Growing evidence of the pandemic’s second wave in many jurisdictions led investors to become more cautious in September. Rising infection rates attracted more attention than less timely economic data that detailed a robust economic recovery in the summer. Equity markets that had rebounded and, in some cases rose to record highs in early September, consolidated over the balance of the month. The tech-heavy NASDAQ index fell more than 10%, thereby qualifying as a correction. The S&P/TSX and the S&P500 avoided corrections, but still declined roughly 9% each. In the bond market, the risk off sentiment was reflected in slight widening of provincial and corporate yields spreads following several months of tightening. Government bond yields edged lower on the prospect of growth slowing again, but the prospect of massive fiscal deficits for longer tempered the investor enthusiasm for bonds. The FTSE Canada Universe Bond index returned 0.32% in the month.

Canadian economic data received in September was generally strong. Growth in Canada’s GDP during July was 3.0% (not annualised) and estimated to be 1.0% in August. Unemployment declined to 10.2% from 10.9% the previous month, with 246,000 more jobs offsetting a rise in the participation rate. The housing sector was particularly robust, with prices in several cities rising sharply and starts of new homes hitting the highest level since 2007. The jump in housing starts may not last, however, because it was due to surprising strength in multiple-unit starts despite sharply lower demand from students and reduced immigration. Inflation was one of the few weaker than expected indicators, as the year over year rate held steady at 0.1%. As noted above, the bond market reaction to the strong data was muted because it did not cover the period of the pandemic’s second wave and investors anticipated that growth would decelerate considerably in the coming months.

After being prorogued a month ago to stifle discussion of the WE charity corruption scandal, Canada’s Parliament reopened in September. The Speech from the Throne outlined the minority government’s aspirations and led to an increase in weekly unemployment benefits. However, the Speech was lacking in financial details and serious commitment from the government to rein in spending. Financial projections will have to wait for a budget late in October or November. Fiscal discipline will likely come only after rating agencies remove Canada’s AAA rating.

U.S. economic data was also relatively strong in September. Of note, the unemployment rate dropped sharply to 8.4% from 10.2% the prior month, but that was based on an estimated increase in jobs of 3.8 million. A different, less volatile survey of business establishments suggested only 1.4 million jobs were created in the month, which suggests the unemployment rate might be revised higher. In addition, the number of weekly claims for unemployment benefits remained elevated. In other signs of strength, the manufacturing sector continued to recover with factory orders markedly higher, and sales of new homes hit their highest pace since 2006. Importantly, though, there was still no deal in Congress to extend federal stimulus measures, such as enhanced unemployment benefits and mortgage deferrals, that expired at the end of July. As a result, the rebound in retail sales began to slow.

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