Weekly Market Pulse - Week ending June 18, 2021

Market developments


Markets retreated as signals from the U.S. Federal Reserve of a less-stimulative policy positioning took markets by surprise. The Fed’s Summary of Economic Projections reported upwardly revised growth and inflation expectations for the year. However, markets were particularly focused on the “dot plot,” which showed a forecast for two rate increases to the federal funds rate in 2023, based on median estimates, a change from expectations of zero increases previously.

Fixed income:

Ten-year Treasury yields were relatively unchanged even as the Fed’s stance shifted to favour less-stimulative policy. Short- to mid-term yields noticeably moved higher as expectations of rate increases were pulled forward. The U.S. Treasury 10-year yield fell one basis point to 1.44%. The Government of Canada 10-year yield was unchanged at 1.37%.


The oil rally extended, with demand increasing and U.S. stockpiles experiencing another significant drawdown. Copper and gold fell in response to a less-stimulative Fed and a stronger dollar. Copper also faces additional challenges as China looks to curb rising prices and announced it would release state metal reserves to help quell demand.

Performance (price return)

Performance - Price return

As of June 18, 2021

Macro developments

Canada – CPI rises; Manufacturing sales decline

In inflation news, Canada’s Consumer Price Index by rose by 0.5% in May, following a 0.5% increase in April. Gasoline prices drove the increase, rising 3.2% for the sixth consecutive month. Goods prices rose 0.9%, while services rose just 0.2%. On a year-over-year basis, prices rose 3.6%.

Manufacturing sales fell 2.1% in April, following a 4.0% increase in March. Transportation equipment sales fell 23.6%, attributed to the semiconductor chip shortage for motor vehicles, and petroleum and coal product sales declined 7.1%. 

Conversely, machinery sales rose 14.6% and wood products increased 6.5%.

U.S. – Fed shifts its tone; Retail sales fall; Industrial production increases; Empire and Philadelphia manufacturing continue to expand

The Fed surprised markets with a shift in tone toward a less-stimulative bias, due to a strongly recovering economy. The central bank’s Summary of Economic Projections reported upwardly revised 2021 GDP expectations, to 7.0% from 6.5% previously. Furthermore, inflation expectations for personal consumption expenditures (PCE) jumped to 3.4% from 2.4%.

PCE inflation risks are now seen as leaning toward the upside, from being broadly balanced in March. The federal funds rate dot plot is also reflecting expectations of interest-rate hikes coming earlier than previously expected. The median projection for 2022 still calls for no hikes, though the number of Federal Open Market Committee members who expect a 2022 hike rose to seven, from four, while the median estimate now calls for two hikes in 2023, compared to none just three months ago. During his speech, Fed Chairman Jerome Powell once again reiterated that the recent surge in inflation is expected to be transitory. Although inflation could turn out to be higher and more persistent, the Fed’s view remains unchanged: the immediate surge in demand has been caused by economic reopenings, and related supply chain bottlenecks are expected to abate. Also, the recovery is still incomplete with employment below pre-pandemic levels. With respect to tapering quantitative easing measures, Powell said the Fed has started that conversation, stressing that considerable notice would be provided beforehand and any tapering decision would be based on the Fed’s assessment of economic progress relative to its goals.

Retail sales fell 1.3% in May, following the 0.9% increase in April. Demand for goods fell with building materials and gardening supplies sales decreasing 5.9%, motor vehicle declining 3.7%, and electronics contracting 3.4%. Food services and drinking places sales rose 1.8% and gasoline station sales rose 0.7%, providing some offset.

Industrial production rose 0.8% in May, following the 0.1% increase in April. Manufacturing production rose 0.9%, mining increase 1.2%, and utilities grew 0.2% Total production remains 1.4% lower than pre-pandemic February 2020 levels.

Capacity utilization rose by 0.6% to 75.2%.

The Empire State Manufacturing General Business Conditions Index fell to 17.4 in June, from 24.3 in May. Activity continues to expand, though at a slower pace. New orders, shipments, unfilled orders, and employment levels rose.

