Weekly Market Pulse - Week ending September 4, 2020

Market developments

Equities:

Global stocks sold off this week led by the technology sector, ending five straight weeks of gains. The NASDAQ saw its worst single day drop since June. Equity momentum was running strong up to the first half of this week, driven by encouraging news on the vaccine front. Economic data this week were moderately positive, however, raising further concerns whether the recovery can continue at the same pace. The S&P 500 fell 2.31% while the S&P/TSX fell 2.92%.

Fixed income:

Bond yields initially fell on concerns of continued elevated uncertainty, offset after rising on strong job numbers in the U.S. and Canada. The Bank of Canada and ECB will meet this week. The U.S. Treasury 10-year yield was unchanged at 0.72%. The Government of Canada 10-year yield fell 4 basis points ending the week at 0.60%.

Commodities:

Oil fell 8.05% selling off on demand concerns going forward as well as with the equity rout. Gold prices fell 1.57% as demand moderated on more signs of a recovery. Copper gained 2.17% on hopes of a recovery combined with tightening supply.


Performance (price return)

Performance - Price return

As of September 4, 2020


Macro developments

Canada – Manufacturing PMI rises; Labour market improves

The Markit Manufacturing PMI increased to 55.1 in August, from 52.9 in July. Production continues to rise, with output linked to recovering market conditions. New orders also rose, and foreign demand signaled its first increase in 5 months. Employment gained due to efforts to alleviate capacity constraints as new orders come in and amid a growing backlog. Supply chain pressures however continued into the month, noting transportation issues because of COVID restrictions. Uncertainty surrounding the possible continuation of the pandemic continues to weigh on inventory purchases, but business sentiment remains positive as firms continue to foresee a rise in output over the coming year.

Employment rose 246K in August, following a 419K increase in July. The unemployment rate fell by 0.7% to 10.2% as a result. The growth was concentrated in full-time work which expanded by 206K. The labour market has recovered strongly since May, but employment is 1.1M or 5.7% below the pre-COVID February level. Those employed but worked less than half their usual hours also fell by 259K during the month. The total number of Canadians workers affected by the COVID-19 shutdown stood at 1.8M, from a peak of 5.5M in April.

U.S. – Fed Beige Book shows continued recovery with cloudy outlook; Trade deficit expands; Nonfarm payroll gains in August; Weekly jobless claims at 881K

The Fed Beige Book reports that economic activity continues to increase but remains below pre-pandemic levels. Consumer spending continues to pick up and the overall outlook was modestly optimistic, but “continued uncertainty and volatility related to the pandemic, and its negative effect on consumer and business activity, was a theme echoed across the country.” Employment overall increased, with some districts reporting slower job growth. Firms continue to report difficulty finding necessary labor, “a matter compounded by day care availability, as well as uncertainty over the coming school year and jobless benefits.”

The U.S. trade deficit expanded to US$63.6B in July, from US$53.5B in June. The reading is the largest since 2008. Exports increased in all sectors rising 8.1%, but imports had increased even more rising 10.9%. Gains in both imports and exports were driven by automobiles.

Nonfarm payroll employment rose 1.4M in August, following the 1.7M increase seen in July. Notable job gains were seen in retail trade, professional and business services, leisure and hospitality, and education and health services. The increase was also supported by a 238K hiring of temporary 2020 Census workers. The unemployment rate fell to 8.4%, from 10.2%. Temporary layoffs decreased by 3.1M to 6.2M, from a high of 18.1M reported in April. However, permanent job losers increased by 534K to 3.4M, 2.1M higher since February.

Weekly jobless claims came in at 881K for the week ending August 29, compared to 1.0M the week prior. The reading came in better than market consensus for 950k. Continuing claims fell to 13.3M, from 14.5M.

International – China PMIs expands further into expansionary; Japan industrial production rises; South Korea exports contract; Eurozone retail sales falls; Germany factory orders muted

The Caixin China General Composite PMI rose to 55.1 in August, from 54.5 in July. The reading is the second highest since December 2010, after June 2020. The General Manufacturing PMI rose slightly to 53.1 from 52.8 while the General Services PMI fell marginally to 54.0 from 54.1. Activity in both services and manufacturing continue to recover. In the manufacturing sector, production and new orders rose sharply with firms reporting the first increase in export sales in 2020. Within services, new orders growth is easing but remains strong with greater client numbers and resumption of projects in August. Service firms expanded their workforce for the first time since January, while staffing levels in manufacturing fell possibly indicating that employment had already stabilized as firms had previously noted large backlogs. Manufacturers also reported that vendor performance deteriorated in August often mentioning prolonged delivery times due to a lack of stock at suppliers. Overall, firms continue to anticipate improving market conditions, but many expressed concerns on the continued impact on operations and sales.

Japan industrial production rose 8.0% in July, following a 1.9% increase in June. The gains were driven by automobiles and IT-related products while machinery was a drag.

South Korea exports fell 9.9% year over year in August, following a 7.1% decline in July. Exports to all major trading partners (China, U.S., Japan, and EU) fell.

Euro area retail sales fell 1.3% in July even as containment measures were relaxed in many countries. The decrease was attributable to non-food products excluding fuel, led by textiles, clothing, and footwear which fell 25.8%.

Germany factory orders rose 2.8% in July, easing significantly from the 27.9% increase in June. The rise was driven by intermediate goods which rose 9.5%. Consumer goods orders was muted while capital goods orders slightly decreased.


Quick look ahead

Canadian and U.S. markets are closed Monday, September 7 for Labour Day.

Canada – Housing starts and Bank of Canada meeting (September 9)

Housing starts has been a bright spot for the Canadian economy, with the momentum expected to continue into August. There are no policy changes expected at the Bank of Canada meeting, likely to reaffirm its commitment to its asset purchase program. Markets are on the lookout for any hints on forward guidance.

U.S. – NFIB small business optimism (September 8); CPI (September 11)

The week starts with small business optimism which recovered strongly since the onset of the pandemic but waned in July. August CPI will be the main release this week. Gasoline prices had stabilized but the reopening of the economy continued which should have supported inflation. Operating costs related to the pandemic are also likely to contribute.

International – Germany industrial production (September 7); ECB meeting (September 10); UK GDP (September 11)

Germany industrial production has been solidly recovering from the lockdown but remained 12% below February pre-pandemic levels. The reading is likely to continue to gain, with consensus for a 4.5% reading for July following positive surveys and sentiment.

There are no policy changes expected at the upcoming ECB meeting. An updated forecast for growth and inflation may hint at next steps from the central bank and markets will be watching for any comments from President Lagarde on the Fed’s new policy framework tolerating higher inflation. There are also worries that the recent strength of the Euro could act as a headwind for spurring growth and inflation. Lastly, UK July GDP reading should strongly rise with reopening of the hospitality sector expected to provide a boost.

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