Financial News for the Week of December 4, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• Financial markets remained upbeat this week, looking past the near-term risks associated with the ongoing health crisis.
• Economic data delivered a mixed bag. Both ISM activity indexes remained in expansionary territory and jobless claims showed improvement, but nonfarm payrolls disappointed with lower-than-expected gains in November.
• The surge in infections is expected to continue until early January. Fortunately, prospects for additional fiscal supports brightened this week, which would go a long way to supporting the recovery into the New Year

U.S. – December Calm Before the Storm

The first week of December brought a mixed bag of economic and financial data. On the financial front, the S&P 500 continued to defy gravity, setting a record high almost every day of the week despite soaring cases of coronavirus infections and related deaths. Markets looked past the near-term risks associated with the continued health crisis and focused on the positives. The “reopening trade” that started with positive vaccine news continued into the fourth week, while renewed hopes of an additional fiscal package added fuel to the fire. The likelihood of a deal before the end of the year improved this week, as news broke of a $908 billion compromise offered by a bipartisan group of Senators.

On the economic side, the data was rich this week. The Institute for Supply Management released November updates for its manufacturing and non-manufacturing purchasing managers indexes. Both indexes posted moderate declines but remained in expansionary territory, indicating a slowing but still positive pace of improvement (Chart 1). The slowdown in manufacturing was driven by new orders, production and inventories, while the employment sub-index moved back into contractionary territory just one month after posting an above-50 reading in October. Overall, the index remains at the high end of historical readings, suggesting that manufacturing demand remains strong for most sectors. The recovery in services, meanwhile, continued for the sixth month in a row despite increased restrictions across several states in November. Sectors sensitive to social distancing measures remain in contraction and are unlikely to get a recovery boost until more progress is achieved in defeating the pandemic.

On the employment front, the data was mixed. Last week’s jobless claims declined after a two-week consecutive increase. However, the reading may be overstated due to processing complications during the Thanksgiving holiday. To make matters worse, the weekly claims report came under scrutiny due to a GAO report noting “flawed estimates of the number of individuals receiving benefits.”

The November nonfarm payrolls report was more in tune with the epidemiological data. Employment rose by 245k – roughly half the amount that economists expected. Employment gains were particularly modest in the leisure and hospitality sector, which remains one of the most badly hit sectors of the economy (Chart 2). The unemployment rate fell to 6.7% from 6.9% but was marked with a sizeable decline in the labor force. The number of people not counted as unemployed but who want a job rose by almost 450 thousand to 7.1 million, 2.2 million more than in February 2020.

Moderate employment data provides more evidence of a bifurcated recovery, suggesting that more relief measures are required to support American households that are struggling in this pandemic. According to the most recent Household Pulse Survey 32% of families reported some difficulty paying for usual household expenses during the coronavirus pandemic. As the surge in infections is not expected to wane until at least early January, there is a strong case for additional fiscal supports. Fingers crossed the message appears to be getting through.

Maria Solovieva, CFA, Economist | 416-380-1195

 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 November 20, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• COVID-19 concerns took center stage again this week as cases surged to new daily records. This overshadowed optimism on vaccine progress and mostly positive economic data, with U.S. equity markets trending modestly lower as a result.
• Retail sales grew by 0.3% in October, extending their winning streak. Housing market data meanwhile continued to surprise on the upside, with existing home sales up 4.3% on the month and housing starts up 4.9%.
• Signals from the labor market were not quite as upbeat, with initial jobless claims recording a mild increase to 742k last week from 711k the week earlier.

 It’s Always Darkest Before the Dawn

Concerns around the spread of COVID-19 took center stage once again this week as infections surged to new records. Optimism over vaccine progress and broadly positive economic data generally played second fiddle. Equity markets trended modestly lower on the week as a result.

On the economic data front, retail sales improved by 0.3% in October, extending their winning streak to six months. The outturn, however, was below market expectations and a marked deceleration in the pace of gains from the 1.5% averaged in the three months prior. Within this slowing trend, there’s a noticeable shift toward online shopping. Sales at non-store retailers, a proxy for online sales, appear to be taking the lead once again as in-store sales moderate – a divergence that is in line with the third wave of COVID cases (Chart 1).

Home sales, meanwhile, continued to be robust in October. Existing home sales defied market expectations, rising by 4.3% (Chart 2). The growth in resale activity over the past several months has been nothing short of remarkable. Sales are now up nearly 27% from year-ago and 19% from the pre-crisis peak. The number of homes for sale, on the other hand, is in short supply. At the current sales pace, there is just 2.5 months of supply on the market - a record low. With such little product for homebuyers to choose from, the median sales price accelerated further, to 15.5% year-over-year. The strong acceleration in home price growth has overwhelmed the positive impact of record-low mortgage rates on housing affordability. The combination of deteriorating affordability and low supply is likely to lead to a more moderate pace of sales growth going forward.

