Financial News for the Week of September 18, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

United States

• The Federal Reserve is not likely to increase interest rates until at least end-2023, however, this has not been enough to quench investors’ thirst for more liquidity.
• Retail sales strengthened for the fourth straight month this August, with several categories above or close to pre-pandemic levels of sales. However, the recovery momentum is fading.
• The labor market recovery has slowed with initial claims flattening at elevated levels. Almost 30 million people are still claiming unemployment benefits.

Canada

• Financial markets were mixed this week, with the S&P/TSX flat on the week. Meanwhile, oil markets received a boost from a bullish EIA inventory report and Thursday’s OPEC+ meeting.
• Economic data released this week continued to point to an ongoing recovery. However, improvements are uneven across the sectors. The highlight was the ongoing strength in resale housing markets that left sales 20% above their pre-pandemic levels.
• Meanwhile, soft CPI inflation readings for August (0.1% y/y) once again served as a reminder that slack remains in the
  economy

U.S. – The Recovery Shifts In to Low Gear

U.S. financial markets had a bumpy ride this week. The highs early on were followed by a sharp drop after Chairman Powell failed to quench investors’ thirst for more liquidity. The declines were primarily led by large cap technology stocks, which have so far made major gains during the crisis. As of writing, the S&P 500 is on track to end the week about 0.1% lower compared to last week’s close.

On the economic front, the Federal Reserve indicated that there will be no interest rate increase until at least end-2023. The Fed said that it would not tighten policy until inflation is higher than 2% for “some time”, a move away from its previous policy goal of “maximum employment” and “symmetric 2% inflation”. This announcement makes the Fed’s desire to make up for past inflation underperformance more explicit. However, the Fed continued to remain vague on the period over which it seeks to achieve higher inflation. Despite the dovish stance, markets thought it wasn’t dovish enough. Equities slid, as investors were hoping for the Fed to magnify its QE by announcing the purchase of more government bonds.

In terms of economic data, retail sales strengthened for the fourth straight month in August with many of the major categories being very close to or even above their pre-pandemic level of sales (Chart 1). However, the momentum is fading as sales grew by a meagre 0.6% month-on-month in August, down from 0.9% in July. Cooling pent-up demand and a decline in income for a significant share of the population (due to CARES Act payments being stopped in end-July) may be responsible for this slowdown. However, the strength in retail has been uneven as it masks the continued weakness seen in clothing, restaurants and bars and department stores. It is important to keep in mind that some of the hardest-hit areas, especially high-touch services (recreation, childcare and haircuts etc.) are not included in these data.

Turning to the housing market, starts weakened by 5.1% month-on-month. The decline was primarily driven by the multi-family segment, which fell by 23% on the month, reversing much of the gains seen during the summer. Single-family starts, on the other hand, jumped by 4.1%. Construction for single family homes is continuing at a solid pace on the back of perceived health risks posed by dense living as well as more permanent work from home policies. The housing market is likely to see slower gains in the coming months as economic recovery slows and pandemic-induced uncertainty abounds.

Meanwhile, the labor market recovery has slowed down (Chart 2). Initial jobless claims (860k) were broadly around consensus, down 33k from last week. Continuing claims came in at 12.6 million, beating the consensus (13 million) and down 1 million. Moreover, the number of people collecting unemployment benefits edged higher in late August. At almost 30 million people, the total remains incredibly high. Job growth is expected to be slower through the remainder of the year, with a full labor market recovery not taking months, or quarters, but years.

Sohaib Shahid, Senior Economist | 416-982-2556

 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 September 11, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• A wide dispersion of forecasts for U.S. growth over the next year reflects high levels of uncertainty around the duration of the health crisis as well as future government supports.
• Assuming a modest fiscal package passes Congress this fall and a vaccine becomes available by the middle of next year, the American economy should recover most of what was lost through the pandemic by the end of 2021.
• Inflation data showed an acceleration in price growth in August. Total CPI was up 1.3% year-on-year in August, continuing its recovery from only 0.1% in May.

