at a new record. It is now 3.6% above its pre-COVID high and is up 8.6% in 2020. Despite a highly disrupted few days of trading, the local NZX 50 rallied 2.2% for the week and also surpassed its pre-COVID closing high from February. The top NZX 50 movers last week were Vista Group (+35.7%), Tourism Holdings (+15.2%) and Meridian Energy (+7.6%), while a2 Milk (-4.8%), Refining NZ (-4.4%) and Spark (-2.4%) lagged.
However, it should be noted that the US and New Zealand are the exception, rather than the rule. Most other major sharemarkets are still some way below the highs reached earlier in the year. The FTSE 100 in the UK is 22.3% down from those levels, while the Australian ASX 200 and the European Stoxx 600 are 13.8% and 15.0% below the irrespective peaks. Japanese and emerging market shares have performed better and are just 5.0% and 2.2% down from their respective highs from early 2020.
The NZ dollar gained 3.1% against the US dollar last week and is now comfortably above US$0.67. The greenback suffered in the wake of the Federal Reserve’s announcement that it would take a more relaxed approach to any resurgence in inflation, which is a further commitment to keeping interest rates very low. There are several Fed representatives on the speaking circuit this week, and investors will be listening carefully for more detail on this significant change in approach.
Elsewhere in the week ahead, markets will be watching the latest ISM manufacturing survey in the US, as well as the monthly jobs report on Friday. The economic highlights in the US this week will be the ISM manufacturing index for August, due for release on Tuesday, and the monthly jobs report for the same month, which is scheduled for Friday. The ISM index improved to 54.2 in July, while the new orders component was also very encouraging, increasing from 56.4 to 61.5. This was well ahead of expectations and represents the strongest pace of improvement since September 2018. We would expect this strength to continue, given the Markit flash manufacturing PMI for August increased to 53.6, the highest since January 2019. In terms of the jobs report, markets are expecting another 1.4million jobs to have been added, as the US labour market continues to recover. The unemployment rate is forecast to fall to 9.8%, compared with 10.2% in July.
There could be some excitement on Monday as share splits for two high profile US companies are consummated. Apple and Tesla both begin trading after 4-for-1 and 5-for-1 splits respectively. Apple’s split will see its weighting in the Dow Jones Industrial Average reduce substantially, and we will see some changes in the iconic US index.
It’s a much quieter week on the domestic front. With the reporting season now largely complete, Sky City and Property for Industry are the only notable companies due to announce results. Investors will also be focused on the stability of the NZX trading platform, while the move to a lower Alert Level will be welcomed by those in our biggest city.
On the economic front, the results of another dairy auction will be forthcoming midweek. We will get the results of the latest dairy auction early on Wednesday morning. A fortnight ago, the global dairy trade (GDT) index fell for the third consecutive auction, as headline prices declined 1.8% and whole milk powder dropped 2.2%. That saw the index is down 8.8% since the beginning of 2020 and 7.1% lower than 12 months ago. The farming sector will be keeping a close eye on the path of dairy prices over the coming months, with the potential for increasing seasonal supply to exert further downward pressure.