Weekly Market Pulse - Week ending August 27, 2021

Market developments

Equities:

Equities rallied to new highs as investors continued to look to an eventual return to post-pandemic normal. The Pfizer-BioNTech COVID-19 vaccine gained full FDA approval in the U.S., which has set off expectations of mandated vaccines by employers. Strong corporate earnings amid a solid economy and accommodative Fed continue to support the market. At the Jackson Hole Symposium, Fed Chairman Jerome Powell’s tone was taken as dovish, as it seems the Fed would like to see a few more solid employment readings before tapering. Even then, Powell emphasized the reduction in asset purchases is not intended to indicate the timing of interest rate hikes.

Fixed income:

Yields rose despite the dovish message from the Fed as equities rallied to highs on strong economic expectations.

Commodities:

Commodities gained alongside equity markets. Oil rose as continued strong weekly drawdowns have seen U.S. crude stockpiles fall below pre-pandemic levels, combined with concerns over hurricane Ida in the Gulf of Mexico as oil firms cut output in anticipation. Copper rose on demand optimism from China amid declining inventories.

Performance (price return)

Performance - Price return

As of August 27, 2021

Macro developments

Canada – Small business sentiment mixed

The CFIB Business Barometer Index fell to 67.1 in August from 69.4 in July. Small business confidence was unchanged as the easing and reintroduction of restrictions in differing regions and sectors caused mixed reactions.

U.S. – Fed Chairman Powell speaks at Jackson Hole Symposium; Markit PMI falls; Durable goods orders declines; Personal income and spending increase

At the Jackson Hole Symposium, Federal Reserve Chairman Jerome Powell said the FOMC members thought it could be appropriate to start reducing asset purchases this year. As mentioned previously, the “substantial further progress” goal has been met for inflation but is expected to be transitory. However, Powell pointed out that it has been COVID-related supply chain disruptions which are driving prices higher, noting that gains are concentrated in durable goods which could see some reversal. Employment on the other hand does remain a point of concern. In line with the theme of the symposium “Macroeconomic Policy in an Uneven Economy,” Powell noted that employment is below pre-pandemic levels, and the shortfall is largely attributed to the services sector. He also noted minority groups continue to be disproportionately affected and the Delta variant will be watched for new risks. Overall, markets interpreted Powell’s tone as dovish. It seems the Fed believes the U.S. is not yet near maximum employment and would need a few more employment readings before it makes a decision on tapering. He also emphasized the tapering decision is not indicative of the timing of an interest rate lift-off.

The IHS Markit Flash U.S. Composite PMI fell to 55.4 in August, from 59.9 in July. The Services PMI fell to 55.2 from 59.9, while the Manufacturing PMI held up better at 61.2, from 63.4. The pace of expansion slowed as manufacturers and service providers reported capacity constraints, stemming from material shortages and the spread of the Delta variant. Manufacturers fared better as they noted continued robust demand for goods. Supply chain disruptions persisted as firms noted a quicker rise in price. Backlogs steeply rose as demand outpaced capacity, but only saw minimal growth in employment as companies reported difficulty finding suitable workers. Nonetheless, despite this backdrop, optimism remained upbeat regarding the year ahead.

Durable goods new orders declined 0.1% in July, following the 0.8% increase in June. Transportation drove the decline as aircraft orders fell steeply, reversing a strong boost from the previous month. Excluding transportation, orders rose 0.7% on strength from machinery and metals.

Personal incomes increased 1.1% in July, reflecting a surge in government social benefits due to advance Child Tax Credit payments as part of President Biden’s American Rescue Plan. Wages and salaries rose 1.0% during the period as well. Meanwhile personal spending rose 0.3%. Consumer spending shifted towards services growing 0.6% with widespread increases in all categories, offsetting the 1.6% decline of spending on goods.

International – Japan PMI declines; Eurozone PMI holds strong; Germany ifo sentiment deteriorates

The au Jibun Bank Flash Japan Composite PMI fell to 45.9 in August from 48.8 in July. The Service PMI dropped to 43.5 from 47.4, while the Manufacturing PMI held stronger at 51.0 versus 51.8. Business conditions further deteriorated, attributed to virus restrictions and sustained supply chain pressures. Service providers were the most affected, reporting a drop in output and contracting business inflows. Manufacturers saw the pace of growth slow, coupled with persistent supply chain pressures hampering the receipt of inputs for production. Optimism moderated but remains slightly positive as vaccination rates increase.

The IHS Markit Flash Eurozone Composite PMI fell to 59.5 in August from 60.2 in July. The reading remains at extreme highs indicating eurozone business activity continues to grow at a strong pace, pulling back slightly from the 15-year highs seen in July. The Manufacturing PMI fell to 61.5 from 62.8, while the Services PMI moderated to 59.7 from 59.8. Demand remains solid, buoyed by a further reopening. Manufacturing output continues to grow but manufacturers faced a weaker rate of expansion linked with supply chain constraints. Sustained demand saw strong growth of new orders, and the surging demand outstripping supply saw cost pressures and rising prices. Employment grew at record levels, led by services, while manufacturers faced labour shortages. Service providers are starting to face some pressures from the recent resurgence in cases, but optimism was sustained as vaccine rates trended higher.

The German ifo Business Climate Index fell to 99.4 in August from 100.7 in July. Optimism in services and trade saw some deterioration on rising infection numbers. Supply bottlenecks continue to pose issues in manufacturing. The construction industry was the one sector with brighter expectations.

Quick look ahead

Canada – GDP (August 31); Manufacturing PMI (September 1)

GDP is expected to have expanded 0.6% in June according to preliminary estimates from StatsCan. The reading, if accurate, would point toward a contraction for the quarter.

We will also get an update on how the Canadian manufacturing industry is faring. Despite Covid-19 case counts being on the rise, the manufacturing sector could hold steady based on similar strength in the U.S.

U.S. – Factory orders (September 2); Nonfarm payrolls (September 3)

Factory orders are expected to have increased another 0.4% in July, moderating from the 1.5% increase in June.

The focus will be on the nonfarm payrolls reading for August, with expectations of a 750K increase. The Fed has said that the inflation goal has been met, which puts the emphasis on employment. Despite the labour market outlook brightening, it seems the Fed would like to see some more concrete data before taking any steps toward tapering asset purchases.

International – Eurozone CPI and South Korea exports (August 31); China PMI (September 2)

Eurozone CPI is predicted to jump to 2.7% year-over-year in August, compared to 2.2% in July. The growth is attributed to the timing of summer sales, which were brought forward to July this year, skewing the year-over-year readings. On a month-over-month basis, prices are expected to increase 0.2%.

South Korea exports are expected to post a strong increase in August. Market expectations are for a 34.2% year-over-year increase for the month. As usual the reading will be bolstered by base effects but also reflects strong growth as foreign demand remains resilient despite the Delta variant headwinds.

Lastly, China’s PMI readings for August are expected to reflect consumer weakness due to recent virus outbreaks, which have led to containment measures.

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