Short And Sharp: COVID-19 Recovery: What’s Driving Your Skepticism

By Seema Shah, Chief Strategist, Principal Global Investors

Consider a crowded street fair, commonplace to so many of us just 6 months ago. Today, does the thought of visiting the food stalls and shops fill you with fear and anxiety? If your answer is yes, it is possible that you also view the recent market rally with scepticism. By contrast, if the idea of visiting an open market makes you feel hopeful about a return to normality, perhaps you believe this equity rally has room to run.

In a similar way that older generations feel generally more anxious about coronavirus than younger generations because they are more vulnerable, people living in cities hard-hit by COVID-19 feel more anxious about the virus than those that live in areas where rates are lower. Even further, industries which tend to be centred in hard-hit areas may also feel more anxious about COVID-19.

New York City, where COVID-19 related deaths have eclipsed all other cities in the world, employs and houses thousands of financial professionals: bankers, institutional investors, market pundits, economists and strategists. Similarly, while London, another international financial centre, hasn’t suffered as many deaths as NYC, it too has been hit hard.

So what you say?

This economic crisis, like no other, is being determined by our own behavioural responses to COVID-19, and the success or failure of the current global economic reopening, particularly over the next few months, is critical for asset valuation. If the reopening succeeds, then current asset valuations start to look more justified. If it doesn’t succeed, fears of a desperately slow recovery will be realised, and the investors questioning current asset valuations may be proved correct.

For a strong recovery to take hold, households need to return to their normal behaviour as quickly as possible. Yet for places such as New York City and London, where normal behaviour has historically included being in situations where appropriate social distancing is not remotely feasible, even as reopening commences, the thousands of investors who live in those two cities – may still be some way off.

Yes, I know – London and New York are not the centre of the world and what happens in those two cities does not speak for the global economy nor, for that matter, the U.S. or the U.K. However, with companies cutting forward earnings guidance for 2020, backward-looking traditional economic data struggling to make sense of weekly improvements in sentiment, and high frequency indicators still unfamiliar, there is an unusual lack of visibility on the path forward.

In such an environment, we rely on our own experiences and emotions to help make sense of our surroundings and the market. Investors from London and New York, both financial hubs dealing with a more dire coronavirus landscape, may just be bringing in their own individual downward bias into market commentary.

Optimism bias drove markets in January

It is this reliance on our own experience that perhaps explains why it took so long for the COVID-19 reality to dawn on Western investors. Consider that, back in January and the first half of February when the virus was still confined to Asia, U.S. and European markets remained astonishingly complacent about the virus, struggling to comprehend that what was hitting Asia could ever reach their shores. During this time, lest I remind you, U.S. and European stock markets reached a new record high.

Traders only began to react once the epidemic reached their own doorstep. Soon after lockdowns were announced in NYC and London, investors quickly adjusted their perspectives of COVID-19 and markets followed. They quickly anticipated what non-essential activities would be paused: Cancelled holiday plans? Reduced exposure to airlines, hotels and travel companies. Stuck inside, unable to shop, visit or entertain? Investors flocked to tech stocks that were likely to be beneficiaries of online ordering, communications and media.

Understandably, when people believe they are still at high risk from COVID-19 and continue to be restricted from leaving their homes to shop and socialise, they tend to be more conservative – and this has, and continues to be, extended to their investment habits.

Certainly, the most recent Bank of America Merrill Lynch fund manager survey painted these investment professionals as a rather cautious subset of the population. It showed that only 10% of respondents expect a V-shaped recovery, while 75% expect a U or even W shaped recovery.

Londoners’ pro-Europe bias drove incorrect 2016 referendum result predictions

Of course, COVID-19 is not the first time that investors and financial markets have got it wrong. Recall the U.K. referendum in 2016 when betting odds and financial markets overwhelmingly predicted a “Remain” result. Betting odds are often assumed to convey the “expectations of the majority,” while financial markets pride themselves as the best forecasters in town, but both suffered from biases leading them to be horribly wrong.

Prior to the vote, much of the referendum wagering action was coming out of London, a city that voted resoundingly to remain in the EU. Londoners overwhelmingly believed the rest of the country felt as pro-Europe as they did.

