Weekly Market Pulse - Week ending July 17, 2020

Market developments

Equities:

Markets edged upwards as investors continued to see encouraging signs of an economic recovery. June retail sales are now higher when compared to last year, and surveys continue to point to improving business conditions. COVID-19 cases in the U.S. continue to trend upwards. Trump ordered to end Hong Kong’s special status with the U.S., which would also sanction Chinese officials. The S&P 500 gained 1.25% while the S&P/TSX composite gained 2.61%.

Fixed income:

Bond yields inched lower. The Bank of Canada signaled it would not raise rates until 2023 given current forecasts. The European Central Bank left rates and purchases unchanged. The U.S. Treasury 10-year yield fell 2 basis points ending the week at 0.63%. The Government of Canada 10-year yield fell 2 basis points ending the week at 0.53%.

Commodities:

Gold prices gained a slight 0.65% as investors looked to hedge uncertainty. OPEC released an updated monthly Oil Market Report which sees oil demand largely recovering next year. Oil and copper prices were unchanged last week.


Performance (price return)

Performance - Price return

As of July 17, 2020


Macro developments

Canada - Bank of Canada guidance reflects long recovery expectations; Manufacturing recovery begins

The Bank of Canada left rates unchanged at 0.25% and plans to “hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.” The large-scale asset purchase program continues to run its course, and the central bank states “to support the recovery and achieve the inflation objective, the Bank of Canada is prepared to provide further monetary stimulus as needed.”

The BoC also unveiled their updated Monetary Policy Report. The COVID-19 pandemic was broken down into three phases: containment, reopening, and recuperation. Containment has already occurred reflected by the sharp drop in economic activity. The economy is currently on the reopening phase where the reopening of businesses and pent-up demand will lead the initial bounce-back in employment and output. The recuperation phase will then follow on the expectation that Canada’s economic output will also likely take some time to return to pre-coronavirus levels. Under the central scenario that assumes no widespread second wave, 2020 GDP is expected to decline 7.8%, before rebounding 5.1% in 2021. 2020 inflation is expected at only 0.6%, and only gaining 1.2% in 2021 and 1.7% in 2022. Given the central bank has stated no intention to raise rates until inflation hits 2%, it seems BoC expects the current rate of 0.25% to remain until at least 2023 at this point. Ultimately, the central bank assumes a long recovery, as they “assume that the pandemic will have largely run its course by the middle of 2022, because either a vaccine or an effective treatment is widely available by then.”

Manufacturing sales in May rose 10.7% as manufacturers resumed operations of either full or partial lockdowns with sales increasing in 18 of 21 industries. The gain was largely driven by sales in the transportation equipment industry which rose 81.7% and sales in petroleum and coal products which rose 18.6%, benefitting from the economic reopening. Manufacturing sales are still 28.4% lower given the large double digit drops of 10.3% and 27.9% in March and April.

U.S. –Record budget deficit; June CPI rises; Industrial production increases; Fed Beige Book shows improving demand but uncertainty in labour market; Retail sales rises, Jobless claims elevated

The U.S. posted a record US$864.1B budget deficit in June. The tax filing extension decreased revenue by 27.9% to $240.8B, while federal government spending surged to $1.1T. Most of the spending was related to the Payment Protection Program and unemployment benefits.

CPI rose 0.3% in June following a 0.1% decrease in May. The gain was largely attributed to gasoline prices rising 12.3% and food prices increasing 0.6%. Looking at core CPI which excludes food and energy, prices rose 0.2% for the first time since February. Prices for transportation services increased 2.1% and prices for apparel increased 1.7%.

Industrial production rose 5.4% in June following the 1.4% increase in May, but production levels are still 10.9% below February levels. Manufacturing output rose 7.2% with the largest gain seen in motor vehicles and parts jumping 105.0%. Capacity utilization rose to 68.6% in June, from 65.1% in May, but remains 11.2% below the long-term average of 1972- 2019.

