Weekly Market Pulse - Week ending April 17, 2020
Equity markets overlooked weak economic data, continuing to climb as countries looked at how to restart their economies. German Chancellor Angela Merkel announced plans to reopen schools and shops in May. U.S. President Donald Trump unveiled guidelines and allowed state governors to restart the economy as they saw fit. The contraction in Chinese industrial activity was not as bad as markets had feared. The S&P 500 gained 3.04%. The S&P/TSX rose 1.36%.
Bond yields fell as hard economic data releases started to reflect the impact of the economic slowdown. Downside risks persist as countries look to jumpstart economic activity. The U.S. Treasury 10-year yield fell 8 basis points, ending the week at 0.64%. The Government of Canada 10-year yield fell 12 basis points, ending the week at 0.65%.
Oil fell 20.39% as markets continue to show disappointment in production cuts as supply continues to outweigh demand. Copper prices rose 3.67% on signs of strength in Chinese industrial output, while gold prices retreated 3.33%.
Performance (price return)
As of April 17, 2020
Canada – Preliminary March GDP reflects COVID-19 impact; Bank of Canada unlikely to cut further but continues to support markets; housing market on pause
StatsCan released a flash estimate for March GDP showing a plunge of 9% as social distancing measures and government restrictions caused widespread economic disruptions. This would be the largest one-month decline in GDP since the series started in 1961. The preliminary reading would imply a Q1 decline of 2.6%. The measure is an approximation released early given the unique circumstances of COVID-19, which will change once more actual data is incorporated.
The Bank of Canada (BoC) left rates unchanged at its “effective lower bound” of 0.25%. The BoC expanded its asset purchases to include up to $50B of provincial bonds and $10B of investment grade corporate bonds. The economic effects of the coronavirus are expected to produce the sharpest contraction in Canadian activity on record, with estimates of 15% to 30% contraction in the second quarter. The weak economic outlook will also weigh on inflation with Q2 projections close to 0%, dominated by transitory effects of lower gasoline prices.
Data provided by the Canadian Real Estate Association (CREA) show that existing home sales in March dropped 14.3% and the Canada MLS Home Price Index rose 0.82% during the period. The data does not fully reflect the situation as social distancing rules were only imposed in the second half of the month. Both buyers and sellers have receded since, and according to CREA, “preliminary data from the first week of April suggests that sales and new listings were only half of what would be normal for that time of the year.”
U.S. – Trump unveils guidelines for restarting the economy; Retail sales and industrial production slump; Manufacturing surveys paint grim outlook; Initial jobless claims at 5.25M
President Trump unveiled “Opening Up America Again” guidelines, in which a proposed phased approach would be taken. Trump told state governors they could look to begin reopening businesses and lifting other lockdowns. Under this approach, individuals would be expected to continue good hygiene practices, people who feel sick should stay home, and businesses would develop their own policies, in accordance with federal, state, and local regulations and guidance. An increasing number of workers would return to work as the situation improved, and social distancing continues to be encouraged.
The advanced estimate for March retail sales and food services dropped 8.7% as many businesses are operating on limited capacity or have ceased operations completely. Categories including automobiles, clothing, gasoline stations, furniture, electronics, and restaurants posted sharp declines as consumers cut unnecessary purchases, while grocery stores reported a substantial 25.6% increase in sales.
Industrial production fell 5.4% in March, the largest decline since January 1946, as the coronavirus forced many factories to suspend operations. Most major industries reported declines, with the largest in automobiles. Industrial capacity utilization decreased 4.3% to 72.7%, compared to the 1972-2019 average of 79.8%.
Empire State Manufacturing Survey data reveal that business activity in New York State declined sharply in early April. The General Business Conditions Index plummeted 57 points to -78.2, the lowest reading on record. The prior low was -
34.3 during the Great Recession. New orders and shipments fell drastically. Employment indicators were also extremely weak, with the number of employees and the average workweek contracting at a record pace. Surveyed firms signaled plans to cut capital expenditures as business conditions are only expected to improve slightly over the next six months.
The Philadelphia Fed Manufacturing Business Outlook Survey reported similar findings. The Current Activity Index fell 44 points to -56.6. in April, dropping below levels during the Great Recession. New orders and shipments continue to fall, and employment indicators sank deeply into negative territory. Despite current weakened conditions, respondents remained optimistic that growth would pick back up over the next six months.
Initial jobless claims last week increased 5.25M for the week ending April 11, less than the 6.6M increase the prior week. Consensus was for an increase of 5.5M. With this week's number the total initial claims over the last four weeks was 22.03M, effectively erasing a decade’s worth of job creation.
International – China posts largest GDP drop on record; Trade balance improves; March monthly data mixed
China’s first quarter GDP fell a record 6.8% year-over-year, deeper than the consensus expectation of 6%. The spread of COVID-19 has caused the largest drop on record since official GDP releases began in 1992. Chinese exports fell by a less-than-expected 6.6%, while imports dropped just 0.9%. The trade data indicates that global supply chains took less of an initial hit than expected.
The March activity data was mixed with retail sales dropping 15.8% as consumers remained wary and investment decreased 16.1% year to date. The encouraging sign was the better-than-expected contraction in industrial production, which fell only 1.1% as factories reopened amid easing lockdowns.
Quick look ahead
Governments remain focused on the physical and economic battles against COVID-19. The news flow and events are highly fluid and change frequently. Expect the possibility of surprise announcements from central banks or governments.
Canada – February Retail Sales (April 21); March CPI (April 22)
Canada reports February retail sales on Tuesday which are a bit stale given the effects of COVID-19 since February. March CPI will show how inflation has been hit given the StatsCan Nowcast estimate of a 9% fall in March GDP.
U.S. – Jobless claims (April 23); April PMIs (April 23); Preliminary March Durable Goods (April 24)
U.S. durable goods provide a good signal on future capital spending. Based on the horrible reports from the Empire and Philly Fed surveys, market consensus is for a 12% month-over-month drop. The April PMI reading will give further insight into U.S. business activity. The consensus expectations are for the April manufacturing PMI to fall to 38 and the service PMI to fall to 30, some of the lowest readings on record.
As explained in our previously weekly commentaries, initial jobless claims on Thursday will be closely monitored because it is the highest frequency and most accurate measure we have of mounting job losses in the U.S. Initial claims should be monitored every Thursday throughout this crisis.
International – Germany ZEW Survey (April 21); Japan PMI (April 22); South Korea Q1 GDP (April 23)
The German ZEW survey on Tuesday will add color to how painful the European recession will be. Japan reports April PMIs, providing insight into the latest reading on business activity in the country. Based on China’s GDP result, South Korea is likely to see its largest GDP drop since the Asian financial crisis in the 1990s. Bloomberg Economics expects Q1 GDP to fall -2.4% year-over-year.