With the U.K.’s large domestic and international investment community based almost exclusively in London, investors also suffered from their own biases. Then, just as now, investors were working with the same limited and distorted information set: what was happening outside their windows.

Maintaining a long-term investment outlook & avoiding emotional biases

Perhaps then, because a large proportion of the investment community is based in cities that have been significantly impacted by COVID-19, market forecasts have a downward bias. It should be no wonder then that investor sentiment has remained on the bearish side of the spectrum even as equity markets rapidly approach their previous record highs. In fact, even the market rally has been driven by the more defensive sectors of the economy: technology, healthcare and utilities.

As we have seen time and time again, short-term market events and the emotions that they can trigger should not drive investment choices. As market analysts, we need to look beyond our own home cities and acknowledge the biases that are creeping into our own market analysis. We all know that maintaining a proper focus on long-term investment strategies is the most sensible way of investing through this crisis.

It also tells us that, as NYC and London reopen and, assuming there isn’t a resurgence in infection, glimmers of optimism may emerge, pushing investor sentiment to enjoy its own resurgence. Cautiously optimistic is as far as I can bring myself.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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Brazil’s rescue plan flaws imperil small business recovery By Reuters

© Reuters. A floating gas station for small and medium vessels is seen in the middle of the Rio Negro river, near the Port of Panair in Manaus in Amazonas state


By Tatiana Bautzer and Carolina Mandl

SAO PAULO (Reuters) – Most of Brazil’s small businesses, which account for more than half of its jobs and 30% of gross domestic product, are not getting the cash President Jair Bolsonaro pledged to help them through the coronavirus crisis, putting recovery at risk.

Despite a $7 billion program to help small and medium-sized businesses pay their workers as lockdowns tipped Brazil into its steepest annual downturn since records began, banks have so far only 5% distributed of the funds, Economy Ministry data shows.

Jose Eutimio Brandao Jr, who fired 50 of the 170 people he employed at a bar, restaurant, bakery and nightclub in the northeastern state of Alagoas, is one of those affected.

Brandao wanted a loan to help pay his remaining staff, but says his bank turned him down because his group’s total revenue surpasses a 10 million reais ($1.9 million) ceiling.

“(The) interest rate is low, equal to the then benchmark Selic, at 3.75% a year, the banks won’t make money with it,” Brandao told Reuters.

A survey by small business industry group Sebrae found that some 86% of firms that sought loans had not received them, with 28% still awaiting an answer.

Meanwhile BNDES, Brazil’s state development bank, is in talks to bail out airlines like Azul and Gol Linhas Aereas Inteligentes, jetmaker Embraer and even the local units of multinationals like Volkswagen (DE:) and General Motors (NYSE:).

And while some big corporate rescues have suffered problems, the small business program’s limitations have reinforced a perception of inequality in Latin America’s largest economy.

Brazilian banks extended 442 billion reais in new loans over the last two months, but almost 60% went to large corporations, Central Bank data on Brazil’s total loan book shows.

The Economy Ministry said in a statement to Reuters that it is working on alternative credit lines, and that it is already subsidizing the payroll loan program.


Many business owners, unsure about their future revenues and concerned they will be taking on debt that will be tough to repay, say they are reluctant to apply for the aid.

Unlike the U.S. Paycheck Protection Program, which forgives the loan if used to pay employees, the funds offered in Brazil are liabilities that would add to a company’s debt.

So firms are firing staff or cutting salaries instead.

Luiz Soares, whose three hair salons and one restaurant saw sales decimated by Sao Paulo’s stay at home orders, opted to pass on the payroll loan program and fired at least 10 of his 25 formally hired employees.

Soares, 68, who has another 100 people working for him as contractors, is now renegotiating existing bank loans, although he worries whether customers will show up at his mall-based restaurant and how many will be allowed in his salons.

“I can’t get more credit, I have no idea of when I will be able to reopen and how much my revenue will be,” Soares said.

Only 40% of the small businesses polled by Sebrae sought loans, although 90% say they lost revenue during the pandemic.

Even among those who did try to borrow, many said they struggled with the complexities of the program, which include having a bank manage payrolls and risk analysis by the banks, which include Itau Unibanco, Banco Bradesco and Banco Santander (MC:) Brasil, administering the scheme.

