Weekly Market Pulse - Week ending May 21, 2021

Market developments

Equities:

Equities were mixed last week. The Fed minutes indicated a brighter outlook, and some participants showed interest “to begin discussing a plan for adjusting the pace of asset purchases” if the U.S. economy continued to make rapid progress. Nonetheless, the Fed continued its dovish message to overlook stronger inflation readings in the short term on transitory effects. PMI surveys showed strong demand and activity in the U.S. and Europe, while highlighting heightening inflation pressures and persisting supply bottlenecks. The S&P 500 fell 0.43%. The S&P/TSX Composite rose 0.83%.

Fixed income:

Yields moved slightly lower. The U.S. Treasury 10-year yield fell a basis point to 1.62%. The Government of Canada 10- year yield fell 2 basis points to 1.54%.

Commodities:

Oil prices declined 2.74% on expectations that sanctions around Iran could be lifted as markets anticipate a return of Iranian oil supply. Copper prices retreated 3.60% as the Chinese government announced it would look to curb rising prices. Gold prices rose 2.05%.

Performance (price return)

Performance - Price return

As of May 21, 2021

Macro developments

Canada – CPI rises; Retail sales increase

CPI rose 0.5% in April following the 0.5% increase in March. Services and goods prices both rose 0.5%. Gasoline prices rose 1.8%, clothing increased 1.3%, and household operations, furnishings and equipment grew 1.0%. On a year-overyear basis, CPI rose 3.4% with rising energy prices accounting for the majority of the increase. Excluding energy, prices rose 1.6% over the year.

Retail sales rose 3.6% in March following the upwardly revised 5.8% increase in February. Sales rose in 10 of 11 subsectors. Sales at clothing stores soared 23.6%, building material and gardening equipment surged 19.8%, and sporting goods, hobby, book and music stores jumped 12.1%. StatsCan estimates that retail sales declined 5.1% in April as provincial governments enacted lockdown measures.

U.S. – FOMC sees brighter outlook and could consider tapering soon; Markit PMI surges to series high; Empire and Philadelphia Fed surveys decline

The FOMC minutes show that “participants assessed that risks to the outlook were no longer as elevated as in previous months.” Some noted that downside risks do remain, highlighting the potential of an uneven recovery with potential virus strains and hesitancy regarding vaccinations. The more upbeat remarks also come with the first firm hint that tapering could be around the corner. “A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.” With regard to inflation, the Fed once again reiteratef its expectation that inflation is expected to ease following temporary transitory effects, including high oil prices, pent-up demand, and supply chain bottlenecks.

The IHS Markit Flash US Composite PMI rose to a series high of 68.1 in May, from 63.5 in April. The Manufacturing PMI rose to 61.5 from 60.5, while the Services PMI surged to 70.1 from 64.7. Both manufacturing and services firms reported stronger paces of activity growth. Orders rose due to stronger customer confidence and a further reopening of the economy. Manufacturers saw clients order higher volumes due to material shortages and efforts to stockpile inventories amid rising costs. Inflationary pressures continue to mount as input and output cost indicators rose sharply to a survey high. Vendor performance deterioration, rising logistic and transportation pricing, increasing material costs, difficulty in sourcing materials, and PPE were commonly reported. Firms passed the increasing cost burdens to customers. Backlogs rose amid the strong demand but also with raw material shortages in manufacturing. Overall, business confidence improved, mostly attributed to a more optimistic service sector on hopes of further vaccinations and a return to normal. Manufacturers forecast strong demand but noted that the strain on capacity and material shortages are expected to last through 2021.

The Empire State Manufacturing General Business Conditions Index fell to 24.3 in May from 26.3 in April. New orders, shipments, and unfilled orders continued to expand. Employment levels and the average workweek increased as a result. Delivery times continued to rise, indicating persisting supply chain bottlenecks. Meanwhile the prices paid and received indicators both rose to all-time highs. Firms are seeing high input costs as raw commodity prices rise, but many are also able to pass along costs amid the high demand.

