Weekly Market Pulse - Week ending May 1, 2020
Markets started the week strong, as countries planned for an eventual economic restart. The rally promptly ended as poor economic data and company earnings acted as a wake-up call. According to Bloomberg, over half the companies in the S&P 500 have reported Q1 earnings so far, with earnings declining 9%. Many firms have issued warnings about Q2 and have even withdrawn guidance. The S&P 500 fell 0.21%. The S&P/TSX Composite rose 1.39%.
Bond yields continue to remain low given the weak economic data and company earnings. The U.S. Treasury 10-year yield rose 1 basis point, ending the week at 0.61%. The Government of Canada 10-year yield fell 5 basis points, ending the week at 0.53%.
Oil made a strong recovery with prices increasing 16.77%. Gold fell 1.69% on USD weakness, while copper prices fell 0.79% on subdued global demand.
Performance (price return)
As of May 1, 2020
Canada – February GDP flat; Manufacturing PMI contracts further in April; Tiff Macklem appointed Bank of Canada governor
GDP was unchanged in February. The economy saw strong increases in mining, quarrying, and oil and gas extraction and the real estate industry, offset by declines in educational services and transportation and warehousing, weighed by Ontario teacher strikes and the onset of COVID-19 reducing the movement of people, goods and services. Previously released flash estimates by StatCan for March project a 9% decrease for the month which translates to a 2.6% fall for the first quarter.
The Markit Manufacturing PMI came out at 33.0 for April, down sharply from 46.1 last month, the largest fall in manufacturing conditions since the survey began in 2010. Unsurprisingly, firms reported lower production and employment and fewer new orders, citing factory shutdowns and reduced customer demand. The firms that did report growth were mainly linked to consumer essentials and production for healthcare supply chains. Delivery times, a proxy typically used to determine a firm’s capacity, increased but the gain was not demand-driven. In this case, the uptick reflected distress in global supply chains and delays at international borders. The uncertain length of the shutdown and the slump in the energy sector increased pessimism about economic prospects.
Tiff Macklem was appointed the next Bank of Canada governor to succeed Stephen Poloz, effective June 3. Macklem will play a key role in helping navigate Canada through this unprecedented situation. “You need to think beyond the normal responses, you need to restore confidence,” he said.
U.S. – Fed to support low rates until signs of recovery; April consumer confidence falters; Q1 GDP contracts; Initial jobless claims add another 3.8M
The U.S. Federal Reserve maintained rates at current levels near zero percent and expects rates to stay low until it is confident the economy is solidly on the road to recovery. The Fed reiterated that it would use its full range of tools to support its dual mandate. In the meantime, the Fed pledged to continue buying bonds as the health crisis continues to weigh on economic activity. The Fed has also expanded eligibility requirements for the previously announced Municipal Liquidity Facility, Main Street Lending Program, and Paycheck Protection Program Liquidity Facility.
The Conference Board Consumer Confidence Index fell to 86.9 in April, down from 118.8 in March. Consumer confidence continues to deteriorate reflecting the contraction in economic activity and the surge in unemployment claims. The decline was driven by a sharp fall in the Present Situation Index which fell 90 points to 76.4, the largest drop on record. The Expectations Index, measured by the short-term outlook of consumers, improved to 93.8 from 86.8, perhaps influenced by the possibility of an economic restart edging closer.
U.S. GDP decreased 4.8% in the first quarter, ending the record 11-year economic expansion. Demand quickly fell off as businesses reduced or cancelled operations and consumers restricted or redirected their spending. Consumer spending fell 7.6% and investments contracted another 5.6%. Both imports and exports also declined. The full economic effects have yet to be felt; Q2 estimates currently sit at -27.3% according to Bloomberg.
Initial jobless claims last week increased another 3.84M for the week ending April 25, now topping 30M claims since the onset of the pandemic forced businesses to shut their doors. The number of jobless claim filings continues to decrease each week, but the amount continues to be extremely elevated compared to historical standards.
International – China PMI shows recovering economy; Euro area Q1 GDP contracts; ECB increases pandemic funding; Bank of Japan expands asset purchases
China’s April Composite PMI increased slightly to 53.4 from 53.0, a glimpse of hope for an economic recovery. The Manufacturing PMI weakened to 50.8, from 52.0 in March. The reading is just within expansionary territory, revealing the fragility of the recovery. Production continues to increase with output, new orders, and employment just above 50, while demand faltered showing weakness as new exports, imports, and backlog fell deeper into contraction territory. The Non- manufacturing PMI fared better rising to 53.2 from 52.3. The new orders and employment readings rose, offset by decreases in new export orders. Future business expectations also rose strongly.
Euro area Q1 GDP contracted 3.8%, in line with consensus. Economic activity was weighed down by coronavirus containment measures widely introduced in March. Economic worries in the eurozone continue to mount as Germany reported a record 373K surge in jobless claims in April. Expectations for Q2 GDP are -7.6%.
The European Central Bank (ECB) left its deposit facility rate unchanged at -0.5% and held off on boosting the 750B euro emergency asset purchasing program for now. The ECB estimates the crisis could lead to a contraction of 12% in the euro area this year. The ECB improved the terms on its long-term bank-funding program, where banks will be paid even more to borrow. The ECB will also offer a new round of financing to ensure sufficient liquidity and smooth money market conditions during the pandemic period.
The Bank of Japan (BOJ) kept rates steady but expanded several asset purchasing programs. It increased the caps for commercial paper and corporate bonds by 15T yen until September and expanded the acceptable collateral from a universe of 8T yen to 23T. The BOJ also scrapped the 80T bond-buying target and said the BOJ will buy whatever is needed to ensure bond yields stay low. The BOJ sees the economy shrinking 5% in 2020, characterizing it as in a “severe” state with risks tilted to the downside.
Quick look ahead
Canada – March international trade (May 5); April net employment (May 8)
Main focus this week will be the April net employment report on Friday. Millions of Canadians have applied to the Canadian Emergency Response Benefit (CERB) and consensus expects jobs to fall 4.0 million in April after already falling 1.01 million in March. The large increase in job losses is expected to push the unemployment rate to 18.2%. Due to a steep fall in commodity prices, Canada’s March international trade balance is expected to fall $2.65 billion.
U.S. – March factory orders (May 4); ISM Non-manufacturing (May 5); Non-farm payrolls (May 8)
U.S. March factory orders are expected to drop 9.2%, consistent with last week's durable goods data. ISM Manufacturing fell less than expected last week and the ISM Non-manufacturing survey on Tuesday is expected to fall to 37.5, the lowest reading since the series started. Lastly, non-farm payrolls will be closely monitored on Friday as we get a closer look at the damage done to the labour market in April. Consensus expects jobs to fall 21.5 million in April.
International – Bank of England decision (May 7); China April trade balance (May 7); Germany industrial production (May 7)
Thursday, we get several important international data points, first the Bank of England (BOE) has its interest rate decision. The policy rate is expected to be unchanged, however the Bank’s GDP and inflation forecasts in its May Monetary Policy Report are expected to be ugly. Bloomberg expects the BOE to increase its asset purchase target by 75B pounds in both June and August.
Germany’s March industrial production data will give insight into the effects of lockdowns on production. Lastly, China’s April trade data should show exports falling at a faster rate as the shutdowns around the world have been an external shock on Chinese trade.