Weekly Market Pulse - Week ending June 26, 2020

Market developments

Equities:

Equities ended the week lower as COVID-19 cases in the U.S. continued their record daily increases, led by Texas, Florida, and Arizona. San Francisco is delaying the next phase of its reopening as cases in California are once again on the rise. The growing concerns of a second wave are outweighing the signs that the U.S. economy has begun stabilizing, preparing itself for a recovery. The S&P 500 fell 2.86%. The S&P/TSX Composite fell 1.84%.

Fixed income:

Yields fell on a resurgence of cases. The U.S. Treasury 10-year yield fell 5 basis points ending the week at 0.64%. The Government of Canada 10-year yield fell 3 basis points ending the week at 0.51%.

Commodities:

Oil prices fell 4.00% while gold prices gained 1.57%. Copper prices rose 1.59% due to supply disruptions in Latin America. 


Performance (price return)

Performance - Price return

As of June 26, 2020


Macro developments

Canada – Bank of Canada sees “prolonged and bumpy” recovery

Tiff Macklem made his first speech as BoC Governor, saying “the recovery will likely be prolonged and bumpy, with the potential for setbacks along the way.” A considerable amount of monetary stimulus is in place and the central bank continues to support the recovery. The BoC has lowered rates to their effective lower bound and continues large-scale asset purchases. Macklem also said that “it will be a very long period before we start discussions about removing stimulus” given the damage to the economy. The BoC’s July Monetary Policy Report will provide output and inflation forecasts.

U.S. – Markit PMI shows weak demand but high optimism; Durable goods orders recovering; Personal income drops and spending recovers; Weekly jobless claims register 1.5M

The IHS Markit Flash U.S. Composite PMI rose to 46.8 in June, from 37.0 in May. Both the services and manufacturing sectors showed improvements as states reopening helped offset weak demand. The reading however remains below 50, signaling contraction, albeit at a much slower pace, and may be an early indicator of stabilization. The Services Business Activity Index rose to 46.7 in June from 37.5 in May, and the Manufacturing PMI rose to 49.6 in June from 39.8. New business registered a small decline. Many firms noted a rebound in demand, while others stated renewals and requests for new business were historically muted. The survey signaled further cuts to staff as demand remains subdued and the backlog of work is reduced. Optimism rose as the expectations for increasing activity was renewed amid states reopening and reports of customer interest.

Durable goods orders in May rose 15.8% from April. The increase was primarily attributed to transportation equipment, where orders rose 80.7%, following a 43.2% and 48.6% decrease in March and April. Excluding transportation, orders increased 4.0%. The reading is promising, but durable goods orders are still down nearly 18% compared to May 2019.

Personal income fell 4.2% in May. The decrease follows the personal income jump of 10.8% in April primarily due to stimulus payments. The relief payments continued into May but at a lower level, while unemployment benefits surged, partially offsetting the decrease. Personal consumption expenditures rebounded 8.2% in May, following sharp drops of 6.6% and 12.6% in March and April. The main drivers of spending were recreational goods, vehicles, health care, and food services and accommodation. Consumer spending rose likely in conjunction with businesses reopening and Americans spending their stimulus cheques but remains below pre-COVID levels.

Weekly jobless claims once again showed little improvement this week, registering 1.5M for the week ending June 20, reflecting only a 60K decrease from the prior week. Markets were anticipating 1.3M claims as states reopen, and the reading reinforces the expectation of a long and uneven recovery. Continuing claims showed improvement in the labour market, falling to 19.5M for the week ending June 13, from 20.5M the previous week.

International – Eurozone Markit PMI stabilizes; German ifo rises on expectations; ECB minutes assess asset purchases

The IHS Markit Flash Eurozone Composite PMI rose to 47.5 in June, from 31.9 in May. The Services Activity PMI rose to 47.3 in June, from 30.5 in May and the Manufacturing PMI rose to 48.2, from 35.6 in May. Output fell at a reduced pace in both manufacturing in services and the lack of new business led to a decline in the backlog of orders. Easing social distancing measures and lockdown restrictions allowed firms to reopen, but many companies continue to report weak demand as businesses and consumers remain cautious with respect to spending. Jobs continue to be cut on worries of the lack of demand, but business sentiment improved with optimists exceeding pessimists for the first time since the outbreak.

German business sentiment continues to regain ground showing the strongest increase in the ifo Business Climate Index, which rose to 86.2 in June from 79.7 in May. The gain was driven by the Expectations Index which soared to 91.4 in June, from 80.5 in May. Optimism rose in all sectors as “German business sees light at the end of the tunnel” but the Current Business Situation Index showed little improvement at 81.3 in June, from 78.9 in May.

The European Central Bank (ECB) minutes show that the growth outlook is skewed to the downside, which could further drag on the already weak inflation expectations. Even before the pandemic hit, the ECB was struggling to hit their inflation target and the weakened demand caused by the virus poses additional downward pressure, posing the risk of disinflation or possibly deflation. Additional asset purchases were then implemented to further stimulate the economy. The minutes also touch on the benefits and costs of asset purchases, concluding that the positives outweighed the negatives. Overall, the purchases “had made a very significant positive contribution to both economic growth and inflation in the euro area,” leading to other significant macroeconomic effects such as higher wages and employment increasing disposable income and consumption. The minutes show that similar to other major central banks, the ECB will continue to support the euro area into “building a lasting and prosperous recovery.” 


Quick look ahead

Canada – April GDP (June 30), May International Trade and Markit Manufacturing PMI (July 2)

On Wednesday we get a look at another month of Canadian GDP during the COVID-19 lockdowns. Market consensus is expecting April GDP to fall 16.9% year-over-year down from a drop of 5.8% in March. On Thursday we get a more recent data point with May international trade expected to rebound from -$3.25 billion in April to -$2.8 billion in May. Lastly, the Markit Manufacturing PMI for June is released Thursday which is expected to rise from the 40.6 reading in May as the U.S. saw its manufacturing PMI jump 10.2 points last week.

Canadian markets are closed Wednesday July 1 for Canada Day.

U.S. – ISM Manufacturing and FOMC Minutes (July 1) and Nonfarm Payrolls (July 2)

The June ISM manufacturing survey will provide further insight into business conditions as consensus expectations are for the index to increase to 49.1 from 43.1 in May, similar to the rise in the Markit manufacturing index last week. The survey should reflect the effects of production restarts, improvement in orders, and a slowdown in job losses. Also on Wednesday the Federal Reserve releases its meeting minutes from the June 9-10 FOMC meeting. The Fed did not surprise at its meeting, however, investors will be interested whether participants are incorporating another wave of infections and renewed lockdowns into their forecasts. Lastly, nonfarm payrolls on Thursday are expected to rise 3.0 million.

U.S. markets are closed Friday July 3 for Independence Day.

International – Euro area Inflation and Japan Tankan Survey (June 30), Russian Referendum (July 1), China PMI (July 2)

Euro area inflation for June is reported Tuesday with markets expecting a 0.2% rise year-over-year. Price movements have largely been driven by food and energy the last few months which are expected to slow in June. The Bank of Japan releases its Tankan survey which should reveal a major hit to business sentiment and exports due to COVID-19.

Russians are voting in a weeklong referendum on constitutional amendments which would allow President Putin to remain in power until 2036. Lastly, China releases both official and private PMI surveys for June with manufacturing potentially getting a boost from foreign demand as western countries ease lockdowns and domestic services industries suffer from fresh outbreaks of COVID-19. 

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