A Wide Dispersion of Expectations for Recovery

As we head into the final days of summer, it’s a good time to step back and evaluate the prospects for the American economy over the next year. The dispersion of economic growth forecasts has perhaps never been higher. While forecasters all expect a meaningful decline in activity this year, that is due to what’s already been recorded. Meanwhile, forecasts for growth in 2021 in the Blue Chip survey range from over 6% at the high end, to under 2% at the low end. At the high-end, this recovers all the activity lost to the pandemic, while at the low end, it is nothing short of stagnation.

This wide dispersion reflects the unprecedented level of uncertainty around the course of the pandemic, as well as its secondary economic impacts. This can be seen in the wide array of underlying assumptions among forecasters around items key to the outlook. For example: when and if a vaccine becomes available, how effective and permanent it will be, how much future government support will be provided.

We do not claim to have any better insight on these questions than other forecasters, but we have tried to make plausible assumptions to ground our forecast. In the case of the health questions, we assume that a vaccine or effective treatment becomes widely available by the second half of 2020.

Beyond the basic uncertainty around when and if we recover fully from the pandemic, we have little in the way of traditional macro models to gauge how consumers and businesses respond to health crises. This was true on the way down, but also on the way up. We can observe, based on recent data, that after an initial plunge, households have been more than willing to increase spending on durable goods – suggesting little permanent damage to household confidence. Rather, what’s holding back a broader recovery is service-sector areas of the economy where activity is directly impacted by the potential risk of infection. This offers reason to expect a fairly solid bounce back once these fears are allayed.

In the case of government policy, we are equally in the dark. The extraordinary fiscal supports early in the year have divorced measures of overall economic activity from household income. Spending rebounded as it did due to these supports. Congress continues to debate another package, but the chasm between Republicans and Democratic bills is roughly 10 times ($300 billion versus $3 trillion). So, we’re left making assumptions. We assume that Congress does eventually come up with some additional support, but closer to the lower range of outcomes, around $400 billion, split between individual checks and unemployment benefits.

With these assumptions in place, and assuming no major second wave of the virus leads to another round of shutdowns, it is reasonable to expect the American economy to recover much of what was lost to the pandemic over the past year. While growth appears likely to slow after its initial burst on reopening, it should pick up again once a vaccine is available. Importantly, much of the deficit in spending is due to high-income individuals, who should be able to dip into these accumulated saving to support growth once the virus threat has passed. As a result, we expect the level of GDP to regain its pre-recession level by the first quarter of 2022. We will be publishing our full views on the economic outlook next week and hope you will give them a read.

James Marple, Senior Economist | 416-982-2557

 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 September 4, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• After reaching new highs early in the week, financial markets tumbled, driven by a broad sell-off in technology stocks. The S&P 500 is on track to end the week about 3% below last week’s close.
• The labor market recovery continued as the economy generated 1.4 million jobs in August, and the unemployment rate fell to 8.4%. However, the pace of the recovery has slowed from previous months, a theme that is echoed in other economic data.
• In speeches throughout the week, Fed officials warned about the fragility of the current recovery. They emphasized the importance of additional government help in supporting the recovery going forward.

Labor Market Mending Continues, but Risks Are Mounting

This was a volatile week for U.S. financial markets. Fresh highs early on were followed by a sharp drop, driven by a broad decline in technology stocks and signs of slowing economic momentum. As of writing, the S&P 500 is on track to end the week about 3% below last week’s close.

On the economic front, the main highlight was the release of the August employment data. As largely expected, the American economy continued to churn out jobs last month, albeit at a slower rate than in June and July (Chart 1). Indeed, August saw a total of 1.4 million net new jobs added, down from 1.7 million in July. Overall, nonfarm employment is about 7.6% below where it was in February. The unemployment rate also continued to trend lower, falling to 8.4% in August. While it has come down significantly since the apex of the crisis, it remains high by historical standards.

As unemployment fell, purchases of new vehicles jumped up 3.9% month/month in August (from 12.4% in July), to 15.2 million units. Meanwhile, the recovery in international trade progressed further in July, as exports rose by 8.1% (from 9.6% in June), and imports grew by 10.9% (from 4.6% in June).

