Financial markets, including the bond markets, during June displayed considerable faith in global central banks, particularly the U.S. Federal Reserve. By and large, there were relatively few additional government programmes launched to deal with the economic aftermath of the pandemic lockdown, and investors focussed instead on central banks’ efforts to stimulate the respective economies. Early in the month, there was optimism about a quick economic recovery, with equity prices and government bond yields rising, and corporate yield spreads narrowing. However, in the second week, investors suffered a crisis of confidence that saw equity markets plunge 5% to 7% in a single day, and corporate yield spreads widen by 15 basis points or more. The markets stabilized, however, following the Fed’s announcement of new details of its corporate bond buying program, expanding the list of eligible issuers. Prior to that, the Fed had been buying corporate bond ETFs, but the prospect of it buying individual corporate bonds suggested it was willing to go to extraordinary lengths to ensure a recovery in the U.S. economy. The corporate bond purchase programmes of the Fed and, to a lesser extent that of the Bank of Canada, caused yield spreads to tighten to levels that no longer reflected the extraordinary economic uncertainty. Within the corporate bond space, investors seemed to have an almost childlike belief that the central banks would make everything all right, no matter what happened. In addition, expectations that the Bank of Canada, the Fed, and other central banks would keep interest rates very low for a prolonged period helped hold government bond yields near their lows during June despite substantial increases in bond issuance to finance massive deficits. The FTSE Canada Universe Bond index gained 1.69% in June.

The traditional definition of a recession is two consecutive quarters of negative growth in the economy. Undoubtedly, the first and second quarters in Canada will show the economy contracted but, in fact, the recession lasted only two months, March and April. The unprecedented plunge in activity in those months far outweighed growth in the other months in the first half of 2020. With the partial reopening in May and June, the Canadian economy began growing again, albeit much more slowly than the pandemic-induced contraction. In other words, the recession ended, and the recovery began.

Economic data received during June covered both April’s weakness and the nascent recovery in May. For example, Canadian GDP was reported to have shrunk by 11.6% (not annualized) in April but estimated to have rebounded by a moderate 3% in May. Unemployment rose to 13.7% in May from 13.0% the previous month, but job creation was surprisingly strong. The number of jobs in Canada grew by 290,000, confounding expectations that half a million jobs had been lost in the month. Housing starts and existing home sales also indicated a strong rebound from April’s levels. More timely information on economic activity came from Canadian banks looking at credit and debit card use. The banks reported that consumer spending had nearly fully recovered by mid-June, although the pattern of spending had changed toward online and away from bricks-and-mortar stores. How much of the recovery in consumer spending was supported by temporary emergency income support programmes from the federal and provincial governments is not yet known.

In the United States, the economic data tended to be better than expected. The labour data, in particular, was much better than forecasts. Unemployment declined from 14.7% the previous month to 13.3% rather than jumping as expected to 19% by the consensus forecast. In addition, rather than falling by an expected 7.5 million, U.S. payrolls actually increased by 2.5 million jobs. The increase in jobs was somewhat surprising given that more than 1.5 million people were applying for state unemployment benefits each week. The better labour situation combined with partial economic reopening in many U.S. states led to a surge in retail spending. Vehicle sales were particularly strong, although they remained 30% below year ago levels.

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