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Weekly Market Pulse - Week ending May 15, 2020

Market developments


Markets fell as investors continued to digest the economic fallout of COVID-19. U.S.-China tensions escalated as the U.S. tightened exports of technology to Huawei. Wuhan, the former epicenter of the pandemic, moved to retest all 11M residents after new cases appeared just one month after lockdown restrictions were lifted. Meanwhile the U.S. continues to proceed with easing lockdowns. The S&P 500 fell 2.26%. The S&P/TSX Composite fell 2.19%.

Fixed income:

Bond yields fell as investors feared a resurgence of U.S.-China tensions and worried over steep declines in economic data. The U.S. Treasury 10-year yield fell 5 basis points, ending the week at 0.64%. The Government of Canada 10-year yield fell 5 basis points, ending the week at 0.54%.


Oil prices continued to climb, gaining 19.85% over the week. OPEC said they were cautiously optimistic that the worst is over, and cuts are being implemented with global supply to be reduced by as much as 17.2M barrels a day. Copper prices retreated 2.95% on weak production and retail sales while gold prices increased 2.41%

Performance (price return)

Performance - Price return

As of May 15, 2020

Macro developments

Canada – Financial system remains resilient; Manufacturing sales fall; Home sales on pause

The Bank of Canada (BoC) released its Financial System Review and overall, the BoC says the financial system remains resilient even in its more pessimistic scenarios. Banks had a strong foundation going into the outbreak; they were well- capitalized with ample liquidity. The BoC has since introduced policy actions amid the global uncertainty to help alleviate financial stress. The central bank expects its policy actions will help households and businesses weather the storm and prepare for the recovery, but they also say the longer this crisis lasts, the greater the risk of insolvencies.

Manufacturing sales fell 9.2% in March as 78.3% of firms reported that their activities were impacted by COVID-19. Sales declined in 17 of 21 industries, led by steep declines in transportation equipment and petroleum and coal products, while food manufacturers reported the largest increase. Capacity utilization dropped 3.6% to 72.8%, compared to 80.7% during March of last year.

Existing homes sales plunged 56.8% in April. Home buying and selling has been put on pause during the lockdown. The Canada MLS Home Price Index fell a slight 0.58%. According to the Canadian Real Estate Association, preliminary data for May suggests the housing market may be starting to pick up again.

U.S. – CPI falls again; Industrial production and retail sales drop; Consumer sentiment slightly improves; Another 3M initial jobless claims

CPI fell 0.8% in April dragged down by the energy index, which declined 10.1% as gasoline prices fell 16.5%. On the other hand, the food index increased 1.5%, posting the largest gain since 1974. Excluding food and energy, inflation still fell 0.4% reflecting weak demand within the economy.

Industrial production dropped 11.2% in April. The collapse is the largest drop in recorded history of the data as factories suspended operations during the month. The output of motor vehicles and parts dropped 71.7%. Excluding vehicles, production elsewhere dropped 8.6%. Capacity utilization decreased 8.3% to 64.9%, 12.9% below the same period last year.

Retail sales fell another 16.4% in April, following the previous month’s drop of 8.3%. Some of the largest drops were from motor vehicles and food services and drinking places. Total sales for February to April 2020 were down 7.7% from the same period last year.

The University of Michigan Consumer Sentiment Index edged up slightly to 73.7 in May, from 71.8 in April. The increase was driven by improvements in current conditions, while the expectations portion continued to deteriorate. Discounted prices and low interest rates bolstered sentiment, while uncertainty about job and income prospects weighed on sentiment. Consumers identified their top concerns: 61% identified health concerns, 21% said social isolation, while 17% cited finances. Surprisingly, the financial concern decreased from 22% in the prior month, likely from the federal rebate checks. 95% of respondents reported a worsening economy, but 59% expect the economy to improve in the year ahead.

Initial jobless claims increased another 3.0M for the week ending May 9. Claims remain above levels seen during the financial crisis and the total number of claims is now 36.5M.

International – Euro area industrial production falls; China April economic activity shows recovery underway; Germany in a technical recession

Industrial production in the euro area fell 11.3% in March. Unsurprisingly, Italy, the first to impose a lockdown, was the hardest hit with production plunging 28.3%. Germany and France also saw production fall sharply at 11.2% and 16.4% respectively. The hardest hit industries were durable consumer goods and capital goods. Production is expected to drop further in April as containment measures continue.

Germany GDP contracted 2.2% in the first quarter despite lockdown measures only taking effect in late March. Lockdowns within the continent caused slumps in consumer spending and capital investment. Q4 2019 GDP was also revised lower. from 0% to -0.1%, meaning the country is technically already in a recession.

China’s activity data shows a recovery is underway. China industrial output rose 3.9% y/y in April, as manufacturing activity rebounded 5% following a contraction in March. Weakness in consumption persists as retail sales fell 7.5% y/y, but it was a significant improvement from the 15.8% y/y decrease in March.

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 – April CPI (May 20); March retail sales (May 22)

April CPI comes out next week and is expected to fall 0.6% given the large drop in gasoline prices. We will also get an idea of consumer spending through March retail sales as the lockdown measures started. Consensus is for a historic 11.8% plunge based on the slump in auto sales.

U.S. – Housing Starts (May 19); FOMC Minutes (May 20); Markit PMIs (May 21)

A light week of data in the U.S.; housing starts are expected to fall under 1 million units in April. Wednesday we get the FOMC minutes from the April 28-29 meeting. Investors will be looking for clues to the Fed’s next steps to boost the economy. Lastly, we get the May Markit PMIs for both manufacturing and services, providing an outlook from U.S. businesses.

International – Germany ZEW survey (May 19); UK unemployment rate (May 19); Euro area PMI (May 22); China National People’s Congress meeting (May 22)

The United Kingdom’s labor market will provide a first glimpse of the economic damage. The reading will be dampened as the official release is a three-month average, but the unemployment rate in March is expected to increase to 4.3% from 4.0% in February. The Germany ZEW survey and euro area PMI will provide a better picture of the current situation and outlook. Both are expected to post improvements, but given the nature of diffusion indexes, the estimates still point toward further contraction.

Finally, we have China’s annual National People’s Congress. Having been postponed due to the coronavirus, the parliamentary session will go over topics including the prevention of COVID-19 and the gradual return to a normal life. More importantly, the government will unveil key economic targets, budgets, and fiscal spending.

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