In contrast, other data was consistent with a slowdown in momentum. The number of people receiving unemployment benefits - or continuing claims - has ticked up to 29.2 million in all programs in the week ended August 15th. Unlike initial claims, continuing claims have yet to show any meaningful and sustained improvement. Similarly, the latest Fed Beige Book (covering the period up to August 24th) noted that hiring volatility is becoming a recurring issue, particularly in services industries. The report highlighted that as demand remains subdued, temporary furloughs are increasingly being turned into permanent layoffs. That was born out in the August jobs data, where despite a drop in overall unemployment, the number of people “permanently” unemployed (i.e. out of work, but not on a temporary layoff) rose to 7.4 million, outnumbering the temporarily unemployed (6.2 million) for the first time in months.

Service industries also lost some momentum in August. The ISM Services Index declined by 1.2 points to 56.9, signaling that the pace at which the services sector is expanding is slowing (Chart 2). By contrast, the ISM Manufacturing Index recorded a surprise 1.8-point gain to 56.0. Despite the top-line increase, the details reveal an uneven recovery thus far, with many businesses still holding back on investment and hiring due to elevated uncertainty.

Given the still very high level of unemployment, the moratorium on residential evictions until the end of 2020 issued by the Center for Disease Control and Prevention (CDC) was a welcome development (it applies to individuals earning less than $99,000 per year). With pandemic-related uncertainty remaining elevated, near-term risks to the economy still appear tilted to the downside. As such, continued government support will be essential in limiting financial stress to households and businesses. This was emphasized by Fed officials in speeches throughout the week, noting that additional support will be key in determining the pace of the recovery. Considering stalled negotiations around the next stimulus package in Washington, consumption growth is at risk of tapering off in the coming months. It is going to be a long and bumpy road back to economic normalcy.

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 August 28, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• Federal Reserve Chair Powell unveiled a change in the Fed’s monetary policy strategy, announcing that it will target an inflation rate “that averages 2% over time” (instead of a strict 2% goal), and that it will be concerned with shortfalls of employment from its maximum level (rather than deviations). Taken together, these mean a bias to keeping rates on hold well after economic recovery sets in.
• Personal income and spending data this week showed continued, albeit slowing progress in recovering from the pandemic-induced shock earlier this year. Real personal spending rose 1.6% in July down from 5.7% in June. Total spending is still 4.9% below its pre-recession peak, with the deficit entirely due to spending on services.

Federal Reserve Flips the Script, Targets Average Inflation

It’s not easy being a central banker. The job of the Federal Reserve – to keep the economy and inflation on an even keel with just its power over the monetary printing press – has been made a lot more difficult by the unprecedented global pandemic. While lower interest rates certainly help, as evidenced by the strong rebound in activity in the auto and housing market, there is still a large hole to fill in other areas of spending less sensitive to interest rates. Things like food services and accommodation, healthcare, and recreation services, which together make up 90% of the deficit in spending relative to January of this year, will not return to normal as long as the virus threat remains. Until they do, employment will remain impaired.

It’s not just the health crisis that has complicated the Federal Reserve’s task of achieving maximum employment and price stability (which it interprets as an inflation rate close to 2%). Its traditional policy lever – the fed funds rate – is consistently impaired by the effective lower bound. Once it cuts to near-zero, it must turn to less traditional tools such as large scale asset purchases. At the same time, the relationships between economic variables that it relied on to achieve its mandate appears to have weakened. A hot labor market does not seem to put upward pressure on inflation the way it seemed to in the past.

Faced with challenges to achieving its goals, the Federal Reserve has decided a chance of tack is necessary. Nothing too revolutionary of course, but a recognition that it should be more concerned with employment undershooting its goal than outperforming it. At the same time, having consistently over-predicted the future path of inflation over the past decade, it has come to the view that it should be less concerned about overshooting its 2% objective. So, rather than targeting a forecast of 2% inflation, it will target a rate that includes the recent past – an average inflation target. In other words, if inflation has underperformed, due, for example, to a period of economic weakness, it will not immediately tighten policy even if inflation pushes higher than 2%.