These banks must also provide 15% of each loan, which critics say has made them overly strict in considering applications because their own capital is at risk.

“The reach of payroll credit has been overestimated, as most targeted companies do not comply with requirements,” Cassio Schmidt, Santander Brasil’s director of retail loans, said.

Schmidt told Reuters the bank has been less strict for the payroll loan, but is still flagging obvious risks, such as borrowers more than 30 days in arrears on existing loans.

Itau and Bradesco did not comment.


But many businesses say banks are avoiding a program they view as risky and offering too little profit.

“Banks do not want to run the risk, they know restaurants will struggle for a long time,” said Paulo Solmucci, head of Brazil’s restaurants association, which represents 6,000 businesses, saying most of them did not get loans.

Some business owners told Reuters that since the loans are focused on payrolls only, they fall short of many of their needs, including rent and utility bills.

The program also requires companies to process their payrolls through one of Brazil’s largest banks, giving small businesses, many of which electronically transfer funds to employees or pay cash, an added hurdle.

To broaden the program’s reach, the government is considering changes such as allowing companies to fire up to 50% of their workforce and raising the revenue limit to 50 million reais, central bank chief Roberto Campos Neto said this week.

And in answer to complaints from some businesses that the payroll loans did not address other costs, it will start offering an all-purpose credit line.

But borrowers under that program, which is not yet operational, must start repaying the loans within a month, a tough ask for companies that have no idea of when they can resume activities, at least three businessmen told Reuters.

And while the government has promised to make up for 85% of potential losses under that program, banks are responsible for the full amount of the initial loan, making them even more cautious, one executive told Reuters, on condition of anonymity.

Bolsonaro’s economic team rolled out yet another program in late May for which small businesses will also be eligible, using funds from an existing state development bank fund.

But Carlos Chiaroni, who owns a music store in a Sao Paulo mall, wants the state to do more.

“If I had all the collateral banks are requesting, I would not need a loan right now. It shows that if the government doesn’t provide credit, nobody will,” he said.

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Star Bulk Reels From Trade Recession, Could Soar With Recovery (NASDAQ:SBLK)

Star Bulk Carriers (SBLK) is in the dumps. After hitting a 52-week high of $12.09 in December, the dry bulk shipper’s stock hit a 52-week low of $3.86 on May 13. It has since recovered to close on Monday, June 1 at $5.30 per share. Shipping dry bulk freight like iron ore, coal, and grain has always been a volatile business, but volatility of shipping rates in the past year has been exceptional, leading to high stock price volatility. I believe that unless the coronavirus damage to the economy results in a lengthy global recession, shipping rates will bounce back and so will the stock. The question is timing: how long do investors need to wait to catch that bounce? I will cover some factors that could affect timing, profits, and the stock price. I believe that when the economy improves, a stock price of $10-15 per share becomes likely. As I will explain, under the IMO 2020 pollution control rules, I would have expected the share price to hit $20 in the second half of 2020, absent the pandemic.

Data by YCharts

SBLK background

Star Bulk Carriers owns 106 ocean vessels used to ship dry bulk cargoes. 38 are Capesize or larger, 44 are Panamax to post-Panamax, and 34 are Ultra or Supermax. It is headquartered in Greece but the stock is listed in the U.S. Its annual shipments have been above 60 million metric tons. The dry bulk shipping industry is highly competitive. I believe Star Bulk has a highly experience management that runs the fleet efficiently and looks out for its stockholders.

Pandemic Impact on Bulk Freight Rates

The dry bulk shipping market tends to operate by classic free market rules. Ships may be chartered for long periods of time or for a single load on the spot market. When there is excess cargo, shipping rates get bid up. When there are idle vessels, spot rates and even longer-term charters may fall below the level of profitability. In addition to seasonal factors addressed in the next section, the health of the global economy also affects demand. Over longer periods of time, there have been years when so many new ships were launched that rates fell, as well as years when insufficient new launches resulted in rates rising. This is because these ships typically take two or more years to build, and the ability to build may also be constrained or enabled by banks’ willingness to lend.

