Research and Market Commentary

Global Markets Insights: Retail, housing see gains, FX markets settle down

June 19, 2020

Retail sales in the US saw their biggest monthly gain on record as parts of the economy began to reopen, but the year-on-year numbers are less impressive. Housing in Canada also had a significant bounce, though some downside risks remain. Currency markets have settled into a narrow range, but the Canadian dollar continues to track equity market volatility quite closely.

 

We asked Scotiabank analysts to weigh in with their latest insights on what the pandemic might mean for retail, foreign exchange and equities.

 

Retail

  • US retail sales saw the biggest monthly gain on record in May, with month-on-month (m/m) sales up 17.7%, a solid rebound from the April m/m decline of 14.7% (adjusted from -16.4%). The 17.7% gain was more than double the consensus expectation of +8.1%. Excluding auto, May retail sales rose m/m by 12.4%. However, on a year-on-year (y/y) basis, May retail sales declined 6.1%. Sales of clothing and accessories, electronics, appliances, sporting goods, furniture and motor vehicles surged in May after steep declines in April.

 

  • Every retail category saw a month-on-month uptrend in May sales, according to the National Retail Federation (NRF), which conducts a separate US data survey. Clothing and accessory stores led the gain with a 186% surge. However, sales were down 63% y/y. Furniture stores gained 89.7% (down 23.2% y/y) while sporting goods delivered a similar trend, up 88.2% with a 6% decline y/y. Grocery and beverage stores were up 2% m/m seasonally adjusted, and up 14.3% unadjusted y/y. Building materials and garden supply stores were up 10.9% m/m seasonally adjusted, and up 10.8% unadjusted y/y. Online and other non-store sales were up 9% m/m seasonally adjusted, and up 25.3% unadjusted y/y. General merchandise stores were up 6% m/m seasonally adjusted and up 1.6% unadjusted y/y. The year-on-year trends for the most part do tell a less robust story, with most retail categories witnessing sales declines that will certainly threaten some livelihoods should they persist.

  • No doubt the May recovery in spending reflects the fact that 2.5M people returned to work in the US that month and the boost to household incomes brought about by the various government support programs. It remains to be seen if the May trends can continue and whether this surge simply reflects pent-up demand and might not be sustainable. There is likely to be a behavioural component here as well, as consumers feel release from lockdown and have the freedom to engage in an activity they had been denied for months. The bigger question is how consumers will behave when the government benefits end. Here in Canada, retailers will likely get a boost from the fact the Trudeau government has extended the CERB until September. As such we would expect continued positive sales trends in those categories that support recreation and outdoor living. In the US all eyes are on the prospect of a second stimulus package and how large that might be.

  • Customers returned to the British high streets this week as non-essential retail stores were allowed to reopen on June 15. Initial data from UK consultancy Springboard indicated footfall or traffic was down ~30% compared to the same day a year ago. This is better than the 50% decline anticipated by many retailers. It would appear on the surface the UK trend is mirroring that of other European countries where non-essential retail opened earlier. What we are seeing on a global basis is that customers want to shop and want to resume normal activities. How 2020 fares with respect to retail recovery will be highly dependent on whether consumers have the wherewithal to support shopping spend. In the context of government support they do at least for now have some ability to do so. It remains to be seen how that will look in the back half of the year.
     

—  Patricia Baker, Director, Retailing, Global Equity Research


Foreign Exchange

  • FX markets have settled into narrow, churning ranges as equity markets steadied after last week’s sharp losses.  Renewed worries have emerged on the geo-political front (following the India/China border clash and renewed tensions on the Korean peninsula) and in the US amid clear signs of COVID-19 flare-ups in some of those US states (for example, Florida, Arizona and Texas) that had opted to re-open earlier than others. For now, investors are looking through these challenges amid very accommodative central bank policy settings globally, which is providing a significant backstop for risk assets.

  • USDCAD’s early week rally towards 1.37 drew out renewed USD selling pressure but losses have steadied around 1.35 at writing.  The CAD continues to track equity market volatility quite closely, at the expense of variables such as crude oil prices. Our correlation studies show the CAD’s rolling 1-month correlation with daily returns of the S&P 500 strengthened to +76% this week, near the recent peaks (+81%) seen around the March market crash.

  • Positioning and sentiment data indicate that FX investors and speculative FX traders have remained bullish on the USD and bearish on the commodity currencies such as the AUD and CAD since earlier this year and have maintained those positions even through the melt up in stock prices since the late March low. This should limit scope for USD gains and CAD weakness in the near-term (as traders will look to liquidate unprofitable or “offside” positions at more advantageous levels) and might force investors to liquidate those positions (selling USD and buying back the CAD, in other words), if the risk rally extends further in the coming weeks.
     

—  Shaun Osborne, Managing Director, Chief FX Strategist, and Juan Manuel Herrera, FX Strategist
 

Housing

  • Easing of COVID-19 lockdown measures brought increasing numbers of home buyers and sellers to the table in May. Canada-wide existing home purchases surged 56.9%, while new listings climbed 69% (both sa m/m). Both gains were the strongest ever recorded; though relative to February 2020—the final pre-lockdown month—sales and listings were down 42% and 36%, respectively. A national sales-to-new listings ratio of about 59% continued to indicate roughly balanced supply and demand, and the aggregate MLS Home Price Index (HPI) held steady on a year-over-year basis, as it did in April.

  • After April’s near-nationwide plunge in sales activity, markets across the country were buoyed by partial economic re-openings. Purchasing volumes rose in 30 of the 31 metropolitan areas for which we maintain data; 16 of those increases were record highs. Ten of those 31 cities were technically in sellers’ market territory, while 16 were technically balanced.

  • Significant, broad-based home sales and new listings rises were widely expected following early reports from local real estate boards plus trends noted in consumer spending data and early economic indicators such as employment and auto sales. More gains may well come in June as restrictions continue to be eased.
     

—  Marc Desormeaux, Senior Economist, Scotiabank Economics


To read the full Scotiabank Economics report, including potential downside risks for Canadian housing, click here.

 

For Scotiabank, Global Banking and Markets Research Analyst Standards and Disclosure Policies, please visit www.gbm.scotiabank.com/disclosures.

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