Weekly Market Pulse - Week ending August 28, 2020

Market developments


Global stocks ended the week at all-time highs, fueled by positive tech earnings, strong U.S. durable goods orders, and a new policy framework from the U.S. Fed that suggests accommodative policies for the foreseeable future. Category 4 Hurricane Laura was downgraded to a Tropical Storm after touching down on the U.S. Gulf Coast, inflicting moderate damage. In Canada, the big banks drove the market higher as they reported strong earnings. The S&P 500 rose 3.26% while the S&P/TSX rose 1.14%.

Fixed income:

Longer-term bond yields spiked higher. The Fed’s new framework suggests they will likely allow inflation to drift above target, after undershooting for most of the last decade. The U.S. Treasury 10-year yield rose 9 basis points ending the week at 0.72%. The Government of Canada 10-year yield rose 9 basis points ending the week at 0.63%.


Gold gained 1.25% as the U.S. dollar weakened on comments from the Fed hinting rates will stay accommodative for longer. Copper prices benefitted 3.19% from tightening supply while oil prices remain in its trading range, gaining 1.39%.

Performance (price return)

Performance - Price return

As of August 28, 2020

Macro developments

Canada – June GDP rises 6.5%; Current account balance narrows; Canadian banks remain resilient

GDP fell 11.5% in Q2, following a 2.1% drop in Q1. On an annualized basis, Q2 GDP fell 38.7% with record sharp drops in household spending, business investment, and trade. Household spending dropped 13.1%, a mix of lost income but also lost opportunities to spend. Business investment fell 16.2%, exports volumes decreased 18.4%, and import volumes shrank 22.6%. Employee compensation dropped 8.9% but disposable income rose 10.8% given the increased government fiscal support to households. The drop in spending and rise in income boosted household savings 28.2%.

Economic activity continued to recover in June with GDP growing 6.5% following a 4.8% increase in May. Gains were seen in 19 of 20 industrial sectors with goods-producing industries gaining 7.5% while services-producing grew 6.1%. The only sector to contract was mining, quarrying, and oil and gas extraction. GDP remains about 9% below February levels. StatsCan’s preliminary estimate for July GDP is for another 3% increase.

Canada’s current account deficit unexpectedly narrowed to $8.6B in Q2, from $11.1B in Q1. The deficit in goods and services narrowed, partially offset by a reduction in investment income surplus. Both goods exports and imports saw record drops during the quarter. Goods exports decreased by $33.2B to $106.9B while imports fell by $34.2B to $114.5B. Data show that export and import activity started to show signs of recovery in June.

The big six Canadian banks reported Q3 earnings and the commentary has been largely positive. Loan loss provisions remain elevated, but earnings were strong. The average drop in earnings was only 18.5% compared to analyst expectations of a decline of 30%. Some banks noted it is likely provisions will start to recede.

U.S. – Fed confirms average 2% inflation; Consumer confidence declines; Durable goods orders beats expectations; Personal income and personal spending rise; Weekly jobless claims at 1M

Federal Reserve Chairman Jerome Powell spoke at the Jackson Hole Symposium last week introducing the Fed’s new target of an average rate of 2% inflation over time. This would set the bar of raising rates higher as it hints that the Fed will allow inflation to run higher and implies rates are likely to stay low for the foreseeable future. There was nothing on forward guidance this time around, but the topic is expected to be brought up at the next Fed meeting on September 16.

The Conference Board Consumer Confidence Index fell in August to 84.8 from 91.7 in July. The Present Situation Index fell to 84.2 from 95.9 while the Expectations Index fell to 85.2 from 88.9. Consumer confidence deteriorated with business and employment conditions in the month. Spending has been strong in recent months but optimism about financial prospects has declined.

Durable goods orders rose another 11.2% in July, following the 7.7% increase in June. Markets had expected only a 4.8% increase. The strength was concentrated in the vehicle and parts industry. Excluding transportation, orders only rose 2.4%.

Personal income rose 0.4% in July reflecting an increase in employee compensation as the economy reopens, moderated by a decrease in government social benefits. Personal consumption rose 1.9% in the month.

Weekly jobless claims came in at 1.0M for the week ending August 22, compared to 1.1M the week prior. Continuing claims for the week ending August 15 saw a slight decrease to 14.5M from 14.8M.

International – Germany ifo survey continues to increase; France inflation muted

The ifo Business Climate index rose to 92.6 in August from 90.4 in July. The Business Situation index rose to 87.9 from 84.5 while Business Expectations increased to 97.5 from 96.7. Companies continue to see an improvement in the current conditions with optimism also slightly increasing. Manufacturing continues to see improvements but overall conditions are still deemed to be poor. The trade sector has flatlined, and pessimism regarding the coming months lingers. The service and construction sectors reported improvements.

A preliminary reading shows inflation in France fell 0.1% in August. On a yearly basis, inflation has risen 0.2%. The lower inflation is linked to a downturn in manufactured products due to postponed summer sales and a slowdown in food prices.

Quick look ahead

Canada – Markit PMI (September 1); Labour force survey (September 4)

The Market Manufacturing PMI will kick off the month of September and is expected to show continued strength in manufacturing. However, the main focus this week will be the labour force survey. The labour market should continue to point towards a recovery. Markets forecast a net change in employment of 250K which would drop the unemployment rate to 10.2% from 10.9%.

U.S. – Fed Beige Book (September 2); Weekly jobless claims (September 3); Nonfarm payroll (September 4)

The Fed Beige Book will give more colour to the economic recovery and may provide important information on economic growth and labour market expectations.

As usual, weekly jobless claims will be of interest to watch but nonfarm payrolls will be the highlight. Markets expect the trend to continue and are forecasting a net 1.4M increase for August. The unemployment rate is expected to decrease to 9.8% from 10.2% in July.

International – China PMIs and Japan industrial production (August 30); South Korea exports (September 1); Eurozone retail sales (September 3); Germany factory orders (September 4)

The week starts off with a slew of PMIs from China for August that should show continued progress. The recovery in China has been mostly domestic so investors will be watching for any indication of stronger external demand. Heavy flooding has affected part of China which is a risk. We will also get readings of industrial production for Japan and August export data for Korea. Both are expected to have risen.

In Europe, we get July retail sales for the eurozone and July factory orders for Germany. Both are expected to continue their upward trend, though the pace of the rebound is likely to have moderated.

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