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The Weekly Bottom Line: Pandemic Dampens Holiday Cheer

U.S. Highlights

  • Financial markets were more upbeat this week as investors cheered encouraging vaccine news and the start of the presidential transition. The S&P 500 is on track to end the week with a 2.3% gain from last week’s close.
  • The impact of the current wave of infections continues to weigh on economic data. Consumer confidence pulled back in November, and initial jobless claims increased for the second straight week.
  • Personal income contracted by 0.7% in October, reflecting the fading boost from federal aid programs. Meanwhile, personal spending increased by 0.5%, the slowest pace of monthly gains since May.

Canadian Highlights

  • The second wave continues to run rampant across Canada. Provinces are responding by tightening restrictions and in some cases introducing regional lockdowns.
  • Small business optimism for the year-ahead posted a surprise uptick, on the back of encouraging vaccine news. However, the near-term outlook remains weak, reflecting the difficulties small businesses face amid renewed restrictions.
  • The domestic approval process for vaccines has already started, but given Canada’s lack of domestic production capability, other countries may get priority.

U.S. – Pandemic Dampens Holiday Cheer

Market sentiment was upbeat this week as investors cheered encouraging developments on the vaccine front and the official start of the presidential transition. As of writing, the S&P 500 is on track to end the week with a 2.3% gain from last week’s close.

With reports that an effective vaccine is likely on the horizon, the prospect of an earlier-than-anticipated end to the pandemic is gaining traction. Until then, however, the balance of risks appears tilted to the downside. Indeed, the virus is continuing to spread at an unprecedented rate in many states, prompting the introduction of a fresh round of restrictions. Already, the impact on the economic recovery is unravelling in high-frequency data. Following three consecutive months of increases, consumer confidence pulled back in November (Chart 1), illustrating the perception that growth will likely slow heading into 2021.

Likewise, initial jobless claims increased for the second straight week to 778,000, the highest level since mid-October. The recent increases suggest that the current wave of infections is slowing the labor market rebound. Should this trend continue and with the impact from previous fiscal support quickly loosing steam, many American households are at risk of facing additional duress as we approach the festive season. What is more, leftover supports from the CARES Act are set to expire at the end of the year. Notably, these programs continue to provide benefits and support to gig workers and the self-employed, whom state unemployment insurance programs do not cover.

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Bringing credence to the above was personal income and spending data for the month of October. Incomes contracted by 0.7% on the month, reflecting the fading boost from federal aid programs. In comparison, spending continued to increase (+0.5%), albeit at the slowest pace since the recovery began. Meanwhile, the personal saving rate edged lower to 13.6% (Chart 2). Households saved a considerable share of their income when the pandemic hit, pushing the saving rate to an all-time high of 33.7% in April. It has since come down, but it remains elevated by historical standards.

Other economic data released this week included the second estimate of real GDP for the third quarter. The report had little in the way of surprises with only minor revisions to the GDP components, confirming the strong 33.1% (annualized) rebound in economic growth last quarter. Released alongside the report were corporate profits, which jumped by 27.1% (non-annualized) in the third quarter from a quarter prior thanks largely to support provided by the Paycheck Protection Program.

Looking ahead, last quarter’s pace of growth is unlikely to be repeated. In fact, minutes from the November 4-5 Federal Open Market Committee meeting showed that members were bracing for a near-term slowdown in activity. Importantly, Fed officials continued to view the economic outlook as clouded with high uncertainty, and emphasized the importance of additional fiscal support. The prospects of a new stimulus bill, however, have dimmed considerably over the last few weeks. Without additional help, we anticipate economic growth to slow materially this quarter and next.

Canada – Pandemic Runs Rampant, But Vaccines Keep Hope Alive

Financial markets had a solid showing this week. The S&P/TSX Composite gained 2% on the week (as of writing) on the back of gains in the technology, metals and mining sectors. The index has now made positive gains for the fourth straight week, climbing 11% so far in November. Elsewhere, oil markets rallied to an eight-month high amid recent breakthroughs on a COVID-19 vaccine, a weakening dollar and a surprise drawdown of U.S. crude supplies. As of writing, oil prices stand at $45.2, more than 7% higher compared to last week.

In terms of economic data, the CFIB Business Barometer, a measure of small business confidence in the next 12 months, rose by 2.4 points to 55.7 – the first improvement since July (Chart 1). The improvement captures hopes of an earlier-than-expected vaccine. Meanwhile, near-term confidence remained weak, reflecting the difficulties small businesses are facing amid surging cases and subsequent restrictions. Since these data were collected prior to the latest restrictions imposed in Toronto and other regions, the near-term outlook will likely deteriorate in the coming weeks, accelerating business closures.

On the pandemic front, the second wave continues to run rampant across Canada (Chart 2). The rising second wave is already bigger and geographically more widespread compared to the first wave. Western Canada – which had handled the virus relatively well previously – is seeing a surge this time round. Meanwhile, the Atlantic provinces, which had so far kept the pandemic at bay, are seeing their ‘Atlantic Bubble’ burst as cases rise. If this trend continues, hospitals across the country will soon reach capacity.

As a result, provinces have continued to toughen up restrictions; Alberta added new restrictions prohibiting all indoor social gatherings, British Columbia ordered temporary closures of indoor fitness activities; and Toronto entered a lockdown. New restrictions were also imposed in Atlantic provinces. These measures are bound to weigh on economic activity, as reflected in latest mobility and restaurant bookings data. However, the mor