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Optimistic ASX challenges economic gloom

  • April 18, 2020 01:21 AM AEST
  • Kunal Sawhney
    CEO Kunal Sawhney
    2279 Posts

    Kunal Sawhney is founder & CEO at Kalkine and is a richly experienced and accomplished financial professional with a wealth of knowledge in the Australian Equities Market. Kunal obtained a Master of Business Administration degree from University of T...

Optimistic ASX challenges economic gloom

As COVID-19 crisis is deepening across the major part of the world, economic damage is progressively escalating due to public health measures promulgated by policymakers.

Gold MTF non-AMP

It took an extremely short period of time for markets to enter the bear territory in the face of COVID-19 crisis. Such that the market crash broke the historical records, marking one of the steepest falls that the markets have ever seen.

Nonetheless, markets have been finding the floor over the past month. Mainstream US benchmark, the S&P 500 has rallied to 2700s from 2300s over the past one month to 15 April 2020. In the similar time frame, Dow Jones Industrial Average has scaled from 20000s to 23000s. In Australia, S&P/ASX 200 traded above 5500 on 17 April 2020, which closed at 4546 points on 23 March 2020.

Over the past month, policymakers across the world have introduced rescue packages for the industries in deep trouble. In Australia, debate is that the peak of the virus may have passed, and the States’ head may look to ease public health measures in the near future.

In the US, President Trump is eager to restart the economy, as economic damage and unemployment are getting intensified day by day.

Meanwhile, PM Morrison expects restrictions to remain in place for at least four more weeks or around a month. In the latest public appearance, the Prime Minister said that the country needs extensive testing, tracing capability and isolation of areas with large outbreaks prior to any sort of relaxation on the public health measures.

On Thursday, 16 April 2020, President Trump announced guidelines to reopen the economy, with the guidance outlining three phases through which the reopening would be undertaken. He noted that a national shutdown is not a sustainable long-term solution.

Although Trump Administration is vying for 1 May reopening, the decision depends upon the states’ respective Governors and the condition of the virus outbreak in a state.

Meanwhile, the US economy is going into deep troubles, as unemployment is racing higher, and retail sales dropped by a record 8.7% in March 2020, the largest decline since the data release was initiated in 1992.

Unemployment came flat at 5.2% for March 2020

On Thursday, the Australian Bureau of Statistics released job data for March 2020. The body had collected the data during the first half of March when there were a smaller number of COVID-19 cases and extensive public health measures were not in place.

ABS noted that there would be a change in data extraction starting from April. It would be considering the necessity of trend estimates, as COVID-19 crisis is likely to impact the short-term trends of the labour market.

The latest figures suggested that around 13 million people in Australia are currently working. Over the past three years, the number of unemployed people has averaged 700k each month.

The body would be classifying working people during the COVID-19 crisis. Working population being paid through JobKeeper payment would be classified as employed. The classification of people on JobSeeker payment would be dependent on the labour market activity.

During March 2020, the unemployment rate was steady at 5.2% with the number of unemployment persons increasing by 3.5k. ABS’ release stated that underemployment increased by 0.1 ppts to 8.7%, and a similar increase was recorded in underutilisation rate that reached to 13.9%.

Participation rate among the labour force was noted at 66%. Over the past year to March 2020, the trend employment recorded an increase of 1.8% or roughly 224k people, lower the average of past 20 years of 2%. Likewise, the same measure increased by 0.13% or 16.8k people from February 2020 to March 2020.

Economists are bracing for more damage

Street economists noted that the data was taken in early March, and the worst is yet to come. Some noted that Google Search trends are indicating the boom in search items related to unemployment.

It was also noted that employers have refrained from additional hiring as the pandemic has intensified in the country, causing businesses to stop trading, and scaling back on employment opportunities.

Economics Desk at Commonwealth Bank is forecasting that unemployment would peak in the June 2020 quarter at 7.8%. It notes that the country has seen significant job losses in accommodation, cafes, retail and air transport, and more is expected from the personal services and recreation part of the economy.

Source: CommBank Website

By the end of the calendar year, the economists at the bank are expecting unemployment to be around 6.5%, assuming that public health measures last for only six months while noting that JobKeeper payments are likely to mobilise money into the pockets of the needy.

Australia Treasury has a forecast of 10% unemployment rate over the coming months, and the forecast numbers could have been higher if no JobKeeper payments were being made to the employers in distress due to COVID-19.

CBA Economists noted that the point of difference against the Treasury’s forecast is that they believe participation rate would fall as many Australians may not choose to return to work or due to limited opportunities.

Debit/Credit Card Spending Data of CBA

The latest card spending data for the week ended 10 April reflected that spending fell by 20% against the same period last year. The data suggested that spending on services is down by 44%, while spending on goods for the week was up only 3% compared to the pcp.

During the week, spending on recreation was down 37%, transport was down 44%, apparel was down 58%, personal care was 61%, while household spending was up 10%, alcohol goods/bottle shops were up 28%, all compared to the pcp.

During the previous week ended on 3 April, the spending levels were down 15% compared to a year ago. Over the year, food spending was up 4%, food services (cafes and restaurants) was down 38%, alcohol goods (bottle shops) were up 28%, clothing and footwear were down 60%, and recreation was down 33%.

In the last release, it was noted that a rebound in spending is not expected over the foreseeable future, as most of the businesses are shut that provide services recording large falls, while Australian households are avoiding face-to-face interactions.

Manufacturing & Services PMIs for March 2020

Commonwealth Bank, in collaboration with IHS Markit, publishes the services and manufacturing PMIs for Australia. In March, the Australian manufacturing worsened as COVID-19 implications escalated, causing record falls in output and new orders.

Manufacturing business faced production halts that led to pull back in production, hiring, purchasing and inventories, while business confidence tanked to lowest on record.

At the same time, supply chain disruptions intensified due to import restriction, while a lower Australian dollar led to higher input costs albeit rising selling price. The Manufacturing Index fell to 49.7 points from 50.2 points in February.

In March, services PMI fell to 38.5 points from 49 points in February. It was noted that COVID-19 crisis impacted the Australian service sector heavily. A sharp downturn in new sales was recorded with a record fall in new overseas business.

Australians firms also pulled back on new jobs. CBA’s Business Activity Index was at 38.5 points in March from 49 points in the previous month, marking the steepest decline over the past four years.

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