Head of BofA Global Research
On the road to recovery: proceed with caution. This week we discuss BofA’s Library of Proprietary Indicators, findings from our 30th annual Car Wars report, and an IT spending survey.
As illustrated by BofA’s Library of Proprietary Indicators, a number of high frequency indicators are showing nascent signs of green shoots across the globe. The U.S. and Europe now follow suit to China’s road to recovery - where 93% of consumer services (restaurants, hotels, etc.) are back in business.
The BofA Industrial Momentum Indicator bounced off its lows, with all components contributing to the improvement. Our Fluid Power Distributor Indicator, focusing on hydraulics and pneumatics, also inflected to a bullish signal, and shipping demand has bottomed out as evidenced by the Truckload Diffusion Indicator. In the U.S., stimulus payments and a phased re-opening of the economy caused our consumer spending indicator to turn bullish. Also, residential mortgage applications, a key barometer of the health of the economy, are back to pre-pandemic levels (see below).
In Europe, toll road traffic volumes in France, Spain and Italy have all edged higher, while data from the Google Mobility tracker suggests improving activity levels at workplaces and retail & recreational locations.
Although we’re encouraged by these positive signs and acknowledge that a vaccine could create an upside surprise for markets, key risks we see include a second wave of COVID-19 and the decoupling of China from the West.
Figure: Mortgage loan applications to buy a home in U.S. have already sprung back to pre-pandemic levels
In this year’s Car Wars report, a proprietary study which assesses each automaker’s product pipeline in the U.S., Autos analyst John Murphy suggests replacement rate is key to market share. Replacement rate is the estimated percentage of sales coming from new models or next-generation vehicles, an important way to measure an automaker’s strength.
In the near term, model launches and introductions into a softer 2020 market given COVID-19 may result in some overcrowding and profit pressure until demand recovers in 2021. The expected rate of new models to be released over the next four years is 50% higher than the past 20 years, underscoring intense competition. Expected new model mix is 77% CUVs and Light Trucks which should put pressure on segment profitability, but support used vehicles.
During the height of the market sell-off in March, our Global Technology team conducted an IT spending survey of 175 companies whose annual tech spending exceeds $5 billion. Despite a recessionary environment, large companies are not holding their IT budgets steady with growth modestly exceeding last year’s pace and the optimism in forecasts improved as March progressed.
Areas of accelerated spending include security (+36%), software (+17%) and laptops (+16%) with growth moderating on networks and servers. Strongest demand is occurring among government customers with industrials lagging.
Owing to U.S.-China trade tensions, one-quarter of respondents anticipate increasing U.S. IT hardware spend as compared to negligible numbers two years ago.
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