Weekly Market Pulse - Week ending September 11, 2020

Market developments

Equities:

The technology rout continued into the week weighing heavily on stocks, spilling into the broad equity market with valuation worries. Dovish central bank statements helped alleviate concerns of a continued recovery in demand, while fears of a renewed coronavirus wave was present as schools start and the weather gets colder. In the U.S., the Senate Democrats blocked a Republican US$300B COVID-19 stimulus bill which further adds to uncertainty. The S&P 500 fell 2.51% while the S&P/TSX rose a meager 0.03%.

Fixed income:

Bond yields fell on concerns of elevated uncertainty and as investors looked for safety. The U.S. Fed, Bank of Japan, and Bank of England will meet next week. The U.S. Treasury 10-year yield fell 5 basis points ending the week at 0.67%. The Government of Canada 10-year yield fell 5 basis points ending the week at 0.55%.

Commodities:

Oil continued selling off on demand concerts, dropping another 5.98%. Gold and copper prices held, gaining 0.34% and falling 0.30% respectively.


Performance (price return)

Performance - Price return

As of September 11, 2020


Macro developments

Canada – Bank of Canada says economy will require “extraordinary” policy support; Housing starts rise

The Bank of Canada left rates unchanged at 0.25% and agreed to continue its quantitative easing program. According to the central bank, “as the economy reopens, the bounce-back in activity in the third quarter looks to be faster than anticipated in July” and core funding markets are functioning well. However, there is still plenty of uncertainty as the economy recuperates and the BoC will continue to support the economy with “extraordinary” policy support, which suggests rates will stay lower for longer.

Housing starts were 262K in August, up from 245K in July, driven by strong multi-family starts in Ontario. According to the CMHC, “national starts [are expected] to trend lower by the end of 2020 as a result of the negative impact of COVID-19 on economic and housing indicators.”

U.S. – NFIB small business optimism increasing; CPI rises

The NFIB Optimism Index rose to 100.2 in August from 98.8 in July. The small business economy is improving with plans to hire increasing, but uncertainty about the future remains high. In terms of employment by sector, the construction and manufacturing continue to see strong growth, while the service sector continues to lag.

CPI increased 0.4% on a seasonally adjusted basis in August, following a 0.6% rise in July. On an annual basis, CPI increased 1.3%. The monthly increase was broad-based, driven by used cars and trucks and gasoline. Core CPI, excluding food and energy, also rose 0.4%.

International – ECB see receding deflationary risks; Germany industrial production posts modest growth; UK GDP recovery led by hardest hit sectors

As markets had expected, the European Central Bank left asset purchases and interest rates unchanged. A new forecast was released where 2020 GDP was revised higher, now expected to shrink 8.0% from 8.7% previously. President Christine Lagarde said that deflationary risks have receded since June. There is no goal of a target exchange rate and in the meantime the ECB will monitor the effect of the rising euro with respect to inflation. The ECB says it continues to stand ready to use all the tools it has available.

Germany industrial production rose 1.2% in July, following the 9.3% rise in June, missing market expectations of an increase of 4.5%. Production of goods rose 2.8%, while energy fell 0.6% and construction dropped 4.3%. Looking at the automotive industry, production rose 6.9% but remains 15% below February levels.

UK GDP rose by 6.6% in July, following an 8.7% increase in June. The gains were widespread in all sectors led by construction rising 17.6%, manufacturing expanding 6.3%, and services rising 6.1%. However, it is important to note these three sectors were the hardest hit. The latest reading means just over half of the lost output caused by the coronavirus has now recovered, and GDP remains 11.7% below pre-pandemic levels in February.


Quick look ahead

Canada – Manufacturing sales (September 15); CPI (September 16); Retail sales (September 18)

Canada is set to release July manufacturing and retail sales this week, which are expected to post gains of 9.0% and 0.7% respectively as the country continues to reopen. A continued rebound in the automobile industry is expected to contribute. The focus this week will be on August CPI, expected to rise 0.1%, as gasoline prices have held up strongly.

U.S. – Industrial production and Empire State manufacturing (September 15); Fed meeting and retail sales (September 16); Philadelphia Fed manufacturing (September 17)

The week starts off with industrial production for August, expected to have increased 1.0%, followed by a glimpse of the state of the manufacturing sector with the release of the Empire State and Philadelphia Fed manufacturing business outlooks.

The highlight of this week will be the Fed’s policy meeting as markets await the results of the policy framework review. Having already communicated a change in its rate policy to adopt a more flexible average inflation target of 2%, markets are looking for more clarification related to the framework. No rate changes are expected, and previous communications suggest the Fed does not believe explicit forward guidance is necessary at this point.

August retail sales are projected to rise 1.0%. Higher auto sales and gasoline prices should contribute, but with downside risks as government benefits had been reduced.

International – China industrial production and retail sales (September 15); Germany ZEW survey (September 16); Bank of Japan and Bank of England meeting (September 17)

Chinese August activity readings will kick off the week internationally. Retail sales are expected to have stabilized after falling in July, while industrial production is likely to continue to gain as economies globally improve.

As usual, the Germany ZEW survey will be watched as a good early indicator of growth.

Lastly, the Bank of Japan and Bank of England will hold policy announcements. There are no monetary policy changes expected but they will still be of interest to watch for any comments on the Fed’s recent inflation target shift, as well as hints of more easing later.

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