Financial News for the Week of January 29, 2021

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• Data on U.S. fourth quarter GDP showed the economic recovery continuing, but at much slower pace (4% annualized) than the previous quarter (33.4%).
• The Federal Reserve held its policy rate unchanged, and committed to doing all it can to support the recovery. It warned economic momentum has weakened with the spread of the virus.
• Vaccinations offer the best hope for faster growth. Assuming vaccine campaigns are successful, several months of cabin fever could lead to an even faster unleashing of spending than expected in the second half of this year.

Looking Back, Looking Forward

Not that anyone necessarily wants to remember it, but 2020 was a year for the record books. With U.S. GDP data for the fourth quarter released this week, we now have a complete picture of the economy’s performance during the pandemic-ridden year.

It was a wild ride. As lockdowns took effect in March, economic activity fell sharply. From the fourth quarter of 2019 to the second quarter of the year, real GDP declined by 10.5%, with the biggest drop over the March and April period. The rebound was almost as sharp, at least initially, with growth of 7.5% (non-annualized) registered in the third quarter. Progress, however, slowed in the fourth quarter to just 1.0%, as the virus spread worsened.

When all was said and done, the American economy ended the year 2.5% smaller than it started (Chart 1), though with huge disparities between industries and sectors. Parts of the economy least impacted by the virus – the production of things that you can consume at home (including the services provided by homes themselves) did even better than they would have without the health crisis. Durable goods consumption, including new and used vehicles, and new and existing home sales were particular bright spots. Higher-contact services, on the other hand, never had much of a recovery and are still well shy of pre-crisis levels (Chart 2).

Fortunately, as 2020 ended, vaccines offered hope that 2021 would be a year of solid economic rebound. Still, the virus is not done with us yet. New, more virulent strains are spreading even as vaccines are being distributed. As such, the economic outlook must be separated into two periods. The next few months will be defined by the struggle to contain the virus and vaccinate as many people as possible against it. As this continues, economic data will remain weak and the attention of policymakers on how best to support it.

This was the message delivered by the Federal Open Market Committee (FOMC) and its Chairman, Jay Powell, this week. While the Fed is aware of the potential light at the end of the tunnel, it is setting policy as if it is not sure when or if we will get there. As long as economic activity is weak, the policy rate will remain at rock bottom levels and asset purchases will continue apace.

Eventually, the Fed will have to go further in recognizing the potential upside to growth and inflation possible, as restraints on activity diminish. However, it has updated its strategy to allow itself to be more reactive than proactive to this change. With a short-term goal of pushing inflation above its medium-term 2% objective, the Fed is less concerned about allowing the economy to run hot.

This suggests a new balance of risks around the economic outlook. Assuming vaccination campaigns are successful, the second phase could surprise on the upside. Households with ample savings and several months of cabin fever could unleash an even faster pace of spending than expected. With businesses also shut down for several months, getting back up to capacity could be challenging. And, if you can’t meet all the demand at current prices, why not raise them?

Leslie Preston, Senior Economist | 416-983-7053

 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

by Connor Hare

Financial News for the Week of January 15, 2021

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• President-elect Biden unveiled a proposal for a new relief package this week. The $1.9 trillion plan includes additional one-time stimulus checks, unemployment benefit supplements and funding for state and local governments.
• Additional fiscal support will help bolster a faltering economy. Initial jobless claims rose by 181k last week to levels
  not seen since last summer, while retail sales fell 0.7% last month, their third straight month of decline.
• This week, Fed Chairman Powell brushed aside concerns about higher inflation and reiterated the central bank’s commitment to maintain an accommodative monetary policy stance until the economic recovery is complete.

New Year, New Stimulus

This week offered some welcome respite following the turbulent events that marked the start of the year. From an economic standpoint, the biggest news came from President-elect Biden’s address on Thursday as he unveiled a new $1.9 trillion coronavirus relief plan. The proposal, which will need to go through Congress, notably includes a round of $1,400 stimulus checks for individuals with expanded eligibility, a $400-per-week unemployment insurance boost through September, as well as funding for state and local governments. With eviction and foreclosure moratoriums set to expire later this month, Mr. Biden also called to extend these measures until September.

