Weekly Market Pulse - Week ending May 28, 2021

Market developments

Equities:

Equities gains last week were led by tech firms as inflation concerns eased. Markets continued to focus on evidence of a sustained global recovery and expectations that higher spending will support further growth. U.S. President Joe Biden unveiled a US$6T federal fiscal budget proposal for 2022 that would come with increased taxes for corporations and wealthy individuals. The S&P 500 rose 1.19%. The S&P/TSX Composite rose 1.66%.

Fixed income:

Yields moved lower as markets weighed dovish comments from the U.S. Federal Reserve and Biden’s budget proposal. The U.S. Treasury 10-year yield fell 3 basis points to 1.59%. The Government of Canada 10-year yield fell 4 basis points to 1.50%.

Commodities:

Oil rose 4.31% on strong demand as stockpiles fell and optimism over summer travel increased. Copper prices increased 4.04% on ongoing supply concerns. Gold prices rose 1.20% as yields fell.

Performance (price return)

Performance - Price return

As of May 28, 2021

Macro developments

Canada – CFIB Business Barometer rises

The CFIB Business Barometer rose to 66.2 in May from 63.4 in April. Small business sentiment showed a slight improvement as hiring intentions increased. Business confidence varied by provinces, with Quebec and New Brunswick easing restrictions, while Nova Scotia and Manitoba went the opposite direction.

U.S. – President Biden unveils US$6T 2022 budget; Personal income falls while spending rises; Consumer confidence declines; Durable goods orders fall

Biden unveiled a US$6.0T federal fiscal budget proposal for 2022. For reference, government spending in 2019 was US$4.4T and spending in 2020 was US$6.6T which includes the US$2.2T CARES act in response to the pandemic. The broad proposal includes plans to restore infrastructure, combat climate change, and improve health care, among other things. Biden is looking to fund the budget with higher taxes on corporations and wealthy individuals, but it would still result in a projected deficit of $1.8T in 2022. The proposed budget is likely to see pushback from Republicans, but the White House argues that despite the steep initial costs, economic growth from these investments will pay off in the long term.

Personal income fell 13.1% in April, following the 20.9% increase in March. The decline can be attributed to the timing of the one-time stimulus relief cheques issued in March, while rising wages and salaries provided some offset. Personal spending rose 0.5% in April, following the 4.7% increase in March. The increase was driven by a 1.1% increase for services, while spending on goods fell 0.5%. Within services, the largest contributor was spending for recreation, food services, and accommodation, as the economy continues to reopen.

The Conference Board Consumer Confidence Index fell marginally to 117.2 in May from 117.5 in April. Consumer assessments of current conditions rose strongly on economic improvements in the quarter. However, future optimism declined on expectations of weakening job and income prospects.

New orders for durable goods fell 1.3% in April, offsetting the 1.3% increase in March. Transportation equipment orders accounted for the decline with a drop of 6.7%, indicative of the recent semiconductor shortage faced by the industry. Excluding transportation, orders rose 1.0%.

International – Germany business sentiment rises; Japan unemployment rate increases

The Germany ifo Business Climate Index rose to 99.2 in May from 96.6 in April. Sentiment in all industry groups—manufacturing, services, trade, and construction—rose. Firms were generally content with the current business climate and were optimistic the economy will continue to pick up. Expectations in manufacturing and construction declined as material shortages remained a concern.

The Japan unemployment rate rose to 2.8% in April from 2.6% in March. Job losses were led by the wholesale and retail trade industry as containment measures were re-enacted to combat an uptick in new virus cases.

Quick look ahead

Canada – GDP (June 1); Labour force survey (June 4)

GDP is expected to have risen 1.0% in March on strength in the retail, manufacturing, and construction industries. If the March reading is accurate, Q1 GDP would have risen 6.8% annualized. Consumer spending and investment are expected to have contributed strongly to the reading.

The labour force survey will also be closely watched. The market consensus is for a loss of 25K jobs with some provinces forced to re-instate social distancing measures in the month.

U.S. – Fed Beige Book (June 2); Nonfarm payrolls and factory orders (June 4)

The newest iteration of the Fed Beige Book will be released this week and is likely to note the economy quickly picking up speed.

The highlight of the week will be nonfarm payrolls. Hiring in May should have strengthened as the economic reopening continued and weekly initial claims declined. Market consensus is for a gain of 650K jobs, which would see the unemployment rate fall by 2 tenths of a point to 5.9%.

Factory orders are expected to be relatively unchanged in April with a slight decline of 0.2% following the strong 1.1% uptick in March.

International – South Korea exports (May 31); Eurozone CPI (June 1); China PMI (June 2)

South Korea exports, often used as a global business barometer, are expected rise 47.5% in May compared to the same period last year. The reading will be skewed by a low base in 2020 but would still represent a 12.5% increase compared to 2019.

The eurozone CPI is expected to increase 0.2% in May as inflationary pressures build, which would bring year-over-year CPI to 1.9%. Increases are likely to be driven by services as economies open and travel returns to the region.

The China PMI could see further improvements as global economies reopen. Major trade partners including the U.S., eurozone, and Japan have seen strong increases.

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