It was an eventful week from a news flow perspective, particularly in the United States, though much of it had little to do with the economy or markets. Another violent incident involving law enforcement and a black man in the U.S. rekindled the strong emotions related to racial injustice that surfaced following similar incidents just a few months ago. Meanwhile, a relatively major storm, Hurricane Laura, swept through the Gulf of Mexico, and resulted in major flooding, damage, and the shut-down of significant oil, natural gas, and chemical infrastructure in the region. Lastly, the Republican National Convention took place, and candidates from both parties will now hit the road for nine weeks of campaigning until the election in November.
From a market perspective, the Canadian banks were a key highlight over the past week, and one of the reasons why the Canadian stock market continued its grind higher. Meanwhile, on the Covid front, many trends remain firmly in place. Lastly, Jerome Powell, Chairman of the U.S. Federal Reserve (the country’s central bank) indicated that it will explore “average inflation targeting” going forward. We offer our take on this new approach and the aforementioned market-related issues below.
The Canadian banks reported their third quarter results this week for the period ending in July. As suspected, some of the banks set aside less reserves for future loan losses than they did earlier this year. These reserves help absorb future loan losses. Up until recently, the banks had been increasing these accounts by billions of dollars, in anticipation of future delinquencies. This quarter, some set aside less, which may be taken as a sign that they feel adequately prepared for any challenges to come. Importantly, none of the banks have experienced any outsized loan losses to date despite the millions of jobs lost and business disruptions as the government aid, income support measures, and the banks’ loan deferral programs have delivered on their objectives.
The U.S. continues to see its rate of new daily infections slow, with levels that now sit above 30,000, nearly 10,000 lower than last week. It is worth noting the decline was not as profound as it has been in recent weeks, but the trend nonetheless was lower. Europe continues to see a broad deterioration in virus trends across many countries. Many are now exploring a variety of containment measures though most have indicated they will avoid any restrictive lockdowns. This should help reassure investors that any hit to the region’s economy may not be as severe as it was earlier this year.
Fed Chair Jerome Powell unveiled a change to the institution’s approach to monetary policy this week. This was widely anticipated but still very important. The Fed has historically wanted long-term inflation expectations to be anchored at 2%. But, it has acknowledged that inflation has been stubbornly low in recent years, running below 2% during periods of both weak and reasonably good growth. This could potentially lead consumers and businesses to expect lower longer-term inflation, a scenario which it is hoping to avoid. As a result, going forward, it will explore policy that would aim to achieve inflation “moderately above 2% for some time” in hopes of offsetting the periods when inflation is running below its long-term 2% target. For those who are interested, I found an interesting article on from CNBC that goes into more detail about Powell’s speech and what it means for inflation and employment.
The messaging from the Fed this week has served as another reminder of the significant role they have played along with other central banks around the world this year. Ultra-low rates and a variety of programs designed to ensure the proper functioning of lending markets have helped foster a significant recovery in global credit and equity markets. The economic recovery on the other hand has been more moderate. It will remain very dependent on fiscal support from governments and will ultimately be dictated by the future path and severity of the virus.
Many businesses have felt the pressure from COVID-19. Over the past few months businesses have been making many sacrifices and compromises to stay afloat, but does ESG (Environmental, Social, and Governance) principles and initiatives need to be one of the things they pull back on? In the beginning of August the RBC Global Equity Team from RBC GAM (Global Asset Management) sat down for a Q&A on “What COVID-19 means for ESG”.
Today’s tip deals with the dreaded back to school season. The beginning of September can be a stressful time for many parent, but this year bring out new challenges. Are you dealing with a kid's back-to-school jitters? Here are some tips and suggested routines.
Have a good weekend and enjoy he warm weather!