Delivery times continued to lengthen at a record pace and inventories fell. Price pressures persisted with both input and selling prices rising sharply.

The Philadelphia Fed Manufacturing Current Activity Index fell to 30.7 in June, from 31.5 in May. Activity expanded as new orders and shipments remained elevated. Employment grew as a result, and the survey continues to note widespread price increases. Optimism grew, reaching its highest level in nearly 30 years, with 75% of firms expecting increases in activity compared to just 6% expecting declines.

International – Bank of Japan policy unchanged; Japan’s CPI declines; China’s retail sales and industrial production rise

The Bank of Japan left rates unchanged and kept the 10-year yield target at 0%, also saying it would not hesitate to do more if needed. However, the central bank did extend its COVID lending program by six months. The program is now set to expire in March 2022 as the coronavirus still poses considerable risks to the economy. The Bank of Japan unveiled a new climate change-focused initiative, looking to provide funds for bank lending to activities combating climate change.

BoJ Governor Haruhiko Kuroda said, “Climate change issues could exert an extremely large impact on economic activity.”

The move also follows the government setting goals to reach net zero emissions by 2050. Further details will be released at the central bank’s next meeting.

Japan’s CPI fell 0.1% year over year in May, from a decline of 0.4% in April. The reading was weighed down by food prices declining 0.9% and transportation and communication decreasing 1.5%. Core CPI, excluding food and energy, fell 0.3%.

China’s retail sales rose 12.4% year over year in May. Restaurant and catering sales increased 26.6% year over year while goods sales increased 10.9%.

China’s industrial production rose 8.8% year-over-year in May. Manufacturing production rose 9.0% year over year. Metal products rose 19.2% and machinery rose 18.7%. The auto industry slowed to 0.5% growth year over year, from 7.7% in April.

Quick look ahead

Canada – April retail sales (June 23); CFIB Business Barometer (June 24)

The last preliminary retail sales estimate from Statistics Canada for April was for a decline of 5.1%. Spending across the board is likely to have been impacted by lockdown measures. A preliminary estimate for May will also be provided, and is unlikely to show much change as lockdowns remained in the month.

The June release of the CFIB Business Barometer will be available. Small business sentiment should see some improvement as measures ease into the summer.

U.S. – Markit PMI (June 23); Durable goods (June 24); Personal income and spending, University of Michigan Sentiment (June 25)

The June iteration of the Markit PMI survey should see activity hold strong. The services reading should be the main beneficiary of the recovery as the economy picks up speed into the summer.

A solid gain of 3.0% is the consensus for May’s durable goods orders. Most categories have seen strong gains this year, but the transportation industry has lagged as the sector faces semiconductor shortages.

Personal income and spending data for May is expected to show the effect of a drop off in stimulus cheques. Personal income is expected to have fallen 2.7% as a result, though an increase in wage and salary income should provide some offset. Spending on the other hand could continue to rise, with services expected to get a boost from the reopening.

And lastly, we have an update on consumer sentiment for June. Consumer inflation expectations have surged and will be of interest.

International – Japan Markit PMI (June 22); Eurozone Markit PMI (June 23); Germany ifo survey and Bank of England (June 24)

Internationally, analysts are awaiting some surveys that will provide an update on how economies abroad are faring.

Japan has lagged the broad recovery with a resurgence of COVID-19 cases and a sluggish vaccine rollout. Material changes to this situation are unlikely as the state of emergency remains, though businesses may show increased optimism as Japan is set to start lifting restrictions.

Meanwhile, the eurozone economy is expected to pick up, with coronavirus cases declining and containment measures easing. Germany and France, the region's two largest economies, have both loosened measures, which should boost the readings. However, it was other nations in the bloc that posted the strongest improvements last month, and this momentum could continue.

The Bank of England is likely to keep policy steady at its upcoming meeting even as data are improving. The meeting may provide hints on how the central bank plans to taper its asset purchase program.

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