Weekly Market Pulse - Week ending May 22, 2020

Market developments

Equities:

Markets opened the week strong. Investor risk appetite continued to grow as economies cautiously reopened and news of a possible COVID-19 vaccine hit headlines. Germany and France agreed on a 500B euro recovery fund to help countries and industries hit by the pandemic. Despite the risk of a further escalation of U.S.-China tensions, the S&P 500 rallied 3.20%. The S&P/TSX Composite rose 1.88%.

Fixed income:

Bond yields rose on baby steps toward a reopening of the economy. The FOMC minutes highlighted some medium-term risks, but the Fed continues to support markets. The U.S. Treasury 10-year yield rose 2 basis points ending the week at 0.66%. The Government of Canada 10-year yield fell 4 basis points on weak data, ending the week at 0.51%.

Commodities:

Reflationary commodities rallied on optimism over the reopening of the economy. Copper rose 3.41% and oil continued its impressive rally, climbing another 14.03%, as the number of oil rigs at work in the U.S. continued to drop. Gold edged down 0.52%.


Performance (price return)

Performance - Price return

As of May 22, 2020


Macro developments

Canada – Retail sales fall; April CPI falls

Retail sales plunged 10% in March, the largest drop on record since the series started in 1991. 40% of respondents reported having closed their stores in March, while the stores that remained open curtailed hours and customer flows. Motor vehicles and parts sales collapsed 35.6%, while food and beverage stores reported record high sales of 22.8%. There was an apparent shift to e-commerce where sales are 40.4% higher compared to March of last year. Given the scale of this event, Statistics Canada also provided an advanced estimate for April forecasting another 15.6% drop.

CPI fell 0.7% in April as gasoline prices fell 15.2% in the month. Excluding energy, CPI only decreased 0.1%. Consumer spending was drastically shifted by the coronavirus. Clothing and footwear prices dropped 5.9% as shopping for non- essential goods was suspended. Spending shifted to food where prices increased 0.8%.

U.S. – PMI survey shows stabilization; Fed worries over medium-term risks; Housing starts drop; Initial jobless claims still elevated

The IHS Markit Flash U.S. Composite PMI came out at 36.4 for May, compared to 27.0 for April. Although a significant improvement, any reading under 50 indicates that U.S. business activity continues to contract. The Services PMI increased to 36.9 while the Manufacturing PMI fared slightly better at 39.8. The readings remain muted as only small parts of the economy have reopened, and firms continue to report further declines in demand or delaying of orders. The lack of new work forced businesses to continue to cut their workforce in May, albeit at a slower pace than April. The outlook remains pessimistic.

In the Federal Open Market Committee (FOMC) minutes, participants noted the near-term economic damage, but also pointed out there is an “extraordinary amount of uncertainty and considerable risks to economic activity in the medium term.” Among the possible scenarios include the risk of a second wave of infections inducing another lockdown, permanent layoffs and business closures, whether the current amount of fiscal aid is enough, as well as shifts in business and consumer spending after the pandemic is over. The monetary policy framework review expected this year is still underway, which could change the guidance of interest rates and asset purchases.

April residential housing starts fell another 30.2% to an adjusted annual rate of 891,000, following the 18.6% drop in March. The good news is that construction is in the process of restarting, and the National Association of Home Builders Market Index showed a slight improvement in May.

Initial jobless claims increased another 2.4M for the week ending May 16. The number of jobless claims continues to trend downward but remains at extreme levels. The number of claims may moderate in the coming weeks as workers gradually return to their jobs. Markets expect another 2M claims for the next reading.

International – China scraps GDP target; Euro area PMI improves; Economic sentiment for Germany on the rise; UK labour market resilient in Q1

China kicked off their annual National People’s Congress meeting and this time around, China did not announce a 2020 growth target given the circumstances, citing the difficulty of predicting future developments and the uncertainty of the world economy and global trade. They will instead focus on stabilizing employment and ensuring the well-being of the people. The budget deficit is expected to widen to 3.6% of GDP, compared to the 2.8% target in 2019. The government unveiled a target unemployment rate of 6% and pledged to create 9M new urban jobs. Taxes will be cut by 500B CNY and the government expects to issue 1T CNY of anti-virus government bonds and 3.75T CNY of special local government bonds.

