Weekly Market Pulse - Week ending August 6, 2021

Market developments

Equities:

Equities rose during the week, with the Financials sector doing notably well. A strong Friday jobs report did not move indices such as the Dow Jones Industrial Average or S&P 500 Index significantly higher, likely on concerns that a strong economy could force the U.S. Federal Reserve to move up its timeline for altering monetary policy. The NASDAQ Composite Index fell Friday as a rise in government bond yields hurt growth stocks, which form a large part of that index. Meanwhile, earnings season continued with 442 of the S&P 500 Index’s constituents having reported results. At the index level, results have beaten sales estimates by approximately 5% and earnings estimates by approximately 17%.

Fixed income:

U.S yields moved up materially on Friday after a strong jobs report showed significant strength in the labour force.

Commodities:

Oil fell during the week due to rising inventories and concerns about slackening demand in Asia due to rising COVID cases. Copper fell on demand concerns from China and production halts in the manufacturing of electric vehicles due to chip shortages. Gold fell after the jobs report on Friday as the U.S. dollar strengthened, and bond yields rose.

Performance (price return)

Performance - Price return

As of August 6, 2021

Macro developments

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

The IHS Markit Canada Manufacturing Purchasing Managers’ Index fell to 56.2 in July, from 56.5 in June. Activity remains expansionary, with output and new orders accelerating as restrictions eased. Production levels rose amid the uptick in demand, leading to more hiring and backlog. Pressures stemming from staff shortages and delivery delays remain key issues. Those pressures, combined with reported issues of sourcing raw materials, saw post-production inventories fall sharply. Inflationary pressures remain elevated as input and output prices rise quickly. Firms remain upbeat about prospects for growth on a full removal of restrictions and plans to upgrade machinery.

Canadian employment rose by 94K jobs in July, lower than the 150K expected increase. This strong absolute gain followed a 231K increase in June. In July, the services sector saw nearly all the job gains, within which food and accommodation gained 35K jobs. The unemployment rate fell 0.3% to 7.5%.

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

Factory orders rose 1.5% in June, following the upwardly revised 2.3% in May. Non-durable goods orders rose 2.1%.  Transportation orders increased 2.0% on a 17.0% increase in aircrafts.

Non-farm payrolls rose 943K in July, beating consensus expectations of an 870K increase. In addition, the figure for June saw an upwards revision to 938K, from the prior provisional report of 850K. In July, significant gains were seen in sectors such as leisure & hospitality (380K). The unemployment rate dropped 0.5% to 5.4%. Average hourly earnings for all employees were up 4.0% year-over-year in July.

International – South Korean exports (August 1); Chinese PMI (August 3); Bank of England (August 5);German industrial production (August 6)

South Korean exports rose 29.6% year-over-year in July, following the 39.8% increase in June. Export growth remains strong, as the slowdown reflects a distorted base due to the pandemic. The reading was driven by semiconductor exports, which rose a solid 39.8%, and petroleum products rising 73.0%.

The Caixin China General Composite PMI rose to 53.1 in July, from 50.6 in June. The services PMI rose solidly to 54.9, from 50.3, while the manufacturing PMI fell to 50.3, from 51.3. Service providers saw a strong upturn, benefitting from a successful containment of COVID clusters. New order growth quickened, and backlogs increased as firms reported insufficient capacity. Employment growth, however, was minor, as firms looked to control rising input cost inflation stemming from high staff, fuel, and material costs. On the manufacturing side, output expanded at the slowest rate in 16 months and new orders fell for the first time in over a year, albeit marginally. Firms noted that higher factory gate prices had dampened demand and export growth was hindered by COVID overseas. Supply chain delays persisted on longer delivery times and material shortages. Employment was relatively unchanged given the subdued demand.

The Bank of England kept its policy steady, and the central bank’s Monetary Policy Committee remains mostly content with letting asset purchases continue in the meantime, noting that the recovery is unbalanced and weighted towards goods, which has exacerbated frictions in the global supply chain. The BoE’s view is that these pressures will diminish as demand switches back towards services. In terms of actual numbers, inflation is now expected to peak at 4% this year, higher than previously expected, before slowing to the 2% target by 2023. The statement also gave some guidance on how the BoE would scale back its asset purchase program, noting that it would cease to reinvest the mature stock owned when the bank rate rises to 0.5% and if appropriate given economic circumstances. Market movement was muted as the current rate sits at 0.1%; setting a negative bank rate is also now part of the policy toolkit.

German industrial production fell 1.3% month-on-month in June, compared to expectations of 0.5% growth. This is following a decline of 0.8% in May (revised downwards after reporting a provisional drop of 0.3%). In June, industrial production excluding energy and construction was down 0.9%. The production of capital goods decreased 2.9%, intermediate goods decreased 0.9% and consumer goods increased by 3.4%. Energy production was down 0.6% while construction decreased 2.6%.

Quick look ahead

Canada

A quiet week ahead for Canada, with no notable economic releases scheduled.

U.S. – CPI (August 11); University of Michigan Consumer Sentiment (August 13)

The U.S. consumer price index will be the main release for the week. Prices are expected to increase another 0.5% in July. The data should reflect stronger demand in services as consumer consumption normalizes. However, due to base effects rolling off, the year-over-year reading is expected to soften to 5.3%, from 5.4%.

Consumer sentiment will be a key metric to watch after a notable drop in July. Consumers have been concerned about the high prices of homes, vehicles, and household durables. While the dominant view on high inflation continues to be that it is transitory, consumers have previously expressed concern about an “inflation storm” brewing in the medium term. It will also be noteworthy to see how the strong jobs report for July may have impacted consumer sentiment.

International – China’s CPI (August 9); Germany’s ZEW survey (August 10)

China’s CPI is expected to soften to 0.7% in July, from a rise of 1.1% in June. This is expected primarily because of lower food prices, stemming from declining prices of agricultural products, especially pork. The Agriculture 200 Price Index, which is run by the country’s Ministry of Agriculture and Rural Affairs and tracks agricultural prices, fell 5.9% year on year in July, with wholesale pork prices dropping 56%. Inflation in non-food components is expected to have risen slightly, likely moving core CPI to above 1% year-on-year growth.

Germany’s ZEW survey is an important gauge of sentiment and economic expectations. Market views suggest a third consecutive month of decline to an Index level of 56, a drop from the high of 84 in May. This is being driven by concerns about new COVID variants and the likelihood of a fourth wave leading to the imposition of broader economic restrictions.

Of note, over the course of the back half of 2021, a strong economic recovery is nonetheless expected, driven by large household savings and pent-up demand for goods and services

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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.