Weekly Market Pulse - Week ending October 23, 2020

Market developments


Markets dipped as the U.S. failed to agree on a stimulus package. The gap between Democrats and Republicans has narrowed to US$1.9T, but they are now at a standstill over specifics. Parts of Europe are reintroducing lockdowns as coronavirus cases soar. The S&P 500 fell 0.53%. The S&P/TSX Composite fell 0.82%.

Fixed income:

Yields rose sharply even with stimulus package delays. Markets are pricing in the likelihood of a large U.S. stimulus package as well as a Democratic sweep, winning the elections and a majority in the Senate, which could lead to more fiscal spending. The U.S. Treasury 10-year yield rose 10 basis points, ending the week at 0.84%. The Government of Canada 10-year yield also rose 6 basis points ending the week at 0.64%.


Oil prices fell 2.69% on prospects of Libya increasing supply. Gold prices were relatively unchanged, while copper prices continued to rise another 2.46% on supply concerns and strong Chinese demand.

Performance (price return)

Performance - Price return

As of October 23, 2020

Macro developments

Canada – Bank of Canada Business Outlook Survey shows improving conditions but weak sentiment;

The Bank of Canada Business Outlook Survey shows that although business conditions have improved with lockdown measures being lifted, sentiment remains weak. The Business Outlook Survey indicator rose to -4.1 in Q3 2020 from -10.4 in Q2 2020. Businesses now expect sales to increase from the current low levels where “the majority of firms expect the rebound in their sales to continue, but one-third of businesses anticipate their sales will not return to pre-crisis levels within the next 12 months.” Sales prospects are expected to be limited by weak demand and precautionary health guidelines. Credit conditions have also improved, but capital expenditure intentions are weak given the elevated uncertainty. Hiring intentions moved higher but remain below the historical average, suggesting that hiring plans are modest.

Retail sales in August rose 0.4%, following the 1.0% rise in July. The increase was led by strong sales at building material and garden equipment dealers rising 4.5% and food and beverage store sales increasing 0.8%. The advance estimate for September calls for sales to be relatively unchanged.

CPI fell 0.1% in September, following the 0.1% fall in August. The drop reflects a decrease in food prices, as well as gasoline prices. On a year-over-year basis, CPI rose 0.5%. Excluding gasoline prices, which fell 10.7% over the last year, CPI rose 1.0% year-over-year.

U.S. – PMI rises to 20-month high; Fed Beige Book shows optimism; Housing starts rise 

The IHS Markit Flash U.S. Composite PMI Index increased to a 20-month high of 55.5 in October, from 54.3 in September. The reading was driven by both services and manufacturing hitting a 20-month and 21-month high, respectively. The Flash Services PMI Index rose to 56.0 from 54.6, while the Flash Manufacturing PMI Index rose to 53.3 from 53.2. The pace of new business growth eased slightly with the ongoing impact of the coronavirus and others holding back until the upcoming presidential election. Overall activity outpaced new orders, and backlogs accumulated which reduced pressure on capacity and the need for hiring. Business confidence has picked up notably on sustained demand as political uncertainty and coronavirus restrictions ease this year.

The Fed Beige Book notes that economic activity continues to increase across all twelve Federal Reserve Districts, but activity varied greatly by sector. Consumer spending growth continues, but many districts have started noticing a leveling off. And yet the outlook remains generally optimistic. Employment also increased in almost all districts, but growth remains slow. Prices saw an increase with input costs outpacing consumer prices due to continued additional COVID-19 costs for firms, including protective and sanitation equipment, as well as technology required for remote work.

Housing starts rose to a seasonally adjusted annual rate of 1.42M in September, from the revised August estimate of 1.39M, driven by an 8.5% increase in single-family housing starts.