The good news is that new supply does appear to be responding to these market forces. With builder confidence riding high, housing starts also defied expectations in October, rising a better-than-expected 4.9%. The increase was driven entirely by single-family starts – a clear signal of the shift in housing preferences during the pandemic.

Signals from the labor market were not as upbeat. While continuing jobless claims trended lower at the beginning of the month, initial jobless claims recorded a mild increase to 742k last week from 711k the week earlier. The still-elevated level of initial claims, a proxy for layoffs, points to softer labor market momentum. The rising spread of COVID-19 is an added near-term risk. With hospitalizations also trending higher, several jurisdictions throughout the U.S. are leaning more heavily on containment measures, which will weigh on business activity and hiring. What’s more, with the virus spreading out of control, stronger measures, such as lockdowns, cannot be ruled out for some parts of the country.

With more containment measures, no new fiscal supports, and the expiry of several Fed emergency lending programs (corporate credit, municipal lending and Main Street Lending programs), the near-term outlook is looking darker. Indeed, it appears that a sustained improvement in economic activity will likely have to wait for a vaccine. Fortunately, there is a light at the end of the tunnel. Major positive developments on the vaccine front in recent days suggest potentially earlier availability and the return to normal in 2021. It’s always darkest before the dawn.

Admir 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 November 13, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

United States

• Good news on the vaccine front cheered financial markets early in the week. However, as the week wore on and COVID-19 infections worsened, that optimism started to fray a bit.
• Many jurisdictions have increased restrictions as hospitals are feeling the impact. High frequency data are starting to show a loss of momentum, putting downside risk to fourth quarter economic growth.
• With inflation and interest rates low, now is the time for fiscal relief. Unfortunately, a deal in the lame duck session of Congress looks like a long shot.

U.S. – President-Elect Biden Has His Work Cut Out For Him

Good news on the vaccine front cheered financial markets early in the week. However, as the week wore on and COVID-19 infections worsened, that optimism started to fray. Vice President Biden was also declared President-Elect Biden over the weekend after a record-breaking voter turnout. But there is no time for him to bask in his victory. The third wave has been building speed for more than a month now and has led to increased restrictions as hospitalizations reach a new peak nationally, and in many areas are reaching the breaking point (Chart 1).

Restrictions are generally more targeted than the spring, but some jurisdictions are taking strong measures. Chicago has issued a 30-day “stay-at-home” advisory and Detroit is closing schools for two months. Many school systems in big cities, including Chicago and Philadelphia did not reopen for in-person learning in the fall, and will now be keeping students out of the classroom longer. Overall, six districts that re-opened in-person learning in the fall have since reversed course.

We economists are trying to sort out how much these restrictions will curtail spending, and economic growth. The second wave of infections in the summer did not lead to as much of slowdown as first feared. However, there are a couple of reasons why there may be more of an impact now. First, the current surge is more widespread across the country. The “second wave” was really a first wave in many states that were not hard hit in the early spring. Other regions’ case counts remained low through the summer, and were still gradually re-opening their economies, helping to keep up momentum on a national basis. The current more extensive surge seems more likely to show up in the national data.

Second, in the summer surge, Americans had recently received relief checks and people who were unemployed were still receiving a generous $600/week extra in addition to their usual benefits. This boost to income helped to offset reduced activity in some sectors. That is no longer the case, and Democrats and Republicans in Congress are still far apart on the size of a package. The need to pass a spending bill to fund government beyond December 11th presents an opportunity to tack on a relief package, but it looks like a Hail Mary pass at this point.

Still, there is a good case for additional fiscal supports. October’s CPI report showed continued softening in core services inflation, which typically reflects economic weakness more so than goods prices do (Chart 2). With unemployment still elevated and the pandemic worsening, we expect inflation pressures to remain subdued for quite some time, keeping borrowing costs low for Washington.

So far, the deterioration in the high-frequency data is modest. Weekly credit and debit card spending have started to lose momentum and passenger throughput at U.S. airports has fallen modestly for two consecutive weeks. We will be watching the weekly data closely to gauge momentum at year end. The fourth quarter got off to a strong start, and right now we are tracking a 3.7% (annualized) pace, but risks appear tilted to the downside.

