Weekly Market Pulse - Week ending May 29, 2020
The market rally continued as economies slowly re-opened. U.S.-China tensions escalated with U.S. President Trump considering sanctions on Chinese officials, citing lack of transparency surrounding their handling of the pandemic and the “deeply troubling situation unfolding in Hong Kong.” The S&P 500 rose 3.01%. The S&P/TSX Composite rose 1.87%.
Yields were little changed. The Bank of Canada, European Central Bank, and Reserve Bank of Australia are set to meet this week, with the Federal Reserve the week after. Bond markets are closely watching for policy tool announcements. In the U.S., the possibility of yield curve targeting has been brought up. The U.S. Treasury 10-year yield fell 1 basis point ending the week at 0.65%. The Government of Canada 10-year yield rose 3 basis points ending the week at 0.53%.
Oil and copper continue to climb on the prospect of an economic recovery underway, rising 6.23% and 1.39% respectively. Gold prices declined a slight 0.25%.
Performance (price return)
As of May 29, 2020
Canada – Q1 GDP contracts 8.2%; Current account balance widens
Q1 GDP fell at an annualized rate of 8.2%. It was the sharpest drop since the Great Depression, reflecting social distancing measures, business closures and travel restrictions. Household spending dropped 9.0% as a result of job losses and income uncertainty, as well as limited opportunities to spend as non-essential stores closed. Government consumption dropped 3.8% as government administration was curtailed and schools closed. In terms of trade, exports plunged 11.3% and imports plummeted 10.7% as key trade partners were under similar lockdown conditions.
Canada’s current account deficit widened $1.8B to $11.1B in the first quarter as exports declined faster than imports. Exports decreased $4.3B and imports decreased $3.3B. The decline in exports was driven by a $1.9B decline in energy products on lower prices and a $1.5B decrease in motor vehicles and parts as suppliers began suspending production in March. Electronic and electrical equipment imports decreased $1.4B and motor vehicle parts decreased $1.1B. The trade deficit in services expanded by $0.3B and investment income rose $0.6B.
U.S. – Initial claims rise another 2.1M; May consumer confidence stabilizes; Durable goods orders fall again; Personal income rises while spending drops
Initial jobless claims increased another 2.1M for the week ending May 23, bringing the total to over 40M since the onset of the pandemic. However, continuing claims for the week ended May 16 dropped to 21.1M from 25.1M, an early sign the labor market is beginning to rebound. Analysts had expected a slight increase. Markets are expecting another 1.8M initial claims for the next reading.
The Conference Board Consumer Confidence Index stabilized at 86.6 in May following two consecutive sharp drops. The Present Situation Index declined slightly to 71.1 from 73.0, while the gradual re-opening helped lift the Expectation Index to 96.9 from 94.3. The survey notes that consumers remain concerned about financial prospects and inflation expectations continue to climb.
Personal income rose 10.5% in April as lost wages were more than offset by $2.6T in economic impact payments from stimulus cheques. Personal consumption expenditures decreased 13.6% as lockdowns remained in place.
New orders for durable goods dropped another 17.2% in April following a 16.6% drop in March. Transportation equipment is once again accountable for most of the drop, plunging 47.3%. New orders excluding transportation decreased 7.4% driven by weakness in metal products and machinery.
International – China industrial profits recover; Japan jobless rate edges up; Bank of Korea cuts rates
Chinese industrial profits fell 4.3% in April compared to the same period last year, a significant improvement from the 34.9% fall in March. The reading reflects the recovery in industrial production and suggests the Chinese economy is on the road to recovery. Overall, YTD profits are down 27.4% compared to the same period in 2019.
The total number of newly unemployed in Japan rose by 130K in April, pushing the jobless rate up to 2.6% from 2.5% in March. The headline number looks good, but the total number of employed in Japan decreased by 720K of which 550K did not look for new positions. The job-to-applicant ratio also fell to 0.98 from 1.03 and new job offers plunged 31.9% compared to April of last year.
The Bank of Korea passed a unanimous decision to cut rates by 25 basis points to 0.50%, citing the economic contraction caused by the coronavirus. The central bank also said it was considering unconventional policy tools, but did not provide any guidance.
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 – May Markit Manufacturing PMI (June 1); Bank of Canada meeting (June 3); May employment (June 5)
There are no changes in interest rates expected at the upcoming Bank of Canada meeting, but may provide more guidance of their policy tools. The meeting will also be Tiff Macklem’s first as governor. The May Markit Manufacturing Aviso Wealth | Weekly Market Pulse | 3 PMI survey will provide an update on how firms are navigating the situation and if demand is returning as the country begins to re-open. Job losses are expected to continue into May with estimates of unemployment topping 15%.
U.S. – Factory Orders (June 3); Trade balance (June 4); Change in nonfarm payrolls and unemployment (June 5)
April factory orders are expected to fall seeing the numbers of durable goods last week and April’s trade balance will show the extent of trade disruption amid the virus. Lastly, the big release to be watching will be the change in nonfarm payrolls and unemployment. Markets expect 7.5M nonfarm job losses which would translate to an unemployment rate of 19.6%.
International – China PMI (May 30); South Korea exports (May 31); ECB meeting (June 4)
Markets will be on the watch for China’s May PMIs to reinforce that the country is in the recovery stage, where the sector is expected to post a strong rebound. South Korea exports in May are expected to post another double digit drop. The European Central Bank is also set to meet next week. No rate changes are expected, but markets will be watching if the central bank will be increasing purchases under its Pandemic Emergency Purchase Programme.