Weekly Market Pulse - Week ending June 12, 2020
Stock market optimism continued into the week, but quickly reversed course as the Fed warned of a prolonged recovery that could take years as worries of a second wave reemerged. Cases in some states started to rise again over the last few weeks as the total number of cases surpassed 2M. The S&P 500 tumbled 4.78%. The S&P/TSX Composite fell 3.77%.
Investor appetite for bonds surged as the Fed provided an updated economic forecast. Growth is expected to pick back up, but employment may take years to recover to pre-COVID levels. The U.S. Treasury 10-year yield fell 19 basis points ending the week at 0.70%. The Government of Canada 10-year yield fell 19 basis points ending the week at 0.54%.
Oil prices dropped 7.56% following weeks of strong recovery as fears of weak economic prospects hit the market. Copper prices held up on strong demand from China, rising 2.35%. Gold prices gained 2.71% as investors flocked to safer assets.
Performance (price return)
As of June 12, 2020
Canada – Housing starts rise in May; Q1 capacity utilization falls
Housing starts rose to 193.5K in May compared to 166.5K in April. The gain looks impressive but is skewed by the fact that April housing starts did not include Quebec, where residential construction was put on hold late March. Construction in Quebec has since resumed and has been reflected in the May number. Housing starts excluding Quebec had decreased to 137.1K in May, a 17.7% drop. The distribution of starts was also highly varied; starts in B.C. rose 30.6% while starts in Ontario fell 39.6%.
Capacity utilization in Q1 dropped to 79.8% from 81.4% in Q4 2019. The lockdowns hit the manufacturing sector the hardest, where capacity fell to 74.4, the lowest since 2009.
U.S. – Fed continues using tools; May CPI falls; Consumer sentiment improves but cautious; Initial jobless claims at 1.5M
The Federal Reserve continues to reiterate a commitment to using its full range of tools to support the U.S. economy. Rates were unchanged and are expected to remain near 0% until the central bank is “confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” The Fed expects growth to pick back up starting in the second half of the year with continued strength through 2021 and 2022. Fed projections show GDP is expected to drop 6.5% in 2020 followed by a 5.0% and 3.5% rebound in the next two years. The labour market on the other hand is not expected to recover as quickly: unemployment is projected to be 9.3% for 2020 before falling to 6.5% and 5.5% in 2021 and 2022, above the unemployment rate of 3.5% before the coronavirus hit. The Fed continues its large-scale asset purchases “at least at the current pace to sustain smooth market functioning.”
Seasonally adjusted CPI fell another 0.1% in May following a 0.8% drop in April. Price declines in energy, apparel, and transportation offset increases in food and shelter. Energy lagged as gasoline prices fell 3.5% in the month, while food prices rose 0.7%. Core CPI (excluding food and energy) also fell reflecting stagnating demand.
The University of Michigan Consumer Sentiment Index rose to 78.9 in June from 72.3 in May. The Current Conditions Index rose for the second consecutive month to 87.8 from 82.3 as consumer sentiment continues to improve as the economy reopens, largely influenced by recovering employment. The forward-looking Consumer Expectations Index also rose, increasing to 73.1 from 65.9. A record number of consumers are anticipating growth in the overall economy and employment, but bad financial times are still expected by two-third of consumers. The largest concerns voiced were the potential for a second wave of the virus and a subsequent downturn and a slow recovering labour market. This income uncertainty impacts the willingness to make discretionary purchases.
Weekly initial jobless claims continue to decline, registering 1.5M for the week ending June 6. The number is still highly elevated compared to the 2010-2019 average of 312K. Continuing claims fell to 20.9M from 21.5M as states reopen and workers return to their jobs, but is still higher than the market expectation of 20.0M. Markets will be closely watching both numbers to reinforce the notion of economic activity beginning to pick up again.
International – German industrial production falls; China credit data rises; Japan core machine orders drop
The Organisation for Economic Co-operation and Development (OECD) released its semi-annual economic outlook. The global outlook is highly uncertain given that the coronavirus “has triggered the most severe economic recession in nearly a century and is causing enormous damage to people’s health, jobs and well-being.” Their outlook this time around highlights two scenarios: a single-hit scenario in which a second outbreak is avoided and a double-hit scenario where a second wave stems a renewed lockdown. World GDP is projected to drop 6.0% under their single-hit scenario or 7.6% given a second wave. Under the double-hit scenario, world GDP would drop again in Q4 before recovering in 2021. Looking at the labour market, the unemployment rate of the 37 OECD member countries was 5.4% in Q1 2020. This unemployment rate is projected to be 9.4% and 12.6% by the end of 2020 in the single-hit and double-hit scenarios, respectively.
Germany industrial production fell another 17.9% in April after the 8.9% drop in March. Manufacturing and mining output fell 22.1% and the data show that capital goods output dropped 35.3% showing that businesses are looking to cut investments given the cloudy conditions.
China aggregate financing increased 3.2T yuan in May, a slight increase from the 3.1T issued in April. Government bond issuance rose while corporate issuance fell but continues at a strong pace. Year-to-date aggregate financing is up 45% compared to last year as China looks to stimulate its economy to support the post-pandemic recovery.
Japan core machine orders fell 12.0% in April, after a 0.4% drop in March. Compared to the same period last year, machine orders are down 17.7%. Orders from manufacturers fell 2.6% while orders from non-manufacturers fell 20.2%. Foreign machine orders also dropped 21.6% reflecting depressed investment spending as firms grapple with the damage caused by the pandemic.
Quick look ahead
This week we will see many global governments begin the process of easing lockdowns. Bars and restaurants are planned to reopen in Europe, and New York will begin its reopening after it saw the first day since March of zero COVID- 19 related deaths.
Canada – Manufacturing sales (June 15); CPI (June 17); Retail sales (June 19)
Manufacturing and retail sales numbers are expected to drop 20% and 15%, respectively. The reading will be somewhat outdated given they will be reflecting April, but will nonetheless shed colour on consumer spending and how Canadian firms navigated the public health crisis. May CPI is expected to increase 0.8%, recovering from the 0.7% drop in April largely due to rising energy prices.
U.S. – Empire State manufacturing survey (June 15); Retail sales and industrial production (June 16); Philadelphia Fed manufacturing survey, initial and continuing claims (June 18)
The Empire State manufacturing survey comes out first thing this week followed by the Philly Fed survey and should show improvements as states reopen. Retail sales and industrial production for May are also expected to rebound following double-digit declines as some states reopen, which should support consumer spending. Initial and continuing claims will be closely watched over the next few weeks as a proxy for the speed and strength of the economic reopening.
International – China industrial production and retail sales (June 14); Bank of Japan meeting and ZEW survey (June 16); Bank of England meeting (June 18); China industrial production and retail sales and jobless rate
Chinese data this week will be indicative of the recovery so far as well as consumer spending. PMIs indicate that industrial production is expected to continue expanding and retail sales should also show further improvement. The Germany ZEW economic survey will provide an updated view of the situation as the country cautiously reopens.
No rate changes are expected from the Bank of Japan but the central bank announced additional quantitative easing through asset purchases to support firms and the economy. Similar expectations have been set for the Bank of England.