Research and Market Commentary

Global Markets Insights: Retail’s rallying cry, a dovish Fed and the U.S. dollar’s drop

July 31, 2020


U.S. retailers are in a difficult spot as the number of COVID-19 cases across the country continue to grow, raising concerns of spread within stores. While some retailers such as Walmart have announced that all customers must wear masks at its stores south of the border, others are not taking this step due to a growing anti-mask lobby and violent incidents over mask policies. Meanwhile, the US Federal Reserve Chair said this week that the Federal Open Market Committee is concerned the economy may be slowing but wants to see harder evidence, including about the magnitude and duration of a slowing period. Against this backdrop, the US dollar has fallen broadly this week, but that decline hasn’t benefitted the loonie. 

Scotiabank analysts and economists weigh in on what the pandemic means for retail, U.S. economic policy, and foreign exchange.


  • The latest rallying cry in retail in the US is the hashtag #maskup. On July 20, Walmart announced it would require all customers at its US stores to wear masks.  About 65% of its stores are in areas where there is a government mandate on face coverings. WMT’s move to require masks across all stores brings consistency across its network and is in line with statements from the CDC recommending everyone wear a cloth face cover when they go out in public. WMT has placed “health ambassadors” at the front of its stores to remind shoppers of the new rule.  Other large retailers, including Kroger, Kohls, Target, Home Depot and Lowes, quickly followed suit. However, retailers such as Foot Locker will not introduce mask mandates, stating they are difficult to enforce, and they don’t want to put their workers in the position of having to tell shoppers to wear a mask.

  • Retailers are caught in a tough position as cases grow and mounting concerns of possible spread in stores. At the same time there is a growing anti-mask lobby which has sparked violent incidents at stores. A security guard in Michigan at a Family Dollar store was shot and killed after telling a customer to wear a mask. In recent weeks, many online videos have surfaced showing confrontations between anti-mask customers and store clerks at Costco, Target and other retail stores. On July 28, a group of 135 Florida-based CEOs signed a statement urging heightened steps to reduce the COVID risk and noted their views are based on science. This is taking place in a state that is reaching record levels of cases on an almost daily basis. They emphasized wearing masks can save lives just as wearing seatbelts and life vests, and obeying traffic lights do.

  • Most retailers are very much focused on the all-important holiday season, as we enter the back half of the retail year. Holiday 2020 will be like no other year. The season begins with Black Friday, usually the largest shopping day of the year which is kicked off with big sales on Thanksgiving Day. In the past decade, the Black Friday tradition has migrated to Canada and Europe. The pandemic is affecting how retailers plan to address the holiday season. No one knows for sure if the typical shopping surge will happen, but if it does, it will stress physical distancing protocols and safety considerations. Walmart announced on July 21 its intention to keep stores closed on Thanksgiving Day for the first time in 30 years. Many other large US retailers have followed suit, including Target and Best Buy. The pandemic looks set to upend a longstanding shopping tradition of consumers rushing out post turkey to grab door stopper specials.

  • After improved Consumer Confidence in June over May, the US Conference Board revealed this week that Consumer Confidence fell in July and now stands at 92.6, down from 98.3 in June, a larger decline than most economists anticipated. The largest declines were evident in Michigan, Florida, Texas and California, undoubtedly a result of the resurgence of COVID cases in these states. US consumers, according to the survey, are now less optimistic about the short-term outlook for the economy and labour markets and are subdued with respect to financial prospects. The percentage of those surveyed expecting more jobs in the months ahead declined to 30.6% from 38.4%. This uncertainty does not bode well for consumer spending, nor for a recovery.  The July data suggest the recovery in the US has shifted into a lower gear as consumers are more cautious about the outlook with virus cases continuing to escalate.


—  Patricia Baker, Director, Retailing, Global Equity Research


U.S. economic policy

  • U.S. Federal Reserve Chair Jerome Powell said in a press conference this week that “we have substantially, not fully restored functioning markets” through asset purchase programs. This is interesting because some would say that market functioning has been restored and then some. Regardless, Powell is saying that the FOMC is not even at the point of shifting motives to, say, emphasizing net stimulus versus repairing markets. Thus, the first goal of boosting market functioning—and with it valuations—has not yet been achieved and that was music to the S&P500’s ears.

  • Powell emphasized that the FOMC is concerned the economy may be slowing but wants to see harder evidence, including about the magnitude and duration of a slowing period. That indicates they are on heightened alert for downside disappointments, but for now, he also left the door open to the possibility the economy could do just fine. Powell also sloped off a question about upside risk if a vaccine emerges and said they “hope for the best, plan for the worst.” For now, markets may have taken this as a dovish bias in favour of doing more, but the obvious trade-off to risk appetite would be if the economy really does sour.

  • Powell explicitly noted that markets should not expect the Fed to cut back on facilities or policy for a "very, very long time."

  • As well, dollar swap lines and the repo facility were extended to the end of March. This is consistent with Monday’s extensions and not especially surprising in that the Fed is just extending the time period that such backstops will be in place throughout a period of heightened uncertainty. Powell explained that while they have served their purpose by restoring markets, the Fed extended them in order to facilitate planning by other central banks so they know they are still there and for as long as needed. He made a point of noting that there is nothing going on in the market that raises any concerns to motivate extensions.


—  Derek Holt, Vice-President & Head of Capital Markets Economics

To read the full Scotiabank Economics report on How the Fed Increased its Dovishness, click here.


Foreign Exchange

  • The USD has fallen broadly this week, with its “market-weighted” DXY index falling to its lowest level since mid-2018. The DXY is heavily weighted to the EUR component (nearly 60%) but the USD has weakened around 2% over the past week against a range of currencies: The JPY, MXN, GBP and EUR are among the main winners.  The move against the USD appears broadly based, in other words. 

  • USD losses reflect much diminished growth and yield advantages that international investors have previously found seductive and that provided a significant cushion against the USD’s traditional structural impediments (large current account and fiscal imbalances). Investors can now obtain higher (that is to say, less-negative) real yields in Japanese government bonds and stronger equity market returns in Europe than on offer in the US and are voting with their feet.  With no obvious market stresses or significant equity market volatility to contend with, investors also feel less need to hold USD. The desire to diversify risk is also clearly reflected in the surge in gold prices to new, record highs near $1,980/oz.

  • The CAD has failed to fully benefit from the decline in the USD and remains more or less range bound above the 1.33 (75 USc) level.  The week has been devoid of domestic data releases, although informal, high-frequency data, such as the Indeed Canada job postings , suggest the economy continues to recover slowly – albeit from a very deep hole. We think the CAD should be able to catch up a little with its major currency peers if it can secure a break under 1.33 in the next week or so.  


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

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


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