Weekly Market Pulse - Week ending September 18, 2020
The technology rout continues to weigh on stock markets, dragging the broader indices lower. The market was uninspired following the Fed meeting this week, where the central bank indicated interest rates will stay at zero until at least 2023. Investors are watching the continuing global resurgence in virus cases for a potential second wave and the possibility of additional fiscal stimulus from the U.S. The S&P 500 fell 0.64% while the S&P/TSX fell 0.14%.
Despite the fall in equities the bond market was relatively tame, even with the Fed's commitment to low rates for longer. The short end of the curve rose slightly while longer-term yields fell. The U.S. Treasury 10-year yield rose 3 basis points ending the week at 0.70%. The Government of Canada 10-year yield also rose 3 basis points ending the week at 0.58%.
Commodities had a strong week with oil rising 9.48% to US$40.90 a barrel, the highest level in two weeks. The falling U.S. dollar helped boost commodities. Copper gained 2.29% while gold was relatively flat.
Performance (price return)
As of September 18, 2020
Canada – Manufacturing sales rise; inflation stays flat and consumers spend more on services
July manufacturing sales rose 7.0% month-over-month led by a strong increase in auto production. Bloomberg consensus expected a 9.0% increase and manufacturing sales are still 5.4% below February’s pre-pandemic high, however it appears the government’s income support programs have helped drive a recovery in the consumer goods sector.
Inflation as measured by the CPI was essentially flat in August, rising 0.1% year-over-year. The weakness in inflation was driven by further deterioration in air fare prices which fell to -16.0% from -8.6% and weaker new passenger vehicle inflation falling from 3.2% to 2.2% in August.
Retail sales came in weaker than expected, rising just 0.6% month-over-month in July after a 23.7% increase in June. Core retail sales fell as households transitioned their spending back to services as the economy continues to reopen, while OpenTable data show an increase in restaurant visits.
U.S. – The Federal Reserve introduces new inflation targeting; industrial production and retails sales come in weaker than expected
Last Wednesday the Federal Reserve kept interest rates unchanged and confirmed near zero interest rates until 2023. The Fed also significantly revamped its forward guidance by adopting a new inflation-targeting framework which will include both inflation and the full employment targets. The Fed said that inflation will have to reach 2% and “moderately exceed” that level for some time before they raise interest rates with the added condition of a return to full employment.
U.S. industrial production increased 0.4% month-over-month in August versus a 3.0% month-over-month rise in July. Specifically, manufacturing rose 1.0%, however, it remains 7.2% off its pre-pandemic February level. Hurricane Laura also caused a temporary 2.5% month-over-month drop in mining production. The forward-looking New York Fed’s Empire Manufacturing Survey for September rose from 3.7 to 17.0, beating expectations of 6.9 and indicating more optimism for manufacturing in the short term. The Philadelphia Fed Business Outlook on the other hand dropped from 17.2 in August to 15.0 in September.
On the consumer side, August retail sales rose 0.6% month-over-month, weaker than the expected 1.0% gain, affected by the expiry of the enhanced unemployment benefits last month. Retail sales are performing better than manufacturing with the level of sales now 2.0% higher than the pre-pandemic level. Additionally, the University of Michigan Sentiment survey hit a 6-month high as consumers grew more upbeat about the economy’s prospects.
International – Chinese economic activity surprises to the upside; Bank of Japan indicates continuity while Bank of England considers negative rates; German ZEW survey hits a 20-year high
China’s economic activity indicators all surprised to the upside in August. Industrial production increased 5.6% year-over-year beating expectations of 5.1%. Retail sales recorded the first year-over-year increase since the pandemic started, gaining 0.5% year-over-year, and fixed asset investment shrank just 0.4% year-over-year. Unemployment also dropped from 5.7% to 5.6% in August, another encouraging sign that private demand is slowly returning in China.
The Bank of Japan kept its key interest rate at -0.1% and left its yield target and asset purchases unchanged. Governor Kuroda made it clear the continuity of monetary policy under the new prime minister is important and said there is no need to change the 2% inflation target. The Bank of England left interest rates unchanged and the minutes gave the clearest signal the central bank may consider dropping interest rates below zero. The BoE stated it will hold “structured engagement” with the Prudential Regulation Authority this year on how negative interest rates could be implemented.
Lastly the Germany ZEW survey for September increased to 77.4 from 71.5, beating expectations and reaching a 20-year high. The ZEW is not normally a market-mover, but last Tuesday’s reading gave a more positive narrative than the most recent German government economic report.
Quick look ahead
Canada – CFIB Business Barometer (September 24) and Throne Speech (September 23)
This week there are no major data releases; the only release is the CFIB Business Barometer on Thursday. As MP’s return to parliament the focus will be on the Throne Speech on Wednesday, which will outline the government’s legislative agenda.
U.S. – August Existing Home Sales (September 22); September Markit PMI (September 23); August Durable Goods (September 25)
Existing home sales for August come out Tuesday and markets expect the month-over-month change to fall to 2.7% from 24.7% in July. The preliminary September Markit PMI survey for both manufacturing and services are out on Wednesday which will show the level confidence in both sectors, though markets expect the surveys to be flat. Lastly, durable goods will highlight the amount of business equipment investment in the U.S. with markets expecting a 1.2% rise for August.
International – September Markit PMI surveys (September 22- September 23); ECB Governing Council members Speaking (September 22); Japan July All Industry Activity Index (September 23); Germany IFO (September 24)
We get the Markit flash PMI surveys across Europe and in Japan, the euro-area composite PMI was 51.9 in August, with readings in Italy and Spain both dropping below 50. Also, ECB Governing Council members Christine Lagarde, Fabio Panetta and Philip Lane are speaking this week with markets watching to see if the dovish stance from ECB members continues. Lastly in Europe, the German IFO survey, which is one of the best growth indicators for Germany, is released Thursday. Markets are expecting a rise in September to 93.8 from 92.6 in August.
China does not have any major economic releases while Japan’s All Industry Activity Index is released Wednesday. The broad gauge of Japanese industry activity is expected to rise 1.3% for July, slower than the huge 6.1% increase in June.