Economic Outlook – 10 April 2022


• The Federal Reserve published the minutes of its two-day policy meeting held March 15-16. All eyes were on the Fed’s roadmap for future monetary policy tightening. About quantitative tightening (QT), the Fed mentioned that “it would be appropriate to begin this process at a coming meeting, possibly as soon as in May”. All QT scenarios studied decreased the balance sheet at a faster pace than over the 2017-2019 period. A likely scenario has assets decreasing $95 billion per month ($60 billion in Treasury securities and $35 billion in MBS). According to the minutes, this plan “could be phased in over a period of three months or modestly longer if market conditions warrant.” Regarding future policy rate hikes, “many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified.” This opens the door to a 50-bps increase at the next meeting in May. Regarding the economic impact of the conflict in Ukraine, “several participants judged that the upside risk to inflation associated with the war appeared more significant than the downside risk to growth, as inflation was already high, the United States had a relatively low level of financial and trade exposure to Russia, and the U.S. economy was well positioned to absorb additional adverse demand shock.” Bottom line, it is likely the Fed will raise its policy rate 50 bps at its next meeting in May

• The ISM Non-Manufacturing PMI rose for the first time in four months, going from a 12-month low of 56.5 to 58.3. This was slightly below consensus expectations (58.5) but above the indicator’s pre-pandemic level and consistent with a decent pace of growth in the services economy. Three sub-indices—new orders (from 56.1 to 60.1), business activity (from 55.1 to 55.5), and employment (from 48.5 to 54.0)—signaled an acceleration of growth. However, the sub-indices tracking supplier deliveries (from 66.2 to 63.4), inventory sentiment (from 55.3 to 40.2) and imports (from 51.7 to 45.0) fell under pressure from supply chain issues. The report also indicated that inflationary pressures continued to mount among service providers. The prices paid index climbed from 83.1 to 83.8, just one-tenth shy of its all-time high of 83.9 reached in October. Of the 18 industries covered, 17 reported growth in March

• On the other hand, the imports sub-index fell into a contractionary territory while ongoing supply chain issued lowered purchasing managers’ inventory sentiment to an all-time low. The prices paid indicator was unsurprisingly higher given the energy shock dealt by the Russia-Ukraine war with all 18 industries reporting higher prices. In addition, respondents’ comments were quite negative, reflecting the pessimism over increasing cost and ongoing supply chain disruption. This pessimism was echoed in the vehicle sales release, which showed the second consecutive month of decline in March. While underlying demand remains strong and improving, sales will remain constrained by limited inventory. Furthermore, production may suffer another blow should the war in Ukraine result in semiconductor shortages later in this year. As a result of strong demand and tight supply, the inventory-to-sales ratio – a measure of adequacy of supply relative to current demand – remains historically low. This will continue to put upward pressure on car prices over the near-term.

• In February, the trade deficit remained steady at an all-time high of $89.2 billion. Goods imports increased 0.6% to a new record of $266.2 billion, led by crude oil (+$1.9 billion), other chemicals (+$1.2 billion), other petroleum products (+$0.9 billion), fuel oil (+$0.8 billion), and capital goods (+$0.9 billion). Goods exports rose 1.8% to $158.8 billion thanks essentially to a rebound in shipments of pharmaceutical preparations (+$1.5 billion). With imports expanding at a lower rate than exports, the goods trade deficit bounced back from its historical low of $108.6 billion to $107.5 billion. On a country-by-country basis, the U.S. goods deficit remained relatively stable with Canada (from $6.9 billion to $6.8 billion) but decreased with the European Union (from $18.0 billion to $17.0 billion), Japan (from $7.1 billion to $5.1 billion), and Mexico (from $12.5 billion to $9.8 billion)

• Initial jobless claims plunged from 202K to a 54-year low of 166K in the week to April 2. Continued claims, for their part, rose to 1,523K from 1,506K (revised from 1,307K). Despite this increase, claims were still at a very low level, reflecting the extraordinary strength of the labour market at present

• The US House of Representatives and Senate on Thursday passed bills stripping Russia of its Most Favored Nation trading status and banning imports of oil from Russia. The bills now go to President Joe Biden for his signature

• US mortgage rates rose above 5% this week for the first time since 2018. The combination of very low inventories of homes for sale and rising rates is increasingly pricing buyers out of the market. Data released this week by the Organization for Economic Cooperation and Development showed that inflation in the world’s 30 richest countries rose 7.7% in February, up from 1.7% a year earlier

• The major indexes finished lower for the week, with small-caps and growth stocks lagging considerably. Sector performance also varied widely within the S&P 500 Index, with the typically defensive consumer staples and health care sectors recording solid gains, while information technology, communication services, and consumer discretionary shares registered steep losses. Volumes were sparse for much of the week, as investors awaited the start of first-quarter earnings reporting season. Twitter shares jumped over 27.0% on Monday, however, following news that Elon Musk had acquired a 9.2% stake in the social media firm

• In terms of data release, the main event will be the publication of March’s CPI report. The economy continued to fire on all cylinders during the month and supply issues exerted upward pressures on prices. In this context, the core index is expected to have gained 0.5% MoM. As a result, the annual core inflation rate could jump to a 40-year high of 6.6%. Headline prices could have increased at an even stronger pace (+1.2% MoM), as seasonally adjusted gasoline prices surged upward. The headline annual rate could thus climb four ticks to 8.4%, the highest since January 1982

