Economic Outlook – 11 April 2021


• The goods and services deficit widened US$3.3 billion to US$71.1 billion. Overall, trade activity was soft, with goods imports and exports sinking 3.5% (US$4.8 billion) and 0.9% (US$2.0 billion), respectively. In the service sector, exports sagged US$0.2 billion while imports rose US$0.3 billion. In light of many industry surveys reporting that widespread supply chain issues and bad weather contributed to lengthen supply delivery times, it was to be expected that these factors would weigh on trade activity in February. On the west coast, where the ports of Los Angeles and Long Beach handle more than one-third of U.S. container imports, the logjam was particularly severe, with ships having to wait to reach berths and off-loaded containers sitting at packed freight terminals for long periods of time. The hold-up was exacerbated by staff shortages due to Covid-19. Rail yards, trucks terminal and distribution centres, too, faced similar challenges. In recent press conferences, however, port officials indicated that, while storage space remained packed with containers, bottlenecks were gradually improving. Although transportation constraints were not expected to evaporate quickly, forecasts for stronger global growth suggest that exports will strengthen later this year, provided that vaccine rollout stays on an uptrend, thus contributing to allay uncertainty regarding the pandemic

• In March, the ISM Service PMI rose 8.4 percentage points to 63.7, its highest reading since inception. The Business Activity index climbed to 69.4, also an all-time high, while the New Orders index jumped 15.3 percentage points to 67.2. The Employment index gained 4.5 points to 57.2, for a third straight month above the 50-point threshold. Employment was up for 22.6% of survey respondents, unchanged for 66.3%, and down for 11.1%. The Supplier Deliveries index edged up to 61 from 60.8 in February. Not surprisingly, input prices continued to head higher. The Prices Paid index climbed 2.2 points to 74.0, its highest reading since July 2008. All in all, the report was encouraging for the service sector, especially in light of the current pace of vaccine rollout in the United States

• The Federal Reserve this week published the minutes of its two-day policy meeting held March 16 and 17. Entering the meeting, the focus was squarely on the Fed’s updated Summary of Economic Projections and Dot Plot, as the $1.9-trillion American Rescue Plan was incorporated in projections for the first time. The new dot plot had two additional dots moving rate hikes into 2023 (for a total of 7) while three more dots moved higher fed funds projections into 2022 (for a total of four). The median dot through 2023 remained at the effective lower bound

• Participants commented on the notable rise in longer-term Treasury yields that occurred over the inter-meeting interval and generally perceived it to reflect three elements: an improved economic outlook, some firming of inflation expectations, and heightened expectations for increased Treasury debt issuance. Disorderly conditions in Treasury markets and a persistent rise in yields that could jeopardize progress toward the Committee’s goals were seen as concerning. Participants also noted that it would likely be some time before substantial further progress was made toward the Committee’s maximum-employment and price-stability goals and that, consistent with the Committee’s outcome-based guidance, asset purchases would continue at least at the current pace until then. The minutes did not provide a whole lot of colour beyond what was contained in the statement and subsequent press conference. They highlighted encouraging COVID-related developments, namely, the start of the vaccination campaign and the decline in the number of infections, hospitalizations and deaths. However, they also indicated that the pandemic continued to pose considerable risks to the economic outlook, especially with the advent of more dangerous COVID variants. The minutes also underscored that inflation remained below 2% and that output and employment were still well below levels consistent with full employment. Finally, it was reiterated that the economic downturn had a disproportionate impact on some minority communities

• The Job Openings and Labor Turnover Survey (JOLTS) showed that positions waiting to be filled jumped from 7,099K in January to 7,367 in February, their highest level since January 2019. Based on these figures, the ratio of job offers to unemployed person in the United States was 0.74. Although this was well below the historic high of 1.23 attained before the crisis, it was still far above the low of 0.16 reached at the height of the 2008-2009 recession. On a positive note, the ratio of openings to total employment struck an all-time high in February. 3Economics and Strategy Weekly Economic Watch In February, job gains in health care/social assistance (+233K), accommodation (+104K), and arts/entertainment (+56K) were offset only in part by declines in state/local government education (-117K), educational services (-35K), and information (-34K). The JOLTS report also showed that hires were up from 5,465K in January to 5,738K. There were 5,456K separations reported, 1,775K of which were layoffs or discharges. The quit rate (number of voluntary separations/total employment), for its part, stayed put at 2.3%, one tick shy of its pre-pandemic peak. The rebound in quits since the height of the crisis is encouraging in that it may reflect growing confidence among employees and stiffer competition among employers