Additional fiscal support will go a long way toward breathing new life into a faltering economic recovery. Indeed, the heavy toll of the third wave of COVID-19 infections was on full display in economic data released this week. Initial jobless claims rose by 181,000 last week to levels not seen since last summer (Chart 1). This marked the largest weekly increase since last spring and suggests that layoffs are picking up speed. The near-term outlook is not particularly bright. The U.S. economy already lost 140,000 payroll jobs last month, mainly in the leisure and hospitality industry, which was hit hard by restrictions imposed across the country to curb the spread.

These difficult conditions are weighing on business confidence. In December, the NFIB small business optimism index plummeted by 5.5 points to 95.9 – one of the steepest drops in the survey’s history. The decline was driven by lower expectations for real sales, earnings trends and economic improvement in the near-future. This downbeat tone was also echoed in last month’s retail sales report. Sales contracted by 0.7% in December from the previous month, marking their third consecutive month of decline. They fell the most at nonstore retailers (-5.8%), electronics and appliance stores (-4.9%) and food services and drinking places (-4.5%). By contrast, sales at gasoline stations increased by 6.6% on the month.

Alongside stronger gasoline sales came higher prices at the pump, which lifted overall consumer prices in December. The headline Consumer Price Index (CPI) rose by 0.4% month/month, while the core series – which excludes volatile food and energy items – was more muted at 0.1% (Chart 2). On the whole, the pandemic continues to dampen consumer price growth, particularly for core services, which are now trailing their goods counterpart. This is a notably rare occurrence, which usually manifests itself on the heels of an economic recession.

Inflation will likely pick up later this year as vaccination rates increase and the economy gets back on track, but the Federal Reserve is in no rush to shift away from its accommodative monetary policy stance. This week, Chairman Powell brushed aside concerns about higher inflation, noting that the central bank has the tools to stave off unwelcomed price growth, though he doesn’t expect to use them anytime soon. What is more, Mr. Powell indicated that the U.S. economy is still a long way from a complete recovery. The message was clear – interest rates will remain low for the foreseeable future.

Johary Razafindratsita, Economist | 416-430-7126

 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

by Connor Hare

Financial News for the Week of January 8, 2021

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• Unprecedented events rocked the U.S. Capitol this week. Ultimately, Congress certified Joe Biden as the next President and President Trump agreed to a peaceful transition of power.
• The Democrats took control of the Senate by prevailing in both Georgia runoff elections. With all three levels of government now in the hands of Democrats, President-elect Biden will have a better shot at implementing his agenda.
• Economic data was a mixed bag. Vehicle sales ended 2020 on a solid footing and ISM indexes remained well in expansionary territory. However, job creation came to a halt in December, with payrolls falling by 140k.

Holiday Shopping Blues

Along with personal resolutions, the New Year tends to usher in a sense of hope. But, as the last few days have demonstrated, simply flipping the calendar does not guarantee a fresh start. Many of the issues that made 2020 a challenging year linger on. The health crisis is (still) front and center, with positive cases and hospitalizations surging to all-time highs (Chart 1).

Meanwhile, the unprecedented events at the U.S. Capitol on Wednesday shocked the country and the world. Still, in terms of the economic outlook, the biggest development on the political front was that Democrats narrowly took control of the Senate by prevailing in both Georgia runoff elections. With all three levels of government now in the hands of Democrats, Joe Biden will have a better shot at implementing his agenda.

The Biden election platform promised an ambitious spending agenda, funded by higher taxes (see report). A thin Senate majority will pose a challenge to several elements on the list, but increased spending to support the economy through the pandemic appears likely. Tax changes, such as the planned tax hikes on corporations and high-income individuals, appear less likely. While they can be rolled through in the budget reconciliation process with a simple majority, more conservative-leaning Democratic Senators would have to be on board, making it a harder sell than temporary supports to bridge the economy while vaccines continue to be rolled out.

Economic data was not all negative – vehicle sales ended 2020 on a solid footing and ISM indexes remained well in expansionary territory. However, after a solid seven-month run, job creation came to a halt in December, with payrolls falling by 140k (Chart 2). While plenty of industries still added jobs, including professional and business services, retail trade and construction, increased restrictions took a heavy toll on the leisure and hospitality industry (-498k), with the decline concentrated in bars and restaurants.

