HIGHLIGHTS OF THE WEEK
- U.S. stock markets erased their earlier gains this week as the rise in COVID-19 cases weighed on sentiment.
- Green shoots are continuing to emerge in the economic data. Consumer spending rebounded by 8.2% in May driven by surging durable goods orders. Home sales data also showed signs of improvement, with new home sales soaring by 16.6%, while a pick-up in mortgage applications suggests existing home sales should rebound in the months ahead.
- Still, the recent spike in COVID-19 infections is threatening the recovery. Fearing a prolonged downturn, the Federal Reserve ordered banks to put a cap on dividends and suspend share buybacks in order to preserve capital.
Climbing COVID-19 Infections Threaten the Recovery
Financial markets erased their earlier gains this week as concerns about rising coronavirus infection rates weighed on sentiment. As of writing, the S&P 500 was on track to end the week more than 2% below last week’s close.
While new COVID-19 infections have generally stabilized in other advanced economies, cases continue to climb in the U.S. Indeed, this week saw new infections hit a daily record increase of nearly 40,000 on Thursday, with cases rising in more than half of U.S. states. Arizona, California, Florida, the Carolinas and Texas are on the unenviable list of states seeing a steep surge in new cases (Chart 1).
While there has been little to suggest the reinstatement of total lockdowns from state officials thus far, reopening plans have been rolled back or delayed in some states. In Texas, bars have been ordered to shut back down, while restaurant capacity has been reduced to 50%. Officials in New York are postponing the reopening of shopping malls and movie theaters and, along with New Jersey and Connecticut, are now requiring travelers from virus hot spots to self-quarantine for 14 days. As noted in our State Economic Forecast, the uncertainty created by a continued rise in cases will likely weigh on consumer spending and business investment even without official shutdowns.
Looking in the rear-view mirror, economic data for May and June, when economies were reopening, has continued to pleasantly surprise. Personal spending bounced back in May, increasing by 8.2% month-on-month (Chart 2). Personal income, on the other hand, fell by 4.2%, no longer lifted by one-time CARES act checks that went out the month before.
The pick up in spending was driven by durable goods orders, which jumped by 15.8% in May, led by an increase in vehicle orders. Elsewhere, signs of improving economic activity came through in Purchasing Managers’ Indexes (PMI) readings across major economies including the Euro Area, Japan, and the UK in June.
On the housing front, sales data released this week also showed signs of improvement. New homes sales soared by 16.6% month-on-month in May as buyers rushed back into the market, looking to take advantage of low mortgage rates. Sales of existing homes fell by 9.7%, reflecting the drop in contract signings in the previous two months when transactions were hampered by state mandated lockdowns. However, a pick-up in mortgage applications suggests existing home sales should rebound in the months ahead.
While economic data have generally taken a positive turn, some indicators are showing signs of plateauing. Following a rapid decline in the back-half of April and May, the number of weekly jobless claims steadied at about 1.5 million each week in June. Next week’s job report will shed more light on the labor market’s health, but its recovery is likely to be an arduous slog. Acknowledging this, the Federal Reserve, this week, ordered banks to put a cap on their dividend payouts and suspend share buybacks. The measures are intended to preserve their capital in the event of a prolonged economic downturn.
Johary Razafindratsita, Economist | 416-430-7126
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