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Weekly Market Pulse - Week ending September 24, 2021

Market developments

Equities:

Markets ended the week mixed, impacted by considerable volatility. Worries of slowing Chinese growth were amplified by the potential default of real estate giant Evergrande Group. Markets started the week in the red, reflecting concerns that the default could see ripple effects of tightening credit conditions and further growth deceleration. However, sentiment reversed as Chinese authorities stepped in. The People's Bank of China injected liquidity of a net 370B yuan through reverse repos (security purchases from commercial banks with an agreement to sell them back) over the week.

Fixed income:

Yields rose sharply following the U.S. Federal Reserve meeting, affirming it was moving closer to a formal tapering announcement even with the slowing recovery. Chairman Jerome Powell said it could be as early as the next meeting. At the same time, Bank of England minutes also showed more appetite from central bankers for a rate hike.

Commodities:

Oil prices gained for the week. Outages following Hurricane Ida storm damage continued to halt production, while U.S. crude oil inventories continued to post their seventh weekly consecutive drawdown.

Performance (price return)

As of September 24, 2021

Macro developments

Canada – Retail sales decline

Retail sales fell 0.6% in July, following a 4.2% increase in June. Sales declined at food and beverage stores and building material and gardening equipment dealers. On the other hand, clothing, furniture, and motor vehicle sales rose. Statistics Canada estimates retail sales rose 2.1% in August.

U.S. – Fed sees tapering announcement as soon as next meeting; Markit PMI declines

The U.S. Federal Reserve noted that economic activity and employment have continued to strengthen. Growth for the year was downgraded to 5.9% in 2021, from 7.0%, and unemployment was expected to end the year higher at 4.8%, compared to 4.5% previously. 2021 inflation forecasts, as measured by personal consumption expenditures, rose to 4.2%, from 3.4%. Supply bottlenecks are lasting longer than expected, slowing growth and increasing inflation. Despite the slowing recovery, the Fed stated that if progress continues broadly as expected, “a moderation in the pace of asset purchases may soon be warranted.” During the press conference, Chairman Jerome Powell said that the “substantial further progress” goal required for tapering could be deemed to be met as soon as the next meeting. In that case, Powell expanded that a gradual tapering process that ends the middle of next year will likely be appropriate if the economy continues at its current pace. Tapering, however, would not be determinant of the timing of the interest rate increase, which follows a more stringent test that most Fed members expect to be met by the end of next year. It is important to note that all of this assumes that the economy continues at its current expected pace, and any derailing from this base case could see this timeline delayed. The Fed continues to watch the effects of the Delta variant, which the central bank noted is changing job market dynamics as healthcare worries resurface and childcare remains an issue as schools are at risk of closing. The updated dot plot sees rates rising to 0.3% in 2022, 1.0% in 2023, 1.8% in 2024, and a long-term interest rate of 2.5%.

The IHS Markit Flash U.S. Composite Purchasing Managers’ Index fell to 54.5 in September, from 55.4 in August. The manufacturing PMI fell to 60.5 from 61.1, and the services PMI fell to 54.4, from 55.1 The reading continues to signal solid expansion in output, though activity slowed. Export growth remained strong in manufacturing but slowed in services as virus restrictions impeded activity. Firms reported only a marginal increase in employment, and pressures on capacity saw backlogs rise rapidly. Supply chain disruptions saw costs rise at a sharp pace. Optimism is still elevated on hints of strong consumer demand.

International – Bank of Japan meeting policy unchanged; Bank of England sees strong case for a hike; Japan’s PMI rises but remains contractionary; eurozone PMI moderates again from highs

The Bank of Japan left policy unchanged and reaffirmed additional easing could come if required. Overall, the central bank scaled back their production and export forecasts on continued supply chain constraints but maintained their view that the economy will continue to trend higher as higher vaccination rates support a recovery.

The Bank of England kept rates steady and policy makers voted to keep bond purchases unchanged. The meeting minutes did indicate a less stimulative stance from committee members, bringing forward a stronger case for a hike as inflation is expected to peak above 4% this year.

The au Jibun Bank Flash Japan Composite PMI rose to 47.7 in September, from 45.5 in August. The services PMI jumped to 47.4 from 42.9, while the manufacturing PMI moderated to 51.2 from 52.7. The services sector continues to contract, though at a much softer pace. Similarly, manufacturing order growth and output fell into contractionary territory. Nonetheless, job creation was strong for the month as firms expect the short-term disruption due to COVID-19 to pass as restrictions are currently scheduled to be lifted at the end of September.

The IHS Markit Flash Eurozone PMI fell to 56.1 in September, from 59.0 in August. Business activity continues to moderate over concerns of the Delta variant tempering demand and disrupting supply chains. The manufacturing PMI fell to 58.7 from 61.4 and the services PMI fell to 56.3 from 59.0. Growth levels decelerated, with slower production primarily linked to supply chain constraints also affecting service providers. At the same time, backlogs rose sharply, indicative of supply constraints, and delivery times lengthened considerably. These shortages fed into costs, with input prices rising to the sharpest rate since 2000. Employment growth moderated but remains historically high.

 

Quick look ahead

Canada – CFIB Business Barometer (September 30); GDP and Manufacturing PMI (October 1)

In Canada, the CFIB business barometer will provide an update on small business confidence. A repeat of last month is likely given the continued rise in cases, where sentiment was net neutral as easing and reintroduction of restrictions differed between regions and sectors causing mixed reactions.

GDP is expected to show a slight decline in July, on weaker consumption in the month in line with the weaker retail sales reading.

The Markit Manufacturing PMI should continue to show robust growth, with supply chain issues straining output.

U.S. – Durable goods orders (September 27); Conference board consumer confidence (September 28); Personal income and spending (October 1)

Durable goods orders are expected to have risen 0.6% in August on strong equipment spending.

Consumer confidence for September will be closely watched as it could be dominated by Delta variant risks. Consumer sentiment has taken a turn in recent months, with subdued economic expectations and lower purchasing intentions.

Personal income is forecasted to continue to climb in August, though just a slight 0.2%. Declining government benefits will be offset by increases in wages and salaries. Spending is also expected to have advanced, on the continued reopening though a rising case count could have been detrimental to services spending.

International – Chinese industrial profits (September 28); China’s PMI and Japan’s industrial production (September 29); South Korean exports (September 30); Eurozone CPI (October 1)

Chinese industrial profits will provide some insight on the health of private firms, amidst worries of a Chinese slowdown. Profit growth is expected to come at 16.0% year over year for August, as higher prices should help cushion declines from lost output.

China’s September PMI readings will be equally as important to watch. Investors will look for signs of stabilizing growth following a disappointing reading last month.

Japanese industrial production is likely to have declined in August. The usual supply disruptions and wider spreading containment measures in the month should have weighed on production.

South Korean exports for September are expected to continue its momentum despite international COVID disruptions. Market consensus is for a 20.3% year-over-year increase for the month.

Eurozone headline consumer price index inflation could rise another 0.5% in September. Soaring commodity prices will provide further upside pressure. Travel-related prices usually see some decline seasonally for September, but with travel quickly recovering prices could have risen. If accurate, the year-over-year reading will have accelerated to 3.3%, the highest in over a decade.

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This material is for informational purposes only. While this material has been compiled from sources believed to be reliable, Qtrade Investor does not guarantee the accuracy, completeness, timeliness or reliability of this information. Information, figures and charts are summarized for illustrative purposes only and are subject to change without notice. All investments are subject to risk, including the possible loss of principal.