The Federal Reserve Beige Book reported that economic activity has increased in all 12 Districts but remains below pre- COVID-19 levels. Consumer spending has picked up as non-essential businesses are allowed to reopen and retail sales have seen a rebound. Loan demand was flat excluding some Paycheck Protection Program (PPP) activity and residential mortgages. Employment increased, but from low levels and remains well below pre-pandemic levels. Job turnover rates remain high and “nearly every District noted difficulty in bringing back workers because of health and safety concerns, childcare needs, and generous unemployment insurance benefits.” Firms who have retained workers with help from the PPP said the strength of demand would determine whether they can avoid layoffs.

Retail sales in June continued their strong rebound gaining 7.5% following an 18.2% gain in May. The growth was attributed to clothing which is up 105.1%, eating and drinking which rose 20.0%, and vehicles and parts which rose 8.2%. Amazingly, retail sales are now 5.0% higher compared to June last year. From June 2019, non-store retailer sales increased 23.5% while building material and garden equipment and supplies dealers gained 17.3%.

Initial jobless claims for the week ending July 11 registered 1.3M, just a 10K decline from the prior week and coming short of expectations of 1.25M. Continuing claims declined to 17.3M for the week ending July 4, from 17.8M, which results in a 11.9% insured unemployment rate.

International – UK GDP growth returns but disappoints; Germany ZEW survey positive; OPEC Oil Market Report sees recovering demand; ECB pledges to spend all 1.35T euros in purchase program

UK GDP rose 1.8% in May, following the 20.3% drop in April. The consensus was for 5.5%. The disappointing growth shows that although activity has picked up, a full recovery remains a challenge. Production rose 6.0% in the month, while services lagged, only gaining 0.9%.

The ZEW Indicator of Economic Sentiment fell slightly to 59.3 in July from 63.4 in June. Germany’s outlook remains largely unchanged. There is an expectation for growth again in the second half of the year going into 2021. The sentiment for the economic development of the eurozone continued to improve for the fourth consecutive month.

OPEC released their Oil Market Report which expects demand for oil to rebound in 2021, but still falls short of pre-COVID- 19 levels. Oil demand in 2019 was estimated at 99.7M barrels a day, expected to drop to an estimated 90.7M barrels a day in 2020 before recovering to 97.7M barrels a day in 2021. Oil demand is already beginning to rebound, and given the forecast, the OPEC+ alliance will continue with the current agreement in place to taper the 9.7M barrels a day cut to 7.7M barrels a day in August.

The European Central Bank left interest rates and asset purchases unchanged. ECB President Christine Lagarde said the ECB will commit the full 1.35T euros for the pandemic emergency purchase programme unless there are significant upside surprises.


Quick look ahead

Canada – Teranet/National Bank House Prices (July 20); Retail Sales (July 21); CPI (July 22)

On Monday we get the Teranet/National Bank House Price Index, which rose 1.1% in May followed by retail sales on Tuesday. Markets expect May retail sales ex-autos to rise 11.8% month-over-month bouncing back from a 22.0% drop in April. Lastly, June inflation readings are released Wednesday with expectations of a 0.2% year-over-year increase, up from the 0.4% fall in May.

U.S. – Fed Governor Vote (July 21); Existing Home Sales (July 22); Markit PMIs (July 24)

On Tuesday, the Senate Banking Committee is set to vote on the Federal Reserve Board of Governors nominees Judy Shelton and Christopher Waller. June existing home sales are expected to rise 22.8% month-over-month reversing from the 9.7% drop in May. On Friday Markit releases both the services and manufacturing PMIs for July which will show how each sector is handling the reopening of some states and rollbacks of others. Both sector surveys are expected to rise above the 50 level which indicates expansion.

International – South Korea Q2 GDP (July 23); Euro-area Markit PMIs (July 24)

South Korea is a barometer for global trade and will report second quarter GDP on Thursday. Markets expect GDP to fall 2.0% year-over-year, a significant drop from the 1.4% rise in the first quarter.

Markit PMIs for July will be released across the euro-area and are expected to continue the rebound from the record low reached in April. Many country PMIs are likely to move above the 50 level which indicates expansionary conditions.

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