Weekly Market Pulse - Week ending December 4, 2020
Markets continued their ascent to another all-time high, notwithstanding moderating job growth in Canada and the U.S., as they looked forward to the eventual vaccine and fiscal stimulus. A US$900B bridge stimulus package looks to be within reach, but more political compromise is required. The S&P 500 rose 1.67%. The S&P/TSX Composite rose 0.72%.
Bond yields rose sharply on the optimism. No change is expected from the Bank of Canada meeting while the ECB is expected to announce a recalibration of its tools. The U.S. Treasury 10-year yield rose 13 basis point, ending the week at 0.97%. The Government of Canada 10-year yield rose 12 basis points ending the week at 0.80%.
Oil rose 1.23% as the OPEC+ coalition agreed to slowly ease production cuts, adding 500K barrels/day in January and then reviewing production monthly. Copper prices continue to gain 3.41% on China’s appetite. Both commodities were also fueled by the prospect of a stimulus deal in the U.S. Gold rebounded 2.86% following three weeks of decline.
Performance (price return)
As of December 4, 2020
Canada – Ottawa announces stimulus intentions; Record GDP expansion in Q3; Employment gain slows
Finance Minister Chrystia Freeland announced "the largest economic relief package for our country since the Second World War." The plan would invest between $70B to $100B (or 3-4% of GDP) over the next three years to stimulate the economy. Freeland says the spending would help jumpstart the recovery and would “[improve] Canadians’ quality of life and [power] our green transformation.” Specific details will be announced at the spring update.
GDP grew 0.8% in September. Goods-producing industries expanded 0.7% while services increased 0.8%. Overall GDP expanded by 40.5% annualized in Q3, missing expectations of 47%. The record increase in output was driven by a strong bounceback in manufacturing, retail, and wholesale trade. Relative to pre-pandemic levels, output still falls short by about 5%. Statistics Canada provided a preliminary estimate of a 0.2% increase in for October.
Employment rose 62K in November, following an 84K increase in October. The rise was driven by a 99K increase in fulltime employment while part-time employment registered a slight decrease. By sector, employment was stronger in the goods-producing industries as the lockdown measures hit harder in the services sector. Within services, employment in accommodation and food services and information, culture and recreation fell, though were offset by increases in professional, scientific, and technical services. The unemployment rate fell to 8.5% from 8.9% due to 317K unemployed who exited the labour force, but the figure remains 2.6 percentage points higher compared to last November.
U.S. – Fed Beige Book (December 2); Jobless claims (December 3); Non-farm payrolls (December 4)
The Fed Beige Book shows that the economy continued to modestly expand in November. Some districts reported seeing slowing growth as virus cases surged and employment overall rose, but the pace was slow. Business optimism remains high but has waned over the case count and both recent and prospective restrictions.
Non-farm payrolls rose 245K in November, following a 610K rise in October. Employment growth has moderated in recent months and was slowed by the surge in cases last month. Private payrolls rose by only 344K when compared to 877K in October. By sector, the strongest growth was seen in transportation and warehousing, professional services, and healthcare. The unemployment rate fell to 6.7% from 6.9%.
International – China PMI rises to 10-year high; Korea exports rise; Euro area CPI falls; Germany factory orders rise
The Caixin China General Composite PMI rose to a 10-year high of 57.5 in November from 55.7. In fact, the subcomponents output, new orders and employment all hit a 10-year high. Strong activity was reported in both services and manufacturing. The Manufacturing PMI rose to 54.9 from 53.6 and the Services PMI rose to 57.8 to 56.8. The growth momentum led to higher staffing, and firms reported stronger domestic and foreign growth though foreign demand continues to lag. Business confidence for the year ahead remains high, with companies widely expecting global conditions to recover from the pandemic.
Korea exports grew 4% year-over-year in November, compared to a drop of 3.6% the month prior. Strong demand for IT products continues to be the main driver. Biohealth products also gained, while exports of machinery fell as uncertainty hinders capital investment. The reading often used as a barometer of global trade suggests that global demand is holding up even as the virus case count increases.
Euro area inflation fell 0.3% in November as measured by the HICP, dragged lower by services and energy. Food prices rose 0.3% while goods prices were unchanged. The ECB had warned of weak inflation, and the reading may add to the case of more policy support at their meeting this week.
Germany factory orders rose 2.9% in October, following the 1.1% increase in September. When compared to prepandemic February levels, orders are 0.8% higher on the strength of the automotive industry. Domestic orders rose 2.4% while foreign orders rose 3.2%. Breaking down the foreign orders shows some weakness in the euro area, where orders only rose 0.5%. By type, capital goods saw the largest increase rising 3.8%, indicating capital investment could be picking up.
Quick look ahead
Canada – Bank of Canada meeting (December 9); Capacity utilization (December 11)
The Bank of Canada meeting will be the highlight this week. It is unlikely to make any changes, having directed its purchases towards longer-dated bonds last time. There may be more guidance on the timing of when the central bank will start scaling back those purchases.
Though a bit outdated, the official reading of capacity utilization for Q3 will released, expected to bounce back to 77.0% from 70.3% in Q2.
U.S. – CPI (December 10); University of Michigan Consumer Sentiment (December 11)
A rather light week for data in the U.S. CPI is likely to be muted in November, with market consensus of a gain of 0.1%. Consumer sentiment is also likely to have slipped.
International – China exports and Germany industrial production (December 7); China CPI, Japan machine orders, Germany ZEW survey (December 8); ECB meeting
China will release export and CPI data for November early this week. Exports are expected to continue to show strength with PMIs last week indicating accelerating foreign demand even amid the outbreaks. CPI in October had decelerated due to food prices, a trend expected to continue in November.
Japan machine orders are expected to rebound in October after declining the month prior. Early data shows some strength in capital investments, even though early forecasts had projected orders in Q4 to decline.
Germany industrial production for October is likely to post a small gain in line with factory orders that came out last week, and strong auto production should also contribute. Next, we have the ZEW survey as an early indicator of economic activity; the ZEW had fallen quickly as the coronavirus surged.
The key release next week is the ECB meeting. Having already hinted at more easing, markets will be watching how the central bank will recalibrate its tools to do so.