To surpass this latest pandemic-induced hurdle, the economy will need all the help it can get. The $900 billion relief bill that was passed in late December, which extends special emergency unemployment benefits for 11 weeks through to mid-March and provides $600 stimulus checks to both adults and qualifying children, will go a long way to supporting the economy in the near-term as restrictions keep many businesses shuttered. More help is likely on the way, with the new administration having pledged to boost the size of the stimulus checks to $2,000, among other things.

Overall, the combination of vaccinations and increased spending, suggests that 2021 should be a much better year than the one we left behind. Markets certainly seem to be in tune with this view, with risk assets shrugging off this week’s turmoil in the Capitol. That said, we are not out of the woods yet and there could be additional bumps along the road. New COVID-19 variants, which appear to spread more easily, pose an added downside risk. The new administration certainly has its work cut out for it.

Adkmir Kolaj, Economist | 416-944-6318

 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

by Connor Hare

Financial News for the Week of December 18, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• Prospects for fiscal stimulus drove volatility in equity markets this week. Policymakers are reportedly closing in on a much-needed relief package following several months of gridlock.
• Economic data released this week were less cheerful. Jobless claims rose to levels last seen in early September, while retail sales declined by 1.1% in November. Housing starts were the exception, increasing by 1.2% last month.
• The Fed reaffirmed its pledge to support the economy. It maintained its current policy stance this week, keeping the fed funds rate near zero and committing to more asset purchases.

Holiday Shopping Blues

It was a busy week for economic data. Financial markets, however, devoted their attention to the brightening prospects for a new stimulus bill. Indeed, following several months of gridlock, this week saw considerable progress on that front. News broke that lawmakers are racing to finalize a deal before next week’s recess, which helped lift market sentiment. At the time of writing, the S&P 500 was on track to end the week 1% higher.

By contrast, economic data released this week was decidedly less cheerful. Outside of a positive surprise coming from housing starts, the data continued to paint the picture of a faltering recovery. As discussed in our Quarterly Economic Forecast, a slowdown has been expected, given the surge in new coronavirus cases and the growing number of restrictions being implemented across the country. On the bright side, rollouts have officially begun for Pfizer’s vaccine. Meanwhile, Moderna’s is expected to receive approval very soon and could be made available as early as this weekend.

Back to the data, the strength in residential construction continues to impress. Housing starts rose by 1.2% in November, their seventh consecutive month of increases (Chart 1). Overall, starts have now rebounded within 1.3% of their healthy February-level. Unlike previous months, multi-family starts powered the gains last month, jumping 4% from October. As we discuss in a recent report, this segment of the market continues to face challenges due to shifting housing preferences toward bigger homes and more outdoor space. Nonetheless, single-family starts saw a more muted increase last month (+0.4%).

Despite its resilience, the construction sector’s outlook is softened by deteriorating affordability. In fact, construction costs have risen at the same time as inventories remained low. These factors could weigh on housing demand in 2021.

Less encouraging was the continued rise in initial jobless claims, suggesting that layoffs are picking up. Claims, which increased to 885,000 last week, were at their highest since early September. The November retail sales report was similarly disappointing. Sales fell by 1.1% last month (Chart 2), following a downwardly revised October reading (-0.1%).

By all accounts, the third wave of COVID-19 infections is weighing on this year’s holiday shopping season. Sales declined the most at clothing stores, alongside food services and drinking places which are most susceptible to be impacted by restrictions. By contrast, food and beverage stores, as well as building material retailers recorded positive sales growth last month.

The fragility of the economic recovery was acknowledged during this week’s Federal Reserve Open Market Committee (FOMC) policy announcement. Members unanimously voted to maintain the current policy stance, keeping the fed funds rate at its effective lower bound and committing to more asset purchases. The Fed reaffirmed its pledge to use the full array of policy tools at its disposal to support the economy until the recovery is complete. The missing piece of the puzzle is additional fiscal support. But, with that likely on the way, coupled with vaccines, the light at the end of the tunnel is finally looking a little brighter.

Johary Razafindratsita, Economist | 416-430-7126

 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

by Connor Hare