August 16 to 20, 2021
What happened last week
Disappointing economic data drove uneven performance
Following a frenetic day of trading on Monday, the Dow Jones Industrial Average and the S&P 500 managed to recover from intra-day declines to close at record highs. North American investors awoke to reports of slowing economic activity in China, with the nation’s industrial production increasing by just 6.4% year-over-year in July, down from 8.3% in June, and lower than analyst expectations for a 7.8% rise. Retail sales data showed an uptick of 8.5% in July from the same period a year ago, but fell below the 12.1% increase in June. China’s economy, which has returned to pre-pandemic growth levels, appears to be cooling off as the country deals with fresh COVID-19 outbreaks and extreme weather that has impacted factory output, along with rising costs and supply bottlenecks. Data released earlier this month showed export growth, a key driver of China’s economic recovery, slowed in July. To start the week, investors also grappled with geopolitical concerns in Afghanistan and a report from the Wall Street Journal that the Fed was nearing an agreement to scale back monetary policies.
U.S. economic data and the Fed meeting minutes fueled a multi-day slide
Tuesday began with news of slower-than-forecast retail sales data in the U.S. – falling by 1.1% in July. American markets also had to digest a 7% decline in new home builds, along with the minutes from the Fed’s July meeting, which showed policy-makers disagreed on employment benchmarks and economic support. This news caused a choppy few days of trading mid-week with the Dow and the S&P 500 falling from record highs, and the Nasdaq riding out a three-day slide. Economists had expected a 0.3% increase in retail sales following a 0.7% increase in June. The reversal seemed to indicate a consumer shift away from merchandise and online purchases in favour of services that were unavailable throughout pandemic-related lockdowns.
At the conclusion of the Fed’s July meeting, policy-makers said they still had faith in the economic recovery, but the minutes also showed disagreements on how long the bank should wait before tapering its monetary policies. Several participants said the current policy measures are still needed to support the labour market, while others felt the Fed had little left to contribute.
Canadian inflation soared to highest level in 10 years
On Wednesday, Statistics Canada revealed that July’s inflation reading hit its highest level since May 2011. The consumer price index rose 3.7% from a year earlier, even higher than economist predictions after a 3.1% increase in June. Canada hasn’t had an inflation reading higher than 3.7% since 2003. This marks the fourth straight month that inflation has come in above the Bank of Canada’s 1% to 3% control range. The news arrived on the heels of Prime Minister Justin Trudeau’s call for a snap election on Sept. 20. Accelerating consumer prices present a challenge for Trudeau’s campaign, providing fodder for the Conservative opposition to suggest the Liberal government’s debt-financed spending plans are a root cause for rising inflation.
Both the looming federal election and the consumer price index report factored into a losing week for the TSX. Another major contributor was declining crude oil prices, which fell 6% throughout the week, reaching its lowest level since May. Flare-ups of the Delta variant, the prospect of reduced demand and reports of the Fed tapering monetary support drove losses for the energy sector and oil prices.
Statistics Canada released retail sales data on Friday, which showed growth of 4.2% in June as businesses reopened and restrictions lifted, but preliminary numbers for July stood in sharp contrast, indicating a 1.7% decline.
The stock and bond market*
|Dow Jones Industrial Avg.
|S&P 500 Index
|10-yr GoC Yield
|10-yr U.S. Treasury Yield
|WTI Crude Oil (US$/bbl)
|Bank of Canada Prime Rate 2.45%
*Weekly performance ending August 20, 2021. Sources: www.bloomberg.com, www.bankofcanada.ca and www.treasury.gov.
Jackson Hole Economic Symposium: Investors will be watching closely for news out of the Fed’s annual retreat that brings together top central bankers and economists. The event is scheduled to be held in Jackson Hole, Wyoming, from August 26 to 28.
Circle these dates
- September 6: Canadian and U.S. markets closed for Labour Day
- September 8: Bank of Canada interest-rate announcement
- September 20: Canadian federal election
- September 21 to 22: U.S. Federal Reserve meetings and statement
This article is provided as a general source of information for a specific point in time and should not be considered solicitation to buy or sell any investment. Nothing contained in this article constitutes investment, legal, tax or other advice.
The Co-operators® is a registered trademark of The Co-operators Group Limited and is used with permission.