• Initial jobless claims increased 16K to 744K in the week ending April 3. The previous week’s level was revised up 9K to 728K. The four-week moving average edge up 4.8K to 723.8K, breaking an eight-week down streak. The advance number for seasonally adjusted insured unemployment (i.e., continued claims) fell 16K to 3,734K in the week ending March 27. At their peak in early May last year, continued claims totaled 24.9 million. Data on claims for benefits under all programs, including those introduced since the start of the health crisis (i.e., Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation), are available only after a longer lag. In the week ending March 20, continued claims for UI benefits across all programs fell 51K to 18.16 million

• On Friday, the Bureau of Labor Statistics reported that producer prices rose by 1% in March, roughly twice consensus estimates. The jump pushed the year-over-year increase to 4.2%, the largest in nearly a decade. Investors seemed to be keeping an eye on supply chain pressures, particularly delays at U.S. ports and the global semiconductor shortage, which has led to temporary shutdowns in automotive production lines

• The U.S. trade deficit rose to a record $71.1 billion, as exports declined more than imports. With major trading partners still struggling to contain the spread of the virus, demand for U.S. exports fell. At the same time, shipping congestion in ports of Los Angeles and Long Beach contributed to the decline in trade in the month. This has not yet been resolved, and alongside the disruption at the Suez Canal, will continue to show up in the economic statistics in the month ahead

• After receiving pushback from business executives and lawmakers in his own party on raising the US corporate tax rate to 28% from 21%, President Biden this week signaled that he is willing to be flexible on the top-line figure. Many analysts expect the statutory rate to land somewhere around 25%. Biden is also said to be open to delaying the tax hikes in order to garner support from Senate Republicans for his infrastructure proposal. GOP lawmakers have indicated that the $2.25 trillion plan spends too little on infrastructure and too much on longtime Democratic policy priorities. However, a favorable ruling from the Senate parliamentarian this week may make it easier for Democrats to pass more spending bills without any Republican buy-in

• Most of the major benchmarks moved steadily higher to record highs, although the small-cap Russell 2000 Index recorded a modest loss. The technology-heavy Nasdaq Composite Index outperformed the broad market S&P 500 Index but stayed below its February peak. Tech shares also regained the lead within the S&P 500 during the week, helped by solid gains in Apple and Microsoft—which together account for roughly 40% of the sector’s market capitalization. Casino and cruise line shares were also especially strong, while energy stocks lagged as oil prices pulled back early in the week. Growth stocks handily outperformed value shares, narrowing the performance gap for the year to date

• In terms of data release, consumer prices are expected to rise in March to 0.6%. If realized, this would push YoY rate to 2.6%, or the highest since August 2018. While market participants will take note of the pickup in inflation, the core measure is expected, excluding food and energy, to rise a more modest 0.2% over the month. A subdued 1.6% YoY rate of core inflation should console markets that inflation is not yet spiraling out of control. Take note: The YoY growth rates will be bolstered in coming months by low base effects from when prices collapsed last year due to lockdowns

• March was likely a blockbuster month for retailers. The public health situation rapidly improved during the month, and nearly 80% of the latest round of economic impact payments (direct checks) designated under the American Rescue Plan were sent to households. Based on how quickly the previous round of direct checks burned a hole in consumers’ pockets, an immediate surge in spending is possible. Retail sales is expected to surge 5.4% in March. Spending should be pretty broad-based, but autos are set to be particularly strong, as separately reported data from last week revealed auto sales notched a three-and-a-half year high in March. Strength extended beyond the auto sector in March, as high-frequency data from OpenTable showed the best month for seated diners since the lockdowns last year, which bodes well for another strong month for restaurant sales


• The government of Italy sold €5 billion worth of 50-year bonds to lock in favorable rates as it fund its COVID-19 recovery plans. Demand for the issue, which yielded 2.2%, was robust at nearly 13 times oversubscribed. Governments throughout the European Union have been heavy issuers of debt this year as fallout from the pandemic has strained national budgets. In the first quarter, a record €373 billion in European government bonds were issued

• At the March meeting, ECB had a slightly optimistic tone on the economic outlook and came with some hawkish comments to the PEPP implementation. The market impact was insignificant in the short term, it will take a significant worsening of the risk appetite for ECB to step up purchases.