The COVID-19 pandemic resulted in a drop of demand from China beginning in January. Rates plunged too, as reflected in the Baltic Dry Index (BDI). However, the BDI records spot rates, while Star Bulk usually has a significant part of its fleet booked well in advance, so it is not an exact predictor of Star Bulk pricing or revenue. As the virus spread and became a pandemic, many nations’ economies slowed. So dry bulk shipping pricing, so far in 2020, has been below pricing in 2019. However, rates have been better than in the spring of 2016, when the culprit was an excess of new ships that had been built between 2014 and 2015, combined with weak seasonal demand. To the extent the pandemic has a negative effect on the global economy, rates will tend to stay low.


More predictable than long-term trends and short-term volatility, Star Bulk revenues and earnings tend to be seasonally weak in Q1 and Q2 but strong in Q3 and Q4. This was true in 2019. Shipping grains tends to be seasonal, with most crops harvested in the northern hemisphere and shipped in the fall or early winter. Coal is seasonal, with the big bump coming from winter heating and a smaller bump from summer use to generate electricity for air-conditioning. Buyers may ship in advance of need, when rates are low, so there is almost always some demand, at some price.

In 2019 and 2020, Q1 has been hit by events beyond normal seasonality. Black Swans are a regular occurrence in the industry. Ports can be damaged by storms, iron ore and other mines can be closed by disasters, and demand for a particular product may dry up. Investing in bulk shipping stocks is not for the faint of heart, but taking a long-term view can help get over the bumps. My original thesis for buying Star Bulk back in 2016, when the industry appeared doomed, was that the free market would correct itself, and it did.

A screenshot of a cell phoneDescription automatically generated

(Source: Bloomberg)

IMO 2020

There was a lot of hope that 2020 would be a great year for dry bulk shippers. 2019 was good, especially the second half, and the number of new ships expected to be launched in 2020 was reasonable. No one foresaw the pandemic. What we knew would happen was the implementation of IMO 2020, a global anti-pollution initiative that would greatly lower the sulfur emissions from high-sulfur fuel. Ships would need to burn low-sulfur fuel, which would be much more expensive, or they could install scrubbers for the high-sulfur fuel, which had significant upfront costs. Star Bulk chose to install scrubbers, with the bulk of installation in 2019. The installations are now complete. They had a negative impact on earnings. But with some older ships (of competitors) being uneconomical due to IMO 2020, rates would rise, the dividend would rise, and $20 per share seemed possible. Then the pandemic hit, lowering the cost of fuel while decreasing demand for bulk goods. Until demand increases, and oil prices, we are not likely to see significant benefit from the scrubber investment except that it was completed in May 2020, which may improve some y/y comps.

Q1 2020 results

Star Bulk reports earnings relatively late, so we did not get them for Q1 2020 until May 26, 2020. As might be expected, it was a weak quarter. There was considerable difference between the reported GAAP numbers and the non-GAAP ones. In this case, it was the non-GAAP results that were lower. I think they more accurately reflect what happened in the quarter. Also note that Q1 2019 was itself not a good quarter due to the mining disaster in Brazil.

Revenue was $160.9 million, down 3% from $166.5 million year-earlier. This decrease in revenue came despite Star Bulk owning more ships, 116 versus 107, so it represents considerably less revenue per vessel. GAAP earnings were $0.03 per share, up from a loss of $0.06 per share year-earlier. Non-GAAP earnings loss was $0.23 per share, down from a loss of $0.09 per share year-earlier.

During the quarter and into the second quarter Star Bulk engaged in several refinancings in order to strengthen its cash position. As a result, its cash and equivalents balance ended Q1 at $130.3 million, up from $125.2 million at the end of Q4.


I covered the dividend policy in detail back in January in an article titled “Star Bulk Carriers’ Dividend Policy Should Boost Stock Price“. Talk about bad timing – my article was published just when the pandemic was about to kill demand in China, the world’s largest importer of dry bulk cargoes. Here, I will only give an overview.

The dividend paid depends on the minimum cash balance per vessel (see my prior article) and the number of vessels. A dividend was paid for Q4 2019 of $0.05 per share. But the cash minimum for Q1 was $1.15 million times 116 vessels, or $133.4 million, while actual cash was $131.3 million. So, no dividend for Q1. Given the low shipping rates in Q2, there is likely to be a reduction in cash, while the minimum cash per vessel is increasing to $1.30 million. A dividend for Q2 is unlikely. The next possible dividend would be for the (usually) seasonally strong Q3, but it is too early to predict whether that will be paid.