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 November 6, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

United States

• Four days of vote counting has not yet produced a clear winner in the presidential election, with the Senate in a tight race and the House won by Democrats.
• There was no change to the policy announcement from the Federal Open Market Committee meeting, but policy makers remained consistent in their message of continued monetary support of the economy.
• The October jobs report was encouraging on all fronts with both employment and labor force increasing, the unemployment rate falling, and permanent layoffs easing.

U.S. - What a Year this Week Has Been

The week has been eventful enough to fill books. Limited to one page, let’s jump right into the presidential election where no winner has yet been announced. Friday morning, Biden took the lead in Georgia and Pennsylvania. Wins in these states would put him over the edge though legal challenges appear likely to leave a cloud of uncertainty over the outcome. Meanwhile, both of Georgia’s Senate races appear be heading to runoffs, making the Republican Senate majority less certain. What is certain is that Democrats retained control of the House with a smaller majority.

With the balance of power see-sawing away from a “blue-wave” outcome, U.S. equity and Treasury markets have also been volatile. Both markets took off on the morning after the election day, seemingly pricing in less fiscal support but also a lower probability of tax increases. The S&P 500 gained 6%, while 10-year Treasuries declined by almost 13 basis points. However, Friday morning markets retraced slightly as uncertainty about the outcome in the Senate increased (Chart 1).

The biggest question on investors minds with respect to government policy is the size and scope of the next fiscal support package. Assuming a Biden win and Republican Senate, the package is likely to be smaller than the roughly $2.5 million CARES act. Still, it is likely to reinstate enhanced unemployment insurance, authorize new funds for small business and provide sector-specific support. On international trade, a Biden victory is likely to mean a more conciliatory approach with America’s traditional allies but a continued assertive stance on China.

For his part, Federal Reserve Chairman Powell, made a point of not talking about the election though he could not avoid some mention of fiscal policy. On Thursday, the FOMC left policy unchanged and made very little changes to its policy statement. As in September, it emphasized downside risks, namely the increase in covid-19 infections across the U.S. In his press conference, Powell reiterated statements he has made many times in the past about the need for fiscal policy, noting that monetary policy can only go so far in dealing with the pandemic-induced shock to household and business income. In the meantime, the Fed will not let off the monetary policy gas pedal until the recovery is much more firmly entrenched.

Amidst everything else, the week was also heavy on economic data, with Friday’s job report the main highlight. October nonfarm payrolls showed another month of solid gains, rising 638,000. The improvement in the unemployment rate was even more impressive, falling a full percentage point to 6.9% from 7.9%. Just as encouraging, the report showed a rebound in the labor force participation rate and decline in the permanent job losses. Permanent job losses have been rising in the past several months, flashing warning signs of employment fragility, so an improvement on this front is welcome (Chart 2).

Still, while ongoing progress is welcome it does not negate the need for additional fiscal support, especially as virus cases continue to rise and activity in high-contact areas to be scaled back. We hope to get more clarity on what the stimulus package may look like in the upcoming weeks.

Maria Solovieva, CFA, Economist | 416-380-1195

 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 October 30, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

United States

• Financial markets tumbled this week as worsening coronavirus caseloads fueled concerns about the global economic outlook. The S&P 500 is on track to end the week 6% below last week’s close.
• The American economy rebounded sharply in the third quarter. Powered by consumer spending, real GDP increased at a 33.1% annualized rate, recovering two-thirds of the activity lost in the first half of the year.
• Boosted by supplemental payments for lost wages, personal income rebounded by 0.9% in September. Personal spending accelerated by 1.4%, while the personal saving rate remained elevated at 14.3%.

U.S. – Economic Growth Resumes in Q3

Risk-off sentiment prevailed this week as worsening coronavirus counts fueled concerns about the global economic outlook. Disappointing earning reports later added to these concerns and, as of writing, the S&P 500 is on track to end the week 6% lower.

New COVID-19 cases are continuing to surge around the globe (Chart 1). Fresh daily records have prompted authorities in France and Germany to impose new lockdowns, which will notably include a month-long shutdown of bars and restaurants. Likewise, new infections are rising to new heights stateside. The overall U.S. case count crossed the 9 million mark this week, while hospitalizations are reaching levels that were last seen in August.

On the economic front, this week saw the release of real GDP data for the third quarter. As widely expected, the American economy rebounded sharply in Q3 following one of the steepest contractions on record in Q2. Economic growth accelerated at a 33.1% annualized pace (Chart 2), recovering about two-thirds of the activity lost in the first half of the year. Overall, real GDP is still 3.5% below where it was at the end of 2019. The rebound was largely powered by consumer spending (+40.7%), which was itself spearheaded by an impressive jump in durable goods spending (+82.2%). Services spending rose more modestly (+38.4%).

