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Weekly Market Pulse - Week ending July 30, 2021

Market developments

Equities:

Equities declined during the week, impacted by China’s introduction of sweeping regulations in the education sector. Chinese regulators banned companies that teach school curriculums from making profit, raising capital, or going public. The fear spread into the technology sector, which markets worried could be the next to face increasing regulation. Indices fell broadly, with big tech companies warning of slowing growth and Amazon missing earnings expectations. The S&P 500 Index declined 0.37% while the S&P/TSX Composite Index rose 0.49%.

Fixed income:

U.S. yields fell again for the fifth straight week. The U.S. Federal Reserve hinted toward tightening, stating that the economy has made progress towards the central bank’s goals. The U.S. Treasury 10-year yield fell five basis points to 1.22%, and the Government of Canada 10-year yield was unchanged at 1.20%.

Commodities:

Oil prices rose a solid 2.61%, on reports of large U.S. inventory drawdowns. Copper and gold prices rose on a falling U.S. dollar. Copper continues to see supply and demand imbalances, with fears of possible worker strikes in Chile.

Performance (price return)

Performance - Price return

As of July 30, 2021

Macro developments

Canada – CPI rises; GDP contracts

The country’s consumer price index rose 0.3% in June, following a 0.5% increase in May. The increase was driven by gasoline prices increasing 1.6% and shelter costs rising 0.7%. Services prices in June grew 0.4%, while goods prices rose 0.2%. In year-over-year terms, despite robust gains CPI slowed to a 3.1% rate of inflation in June, from 3.6% due to negative base effects.

Real GDP fell 0.3% in May, following the 0.5% decline April. Continued lockdown measures saw service producers decline 0.2%, while goods producers fell 0.4%. Within goods, construction fell 2.3% and manufacturing contracted 0.8%. Services saw another notable decline in retail trade of 2.7% and in accommodation and food services of 2.4%. Total economic activity is 1.5% below February 2020 pre-pandemic levels, but StatsCan’s preliminary June estimates suggest that GDP rose 0.7%.

U.S. – Fed sees economic progress; Consumption drives GDP; Personal income, spending increase; Durable goods orders rise

The Fed’s monetary policy statement suggested tightening could be on the horizon. Previous statements noted the Fed would continue asset purchases “until substantial further progress has been made toward the (Federal Open Market) Committee's maximum employment and price stability goals.” This stance has now been changed to, “the economy has made progress toward these goals” due to increases in vaccinations and strong policy support. While this change in tone was anticipated by markets and yields were unfazed, the shift confirmed market expectations that the Fed may lay out a more concrete plan at its September meeting. During a press conference, Chairman Jerome Powell reiterated that high inflation readings are expected to be transitory. With respect to the spreading delta variant, Powell noted that although risks exist, they are expected to be limited as successive waves of COVID tended to have decreasing economic impact.

U.S. real GDP rose at an annualized rate of 6.5% in the second quarter, approximately 1.6% quarter over quarter. Economic activity expanded at a slower-than-expected pace of 8.4% annualized. The increase was driven by an 11.8% annualized increase in consumer consumption. Investments contracted 3.5% annualized, with inventories subtracting approximately 1.1% from the headline reading. Government spending also dragged, declining 1.5%.

Personal income rose 0.1% in June. Government social benefits continued to decline, but the income gain was made possible by increased wages and salaries. Meanwhile, consumer spending increased 1.0%. Within goods, spending for pharmaceuticals and gasoline rose, while spending for vehicles declined. Services, on the other hand, saw widespread increases in spending, led by food services and accommodations.

Durable goods new orders rose 0.8% seasonally adjusted in June, following the 3.2% increase in May. The increase was driven by a 2.1% gain in transportation equipment due to aircrafts. Excluding transportation, orders rose just 0.3%.

International – Eurozone GDP, CPI rise; Germany ifo business sentiment tempers; Japan PMI declines

Eurozone GDP rose 2.0% quarter over quarter in Q2, surpassing market expectations of 1.5%. Growth was driven by peripheral countries, including Portugal expanding 4.9%, Spain growing 2.8%, and Italy growing 2.7%. Meanwhile, growth of Germany and France lagged at 1.5% and 0.9%, respectively.

The eurozone’s CPI rose to 2.2% year-over-year in July, from 1.9% in June. By country, notable increases included Germany surging 3.1% and Spain increasing 2.9%. France’s CPI lagged, rising just 1.6%. Prices for the month actually fell 0.1%, but base effects provided a boost to the year-over-year reading. Energy prices rose 1.8% month over month and services increased 0.8%. Meanwhile, the price of goods declined 2.4%.

German business sentiment cooled in July, as the country’s ifo Business Climate Index fell to 100.8 in July, from 101.7 in June. Companies assessed their current situation as having improved, as expectations of supply bottlenecks and rising coronavirus case counts decreased. Manufacturing sentiment declined despite rising capacity utilization, with companies reporting supply issues and shortages of skilled workers. The services and trade sectors also noted some deterioration, as firms were less optimistic. Sentiment within construction meanwhile reported a slight improvement.

The au Jibun Bank Flash Japan Composite Purchasing Managers’ Index fell to 47.7 in July, from 48.9 in June. The Manufacturing PMI held steady at 52.2, from 52.4, while the Services PMI fell to 46.4, from 48.0. Manufacturing output and order growth eased amid rising COVID-19 cases. Delays in raw materials were also reported. Employment growth slowed, while sentiment remained strong. The slowdown was more severe in services, indicating deeper contractions. New business inflow continued to deteriorate and employment contracted, shedding jobs for the first time since December 2020.

Quick look ahead

Canada – Manufacturing PMI (August 3); Labour force survey (August 6)

The manufacturing sector has been resilient and, following the trends seen in other countries, we should see the Markit Manufacturing index continue to indicate strong expansion.

The highlight, however, will be employment numbers. July should see another strong month of job creation on continued reopening factors, following the robust June reading. Markets forecasts are for 150k, which would see the unemployment rate fall by 0.5% to 7.3%.

U.S. – Factory orders (August 3); Nonfarm payrolls (August 6)

Factory orders are expected to increase again in June, by an estimated 1.0%, following May’s 1.7% gain.

Similarly, the focus will be on job numbers. Payrolls are forecasted to have increased 950K in July and powerful gains are once again expected in services. Another point to note is that many workers may have been incentivized to re-enter the workforce as unemployment benefits start rolling off.

International – South Korea exports (August 1); China PMI (August 3); Bank of England (August 5); Germany industrial production (August 6)

Strength in South Korean exports is likely to have continued into July, as major economies and trade partners continue to reopen. Markets are forecasting a 31.1% increase year over year, due to the low base in 2020.

We will also have an updated release of China’s July PMI. The expectation is for a slight slowdown due to the seasonality of construction. Services are also at risk from COVID outbreaks, which have led to lockdowns in various regions.

The Bank of England is expected to hold policy steady at its upcoming meeting. However, there may be some contention around the central bank’s Monetary Policy Committee members’ view of asset purchases.

German industrial production is expected to have rebounded 0.6% in June, following a 0.3% May decline. The energy and construction sectors should support growth, while manufacturing again could be weighed down by supply constraints.

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This material is for informational purposes only. While this material has been compiled from sources believed to be reliable, Qtrade Investor does not guarantee the accuracy, completeness, timeliness or reliability of this information. Information, figures and charts are summarized for illustrative purposes only and are subject to change without notice. All investments are subject to risk, including the possible loss of principal.