June 15-19, 2020
What happened last week
Markets made gains despite fear of a COVID-19 resurgence
Stock markets charged upward on Monday and Tuesday, spurred by news that the Trump administration may roll out an additional US$1 trillion in economic stimulus, and that the U.S. Federal Reserve will begin buying individual corporate bonds under one of its previously announced emergency lending programs. A better-than-expected report on U.S. retail sales that showed an 18% increase over April – the largest monthly gain since 1992 – also contributed to the market gains.
Momentum slowed through Wednesday and Thursday as concern over rising COVID-19 cases in parts of the U.S. and China weighed on markets, along with the weekly U.S. jobless claims report that indicated 1.5 million Americans applied for unemployment benefits during the previous week – a week-over-week decline, but higher than economists had forecast.
Equities jumped again early Friday on news that China was accelerating its purchase of U.S. farm goods in compliance with the first-phase trade agreement between the economic superpowers. The TSX, Dow Jones Industrial Average and S&P 500 were within 10% of reaching positive territory on a year-to-date basis, and the red hot, tech-heavy Nasdaq was up over 10% on the year.
Investors contemplated the shape of market recovery
With stock markets up over 40% from the March lows, and in sight of all-time-record highs, investors have begun debating what shape the economic recovery will take – will it look like a U, a V, a W, or will it be more like a swoosh? “To date, the V shape has been most evident in equities, with the devastating decline followed by the huge rally to current levels,” said Bill Onslow, Vice-President, US Equities at Addenda Capital Inc. “With corporate earnings falling, market valuation levels are stretched, and a period of consolidation (or pause) appears warranted. Bonds have been stellar performers through the period, as interest rates have plunged and are likely to remain low for an extended period. Both equities and bonds have benefitted from the unprecedented monetary- and fiscal-policy stimulus triggered to combat the virus.”
Taking a broader outlook, Onslow believes an economic recovery should emerge in the second half of the year as policy measures start to work. He notes, however, that: “The severe and uneven impact of the shutdown across the economy will be evident in second-quarter Gross Domestic Product and job losses, which, barring a catastrophic second wave, should represent the low point of this recession. The economy is unlikely to return to pre-virus levels until well into 2021.”
Statistics Canada reported negative inflation for the second month in row
According to Statistics Canada, the annual rate of inflation as measured by the total Consumer Price Index (CPI) fell by 0.4% in May – further than economists had forecast – as COVID-19 lockdowns continued to stifle the economy. It was the second straight month with negative inflation, following a 0.2% drop in April. Lower gas prices contributed the most to the decline, offsetting food prices, which posted the largest increase among the major economic components. Excluding gas, the CPI rose 0.7%, the smallest increase since January 2013. Inflation is a key economic indicator that the Bank of Canada seeks to keep within a target range of 1% to 3% through its monetary policy. While total CPI was negative in May, the bank’s preferred measure (known as “CPI common”), which filters out price movements that might be caused by factors specific to certain components, came in at 1.4%.
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 June 19, 2020. Sources: www.bloomberg.com, www.msci.com, www.bankofcanada.ca and www.treasury.gov.
Economic reports: Expect markets to react to various reports covering U.S. housing, manufacturing, oil production, employment, trade and consumer spending, which will be released throughout this week.
Circle these dates
- July 6: Bank of Canada Business Outlook Survey results
- July 8: Federal economic update (Canada)
- July 15: Bank of Canada Interest-Rate Announcement and Monetary Policy Report
- July 28-29: U.S. Federal Reserve meetings and statement
- Nov. 3: U.S. presidential election
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