The IHS Flash Eurozone Composite PMI increased to 30.5 for May, from 13.6 in April. The reading continues to indicate contracting business activity but at a slower pace as parts of the economy start to reopen. Output continued to fall due to social distancing measures and job cuts continued into May, easing modestly compared to April. Companies continue to offer discounts to stimulate sales. Forward-looking indicators improved but are still subdued compared to historical levels.

The ZEW Indicator of Economic Sentiment for Germany rose to 51.0 in May, from 28.2 in April, showing that optimism is growing in hopes for an economic turnaround. Financial market experts surveyed expect economic growth to pick up again starting in Q4. However, the ZEW Current Economic Situation Index remains extremely depressed at -93.5.

The U.K. labour market showed great resilience in Q1 even as lockdowns started. The 3-month unemployment rate ending March decreased to 3.9% from 4.0% in February. Markets were expecting the unemployment rate to increase to 4.3%. Diving deeper into the data shows that average weekly hours fell by 0.8 hours to 31.4 hours and job vacancies fell to a 6-year low. The unemployment claimant count for April also jumped 69%, signaling the deterioration to come next month.


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 – Current account balance (May 28); March Monthly GDP and Q1 GDP (May 28)

This week we get first quarter GDP for Canada which will show the extent of the economic damage caused by nationwide lockdowns. Market consensus expects a 10.0% annualized drop, which would be the largest drop on record. We will also see March monthly GDP which is expected to fall 9% month-over-month. Lastly the current account balance will be released on Thursday, giving insight into the effect COVID-19 has had on Canadian trade; the drop in oil will also have a significant impact.

U.S. – May consumer confidence (May 26); Durable goods orders (May 28); Personal income and spending (May 29)

In the U.S., a couple of forward-looking indicators should give some insight into how the economic situation is evolving. On Tuesday, the Conference Board releases its April consumer confidence survey which should show what the U.S. consumer is feeling, followed by April durable goods orders on Thursday. Lastly, we get personal income and spending data for April.

Monday is Memorial Day in the U.S. and markets will be closed.

International – China industrial profits (May 27); Bank of Korea rate decision (May 28); Japan jobless rate (May 29)

On Thursday Chinese Premier Li Keqiang will host the closing press conference for the National People's Congress, which will be closely followed for clues about China’s policy focus. Also from China, we get a view of company performance as April industrial profits are reported Wednesday. Profits should recover from the record fall of 34.9% in March, helped by the 3.9% increase in April industrial production.

The Bank of Korea’s rate decision is on Thursday, and it is likely to cut its policy rate by 25 basis points to 0.50%. In Japan we will see the April jobless rate, which most likely rose due to the lockdowns. Lastly, the Japanese government is expected to approve a second supplementary budget draft to finance further support measures with local media expecting its size to be around 10 to 13T yen.

Aviso Wealth Inc. (“Aviso Wealth”) is the parent company of Credential Qtrade Securities Inc. Aviso Wealth is a wholly-owned subsidiary of Aviso Wealth Limited Partnership, which in turn is owned 50% by Desjardins Financial Holdings Inc. and 50% by a limited partnership owned by the five Provincial Credit Union Centrals and the CUMIS Group Limited.

Online brokerage services are offered through Qtrade Investor, a division of Credential Qtrade Securities Inc., a wholly owned subsidiary of Aviso Wealth Inc. and Member of the Canadian Investor Protection Fund. This material is for informational purposes only. While this material has been compiled from sources believed to be reliable, Qtrade Investor does not guarantee the accuracy, completeness, timeliness or reliability of this information. Information, figures and charts are summarized for illustrative purposes only and are subject to change without notice. All investments are subject to risk, including the possible loss of principal.