Economic Outlook – 12 December 2021


• Core CPI inflation slowed slightly from October but remained hot at 0.5% MoM. As expected, motor vehicles once again pushed core goods prices higher. New vehicle prices rose 1.1% while used car and truck prices rose 2.5% for the second month in a row. On the services side, shelter costs continued their steady climb higher, with another 0.4% increase in owners’ equivalent rent component and a 3.2% increase in prices for lodging away from home, such as hotels. Inflation continues to trend higher as prices in the service sector pick up and goods inflation remains stubbornly high, creating a double-barrelled inflation challenge for consumers and policymakers alike. The October data supports expectations for the Fed to announce an acceleration of its wind-down of asset purchases at its meeting next week

• The Job Opening and Labor Turnover Survey (JOLTS) reported 11 million available jobs in October. This number is close to its record high in July and higher than the 6.9 million of workers who were unemployed that month. In fact, the ratio of the unemployed to job openings dropped to an historical low in the month. Adding marginally attached workers back to the labor force, the ratio of unemployed to job openings is slightly higher, but still in line with the average observed in 2019 when the labor market was the healthiest it had been in fifty years

• Delays in transportation and bottlenecks at the nation’s largest ports remain an issue. There were reports of a sizable decline in the number of container ships anchored off the San Pedro Bay ports in recent weeks, but this appears to have been a head-fake rather than a true indication of an easing in conditions. Many ships are now simply anchoring further offshore outside the designated 40-mile ‘Safety and Air Quality Area’, meaning the total number of ships both inside and outside the area awaiting port space remains high. In fact, it is reported higher than ever, with a record 97 ships reported awaiting port space as of December 9, 68 of which were outside the 40-mile area

• Imports have outpaced exports throughout the pandemic due to an exceptional pace of domestic demand. But exports surged in October (+8.1%) and are being met with more modest import growth (+0.9%), causing the trade balance to narrow by $14.2 billion. For perspective, this gain was outpaced only once during the financial crisis of 2008 in data going back to the early-1990s and puts the trade balance at its lowest deficit in six months. That said, October data is likely more a story of monthly volatility rather than the start of a sustained narrowing in the deficit. The need to replenish depleted inventory levels in the U.S. will keep imports flowing in even as demand shifts back to services. Further, global demand for U.S. goods may stumble again in the near-term with the renewed spread of COVID cases, most notably in Europe and China

• Ten Republican US Senators voted for a bill that will allow Senate Democrats to raise the US debt ceiling by a simple majority vote. Party leaders in the upper chamber crafted a one-time suspension of the Senate rule requiring 60 votes to pass legislation to raise the debt limit. The bill stipulates that Democrats must raise the limit by a specified amount and not merely temporarily suspend it, as has been done in the past. Meanwhile, negotiations among Senate Democrats on Biden’s $1.75 trillion Build Back Better agenda remain stalled

• The S&P 500 Index recorded its best weekly gain since February, as fears seemed to abate about the new omicron variant of the coronavirus. Most of the benchmarks moved near their record highs, and the S&P MidCap 400 Index reached a new peak on Friday. Information technology stocks drove much of the rally, as solid gains in Apple pushed the market capitalization of the world’s most highly valued public company near USD 3 trillion. Shares of financial firms and utilities lagged but still recorded gains

• In terms of data release, retail salesy is out on Wednesday. Retail sales bested consensus estimates and jumped 1.7% in October, bringing overall sales to 16.3% above prior year levels. E-commerce sales registered the strongest monthly gain, rising 4.0% during the month. Sales also rose notably at gas stations, auto, electronics and building material stores. The headline gain in overall sales confirms that the U.S. consumer remains on solid ground. However, retail sales are reported in nominal terms (i.e. not adjusted for inflation). Rising prices for items such as vehicles, gas and other goods are clearly playing a role in lifting total sales in those categories. Put differently, October’s change in the volume of retail sales was likely somewhat softer after accounting for inflation

• The FOMC’s final meeting of 2021 will conclude on Wednesday, December 15th. The FOMC is expected to maintain the current fed funds target range of 0.0%-0.25%. However, considering that the labor market continues to tighten and inflation pressures continue to mount, FOMC officials are likely to announce that it plans to taper asset purchases at a faster pace over coming months. Specifically, FOMC is expected to reduce Treasury and mortgage-backed securities purchases at a pace of $15 billion and $7.5 billion per month, respectively, which would lead to purchases wrapping up in April 2022


• Britain’s economy barely grew in October, even before the emergence of the Omicron coronavirus variant, further denting expectations that the Bank of England (BoE) will raise interest rates next week for the first time since the pandemic struck. Gross domestic product edged up by just 0.1%, slowing sharply from September’s 0.6% growth and much weaker than a forecast of 0.4% in a Reuters poll of economists. The world’s fifth-biggest economy remained 0.5% smaller than it was just before Britain was first hit by COVID-19 in early 2020, the Office for National Statistics said. “We’ve always acknowledged there could be bumps on our road to recovery,” finance minister Rishi Sunak said, adding that Britain’s economic support measures and vaccine programme would keep the recovery on track