Cash, Debt, and Assets

During a time when the future is full of unknowns, a cash reserve is essential. At the end of Q1 2020, Star Bulk had $131 million in cash. That should be sufficient if the normal second half seasonal upturn is not wrecked by the pandemic. Long-term debt is $1.31 billion, which dwarfs cash. But that is the model for the industry, where each of the giant ships owned by the company typically has a loan against it, with revenue from shipping used to repay the loans over time. Compare the debt with the value of the assets. The 116 vessels have a book value of $2.97 billion. Including all assets and liabilities, shareholder equity is $1.54 billion, far higher than the company’s current market capitalization of about $508 million. It is true that if the economy is bad enough and shipping rates remain unprofitable, the value of the ships should probably be marked down. I believe it is more likely that shipping rates will increase, returning Star Bulk to profitability and moving the market capitalization towards the shareholder equity figure.


If dry bulk shipping rates recover, Star Bulk’s revenue and earnings will recover. The company will resume paying a dividend. At that point, the market capitalization should gradually merge with the net value of the assets. That would be about $1.5 billion. If the share count remains the same, that implies a share price of about $15.00. There is risk, mainly from the unknown future of the global economy. I believe that if the risks are acceptable, and the investor can wait long enough, going from about $5 per share to anything above $10 per share provides a very good risk/reward ratio. Even if that takes waiting until the second half of 2021, that would still be a marvelous return for the time period. So, I remain long in Star Bulk.

Disclosure: I am/we are long SBLK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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A Potential Game-Changer? The Details Behind The EU’s Proposed Recovery Plan

On the latest edition of Market Week in Review, Quantitative Investment Strategist Dr. Kara Ng and Julie Zhang, director, North America sales enablement, provided an update on the latest policy responses to the coronavirus pandemic. They also discussed the outlook for the U.S. labor market as well as renewed tensions between China and the U.S.

European Union unveils plans for massive recovery package

Reiterating that the road to a global economic recovery depends on three factors – the spread of the coronavirus, the amount of economic damage caused by government containment measures and the effectiveness of the global policy response – Ng noted that the economic devastation inflicted by measures to slow the spread of the virus has been unprecedented. Importantly, though, the magnitude of the worldwide policy response has also been unprecedented in scope, she said. The latest example of this occurred May 27, when Japan announced an additional $1.1 trillion stimulus package, Ng noted. “When added on to the country’s relief measures from March, Japan’s total stimulus package now amounts to roughly 40% of its annual GDP (gross domestic product),” she stated.

The European Union also made headlines the same day, Ng said, with its proposal of a €750 billion recovery plan. “Two-thirds of this package would consist of grants, and one-third would consist of loans,” she stated, adding that the size of the package amounts to 6% of eurozone annual GDP. Ng characterized the package as a potential game-changer, if approved, noting that it would represent risk-sharing across the eurozone via the issuance of what would be known as Eurobonds.

Eurobonds, she explained, would be government bonds issued by the European Union, rather than by individual eurozone countries. Eurobonds were first proposed in 2011, amid the European debt crisis, but never came to fruition, Ng said.

“There is some opposition to this recovery plan, especially from some of the more frugal member-states of the EU, so discussions around the plan will be an important watchpoint moving forward as Europe attempts to stabilize its economy,” she stated.

Pace of U.S. unemployment claims slows

Turning to the U.S., Ng said there is tentative evidence that the U.S. labor market has bottomed out. New jobless claims, while still at extraordinarily high levels, have been falling for the past eight weeks, she noted. In addition, the number of continuing jobless claims -representative of individuals who are already receiving unemployment benefits – dropped for the first time since widespread containment measures were imposed in mid-March. “This is a sign that some workers are returning to their jobs as lockdown restrictions ease,” Ng stated.

The May jobs report, which will be released June 5, will provide further clarity on the state of the U.S. jobs market, she said. “April’s report showed that only 10% of laid-off workers expected their job loss to be permanent. Keeping an eye on whether this number changes in the May report will be important,” Ng remarked.

