May 3 to 7, 2021
What happened last week
Investors shifted between sectors, amid mixed signals on economic recovery
Apart from the tech-heavy Nasdaq, which struggled early in the week, North America’s benchmark equity indexes made gains, with the TSX, S&P 500 and Dow Jones Industrial Average closing the week at record levels. Investors kept a cautious eye on key indicators, watching for signs of inflation, as economies around the world took tentative steps toward reopening.
Weak performance in the technology sector weighed on equity markets early in the week (the Nasdaq, in particular), as investors moved their assets into sectors set to benefit the most from reopening economies.
Data released on Monday showed that manufacturing activity in Canada and the U.S. continued to grow in April – with activity in Canada growing for a tenth-straight month (albeit at a slower rate, after reaching record levels in March). Manufacturing growth in the U.S. also slowed in April. The reports from IHS Markit in Canada and the Institute of Supply Management in the U.S. indicated that suppliers struggled to keep pace with pent-up demand, due to supply-chain disruptions from ongoing pandemic restrictions, and that rising costs were being passed on to consumers.
News that parts of the U.S. and the EU were getting ready to lift pandemic lockdowns in the coming weeks, along with reports that the G20 economies were considering the creation of vaccine passports to boost travel and tourism, helped to push global oil prices higher. The price per barrel for West Texas Intermediate approached US$70 mid-week, reaching its highest level since March. This gave energy stocks a boost and helped stock markets stem earlier losses from their technology sectors.
The U.S. Treasury Secretary startled markets, with interest-rate speculation
Inflation, and its potential to force central banks to raise interest rates sooner than expected, remained a top-of-mind concern for investors. Financial markets started a mid-week slide on Tuesday, after an interview with U.S. Treasury Secretary Janet Yellen was released online. In it, she speculated: “it may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat.” The comment, which contradicted recent statements from the U.S. Federal Reserve, surprised investors and helped to accelerate market losses on Tuesday. Yellen (a former Federal Reserve chair) clarified her comments later, explaining that “It’s not something I’m predicting or recommending. If anyone appreciates the independence of the Federal Reserve, I think that person is me.” Yellen added that, while she didn’t anticipate persistently higher inflation, the central bank has the tools to deal with it, if needed.
The pace of U.S. and Canadian employment growth pointed to slower recovery
U.S. stock markets strengthened on Thursday, and the Dow Jones Industrial Average reached a record high, after data released by the U.S. Department of Labor (the previous week) showed that weekly jobless claims continued to fall – to a new pandemic low.
The story flipped on Friday morning, following the release of jobs data for the month of April. It showed that the U.S. economy added 226,000 jobs – far below economists’ expectations. A separate report from Statistics Canada also disappointed, revealing that the Canadian economy lost 207,100 jobs in April, as tighter economic restrictions came with a devastating third wave of COVID-19 infections.
Equity markets continued to make gains on Friday, following these reports. But it was now technology stocks leading the way, as investors anticipated a slower recovery, and reduced risk that central banks would be in a hurry to raise interest rates.
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 May 7, 2021. Sources: www.bloomberg.com, www.bankofcanada.ca and www.treasury.gov.
U.S. economic data: Multiple reports, set for release this week, will offer insight into different aspects of the U.S. economy, including inflation, oil and energy supply, employment, retail sales, and manufacturing.
Circle these dates
- May 17: Bank of Canada Financial System Review released
- May 24: Canada’s TSX closed for Victoria Day holiday
- May 31: U.S. markets closed for Memorial Day holiday
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