It’s worth unpacking the theory behind this last change. The thinking is that controlling future inflation depends on influencing people’s expectations for it. In order to get inflation up to its (now average) target it has to convince people that its ok being a little behind the curve when it starts to show up. It remains to be seen how effective this can be. Communication will be challenging. People don’t especially like inflation and there will be pressure to tighten policy when the actual rate moves above 2%. The Fed has also not said how much history it is averaging over or how high it will allow inflation to overshoot, simply that it will tolerate it “moderately above 2%.” Will it tighten policy if inflation is at 2.5% or is 3% the more relevant threshold? At the same time, other influences besides expectations may keep downward pressure on price growth. Just because it wants inflation to move above 2% doesn’t mean it will. Just ask the Bank of Japan.

Still, the reaction in markets to the statement has been positive so far. Stock markets rallied on the news. This makes some sense. Taken at face value, the fed funds rate are likely to remain lower for even longer.

James Marple, Senior Economist | 416-982-2557

 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 August 21, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• The housing market continues to exceed expectations. Existing home sales and starts rose by 24.7% m/m and 22.6%, respectfully in July. Existing home sales are now 8% above January levels while starts are 7% below the pre-pandemic peak.
• The labor market recovery, meanwhile, appears to be losing steam. Initial and continuing jobless claims are settling at high levels suggesting more modest job gains in August compared to previous months.
• The Federal Reserve is wrapping up its comprehensive monetary policy framework review. Chairman Powell will provide an update next week at the Jackson Hole Symposium.

Markets Optimistic Despite No Deal Yet from Washington

It was a volatile week for financial markets this week as the S&P500 briefly touched record highs before tumbling back down on Wednesday’s release of the Federal Reserve’s July meeting minutes. Since then, markets have made up some ground and at the time of writing, the S&P was a tad higher than close last week.

On the economic data front, housing activity continued to exceed expectations. Both housing starts and existing home sales trounced market forecasts in July, rising by 22.6% and 24.7% month-on-month, respectfully. Starts are now just 7% below their pre-pandemic peak (January), while existing home sales are 8% above January levels (Chart 1).

The housing market has been a bright spot for the U.S. economy during this pandemic. Record-low mortgage rates have had a magnetic pull on prospective buyers, especially millennial who have held-off purchasing a home due to affordability constraints (see report). This has given homebuilders the confidence to resume construction at extraordinary speed.

Looking ahead, the housing outlook depends on the labor market recovery. Prospective buyers will need the income to take the plunge into homeownership, but a wobbling labor market could delay their plans.

Worryingly, the labor market recovery appears to be losing steam. Initial jobless claims data released for the week ending on August 15th rose to 1.1 million claims, flattening at a level almost one million higher than in pre-pandemic months (Chart 2). Likewise, overall continuing claims are also stabilizing around the 28 million mark. Taken together, these indicators suggest employment gains slowed in August compared to May, June or July.

With the labor market hitting speed bumps, the onus is on policymakers to provide additional support to households and businesses that are struggling due to the pandemic. Congress has been deadlocked on the next set of fiscal measures, with the Democrats pushing for more income support and Republicans arguing for less. It is clear, however, that more aid will be needed to avoid deepening the economic crisis.

This sentiment was the key discussion point among Federal Open Market Committee (FOMC) members. As noted in the minutes from July, participants zeroed in on the importance of fiscal policy in holding up spending, investment, and the labor market until a vaccine or effective treatment is found. A significant downside risk to the economic outlook is if fiscal support disappoints. At the current juncture, this seems to be a very real possibility.

In terms of monetary policy, several FOMC participants agreed that without convincing fiscal support, more stimulus may be needed to promote the economic recovery. They debated the use of forward guidance and yield curve control, with the former getting more attention among members. Fed Chairman Jerome Powell will likely provide more insight into these issues as well the broader wrap up of the comprehensive monetary policy framework review next week at the Fed’s annual Jackson Hole Symposium.

Sri Thanabalasingam, Senior Economist | 416-413-3117

 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