Weekly Market Pulse - Week ending August 7, 2020

Market developments


Stock markets continued to rally even as U.S. stimulus talks came to a stalemate. Republicans are pushing for roughly US$1T of spending, while the opposing Democrats are looking for as much as US$3.5T. Despite such extreme differences in spending, there seems to be no compromise between the two parties so far. President Trump has vowed to take executive action if talks are stalled into the weekend. Tensions between the U.S. and China are also heating up as Trump unveiled bans prohibiting U.S. transactions on Chinese apps TikTok and WeChat. Meanwhile strong employment numbers helped support markets. The S&P 500 rose 2.45% while the S&P/TSX rose 2.32%.

Fixed income:

Bond yields rose on strong job numbers. The U.S. Treasury 10-year yield rose 4 basis points ending the week at 0.56%. The Government of Canada 10-year yield rose 1 basis point ending the week at 0.48%.


Gold prices gained for a ninth consecutive week, increasing 3.02%. Copper prices fell 2.70% as a top producer in Chile lowered its price outlook for 2021. Oil prices rose 3.30% on rising manufacturing production data.

Performance (price return)

Performance - Price return

As of August 7, 2020

Macro developments

Canada – Manufacturing PMI signals growth; Employment rises; Trade deficit widens

The IHS Markit Canada Manufacturing PMI rose to 52.9 in July, from 47.8 in June. The reading now signals growth and a partial rebound in business conditions. Output rose given the phased restart to the economy which also contributed to the first increase in employment since February. New orders increased for the first time since Feb, but only modestly. Export orders continues to signal a downturn given weak overseas demand. The backlog of work was reduced again, and inventory levels remain low as firms remain cautious amid subdued demand to improve cash flow. Firms reported lengthened delivery times largely from stock shortages from suppliers and transport delay across borders. Input prices were also raised by supplier surcharges related to COVID-19. The optimism for prospects remains with some concerns on a possible second wave curtailing growth projections.

Employment rose by 419K in July on the continued resumption of economic activity. The employment rate fell to 10.9% from 12.3% as a result. Most of the gains were in part-time work increased by 345K compared to full-time work which only saw an increase of 73K. Employed Canadians who worked less than half their usual hours fell by 412K. 5.5M Canadians were affected by COVID-19 but stood at 2.3M as of July, a reduction of 58% from April.

The Canadian international merchandise trade deficit widened to $3.2B in June, compared to $1.3B in May. Markets had expected the number to have narrowed instead. Imports rose 21.8% during the month while exports only rose 17.1%. International trade has significantly recovered from the lows this year but compared to February imports are still down 14.3% and exports decreased 17.9%.

U.S. – Non-farm payrolls recovery continues; Weekly jobless claims fall; Factory orders rise

The labour market continues to recover as nonfarm payrolls rose 1.76M in July, following the 4.79M increase in June. The unemployment rate fell to 10.2% from 11.1%. Notably job gains occurred in leisure and hospitality, government, retail trade, professional and business services, other services, and health care. Private payrolls rose 1.46M, government employment increased 301K, and manufacturing payrolls only added 26K. Temporary layoffs decreased by 1.3M to about half of the April level, but the number is still high at 9.2M.

Weekly initial claims registered at 1.19M for the week ending August 1, compared to 1.43M the week prior. The reading is an encouraging sign of a slowly improving job market but remains historically high. Continuing claims also fell to 16.1M for the week ending July 25, compared to 17.0M the week prior. Both numbers surprised markets, beating expectations.

New orders for manufactured goods rose 6.2% in June, following a 7.7% gain in May. Transportation equipment once again contributed the most to the increase gaining 20.2%.

China Caixin PMI falls; South Korea exports improving; Bank of England to keep policy loose; Germany industrial production increases

International – China Caixin PMI falls; South Korea exports improving; Bank of England to keep policy loose; Germany industrial production increases

The Caixin China General Composite PMI fell slightly to 54.5 in July, from 55.7 in June. The reason for the drop was due to the General Services PMI falling to 54.1 from 58.4. Meanwhile, the General Manufacturing PMI rose to 52.8 from 51.2. Both readings continue to indicate continued growth, as activity and new business continue to gain. The main driver continues to be from domestic orders, as firms are still facing ongoing challenges overseas. Despite increasing output, the contraction in employment persists, dropping again as companies look to boost productivity and remain cautious to hiring. Overall, business confidence by both service and manufacturing sectors remains optimistic that economic activity and demand will continue to recover from the pandemic.

South Korea exports fell 7.0% year-over-year in July, compared to 10.9% in June. The easing in the slump of exports was due to increased exports of semiconductors, but partially offset by continued weakness in the auto industry. Exports to China slowed, while exports to the U.S. and EU picked up amid easing containment measures.

The Bank of England (BOE) kept rates and bond-buying programs unchanged. Even though GDP continues to recover, “[the] risks to the outlook for GDP are judged to be skewed to the downside.” The central bank stated it has no intentions to tighten monetary policy until the outlook for inflation is certain in achieving the 2% inflation target sustainably. Based on current forecasts by the BOE, inflation is expected to gain again in 2021 but is only expected to reach 2% in 2022 Q3.

Germany industrial production increased 8.9% in June following a 7.4% rise in May. The contributions in output was broad-based, including strong production of consumer goods indicating recovering demand.

Quick look ahead

Canada – Housing starts (August 10); Manufacturing sales (August 14)

Housing starts have strongly recovered from the April lows and are expected to continue at similar levels for July. Manufacturing sales are expected to gain 15.5% in June, following a strong preliminary reading of June retail sales by StatsCan and the resuming economic reopening.

U.S. – CPI (August 12); Weekly claims (August 13); Retail sales and industrial production (August 14)

Markets expect a 0.3% increase for CPI in July on rising gasoline prices while services are forecasted to drag. We saw an unexpected drop in weekly claims last week and markets are watching for another downwards reading but the risks continue to be skewed to the downside on weak business confidence.

Retail sales has recovered to pre-COVID levels and is expected to moderate going forward. Auto and gasoline sales are expected to contribute in July. Industrial production is also forecasted to moderate given that manufacturing employment only rose 26K in July.

International – Germany ZEW survey (August 11); UK GDP (August 12)

The Germany ZEW survey will likely show another improvement in the current situation, but there is limited scope for improvements in expectations given the high optimism in the last reading.

UK Q2 GDP is expected to contract by 21.5%. High frequency indicators used by the Bank of England show although spending has significantly recovered, payment data suggest spending is still 10% lower. The BOE does not forecast GDP to recover to Q4 2019 levels until the end of 2021.

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