Weekly Market Pulse - Week ending May 8, 2020
Markets continued to recover, looking past abysmal employment data as an economic start edges closer. Germany re- opened part of its economy under strict social distancing guidelines. Some U.S. states are easing restrictions on non- essential businesses. An improving U.S.-China relationship also contributed following recent tensions. The S&P 500 rose 3.50%. The S&P/TSX Composite rose 2.37%.
Yields rose slightly as an economic restart appeared closer. The U.S. Treasury 10-year yield rose 7 basis points, ending the week at 0.68%. The Government of Canada 10-year yield rose 5 basis points, ending the week at 0.58%.
Oil continued its strong recovery as the industry slashed output and countries begin planning to ease lockdown restrictions. Chinese exports also unexpectedly rose, boosting investor confidence that a recovery may be underway. Oil prices gained 24.52% along with copper, which rose 3.95%. Gold prices were relatively flat.
Performance (price return)
As of May 8, 2020
Canada – 2M jobs lost in April; Trade decreases notably
The Canadian economy shed nearly 2M jobs in April, raising the unemployment rate to 13.0%, up a whole 5.2 percentage points from March. Not included in the unemployment data are the additional 380K who worked less than half their usual hours. The data is significantly better than the consensus estimate for a loss of 4M, but since the onset of the pandemic, 3M jobs have been lost and 2.5M worked less than half their usual hours. That said, 97% of the newly-unemployed in April were reported as temporary layoffs, meaning they expect to return to their former employer as the shutdown is lifted.
March international trade data shows that both imports and exports decreased notably as businesses closed. Exports fell 4.7% to $46.3B and imports fell 3.5% to $47.7B. Transportation equipment trade (automobiles, aircrafts, etc.) was severely impacted as production ceased, while energy products suffered from a sharp decline in demand and prices. Canadian trade is expected to further weaken in April as containment measures are fully implemented and energy exports fall further amid weak demand.
U.S. – Unemployment rate surges to 14.7%; March factory orders slump; Markets pricing in negative rates
Nonfarm payroll employment fell 20.5M in April and the unemployment rate rose to a record 14.7%. Job losses were widespread, with no industries spared as the private sector cut 19.5M jobs, largely concentrated in the service sector. The 10-percentage point increase in the unemployment rate is the largest monthly increase in the history of the series going back to 1948. For a point of reference, the unemployment rate peaked at 10.0% during the financial crisis. The majority of losses were reported as temporary layoffs, with 18.1M reported temporary layoffs compared to 2.0M permanent cuts. Given the nature of the losses, the unemployment rate may drop back down quickly as economic activity restarts.
Initial jobless claims increased another 3.2M for the week ending May 2, bringing the total number of claims to 33.5M. The worst of the damage seems to be over, but markets expect another 2.5M for the next reading.
March manufacturing new orders fell 10.3% as the economy shut down amid containment measures. The large drop was led by a 41.3% decrease in transportation equipment. Excluding transportation, new orders fell by 3.7%. April manufacturing PMI readings imply orders are expected to fall sharply again in the coming months.
For the first time ever this week, markets began pricing in negative interest rates in 2021 despite the Fed having previously discounted the idea. The 30-Day Federal Fund Futures market is used to gauge markets’ expectations of future interest rates.
International – Chinese exports unexpectedly rose; Bank of England updates outlook; German industrial production slumps
China trade data surprised markets as exports unexpectedly rose in April. Exports rose 3.5% in USD terms as shipments to South East Asia were strong, offset by decreases to the EU and U.S. Consensus was for exports to fall 11.0%. The Chinese economy looks to be well on the road to recovery, but April shipments may have been boosted by manufacturers making up for previous supply constraints. Imports meanwhile fell 14.2%, due to falling commodity prices even as volume increased.
The Bank of England (BOE) left rates unchanged at 0.1% and did not increase bond asset purchases. They did however provide an updated economic outlook. Q1 GDP is expected to have fallen by 3% and the central bank expects a further plunge of 25% in Q2. Consumer confidence has declined, with a 30% reduction in household consumption measured by payments data. Companies expect sales to fall 44%, employment to decrease 18% and business investment to drop 50%. CPI has fallen to 1.5% in March and is expected to fall below 1% in the next few months. Despite all this negativity, the BOE does expect the economy to pick up and recover quickly starting in the second half of the year.
German industrial production slumped 9.2% in March. Manufacturing and mining saw a decrease of 11.6%, including a sharp 31.1% drop in the automotive industry. Meanwhile, energy production decreased 6.4% while construction increased 1.8%. The slump is likely to deepen in April as the full extent of the shutdowns have yet to be revealed.
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 – Manufacturing sales (May 14); Bank of Canada surveys, existing home sales (May 15)
This week is light for Canadian economic data. Thursday we get March manufacturing sales, which are expected to drop 4.9% month-over-month from a gain of 0.5% in February. Friday will show April existing homes sales. The Bank of Canada will release the twice-yearly Financial System Review on Thursday, followed by the Senior Loan Officer Survey on Friday.
U.S. – April CPI (May 12); industrial production, retail sales and University of Michigan consumer sentiment (May 15)
Tuesday U.S. inflation comes out with expectations for CPI to fall 0.8% in April. Generally, inflation falls when the economy is weak, however, due to supply issues, there may be some mixed results in the report. April industrial production is expected to drop 11.6% with retail sales expected to fall a similar amount. The University of Michigan sentiment survey for May will show how consumers have been feeling during the shutdown.
International – Euro area industrial production (May 13); China April economic activity (May 14); Germany Q1 GDP (May 15)
Euro area industrial production for March will show lockdown effects on factories and is expected to fall 12.0% from February. In China, the back to work rate climbed to 95% in mid-April from 90% at the end of March, and the April economic activity data should show continued improvement. The main question surrounds consumer behaviour. Friday, we get Germany Q1 GDP which is expected to fall 2.3% quarter-over-quarter annualized. Germany GDP is expected to be less affected by containment measures as most of the lockdowns came into effect in mid to late March.