• Industrial production in Germany and France fell sequentially in February, raising concerns about the pace of economic growth. In France, total output fell 4.7%, while industrial production in Germany contracted 1.6%, according to official data

• Shares in Europe rose on growing hopes that injections of fiscal stimulus and dovish central bank policies would spur a global economic rebound. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.16% higher. Major stock indexes were mixed. France’s CAC 40 gained 1.09%, Germany’s Xetra DAX Index added 0.84%, and Italy’s FTSE MIB fell 1.14%. The UK’s FTSE 100 Index advanced 2.65%, partly owing to a weaker UK pound, which fell on concerns about vaccine supply issues and profit taking after a strong quarter


• Prime Minister Boris Johnson said that England would move to the second phase of its “road map” for lifting the lockdown on April 12, when outdoor pubs, nonessential shops, hairdressers, indoor gyms, and other facilities will be allowed to reopen. The UK government also announced a framework for the resumption of international travel, which could begin to take effect on May 17, at the earliest

• British construction activity grew at the fastest pace since 2014 last month, boosted by a restart in postponed hospitality, leisure and office projects as COVID-19 restrictions start to ease, a monthly survey showed. The IHS Markit/CIPS construction Purchasing Managers’ Index jumped to 61.7 in March from 53.3 in February, its highest reading since September 2014 and well above the increase to 54.6 forecast in a Reuters poll of economists. Any reading above 50 represents growth. “Improving confidence among clients in the commercial segment was a key driver of growth, with development activity rebounding in sectors of the economy set to benefit the most from the improving pandemic situation,” said IHS Markit economics director Tim Moore. House-building has shown strong growth, bolstered by rapid house price growth despite the pandemic, as richer households sought more space to work from home and the government cut taxes on house purchases

• London’s FTSE 100 climbed on Thursday supported by gains in heavyweight mining and banking stocks, while Johnson Matthey shares jumped as the company began a strategic review of its health business. The blue-chip index rose 0.08%, according to Yahoo Finance, with Johnson Matthey, up 3.2%, among the biggest gainers on the index. Mining stocks rose, with Anglo American gaining 1.6% on its plans to spin off its thermal coal assets in South Africa. The domestically focused mid-cap FTSE 250 index edged 0.06% lower, after a record high in the previous session


• The private Caixin Services PMI jumped to 54.3, its fastest expansion pace since December 2020 and reinforcing the strong official PMI readings at the end of March. Analysts attributed the improvement to the lifting of travel restrictions after the Lunar New Year in February and said it signaled a broad-based improvement in China’s services sector, which has lagged the country’s recovery. The Caixin Services PMI also revealed that business expectations rose to the highest level since February 2011 while a services employment index rebounded after three monthly declines

• The consumer price index (CPI) rose to a five-month high in March, while the producer price index (PPI) accelerated 4.4% year over year after rising 1.7% in February. The March PPI surge, its largest increase since July 2018, fueled worries about global inflation, which appears to be on the rise as the pandemic recedes and economies recover. Liu He, China’s top economic adviser, said that he is “watching closely commodity prices.” However, falling pork prices—a key part of the CPI basket—should help dampen food prices and restrain headline CPI inflation this year, according to analysts

• Chinese stocks recorded a weekly loss, extending several weeks of underperformance against other major global markets. The large-cap CSI 300 Index fell 2.4% and the benchmark Shanghai Composite Index shed 1.0%. Data indicating higher inflation and elevated U.S.-Sino tensions weighed on sentiment and outweighed positive corporate earnings. According to Citi Research, about 67% of the 33 Chinese industrial companies it covers recorded earnings that either beat or met consensus forecasts, with about half of that number reporting better-than-expected earnings—far exceeding the typical one-third ratio.

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