Weekly Market Pulse - Week ending June 19, 2020

Market developments

Equities:

Equities ended the week higher on the back of improving economic data. Evidence of a U.S. recovery is starting to present itself. U.S. manufacturing surveys were upbeat, pointing to a turnaround. May retail sales in the U.S. and Canada show consumer spending returning. Economic data in China continues to point towards a recovery. All the while, COVID- 19 cases are re-emerging. The S&P 500 rose 1.86%. The S&P/TSX Composite rose 1.43%.

Fixed income:

Bond yields were unchanged as strong economic data was negated by worries of a resurgence of cases. The U.S. Treasury 10-year yield fell 1 basis point ending the week at 0.69%. The Government of Canada 10-year yield ended the week flat at 0.54%.

Commodities:

Oil prices rose 8.74% on signs that demand is recovering. Gold and copper rose 0.76 and 0.25%. 


Performance (price return)

Performance - Price return

As of June 19, 2020


Macro developments

Canada – Manufacturing and retail sales slump; CPI rises

Manufacturing sales fell a record 28.5% in April, following a 9.8% drop in March. April was the first full month of social distancing measures in Canada. Sales fell in all 21 industries and 85.2% of respondents reported that activities were impacted by the virus. The largest drops were in transportation equipment, which fell 76.4% due to every Canadian motor vehicle assembly plant ceasing operations, and petroleum and coal products, due to falling prices in response to reduced demand. Capacity utilization also fell to 55.9% in April from 72.3% in March. Statistics Canada noted that many firms resumed operations in April after restrictions eased.

Retail sales dropped another 26.4% in April, following the 10.0% fall in March. Statistics Canada noted that one third of respondents were closed during April as social distancing measures have hit retailers hard, with sales down in all 11 subsectors. The largest decreases were in motor vehicle and parts dealers, food and beverage stores, and gasoline stations. StatsCan also reported that retail e-commerce sales soared 120.3% compared to April of last year and accounted for 9.5% of total retail trade. Retail sales are expected to pick up again in May as social distancing restrictions ease with Statistics Canada providing a preliminary May estimate of a 19.1% increase.

CPI rose 0.3% in May, from a 0.7% decrease in April. The reading was highly influenced by energy prices, which rose 6.8% due to a 16.9% increase in gasoline prices. Excluding gasoline, CPI fell 0.1% weighed by falling prices in shelter, household operations and furnishings, and apparel.

U.S. – Manufacturing surveys point to a turnaround; Retail sales recover strongly; Industrial production increases; Initial jobless claims disappoint

The Empire State Manufacturing General Conditions Index recovered to -0.2 in June from -48.5 in May. The reading indicates that business activity has stabilized after three months of deterioration. Demand was unchanged as shipments, new orders, delivery times, and inventories were little changed. Employment continues to lag, with employment levels and average workweeks showing a slight decline. Future expectations however rose to the highest level in over a decade as firms expect to recall staff to work and future orders to increase as the economy gradually reopens.

The Philadelphia Fed Manufacturing Current General Activity Index rose to 27.5 in June from -43.1 reflecting a strong recovery in business conditions, with many firms reporting increases in new orders and shipments. Once again, employment continues to lag as firms continue to report a slight decrease in employment. Future general activity expectations rose to the highest level in nearly 30 years as 75% of firms expect increases in activity in the next six months.

The advance estimate for retail sales bounced 17.7% in May following a cumulative 22.7% decrease in the previous two months. The reading surprised markets as consensus was for an increase of only 8.4% and indicates that consumer spending may be returning faster than markets had anticipated. Sales rose in all 13 major industry groups. Motor vehicle and parts sales jumped 44.1% accounting for approximately half of the increase. Other notable increases include clothing, furniture, and eating and drinking where sales rose 188.0%, 89.7%, and 29.1%, respectively. The shift to digital sales has been very apparent as non-store retail sales are up 30.8% from May 2019.

Industrial production rose 1.4% in May, following a 12.5% drop in April, as factories started resuming operations. Most major market groups reported increases with motor vehicles and parts posting the largest. Capacity utilization also increased to 64.8% from 64.0%. Total production is still 15.4% below pre-pandemic levels seen in February and capacity utilization remains 15.0% below the 1972-2019 long-term average.

Weekly initial jobless claims registered 1.5M for the week ending June 12, only posting a 58K decrease from the prior week. The reading came out on the higher end of expectations as markets were anticipating 1.3M initial claims as states reopen and hints to a longer and uneven recovery. Markets continue to closely monitor weekly claims as a proxy for economic activity.

International – China industrial production and retail sales rise; ZEW reflects increased optimism; Bank of Japan expands lending program; Bank of England increases asset purchases

China industrial production rose 1.53% in May, or 4.4% compared to the same period last year. The reading reflects the quick turnaround of the Chinese economy as it gradually climbs out of the coronavirus induced recession. Consumer demand continues to be sluggish. Retail sales rose 0.79% in May but are still 2.8% lower when compared to May of last year.

The German ZEW survey continues to show increased confidence. The Current Economic Situation Index remains extremely low at -83.1, from -93.5 in May, while the Indicator of Economic Sentiment Index improved significantly to 63.4 from 21.3, on increased optimism of a turnaround. Financial market experts “continue to expect only a slow increase in economic value” during the recovery in the second half of this year.

The Bank of Japan left key rates unchanged and said interest rates are likely to remain low into 2023. Asset purchases were also left unchanged, but the lending program for companies affected by COVID-19 was increased by 35T yen to 110T yen.

The Bank of England maintained rates at 0.1% and voted in favor of increasing asset purchases by an additional 100B pounds bringing the total to 745B pounds. Overall, effects of the coronavirus in Q2 will likely be less severe than the central bank had anticipated. Signs of a recovery are presenting themselves but “it is difficult to make a clear inference from that about the recovery thereafter.” 


Quick look ahead

Canada – New BoC Governor Tiff Macklem’s first speech (June 22)

There are no major economic data releases this week for Canada, however the new Bank of Canada Governor Tiff Macklem will give his first speech.

U.S. – Markit PMI (June 23); Durable goods orders (June 25); Personal income and spending (June 26)

The June Markit PMIs for the manufacturing and service sectors will provide insight into the changes in business activity. On Thursday, May durable goods orders are reported with consensus expecting them to rise 10.3% in May from a 17.7% drop in April. Durable goods orders are a forward-looking indicator which show firms’ investment in capital goods, an important component of GDP. Lastly, May personal income and spending are reported Friday, where income is expected to fall 6.0% while spending is expected to rise 8.8%.

International – Eurozone Markit PMI (June 23); German IFO Survey (June 24); ECB minutes (June 25); Chinese industrial profits (June 27)

On Tuesday, the euro-area reports June PMIs which are expected to continue their rebound from the record lows in April. A reading over 50 is expansionary and below is contractionary; last month the composite PMI was 31.9 and consensus expects it to reach 41.7. Another leading indicator is the Germany IFO business survey, which is also expected to rise in June to 85.0 from 79.5 in May.

On Thursday, the minutes from the European Central Bank’s June meeting will be released and analyzed for additional details regarding the expansion of its Pandemic Emergency Purchase Programme. In China, industrial profits for May will be reported as investors try to gauge the impact the virus has had on company earnings and whether profits continue to recover from the record fall of 34.9% in March. 

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