Weekly Market Pulse - Week ending December 18, 2020

Market developments

Equities:

Equities rose as markets continued to pin hopes on the U.S. stimulus package even as it was stalled. Meanwhile the Fed reiterated its support of the economy, stating its asset purchases would continue until “substantial further progress has been made.” Canada and the U.S. started rolling out the Pfizer-BioNTech vaccine, and now the Moderna vaccine could also soon be approved, which could accelerate the rollout. The S&P 500 rose 1.25%, hitting another all-time high. The S&P/TSX Composite fell 0.08%.

Fixed income:

Optimism in the markets pushed up bond yields. The U.S. Treasury 10-year yield rose 5 basis points, ending the week at 0.95%. The Government of Canada 10-year yield rose 4 basis points ending the week at 0.75%.

Commodities:

The vaccine rally continues in the reflationary commodities such as oil and copper, with gains of 5.39% and 3.01% respectively. Gold prices rose 2.26% on the weakening U.S. dollar.


Performance (price return)

Performance - Price return

As of December 18, 2020


Macro developments

Canada – CPI edges up; Retail sales rise; Manufacturing sales increase

CPI in November rose 0.1%, following the 0.4% increase in October. On a year-over-year basis, prices rose 1.0%. The strongest contributors were food and shelter, rising 0.4% and 0.3% respectively. Energy prices dragged with gasoline prices falling 1.5%. Core CPI which excludes food and energy rose 0.2%.

Retail sales in October rose 0.4%. Statistics Canada’s preliminary estimate was for sales to be unchanged. Growth was driven by vehicles and parts dealers, where sales rose 1.5%. On an aggregate basis, sales rose in 6 out of 11 subsectors. Statistics Canada estimates that sales were relatively unchanged in November.

Manufacturing sales rose 0.3% in October, following the 2.2% increase in September. Paper and petroleum and coal products drove the growth.

U.S. – Fed policy left unchanged; PMI moderates; Industrial production gains on manufacturing

The Fed left monetary policy unchanged. Markets were focused on forward guidance but there was little new. The Fed did say it would continue its asset purchase program until “substantial further progress has been made,” but did not provide any specific measures. The Fed’s economic projections were also released, with upward revisions to GDP and downward revisions to the unemployment rate in 2020, 2021 and 2022. Inflation expectations were also slightly revised upward, though inflation is still only expected to hit 2% in 2023.

The IHS Markit Flash U.S. Composite PMI fell to 55.7 in December, from 58.6, continuing to signal a solid expansion. The drop was due to the Services PMI, which was hit hardest by restrictions, falling to 55.3 from 58.4. Services providers noted that clients expressed hesitancy in placing new orders. The Manufacturing PMI retreated just slightly to 56.5 from 56.7. Looking ahead, business confidence moderated but remains high.

Industrial production rose 0.4% in November. Manufacturing production rose 0.8%, with vehicles and parts driving half of the gain. Mining production rose 2.3%, while utilities output declined 4.3% due to unseasonably warm weather. Overall production remains 4.9% below pre-pandemic levels.

International – China industrial production and retail sales rise; Bank of Japan announced monetary easing review; Japan PMI nudges down; Eurozone PMI rises sharply

Chinese industrial production rose 7.0% year-over-year in November, little changed from 6.9% in October. Manufacturing output continues to show strength, and by industry, the strongest gainers were pharmaceuticals, special equipment, and computers and communications.

Chinese retail sales rose 5.0% year-over-year in November, from 4.3% in October, with a broad-based recovery in consumer goods.

The Bank of Japan extended its pandemic support programs by 6 months to September 2021 at the meeting. More importantly, bank governor Kuroda announced the bank would “conduct an assessment for further effective and sustainable monetary easing” in order to achieve the 2% inflation target. The findings will be available at the March meeting.

The au Jibun Bank Flash Japan Composite PMI fell slightly to 48.0 in December, from 48.1. The Services PMI fell to 47.2 from 47.8, while the Manufacturing PMI strengthened to 49.5 from 48.8. Service firms saw new business contract sharply and exports decline. In the manufacturing sector, new orders and output continued to fall, but employment in manufacturing rose for the first time since February, albeit marginally. Business expectations softened but remain robust.

The IHS Markit Flash Eurozone PMI rose to 49.8 in December from 45.3. The Services PMI rose sharply to 47.3 from 41.3 and the Manufacturing PMI also increased to 56.6 from 55.3. The services sector remains contractionary for a fourth month, but the decline eased significantly. Manufacturing meanwhile picked up, seeing an increased rate of growth of new orders and exports. Employment continues to fall but decreased at the slowest rate since the pandemic began. By country, Germany remains the only one expanding. PMIs in France jumped to 49.6 from 40.6, showing stabilizing activity, but the rest of the eurozone reported a more substantial contraction.


Quick look ahead

Many markets globally are either closed or will close early for Christmas Eve and are closed on Christmas day.

Canada – GDP (December 23)

A light week of economic releases during the holidays. GDP in October is estimated to grow 0.2% according to the preliminary view of Statistics Canada. More importantly, markets will be looking toward the preliminary estimate for November.

U.S. – Consumer confidence (December 22); Durable goods orders and personal income and spending (December 23)

Consumer confidence dropped steeply in November with the resurgence of the virus and heightened restrictions, and is unlikely to have changed this month. The reading may surprise with recent vaccine developments, but the lack of any fiscal stimulus is also a factor. The momentum seen in durable goods orders should continue in November, with consensus expectations of a 0.6% increase, as the manufacturing sector continues to show strength.

Personal income and spending in November are both expected to have fallen given the recent weakness in labour markets and reduced unemployment benefits.

International – Brexit talks

Also a light week of data internationally. The main topic to be watching is for any Brexit trade developments, with the UK set to leave the EU on December 31.

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