She explained that in a frictionless world, a pause in economic activity due to containment measures would result in only temporary, rather than permanent, job losses. Unfortunately, the real world doesn’t work that way, Ng said, due to the secondary effects of these measures. “For instance, consumer confidence may fall, which could result in less demand for goods and services. This, in turn, could cause businesses to make permanent reductions to their labor force-and a souring job market could then further derail consumer confidence and spending,” she explained.

In other words, Ng said, the negative confidence spiral brought on by economic disruption could turn a temporary shock into a sustained one – with major implications for the economy, corporate profits, markets and investor portfolios.

Hong Kong national security law sparks renewed tensions between China, U.S.

Shifting to China, Ng noted that after the successful signing of a Phase 1 trade deal between the U.S. and China in January, tensions between the world’s two largest economies are on the rise again. This time, one of the key issues centers around China’s plan to impose a national security law on Hong Kong. The proposal, recently approved by the Chinese government, served as a trigger for the U.S. government’s May 27 declaration that it no longer considers Hong Kong autonomous from China.

“This declaration means that the special trade exemptions the U.S. has carved out for the city of Hong Kong may go away. In addition, the U.S. could also introduce punitive measures against China,” Ng explained. The renewed tensions between China and the U.S. could potentially escalate into another trade war, she said, which would be disruptive for global supply chains, investment spending and business confidence.

“With things already on shaky ground due to the coronavirus pandemic, a re-escalation in trade tensions could be a fatal blow to the global economy,” she concluded.


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China’s Factory Outlook Slips in May Amid Slow Recovery By Bloomberg

© Bloomberg. An employee wearing a protective mask works on a Lynk & Co. 05 crossover sport utility vehicle (SUV) in the paint shop at the Geely Automobile Holdings Ltd. plant in Ningbo, Zhejiang Province, China, on Tuesday, April 28, 2020. China’s manufacturing purchasing managers’ index (PMI) jumped to 52 in March, from an historic low of 35.7 in February as activity rebounded from disruptions caused by the coronavirus and containment measures. Photographer: Qilai Shen/Bloomberg

(Bloomberg) — A gauge of China’s manufacturing activity slipped in May, underlining the slow pace of recovery from the first quarter slump.

The official manufacturing purchasing managers’ index declined to a worse-than-expected 50.6 from 50.8 a month earlier, according to data released by the National Bureau of Statistics on Sunday. The non-manufacturing gauge rose to 53.6. Readings above 50 indicate improving conditions.

The data indicate that China’s recovery from the pandemic shutdowns risks faltering after an initial rebound supported by pent-up demand. While industrial firms are mostly back at work and output is rising again, a collapse in orders has sent a shock-wave through the sector.

“Global demand is still weak even when lockdowns are relaxed in some major cities around the world,” said Iris Pang, greater China chief economist with ING Bank NV in Hong Kong. “The employment level was in contraction again in May, and that highlights the layoff of factory workers after factories have faced continual withdrawal of export orders.”

The sub-index of new export orders climbed to 35.3, manufacturing employment softened to 49.4, while non-manufacturing employment was at 48.5.

What Bloomberg’s Economists Say

“The Chinese economy should continue to pick up in the coming months. Conditions are on the mend at home. External demand is likely to improve as economies overseas begin to exit lockdowns. That said, the potential for mishaps is high given rising tensions between the U.S. and China.”

Chang Shu, Chief Asia Economist

For the full note click here

The government unveiled its stimulus package for the year at the National People’s Congress meeting which concluded last week, and scrapped a hard growth target in light of the uncertain global economy, while pledging targeted monetary easing and trillions of yuan in extra infrastructure spending.

Domestic factories have brought some workers back to staff production lines after the shutdowns in the first quarter and are increasing production, but many are facing a build up in inventories and uncertain orders. Others have not recovered, meaning bankruptcies and unemployment are expected to rise.

“The current global epidemic situation and the world economic situation are still grim and complex, and foreign market demand continues to shrink,” Zhao Qinghe, an economist with the statistics bureau, said in a statement accompanying the data release. Despite small increases in the manufacturing new export order index and import index this month, they “remain at historically low levels,” he said.

(Updates with Bloomberg economist quote)

©2020 Bloomberg L.P.

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