Weekly Market Pulse - Week ending July 16, 2021

Market developments


Markets pulled back during the week. Inflation came back in the spotlight as the U.S. Consumer Price Index spiked in June. Even as markets have become increasingly confident that inflation will be transitory, lingering concerns of more persistent inflation and the near-certainty that companies will have to bear some of the costs have re-emerged. The Bank of Canada upwardly revised its inflation forecast, announcing a reduction in its weekly asset purchases.

Fixed income:

Yields fell even as the high U.S. CPI reading for June came out and the Bank of Canada tapered asset purchases. The U.S. Treasury 10-year yield fell seven basis points to 1.29%, and the Government of Canada 10-year yield fell nine basis points to 1.24%.


Oil prices fell 3.69%. OPEC+ discussions continued and though the coalition was unable to arrive at a firm deal, a compromise has been reached in the meantime. Copper prices declined slightly on continued U.S. dollar strength and lingering worries about weaker Chinese demand.

Performance (price return)

Performance - Price return

As of July 16, 2021

Macro developments

Canada – Bank of Canada cuts asset purchases; Manufacturing sales decline

The Bank of Canada adjusted its quantitative easing program, decreasing its rate of asset purchases by another billion to $2B per week going forward. In its Monetary Policy Report, 2021 GDP growth was revised downwards by half a percentage point to 6.0%, but growth expectations for 2022 and 2023 were revised upwards. The inflation forecast meanwhile was revised upwards for the year to 3.0%, before slowing to 2.4% and 2.2% over the next two years as “short-run imbalances diminish and the considerable overall slack in the economy pulls inflation lower,” according to statements from the central bank. The BoC affirmed that it remains “committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved,” which is currently forecasted to happen in the second half of 2022.

Manufacturing sales fell 0.6% in May, following April’s decline of 2.1%. Machinery sales dropped 16.9%, chemicals declined 2.0%, and fabricated metal products decreased 1.8%. On the other hand, sales of wood products rose 6.1% and primary metals increased 3.6%.

U.S. – CPI, industrial production rises; Retail sales surprises; Fed Beige Book sees improving economy; Manufacturing surveys indicate robust sector

CPI rose 0.9% in June, following the 0.6% increase in May. Reopening factors look to be driving the increase once again. Used car and truck prices rose 10.5%, accounting for a third of the increase. Other reopening factors including lodging away from home and gasoline were also contributors. On a year-over-year basis, CPI accelerated to 5.4% in June from 5.0%.

Industrial production rose 0.4% in June, following the 0.7% increase in May. Manufacturing output declined by a slight 0.1%, as the production of motor vehicles and parts dropped 6.6% due to the ongoing semiconductor shortages. Excluding motor vehicles, output increased 0.4%. The output of utilities rose 2.7% and mining increased 1.4%. Overall, capacity utilization rose 0.3% to 75.4% and total industrial production remains 1.2% below February 2020 pre-pandemic levels.

Retail sales rose 0.6% in June, following the 1.7% decline in May. Market consensus was for a decline of 0.3%. Reopening sectors saw increases in spending as gasoline sales rose 2.5%, clothing sales rose 2.6%, and restaurant sales rose 2.3%. Meanwhile furniture sales fell 3.6% and vehicle sales declined 2.0%.

The U.S. Federal Reserve’s Beige Book noted the U.S. economy strengthened from its last report in May. Employment and wages rose modestly. However, supply-side disruptions became more widespread, with shortages in materials and labour, delivery delays, and low inventories of many consumer goods. Prices rose at an above-average pace as a result. Although the demand outlook improved, there are worries regarding uncertainty of easing supply constraints.

The Empire State Manufacturing Survey reported business activity growing at a record pace as the General Business Conditions Index rose to 43.0 in July, from 17.4 in June. Activity surged and employment grew strongly. At the same time, delivery times lengthened, though at a slower pace compared to last month’s record high.

The July Philadelphia Fed Manufacturing Business Outlook survey saw growth expectations temper, but firms continue to indicate optimism over the next six months. The Current General Activity Index fell to 21.9 in July, from 30.7 in June. Activity and employment declined but remain expansionary. Firms continued to report price pressures, with 72% of firms reporting higher input prices for the month.

International – China’s GDP, retail sales and industrial production increase; Exports accelerate; Bank of Japan’s policy unchanged

China’s GDP rose 1.3% quarter-over-quarter in Q2, following a 0.4% increase in Q1. Combining the first two quarters suggests an annualized growth rate of 5.5%, putting the country’s 6% target in reach. Chinese retail sales rose 12.1% year-over-year in June. Restaurant spending rose 20.2% year-over-year, office supplies rose 25.9%, and petroleum rose 21.9%.

Chinese industrial production rose 8.3% year-over-year in June, or 0.6% on a seasonally adjusted basis in the month. Manufacturing production stayed strong, supported by machinery production.

China’s exports rose 32.2% in U.S. dollar terms year-over-year in June, accelerating from May’s 27.9% rise. Markets had expected exports to slow to 23.0%. Exports of materials including steel and oil products drove the increase, while exports of textiles and medical equipment slowed.

The Bank of Japan left monetary policy unchanged. The nation’s GDP forecast for the year was brought down slightly to 3.8%, reflecting the latest round of restrictions and plans for a fan-free Olympics, while inflation forecasts increased to 0.6%. The central bank unveiled more details regarding its climate change-focused initiative, stating it would offer banks interest-free funds for climate-linked loans and buy foreign green bonds.

Quick look ahead

Canada – Retail sales (July 23)

Retail sales were previously forecasted by StatsCan to have declined 3.0% in May. Many provinces stayed in lockdown for the month, but the preliminary estimate for June should show some recovery as restrictions ease.

U.S. – Markit PMI (July 23)

The main focus for the U.S. will be on its preliminary June Purchasing Managers’ Index survey release, in which firms are expected to continue to report solid growth for the month.

International – Japan’s CPI (July 19); ECB (July 22); Eurozone PMI (July 23)

Japan’s CPI has been muted and is expected to tick up in June. Markets forecast prices to have risen 0.2% year-over-year, from -0.1% in May.

The European Central Bank’s meeting will be the key event to watch next week due to the recent changes to the ECB’s monetary policy framework. The central bank may provide more clarity as to what inflation indicators it is watching; the ECB has changed its target from "close, but under 2%,” to a clearer 2% inflation target over the medium term. Some market participants even expect that the ECB may increase asset purchases, as current inflation forecasts remain below 2%.

Lastly, we will have the preliminary PMIs for the eurozone. The upturn in services recent months as economies reopen could continue to show further improvement, while the manufacturing sector is expected to remain robust.

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