Weekly Market Pulse - Week ending June 5, 2020

Market developments

Equities:

The impressive market rally continued last week led by international markets. U.S. job numbers unexpectedly turned positive in May, an early indicator that the COVID-19 induced recession may soon be over. Germany, which has long stuck to fiscal austerity, unveiled a $130B euro stimulus package to kickstart the economy. The S&P 500 rose 4.91%. The S&P/TSX Composite rose 4.35%.

Fixed income:

Bond yields surged on surprisingly strong job numbers. The Bank of Canada says it thinks the worst is over and has curbed certain operations on improved market conditions. The European Central Bank continues to support markets by increasing asset purchases. The U.S. Treasury 10-year yield rose 24 basis points ending the week at 0.90%. The Government of Canada 10-year yield rose 20 basis points ending the week at 0.73%.

Commodities:

Oil and copper continue to climb as evidence of an economic recovery is substantiated, rising 9.81% and 4.82% respectively. An OPEC+ meeting is set to discuss the possibility of extending the current output cut. Gold fell 2.61%.


Performance (price return)

Performance - Price return

As of June 5, 2020


Macro developments

Canada – Surprise net job gain in May; Bank of Canada sees policy as effective; May Manufacturing PMI shows weak business conditions

Canadian employment rose 290K in May as COVID-19 restrictions eased and economies slowly reopened, allowing Canadians to begin returning to work. Consensus was for another net job loss of 500K. Following the 3M jobs shed in the previous two months, this is an early indicator that the economy is in the early stages of recovery. The unemployment rate dropped to 13.7% from 15.0% as a result. The number of people who worked half their usual hours also dropped by 292K. According to StatsCan: “These changes in the labour market represented a recovery of 10.6% of the COVID-19-related employment losses and absences recorded in the previous two months.”

The Bank of Canada left rates unchanged at 0.25% and said the impact of the virus on the economy appears to have peaked, but the recovery remains heavily clouded. Canada has experienced record losses in output and jobs, with the BoC anticipating another 10 to 20% drop in Q2 GDP before growth resumes in Q3. Meanwhile the policies enacted by the central bank are proving effective. Market function and short-term funding conditions have improved so the bank has opted to scale back certain market operations while continuing its large-scale asset purchases “until the economic recovery is well underway.”

The IHS Market Canada Manufacturing PMI signaled a further deterioration in overall business conditions in May. The reading came in at 40.6, an improvement from 33.0 in April but still in contractionary territory (under 50). Production continues to decline on retreating demand, and new business continues to lag as clients cut spending. Employment continues to be cut with 40% of survey respondents reporting a decline in staff, while only 9% noting an increase.

Business expectations showed a slight improvement, but the optimism remains modest as many firms cited “concerns that the COVID-19 pandemic would have a long-lasting impact on business operations.”

U.S. – Surprise increase in nonfarm payrolls; Initial jobless claims at 1.9M; Trade deficit widens

Total nonfarm payrolls unexpectedly rose 2.5M in May and the unemployment rate fell to 13.3%. Private nonfarm payrolls rose 3.1M, with sharp increases in leisure and hospitality, construction, education and health services, and retail trade.

Government employment continued to sharply decline shedding 585K jobs. Consensus expectations was another 7.5M jobs to be shed in May pushing the unemployment rate to 19%. The gains reflect a partial resumption of economic activity as the country reopens.

Initial jobless claims continued the negative trend, increasing another 1.9M for the week ending May 30. Continuing claims for the week ending May 23 however saw a slight increase to 21.5M from 21.0M following the first decrease last week. Markets were watching for another decline to confirm a rebounding labour market.

U.S. trade in goods and services plunged in April amid the coronavirus. Imports fell 13.7% to $200.7B and exports fell 20.5% to $151.3B, levels not seen since 2010. The decline in two-way trade reflects shutdowns both domestically and internationally. The trade deficit in widened to $49.4B, up $7.1B from March.

International – ECB increased asset purchases; China PMI signals growth; South Korea exports fall

The European Central Bank increased the Pandemic Emergency Purchase Programme by $600B euros, bringing the total to $1,350B euros. The purchase horizon of the program was extended June 2021 and maturing payments will be reinvested to the end of 2022. Key rates were left unchanged.

The Caixin China General Services PMI rose to 55.0 in May, from 44.4 in April. The reading signals the first increase in services activity since January as coronavirus measures ease and business operations resume. Both business activity and new orders saw large increases, but new exports continue to remain subdued as public health measures are maintained across key markets. Firms continue to reduce staff to improve efficiency, and overall business confidence strengthened.

The Caixin China General Manufacturing PMI also rose to expansionary territory, rising to 50.7 in May from 49.4 in April. Demand remains subdued on weak external demand and the lack of new orders and muted outlook forced firms to trim staff. Supply chains stabilized but some firms continue to report stock shortages from vendors. Business confidence rose as firms expect a global rebound as the pandemic situation continues to improve.

South Korea exports fell 23.7% in May compared to the same period last year. Weak automobile demand was slightly offset by a resilient semiconductor sector. The data also show that demand from China held up, only falling 2.8%, reinforcing the notion that economic activity in China is rebounding.


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 - Housing starts (June 8); Capacity utilization rate (June 12)

This week is lite on economic data, housing starts come out today with expectations of 160K housing starts in May, down from 171.3K in April. On Friday we get the capacity utilization rate for the first quarter which is expected to fall due to lockdowns.

U.S. – FOMC decision and May CPI (June 10); University of Michigan Sentiment (June 12)

The Federal Reserve has its interest rate decision this Wednesday with Chairman Powell expected to speak after the meeting. Markets expect the Fed to leave rates at zero and confirm they are willing to use their full range of tools to support the economy. Fed officials are also expected to discuss yield curve targeting for certain Treasuries. The May CPI number is expected to stay flat on a year-over-year basis at 0.3% and come in at 0.0% on a month-over-month basis.

The University of Michigan Sentiment survey for June is released on Friday and despite the protests and riots, consensus expects an increase from 72.3 in May to 75.3 in June, possibly due to the economy beginning the reopening process.

International – German industrial production (June 8); China credit data and Japan core machine orders (June 9)

This week the World Bank releases its semi-annual Global Economic Prospects report and the OECD releases its semi- annual World Economic Outlook. Both reports will lay out the organizations’ expectations for the second half of 2020.

German industrial production is expected to fall 24.8% year-over-year in April, continuing its drop from March as lockdowns essentially halted production for the entire month. On Tuesday, China releases its credit data which will likely show increasing stimulus to support the economy. Lastly, Japanese core machine orders for May, a leading indicator for investment, are reported Tuesday with consensus expecting a 13.2% drop year-over-year. Core machine orders were down 0.7% year-over-year in April and any pick-up would be a welcome sign for confirmation of improved business conditions.

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