The Philadelphia Fed Manufacturing General Conditions Index fell to 31.5 in May from highs of 50.2 in April. Firms continue to see improving conditions but at a slowing pace. Activity and employment continue to expand. Firms continue to see widespread pricing increases, with prices paid and prices received indicators rising to 40-year highs.

International – Eurozone PMI rises on services; Japan PMI falls on resurgence of cases; China industrial production and retail sales rises; Japan GDP contracts; Core retail sales rise

The IHS Markit Flash Eurozone Composite PMI rose to 56.9 in May, from 53.8 in April. The Manufacturing PMI was relatively unchanged at 62.8 from 62.9, while the Services PMI surged to 55.1 from 50.5. An upturn in conditions in services drove the increase as economies continued to gradually reopen boosting confidence of a brighter outlook. New order growth surged and consequently backlogs also rose strongly. Strengthening demand saw firms increase employment even among reported difficulties filling job vacancies. Factories reported the inability to keep up with demand due to lengthening input delivery times on persistent supply chain constraints. Inventories fell as firms tried to keep up with demand with existing stock. Input costs and prices charged rose sharply for both services and manufacturing. The two largest economies in the region, France and Germany, posted solid increases, while the rest of the region which had lagged the recovery posted the strongest gains.

The au Jiban Bank Flash Japan Composite PMI fell to 48.1 in May, from 51.0 in April. The Services PMI fell sharply to 45.7 from 49.5, while the Manufacturing PMI held up better, decreasing to 52.5 from 53.6. A resurgence of cases leading to emergency measures and the sluggish vaccine rollout in the country resulted in a deterioration in business conditions. In the services sector, business inflows declined and job creation slowed. Manufacturers fared better. Activity decelerated, but output, new orders, and employment levels continued to expand.

China industrial production rose 9.8% in April compared to the same period last year. By industry, demand for machinery rose 22.6% year-over-year, metal products increased 21.0%, and pharmaceuticals rose 19.0%.

China retail sales rose 17.7% in April compared to the same period last year. The reading came in weaker than market expectations of 25.0%. Strong discretionary spending led the increase. Jewelry sales rose 48.3% year-over-year, restaurant sales increased 46.4%, clothing sales grew 31.2%, and construction materials expanded 30.8%.

Japan GDP contracted 1.3% in Q1, following the 2.8% increase in Q4. Private consumption fell 1.4%, capital investment fell 1.4%, government consumption fell 1.8%. Net exports also detracted from the reading, as imports expanded 10.8% while exports increased just 4.4%.

Japan core machine orders rose 3.7% in March. Overall, core orders fell 5.3% in Q1. Meanwhile foreign orders, not included in the core reading, increased 31.4% in Q1. Survey results aggregated from manufacturers forecast that Q2 core orders will rise by 2.5% and foreign orders by 2.9%.

Quick look ahead

Canada – CFIB Business Barometer (May 25)

An update on CFIB small business sentiment as firms navigate the shutdown will be the only key data release in Canada.

U.S. – Conference Board Consumer Confidence (May 25); Durable goods (May 27); Personal income and spending (May 28)

The monthly update of consumer confidence will be released. The key gauge to watch will be labor market conditions, but there may also be some key points in inflation expectations.

Durable goods are expected to continue to rise another 0.8% in April. The March reading was dragged lower by volatile aircraft orders.

Personal income is expected to reverse in April, expected to fall 14.3% after the 21.1% surge in March due to stimulus relief cheques. Higher wages and incomes elsewhere should provide some offset. Spending could further increase as services are expected to get a further boost as the economy reopens. Markets are forecasting for a 0.4% rise in April.

International – Germany ifo survey (May 25); Japan unemployment (May 28)

The May Germany ifo survey will likely show improvements amid stronger conditions and expectations.

Japan unemployment is expected to have risen a notch to 2.7% in April, from 2.6%. Demand for services workers is likely to have fallen as containment measures are enacted.

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