Weekly Market Pulse - Week ending July 3, 2020

Market developments


It was a relatively quiet week with Canada Day and Independence Day. North American and European markets ended the week higher, while Japan closed lower. New coronavirus cases continued to rise in some U.S. states, but markets reacted more positively to the upturn in PMIs and jobs. Manufacturing and Service PMIs in China are now reading solidly above 50, signaling a strong recovery and fueling optimism in recovery efforts for the rest of the world. The S&P 500 gained 4.02% while the S&P/TSX Composite gained 2.68%.

Fixed income:

Bond yields rose slightly on the back of improving business activity. The U.S. Treasury 10-year yield rose 3 basis points ending the week at 0.67%. The Government of Canada 10-year yield rose 5 basis points ending the week at 0.56%.


Oil prices gained 4.75% while copper prices gained 1.49%. Gold ended the week slightly higher, but it’s worth noting that early in the week, gold futures briefly topped $1,800/oz intra-day.

Performance (price return)

Performance - Price return

As of July 3, 2020

Macro developments

Canada – April GDP plummets; May international trade narrows; Markit Manufacturing PMI sees weak demand

GDP contracted 11.6% in April, following a 7.5% drop in March. April was the first full month of measures in place to slow COVID-19 where activity fell in all 20 industries, the largest monthly decline since data started in 1961. The largest contributor was manufacturing, which fell 22.5% with over four out of five firms reported being affected by the pandemic. Other affected sectors include construction, falling 22.9%; retail trade, falling 22.9%; wholesale trade, down 17.9%; and accommodation and food services, dropping 42.4%. Given the circumstances, StatsCan provided an early estimate of 3.0% for May GDP as business activity is gradually resuming and output is increasing, however economic activity in April is 18.2% below February levels, before the coronavirus hit.

The international merchandise trade deficit narrowed to $677M in May from $4.3B in April. Exports rose 6.7% following a 29.1% decrease in April largely due to the automobile industry restarting operations, and higher oil prices. Meanwhile, imports declined 3.9% following a 25.2% fall in April. The decrease was due to lower imports of lubricants and other petroleum refinery products as well as motor vehicles and parts.

The IHS Market Canada Manufacturing PMI rose to 47.8 in June from 40.6 in May. Production volumes fell, and data shows jobs continue to be shed, though at a slower pace. Manufacturers continue to report weak demand conditions resulting in cautious spending by clients. Respondents also noted that supply chains remained under pressure, 35% of which noted supplier performance had worsened especially for items shipped from the U.S. Some firms have begun to see growth again given the phased restart of factoring operations. Overall, business expectations are positive as manufacturers expect demand to pick up as COVID-19 measures gradually ease.

U.S. – FOMC minutes discuss forward guidance; Nonfarm payrolls pick up with economic activity; Initial claims remain elevated at 1.4M

The Federal Open Market Committee minutes showed that the Fed is thinking of ways to strengthen their forward guidance on interest rates and asset purchases given that the Federal Funds rate is at its effective lower bound. Participants noted that the economy is likely to need highly accommodative monetary policy support for some time. The possibility of linking forward guidance to a specified macroeconomic outcome such as inflation or the unemployment rate was brought up. Another possibility is calendar-based guidance specifying a date which accommodation could begin to be reduced. Yield curve targeting was also discussed, in which the Fed concluded that large central bank purchases of government debt may not be required to reach desired targets. However, the low levels of long-term yields will act as a constraint on the effectiveness of asset purchases, but large-scale asset purchases could still reduce upward pressure on yields. The Fed also thinks that fiscal policy is a risk, and that more may be required. The direction the Fed will take will likely be decided by the policy framework review that will be completed later this year.

Nonfarm payroll employment rose by 4.8M in June, pushing the unemployment rate down to 11.1% from 13.3% in May as economic activity resumes. Markets were expecting an employment gain of 3.2M and 12.5% unemployment rate. Large increases were seen in leisure and hospitality, retail trade, education and health service, and manufacturing. The number of full time and part time workers each increased 2.4M. In comparison, the number of people employed part time for economic reasons fell 1.6M, but still totals 9.1M, which is double the February level. Other figures released include average hourly earnings which fell 1.2% reflecting stronger gains in lower wage positions, and the average workweek, which fell to 34.5 hours in June from 34.7 in May. The numbers are encouraging, but the number of unemployed is still up 12.0M and the unemployment rate is 7.6% higher than February.

Weekly jobless claims for the week ending June 27 registered 1.43M, just a 55K improvement from the prior week. The reading missed expectations again as markets were anticipating a slightly better reading of 1.35M as states reopen, supporting the Fed’s worries of a long and uneven recovery. Continuing claims also paints a worrying picture as the number for the week ending June 20 rose to 19.3M, from 19.2M the previous week.

International – Euro area inflation rises; Japan Tankan Survey shows weak business conditions; China PMI reflects improving domestic demand

Euro area inflation rose 0.3% in June from -0.1% in May. The increase was driven by strong increases for energy and services. Core inflation, which excludes energy and food, fell to 0.8% in June from 0.9%. 

Business confidence in Japan continue to deteriorate, as the Tankan All Industries Index fell to -31 in Q2 2020 from -4 in Q1. The hit was seen in both manufacturing and non-manufacturing with smaller businesses more affected. The survey shows that both domestic and foreign demand continues to be muted while inventories build up. Employment conditions are also expected to weaken. Large enterprises see inflation at -0.5% for the next year and continue to revise downwards their profit expectations. The only bright spot of the survey is capital expenditures are expected to rise 3.2% in 2020.

The Caixin China Composite PMI rose to 55.7 in June from 54.5 in May, with increases seen in both manufacturing and services. The Manufacturing PMI rose to 51.2 in June from 50.7 while the General Services PMI signaled the sharpest increase in activity in over a decade rising to 58.4 in June, from 55.0. Overall market conditions continue to improve as firms move towards more normal business operations. Output continues to rise, and new business picked up.

Employment however continues to show modest decreases and export business is still lagging as other countries continue to struggle with the coronavirus. Nonetheless business confidence rose on expectations of further increases in customer demand, and manufacturers continue to expand their purchasing activity.

Quick look ahead

Canada – BoC Business Outlook Survey (July 6); Housing starts (July 9); June employment (July 10)

On Monday the Bank of Canada releases their quarterly Business Outlook Survey (BOS) for Q2. Given recent improvements in economic data, this BOS will provide key insight to the future sales outlook and business sentiment surrounding the path of our economic recovery. Some key points to watch will be investment and employment intentions as firms cope with the aftermath of the virus. June housing starts are released on Thursday with expectations of a 185K rise, slightly down from 193.5K last month. Lastly, we will get employment numbers for Canada. Markets expect a net job gain of 550K and a 12.5% unemployment rate following the strong gains in the U.S. last week.

U.S. – Markit PMI (July 6); Initial and continuing jobless claims (July 9)

Data is light in the U.S. this week. We get the final reading of the Markit PMIs, but the focus will once again be on the weekly job numbers.

International – Eurozone retail sales and Germany factory orders (July 6); Germany industrial production (July 7); China credit (July 9-15)

This week we get the first readings of hard economic data for Europe that should point towards a recovery. Retail sales for the eurozone are expected to post the first positive reading in May since February, after being battered by the pandemic. Germany factory orders and industrial production for May will also give an indication on the speed of the recovery as measures are eased.

China will release data on new loans and aggregate social financing for June next week, which should reflect the government’s degree of continued policy support.

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