• The March retail sales report will also attract a lot of attention. Car dealers may have contributed negatively to the headline number, as auto sales dropped during the month. Gasoline station receipts, for their part, may have surged judging from a sharp increase in pump prices. All told, headline sales could have advanced 0.6% MoM. Spending on items other than vehicles may have performed better, rising 1.0%


• British companies hired permanent staff at the slowest rate in a year last month, despite raising starting salaries by a record amount, as they struggled with a lack of qualified candidates, a monthly survey of recruiters showed on Friday. Britain’s central bankers are looking out for signs that the tight job market will prolong the current surge in inflation, which hit a 30-year high in February – though they have also warned high inflation will hurt growth as the year goes on. The Recruitment and Employment Confederation (REC) said starting salaries for permanent staff saw the biggest increase since its records began more than 24 years ago. Hourly rates for temporary staff also rose, though by less than the record increases seen last year. “We can clearly see that labour and skills shortages are driving inflation in these latest figures,” REC chief executive Neil Carberry said

• Britain’s FTSE 100 slid on Thursday, weighed down by oil major Shell after it flagged a bigger write down following its decision to exit Russia, while a jump in shares of gambling firm 888 Holdings helped limit some losses on the midcap index. The blue-chip index (.FTSE) closed 0.5% lower, with Shell (SHEL.L) falling 2.1% as it raised its Russia write-down to as much as $5 billion, more than previously disclosed. Broadly, economy-linked sectors such as oil and gas, miners, banks and insurers fell on concerns over slower economic growth following hawkish signals from the U.S. Federal Reserve and amid the war in Ukraine that has elevated inflation. “The Fed minutes confirmed the feeling in markets, which was that 50 bp rate hikes were on the table and that quantitative tightening will begin in May even though the market believes economic growth will be impacted,” said Edward Park, chief investment officer at Brooks Macdonald Asset Management


• The European Central Bank also released an account of its March policy-setting meeting this week, and the account indicates that officials are prepared to end the ECB’s asset purchase program as early as June while deferring a decision on raising rates amid uncertainty stemming from the war in Ukraine. At the moment, markets expect the central bank’s -0.5% policy rate to end the year around zero. Some policymakers are reluctant to act too quickly given that energy costs, which are outside the ECB’s control, play a big part in the European inflation spike. The policymakers maintain that policy would have to massively depress domestic demand to lower inflation. In related news, ECB President Christine Lagarde announced this week that she is suffering from a mild case of COVID-19 and is working from home

• Investor morale in the eurozone fell to its lowest level in nearly two years in April, according to a monthly survey conducted by German market research group Sentix. Economic data provided more evidence of a gathering slowdown in Germany. German factory orders fell sharply in February, driven mainly by a decline in foreign orders. It was the first drop in orders after three consecutive months of gains

• Shares in Europe rose modestly amid concerns about central bank tightening, inflation, and Russia’s invasion of Ukraine. In local currency terms, the pan-European STOXX Europe 600 Index rose 0.57%. The main continental stock indexes were lower. France’s CAC 40 Index fell 2.04% on election uncertainty, with polls showing a significant narrowing of President Emmanuel Macron’s lead over far-right contender Marine Le Pen. Italy’s FTSE MIB Index declined 1.37%, and Germany’s DAX Index lost 1.13%


• The Caixin Services Purchasing Managers’ Index, a private survey focused on smaller businesses, sank to 42 in March from 50.2 in February, its lowest level since the pandemic started, reflecting the latest outbreak’s toll on consumer demand. In response to recent weak economic data, expectations are mounting that the People’s Bank of China will reduce the reserve requirement ratio, or the amount of money that domestic banks must hold in reserves, in the near term

• China’s market regulators proposed revising confidentiality rules involving offshore listings, a move that could end the country’s long-running dispute with the U.S. over audit inspections for dual-listed companies. The revised draft rules reportedly dropped a requirement that on-site inspections should be done mainly by Chinese regulatory agencies or rely on their inspection results, Bloomberg reported, citing a statement from the China Securities Regulatory Commission. The about-face by Beijing signals a possible breakthrough in the disagreement that has raised the risk of delisting for the roughly 270 U.S.-listed Chinese companies as early as 2024

• Sanctions concerns have prompted Chinese state refiners to forgo buying extra cargoes of Russian oil as they do not want to be seen as openly supporting Moscow, according to Reuters. A senior Chinese diplomat recently said that Beijing is not deliberately circumventing sanctions on Russia, the news agency reported, and that while the country is expected to honor long-term contracts signed before the invasion of Ukraine, it will steer clear of new deals. Furthermore, risk-averse Chinese state banks are said to be reluctant to finance Russian oil purchases. However, some independent refiners are still quietly cutting deals with Russian suppliers, paying in Chinese yuan, Reuters reported

• Chinese markets eased as a coronavirus lockdown in Shanghai and expectations for aggressive monetary tightening by the U.S. Federal Reserve curbed risk appetite. The broad, capitalization-weighted Shanghai Composite Index declined 0.94%, and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell 1.08%

Sources: T. Rowe Price, MFS Investment Management, TD Economics, National Bank of Canada, M. Cassar Derjavets.