• The British public’s expectations for consumer prices over the coming year rose sharply last month but were little changed looking further ahead, a Bank of England survey showed on Friday


• Things have become more complicated for the ECB since the last meeting. Whereas most analysts, and to some extent even the ECB, were expecting the last monetary policy meeting of this year to resolve a number of policy questions, including the Q1 2022 PEPP purchase rate, the nature and extent of post-PEPP APP after March next year, and an updated inflation outlook, this is no longer certain. In the weeks leading up to the meeting, policymakers have signaled that the Governing Council could defer some decisions previously expected for December 16th (most likely post-PEPP QE) to a later meeting. Headline inflation has continued to surprise on the upside, largely due to energy prices and ongoing supply side disruptions. Stronger inflationary pressures and market expectations in the US and some other countries are pushing central banks to reascertain their policy trajectories.The Omicron variant is adding to the problems already being caused by the Delta variant, and has made the economic outlook more uncertain as pandemic restrictions are once again on the table. Indicators of mobility and cases all point to an increasing likelihood of another wave of the pandemic. Vaccination rates, while high in several large eurozone countries, have been low enough in others see to see a dramatic rise in infections

• German industrial production rose much more than expected in October, but orders plummeted, Federal Statistics Office data showed. Output climbed a seasonally adjusted 2.8% month over month, based on revised data for September. Orders, however, tumbled 6.9% sequentially, after the increase for the preceding month was revised higher to 1.8%. Exports grew for the first time since July, rising 4.1% on the month, the strongest pace in more than a year. Imports surged 5%

• Shares in Europe rebounded as fears about the omicron variant of the coronavirus and its potential economic implications subsided. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.76% higher. France’s CAC 40 Index climbed 3.34%, Italy’s FTSE MIB Index advanced 3.02%, and Germany’s Xetra DAX Index gained 2.99%


• China’s export growth slowed in November due to currency strength and weaker external demand. However, imports jumped amid the scramble to restock depleted commodities, such as coal. Exports rose 22% year on year in November, decelerating from last month’s 27.1% increase, while imports surged 31.7%, outpacing October’s 19.8% rise. As a result, China’s trade surplus in November reached USD 71.72 billion, down from October’s USD 84.54 billion surplus. On the inflation front, China’s consumer price index rose 2.3% in November from a year ago compared with October’s 1.5% gain, reflecting higher food prices and a low base in the prior-year period. But the producer price index rose 12.9% in November from a year earlier, easing from October’s 13.5% increase

• The property sector remained under duress. Kaisa Group, the latest high-profile developer trying to avert default, announced a bond exchange program for its creditors. Kaisa has unpaid coupons totaling over USD 59 million that were due on November 11 and 12, with 30-day grace periods for both. If the offer to bondholders fails, “we may not be able to repay the Existing Notes upon maturity on December 7, 2021, and we may consider alternative debt restructuring exercise,” the developer said in a stock exchange filing. Kaisa made headlines in 2015 when it became the first Chinese builder to default on its dollar bonds. The company has the most offshore debt in China’s property sector coming due over the next year after embattled China Evergrande Group

• Property sector turmoil kept investors on edge amid reports of offshore debt restructurings for cash-strapped developers China Evergrande and Kaisa Group. Evergrande announced that it plans to engage with offshore creditors to formulate a restructuring plan. Meanwhile, Kaisa’s recent failure to secure sufficient support from creditors for a bond exchange indicated that a debt recast could be in the offing. On Monday, the PBOC announced it would cut the RRR for banks by 50 basis points effective December 15, its second such move this year as China seeks to bolster slowing growth. The rate cut will release CNY 1.2 trillion in long-term liquidity into the economy. The central bank also cut the rates on its relending facility by 25 basis points to support the rural sector and small firms

• This week, in an attempt to stabilize China’s economy, the People’s Bank of China lowered the average reserve requirement ratio by 50 basis points, to 8.4%, effective December 15. The move will inject about $188 billion worth of liquidity into the economy. In addition, a cut in the loan prime rate is expected in coming weeks

• Chinese stock markets rose for the week after the central bank cut the reserve requirement ratio (RRR) for banks and November factory gate inflation cooled, easing inflation concerns. The CSI 300 Index jumped 3.1%, and the Shanghai Composite Index added 1.6%. However, worries about property sector defaults and the withdrawal of more U.S.-listed Chinese companies dampened sentiment after ride-hailing app Didi Global said it would delist from the New York Stock Exchange earlier this month

• Sources: T. Rowe Price, Wells Fargo, TD Econimics, MFS Investment Management, Reuters, M. Cassar Derjavets.