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Weekly Market Digest
August 24 to August 28, 2020

Don Curren August 28, 2020

It was yet another eventful week, but the US Federal Reserve likely took center stage as far as currency market watchers were concerned.

In a widely watched speech on Thursday at annual Jackson Hole symposium sponsored by the Fed, its chair, Jerome Powell confirmed that the US central bank is revising its monetary policy framework and will now approach its employment and inflation targets on an average basis. That means that instead of laboring to keep inflation, for example, at its 2% target, the Fed will aim at maintaining an average or 2% over a considerable period of time, so that a period of extended below-average readings can be followed by above-average levels in order to bring the average over time back to 2%.

“In seeking to achieve inflation that averages 2% over time, we are not tying ourselves to a particular mathematical formula that defines the average. Thus, our approach could be viewed as a flexible form of average inflation targeting,” Powell said.

While the change was widely anticipated and may not have much immediate practical significance, it does mark a significant change in the Fed’s official operating framework and suggests further monetary expansion is possible in light of inflation’s underperformance in the last several years.

Also on Thursday, the US Bureau of Economic Analysis (BEA) reported that its second estimate of Q2 GDP pointed to a quarterly contraction of just above 9% – or -31.7% on an annualized basis. Although the revised figures are 1.2% better than the advance estimate, which indicated an annualized decline of nearly 33%, the decline in American economic output in the second quarter remains without precedent.

Canada’s numbers, released on Friday, showed it fared even worse in the second quarter, with a record 38.7% decline. But Statistics Canada also indicated the economy had begun to recover quickly in June, when GDP grew by 6.5%, the largest monthly increase on record.

The Canadian dollar retreated from earlier highs after the data was released, but over the week as a whole gained about 0.5% as risk-sensitive currencies retained ascendancy over the struggling US dollar.

Earlier in the week, the Conference Board reported its Consumer Confidence Index dropped 8.2 points in August, falling to 84.8. This represented a second consecutive decline, and was a major disappointment for market participants who had expected a more modest 1.3-point drop.

On the political front, the Republican Party held its convention in Charlotte, North Carolina, with speakers including Vice-President Mike Pence, various party luminaries, and members of the Trump family. It culminated on Thursday night when President Donald Trump formally accepted his party’s nomination as its candidate in the November presidential election.

Tensions over racial inequality and police violence in the US boiled over again when Jacob Blake was shot seven times by police in Kenosha, Wisconsin, unleashing escalating violence in that community that included the killing of two protestors, allegedly shot by a 17-year-old with an semi-automatic weapon.

Meanwhile, COVID-19 continued to exact a deadly toll around the world. According to data compiled by Johns Hopkins University, as of Friday morning, 24,499,384 people around the world had been infected by the novel coronavirus and 832,608 had died.

The data calendar is relatively heavy next week, with the ISM’s PMIs for the manufacturing and service sectors in the US, inflation and retail sales data for the euro zone, and August jobs data for both the US and Canada, which are scheduled for release Friday and will likely be the most important data releases of the week.

Suggested Reading   |   Cambridge Market Analysis

■ Canada’s GDP Contracts 38.7% in Q2, But Healthy Rebound Begins in June  read article
■ Fed to Tolerate Higher Inflation in Policy Shift  read article
■ Modestly Positive US GDP, Labor Market Data Overshadowed by Powell Speech  read article
■ Consumer Confidence Tumbles, Dollar Strengthens  read article

Suggested Reading   |   Counterparties

■ WSJ: Covid Crisis Drives Historic Drop in Global Trade  read article
■ MarketWatch: Consumer confidence tumbles to new pandemic low after summer viral outbreak  read article
■ Federal Reserve: New Economic Challenges and the Fed’s Monetary Policy Review  read article
■ Project Syndicate: The Crowding-Out Myth  read article
■ MarketWatch: Buffett Turns 90 This Week. Succession Is More Important Than Ever for Berkshire Hathaway Stock.  read article
■ WSJ: Covid-19 Is Dividing the American Worker  read article
■ Bloomberg: Ultra-Rich Club Stockpiles Cash as U.S. Economy Fears Grow  read article
■ Bank of Canada: The imperative for public engagement    read article
■ MarketWatch: Fed adopts new strategy to allow higher inflation and welcome strong labor markets  read article
■ WSJ: China’s Economy Is Bouncing Back—And Gaining Ground on the U.S.  read article

Calendar for the Week Ahead

Monday, August 31
■ CAD – Building Permits
■ AUD – Interest Rate Decision

Tuesday, September 1

■ EUR – Core Inflation Rate
■ USD – ISM Manufacturing PMI
■ AUD – GDP Growth

Wednesday, September 2
■ USD – ADP Private Sector Employment

Thursday, September 3
■ EUR – Retail Sales
■ USD – Jobless Claims
■ USD – Balance of Trade
■ USD – ISM Services PMI
■ CAD – Merchandise Trade

Friday, September 4
■ CAD – Labor Force Survey
■ USD – Nonfarm Payrolls

Don Curren
Market Strategist and Content Editor