The remarkable recovery in the U.S. housing market was also front and center in the GDP report. Residential investment grew by 59.3% on account of expectation-defying strength in the resale market, and is now 5.1% above its pre-pandemic level. Other major GDP components also saw considerable increases with the exception of government spending, which fell by 4.5%. State and local governments, whose revenues have plummeted during the pandemic, reduced their expenditures (-3.2%) for the second straight quarter. Employment within these entities has contracted by 6% since February.

The spending recovery was also borne out in the September personal income and outlays report. Personal spending grew by 1.4% m/m, the fifth consecutive month of gains, while personal income rebounded by 0.9% following a pullback in the month prior. An increase in lost wages supplemental payments, which reflected the executive order to replace the expired Pandemic Unemployment Compensation program, provided a fillip.

All things considered, the extraordinary pace of growth in the third quarter is unlikely to be sustained. Indeed, the splurge in durable goods spending over the summer is unlikely to be repeated, while the resurgence in new cases is placing the upswing in services spending in jeopardy. The looming expiration of eviction moratoriums across the country constitutes an additional downside risk to the near-term outlook.

With the election only a few days away, the focus will soon move back to the next installment of fiscal support. At a time when the pandemic continues to upend the livelihoods of millions, the importance of additional government support is hard to understate. Here’s hoping that Washington is able to deliver on this front, sooner rather than later.

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 October 23, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

United States

• Covid-19 infections continued to rise this week, nearing record highs set in July. Concerns regarding this trend weighed on markets, but progress on a new stimulus package helped improve the mood later in the week.
• Positive housing reports reinforced the sector’s position as a bright spot in the U.S. economy. Existing home sales soared 9.4% in September, blowing expectations out of the water, while price growth accelerated further.
• Fast-rising prices are good news for builders who have recognized the need to build more homes. Housing starts also pushed higher in September (+1.9%), with gains concentrated in the single-family segment.

U.S. - Housing Market Remains A Bright Spot

Markets continued their choppy ride this week, as investors weighed a rising trend in new infections against hopes for fiscal stimulus. Signs of progress on the latter helped put markets in a better mood later in the week, while a strong housing report provided an added fillip.

The September existing home sales report reinforced the notion that the housing market remains a bright spot, even as most sectors of the economy continue to struggle under the weight of the pandemic. After gains moderated in the two months prior, resale activity surged by 9.4% in September, blowing expectations out of the water. Sales are now at a new post-Great Recession high and nearly 14% above their pre-pandemic level (Chart 1). Details from the report suggested that the purchasing of homes in vacation destinations – a trend that appears to have been supported by an improved flexibility of working from home – played a part in boosting overall sales. While the latter are up 21% year-over-year (y/y), sales in vacation destination counties accelerated over the summer and are up 34% y/y according to the National Association of Realtors.

With low mortgage rates and a still-improving labor market, we expect resale activity to continue grinding higher, but at a more moderate pace. A sharp acceleration in home price growth is eroding affordability and a record-low supply of housing means that markets will remain tight. Housing inventory now sits at just 1.47 million or a record low of 2.7 months at the current sales pace (Chart 2). As a result, the median existing home price has accelerated to a sharp 15% y/y – the fastest pace since the “frothy” days of 2005.

Low inventory and fast-rising prices are good news for homebuilders who have recognized the need to build more homes. More shovels were put to the ground in September, with housing starts up 1.9% on the month. Gains were concentrated in the single-family segment, while multi-family starts fell for the second consecutive month – a trend that seems to align with a tilt to less-denser suburban living as a result of the pandemic. Added supply in the new home market would help by enabling move-up buyers to acquire new homes, thereby easing the gridlock in the resale market. That said, the support from this channel will take time.

The few remaining indicators pointed to a slowing economic recovery outside housing. Initial jobless claims fell by 55k to 787k last week – better than expected, but still slightly higher than at the start of the month. Meanwhile, continuing claims from all programs eased to a still-elevated 23.2 million at the start of the month (data is delayed). Anecdotal evidence from the Beige Book also pointed to a “slight to modest” pace of growth this fall. Coupled with the fact that the virus’ spread is nearing a record high, these elements support the case for added fiscal stimulus.

The outcome of the election, which is now a little over a week away, will have important implications for the economy (see here) and the amount of fiscal stimulus. So far, Joe Biden is leading in the polls. But, judging from what happened in 2016, it’s worth continuing to take these numbers with a grain of salt.

Admir 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