In Canada, the economic news received during August was generally better than forecasts. Canadian GDP in June grew by 6.5%, faster than StatsCan’s flash estimate of 5.0%, although economic activity was still 7.8% lower than year ago levels. StatsCan’s flash estimate for July GDP growth was 3%, slower than June but still robust for a single month. Unemployment declined to 10.9% from 12.3%, with 418,000 jobs created, and the participation rate rose to 64.3% from 63.8% as discouraged workers returned to the labour force. (Like many other indicators, the participation rate is still below February’s level, which was 65.5%.) Canadian retail sales, though, have experienced a V-shaped recovery, growing 23.7% in June after a 21.2% increase in May. The June results left retail sales 3.8% higher than year ago levels. (Retail sales data, though, do not measure spending on some of the discretionary services that were hardest hit since the pandemic began.) The housing sector also was very strong, with some analysts suggesting it had had a Z-shaped bounce as sales and prices in major markets such as Vancouver and Toronto were well ahead of year ago levels. One indicator that failed to meet expectations was inflation, as CPI declined to 0.1% from 0.7% the previous month. Core measures of inflationary pressure were more subdued, edging down to 1.6%. The generally better economic news was a factor in bond yields rising in the month, because investors anticipated that the recovery would be faster and, as a consequence, the Bank of Canada would be able to let interest rates rise sooner.

Federal Minister of Finance Bill Morneau announced his resignation in mid-August, which the bond market took in stride. His replacement, Chrystia Freeland, was perceived to be less fiscally conservative and she quickly reinforced that impression by announcing a $37 billion expansion in federal stimulus programmes.

In the United States, Federal Reserve Chairman Jerome Powell announced that the U.S. central bank was changing its policy regarding inflation. Rather than targeting an inflation rate of 2%, the Fed would target an average inflation rate of 2%. As a result, following a prolonged period of inflation of less than 2%, the Fed will not reduce monetary stimulus as soon as inflation approaches the target but let it accelerate to above 2% for some time. With inflation currently below the 2% target, the financial markets interpreted Powell’s announcement to mean interest rates will stay lower for longer than previously thought. Long term bond yields rose as investors adjusted to the risk of higher inflation in the future.

As in Canada, U.S. economic data received during August tended to be better than expected. However, most of the data was for June and July, and failed to cover a sharp rise in the number of COVID-19 cases and deaths that led to several states rolling back their reopening plans and reapplying some lockdown measures. As a result, economic growth in August likely slowed significantly. In addition, there was no deal in Congress to extend federal stimulus measures, such as enhance unemployment benefits and mortgage deferrals, that expired at the end of July.

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