International – China GDP misses expectations; Chinese industrial production and retail sales growing strongly; Japan PMI shows companies coping marginally better; Eurozone PMI contracts

China GDP rose by 2.7% in Q3, following the 11.5% rebound in Q2. The reading was weaker than the consensus estimate of a 3.3% rise. On a year-over-year basis, Q3 GDP is up 4.9%. The miss was because of a weak service sector that continues to feel the effect of the coronavirus, while the manufacturing sector has returned to pre-pandemic growth levels.

Chinese industrial production in September rose to 6.9% on a year-over-year basis compared to 5.6% in August, reflecting the recovery of the manufacturing sector. Strong growth was seen in both the private and public sector.

Chinese retail sales rose to 3.3% year-over-year in September from 0.5% in August. Catering  services recovered strongly in the month, and auto sales continue to remain strong.

The Jibun Bank Flash Composite PMI came out marginally better at 46.7 in October, compared to 46.6 in September. The Flash Manufacturing PMI improved to 48.0 from 47.7, while the Flash Services Business Activity Index worsened to 46.6 from 46.9. Output continues to fall, with manufacturers fairing better and reporting a slowing pace, while the service sector saw further sharp decline. New business also slowed slightly, and backlogs declined. Employment in manufacturing fell marginally and was unchanged in services. Business expectations looking at the year ahead remains positive.

The IHS Markit Flash Eurozone PMI Composite Output Index fell to 49.4 in October from 50.4 in September. The second wave of infections have led to a renewed fall in business activity. Business activity fell back into contractionary territory due to a deteriorating services sector, even as manufacturing output strengthened. The Flash Services PMI fell to 46.2 from 48.0 while the Flash Manufacturing PMI rose to 54.4 from 53.7, reaching a 26-month high. Manufacturing saw new orders and backlogs rise, while the service sector experienced a steep fall. Employment continues to be cut in both sectors across the eurozone, albeit with the rate of losses easing. Businesses reported facing deflationary pressures as costs rise. Overall business optimism slipped in both sectors. By country, Germany was the only bright spot, showing some resilience, while the rest of the region fell deeper into decline.

Quick look ahead

Canada – Bank of Canada Rate Decision (October 28); August GDP (October 30)

The Bank of Canada meets Wednesday for its interest rate decision and will publish its quarterly Monetary Policy Report (MPR). On Friday we get August GDP with markets expecting a 0.9% month-over-month rise after a solid 3.0% gain in July.

U.S. – Durable Goods Orders (October 27); Q3 GDP (October 29); Personal Income and Spending (October 30)

Durable goods orders are reported Tuesday, highlighting investment in the U.S. Overall durable goods are expected to rise 0.5% month-over-month, while September capital goods orders are expected to rise 0.5% month-over-month after rising 1.9% month-over-month in August. September personal income is expected to rise 0.3% after falling 2.7% in July after stimulus ended, while personal spending is expected to stay flat.

Lastly, the focus this week will be on third quarter GDP, which is expected to rise 31.9% quarter-over-quarter after the 31.4% collapse in the second quarter.

International – China industrial profits (October 26); European Central Bank (October 29); Bank of Japan (October 29); Euro-area Q3 GDP (October 30)

China reports September industrial profits to give a picture of how the manufacturing sector is doing. In August, industrial profits were up 19.1%, and Bloomberg data shows an expectation for a slight deceleration to 18.8% based on a falling producer price index and decelerating exports in yuan terms, despite decent industrial production numbers.

The ECB meets Thursday, and President Christine Lagarde is expected to signal the bank is ready to increase the size of its asset purchase program. The Bank of Japan also meets Thursday, with expectations of no changes to policy, but a slight increase in GDP forecasts and lower inflation projections. 

We end the week with a slew of third quarter GDP numbers in Europe giving insight into the economic recovery as lockdowns eased throughout the summer. With high frequency indicators all pointing to a broad recovery across Europe, markets expect Q3 euro-area GDP to increase 9.5% quarter-over-quarter compared to a drop of 11.8% in Q2.

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