Weekly Market Pulse - Week ending May 14, 2021

Market developments

Equities:

Equities were rocked by a surge in U.S. inflation. CPI jumped 0.8% in April, surpassing market expectations. Data coming from China is also hinting at the same narrative, with PPI accelerating to 6.8% year-over-year, adding to global inflation worries. Central banks have said they would continue with their monetary support, but markets are worried that inflation could force central banks to tighten policy faster than expected. The S&P 500 fell 1.39% and the S&P/TSX Composite declined 0.54%.

Fixed income:

Yields rose on rising inflation expectations. The U.S. Treasury 10-year yield rose 5 basis points to 1.63%. The Government of Canada 10-year yield rose 6 basis points to 1.56%.

Commodities:

The copper rally stalled. Copper prices fell 2.14% from highs as markets weighed the risk of rising inflation and central banks being forced to act. Meanwhile oil prices rose 0.72% on the Colonial pipeline hack. The pipeline has since restarted, but capacity has yet to scale up.

Performance (price return)

Performance - Price return

As of May 14, 2021

Macro developments

Canada – Manufacturing sales rise

Bank of Canada Governor Tiff Macklem spoke at a press conference last week. He commented on the recent appreciation of the Canadian dollar, reflecting higher commodity prices, and said continued strengthening in the absence of fundamentals could pose a headwind. Macklem also said he would be in no rush to raise rates until a “complete” recovery, noting that Canada is still about 500K jobs below pre-pandemic levels.

Manufacturing sales rose 3.5% in March, following the 1.1% decline in February. The increase was led by motor vehicles, petroleum and coal, and food products. Production of motor vehicles increase from February but continues to be hurt by the semiconductor shortage. Motor vehicle sales are down 16.8% in the quarter. High commodity prices supported petroleum and food products. Capacity utilization rose 0.6% to 80.1%.

U.S. – CPI surges; Retail sales stagnate; Industrial production rises

CPI rose 0.8% seasonally adjusted in April, following the 0.6% rise in March. Prices of goods and services accelerated. Prices of used cars and trucks rose 10.0% in April, accounting for over a third of the increase. Other notable increases include airline fares rising 10.2% and lodging increasing 7.6%, showing surging demand for services impacted by the pandemic. Core CPI, excluding food and energy, rose 0.9% in the month. Food prices rose 0.4% while energy prices decreased 0.1%, posting the first decline in 10 months. On a year-over-year basis, CPI accelerated to 4.2% in April from 2.6% the month prior.

Retail sales were unchanged in April, while the March reading was revised up to 10.7% from 9.7%. Markets had expected a slight increase as consumers continue to spend their stimulus cheques. Spending on motor vehicles increased 2.9% and food and drinking places rose 3.0%. Clothing store sales declined 5.1% and general merchandise stores fell 4.9%.

Industrial production rose 0.7% in April, following the 2.4% increase in March. Manufacturing production rose 0.4%, even with a 4.3% decline in motor vehicles due to shortages of semiconductors. Mining production rose 0.7% and utilities rose 2.6%. Industrial production remains 2.7% below February 2020 pre-pandemic levels. Capacity utilization rose by 0.5% to 74.9%.

International – China CPI accelerates; Germany ZEW sentiment improves; UK GDP falls

China CPI rose 0.9% year-over-year in April, accelerating from 0.4% in March. The increase was driven by transportation and communication prices rising 4.9% while food continues to drag on the reading. The Producer Price Index accelerated to 6.8% in April from 4.4% the prior month.

The Germany ZEW Indicator of Economic Sentiment Index rose to 84.4 in May, from 70.7 in April. Economic expectations rose as the third wave began to show signs of slowing, and given that one-third of the population has received a shot. The ZEW Current Economic Situation Index also showed improvement rising to -40.1 from -48.8.

UK real GDP fell 1.5% in Q1. Household expenditures fell 3.9% and capital investment fell 2.3% in the quarter. Government spending increased 2.6%, providing some offset.

Quick look ahead

Canada – CPI (May 19); Retail sales (May 21)

April’s CPI reading will be closely watched following the blowout reading in the U.S. last week. Markets are forecasting an increase of 0.2%, which combined with positive base effects would push the year-over-year reading to 3.1%.

StatsCan had previously estimated that retail sales rose a further 2.3% in March. Retail sales should have been supported by auto sales, but spending in general should have a boost from the loosening of restrictions in the month. StatsCan will also provide a preliminary estimate for April, with sales likely to post a slight decline as restrictions tightened again.

U.S. – Empire manufacturing survey (May 17); FOMC minutes (May 19); Philadelphia manufacturing survey (May 20); Markit PMI (May 21)

Fed minutes for the April meeting will be the key highlight in the U.S. this week. Once again, the minutes are likely to emphasize the temporary jump in inflation as economies reopen and also any hints on the framework for tapering asset purchases.

Then we have lots of soft data in the form of surveys. The monthly update of the Empire manufacturing, Philadelphia manufacturing, and Markit PMI surveys. Past iterations have been strong, showing solid activity from firms which should continue to hold as the economy recovers further. The key indicators to watch are the persisting supply chain disruptions and price pressures.

International – China industrial production and retail sales (May 16); Japan GDP (May 17); Japan machine orders (May 19); Japan PMI (May 20); Eurozone PMI (May 21)

Strong retail sales and industrial production growth in China should extend into April following a strong Q1. Both indicators will start facing negative base effects looking at year-over-year growth rates.

Japan GDP is expected to have contracted 1.2% seasonally adjusted, or 4.5% annualized, in Q1. Japan had implemented a state of emergency to contain the spread of the virus. Spending is likely to have declined, while exports likely increased.

Japan machine orders are expected to have rebounded 5.0% in March as the state of emergency was lifted. A forecast for Q2 aggregated from manufacturers will also be provided.

Updated PMIs for Japan and eurozone will be released. Manufacturing has been a strong point for both countries, so the focus will be on services. The eurozone services PMI turned expansionary last month and should hopefully see a further boost as vaccination efforts ramp up. Japan has recently declared a state of emergency for certain prefectures, which could pull down the reading.

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