Economic Outlook – 12 June 2022


• The Consumer Price Index rose 1.0% MoM in May, a lot more than the already solid +0.7% print expected by consensus. This came after a 0.3% increase the prior month. Prices in the energy segment jumped 3.9% in May on steep gains for gasoline (+4.1%), fuel oil (+16.9%) and gas utility (+8.0%). The cost of food, meanwhile, sprang 1.2%, marking the fourth-biggest monthly increase since 1980. The core CPI, which excludes food and energy, rose 0.6%, one tick more than the median economist forecast of 0.5%. After having registered their largest advance in 30 years the prior month (+0.7%), prices for ex-energy services rose another 0.6% in May on gains for shelter (+0.6%), medical services (+0.4%), and transportation (+1.3%), this last category boosted by a 12.6% jump in airline fares. The cost of core goods, meanwhile, progressed 0.7%, erasing much of April’s losses (-0.8%). Apparel (+0.7%), new (+1.0%) and used vehicles (+1.8%), tobacco/smoking products (+0.9%) and alcoholic beverages (+0.5%) all showed healthy progressions. YoY, headline inflation clocked in at 8.6%, up from 8.3% the prior month and the highest since the early 1980s. The 12-month core measure eased from 6.2% to 6.0% but nonetheless managed to top consensus expectations for a +5.9% print

• In April, the trade deficit fell from a record low of US$107.7 billion to US$87.1 billion thanks to its best monthly improvement ever (+US$20.6 billion). This was better than consensus expectations calling for a deficit of US$89.5 billion. The smaller trade deficit was due in large part to an improvement in the goods trade deficit from US$126.8 billion to US$107.7 billion thanks to a 3.6% increase in exports and a 4.4% decrease in imports. This significant decline in imports was largely due to a 17.7% decrease in goods imports from China caused by the strict lockdown imposed to limit the spread of Covid-19. As a result, the goods trade deficit with China shrank from US$43.4 billion to US$34.9 billion, one of the smallest deficits since late 2018. The goods deficit also improved with Canada (from $10.0 billion to $8.7 billion) and Japan (from $6.2 billion to $5.6 billion), while it deteriorated with Mexico (from $9.8 billion to $11.5 billion) and the European Union (from $15.9 billion to $17.0 billion

• Imports fell most sharply in the following goods categories: finished metal shapes (-$5.6 billion), computers (-$1.9 billion), textile apparel and household goods (-$1.3 billion), toys, games, and sporting goods (-$1.1 billion), and pharmaceutical preparations (-$1.0 billion). The goods exports that increased most were soybeans (+$2.1 billion) and civilian aircraft (+$1.3 billion). The services surplus increased slightly from US$19.2 billion to US$20.7 billion as exports grew more than imports did. Travel exports (spending by visitors to the United States) rose for the third month in a row since decreasing in January following the imposition of various public health measures to slow the progression of the Omicron variant. Travel imports (spending by Americans abroad), too, climbed to their highest level since the start of the pandemic

• The University of Michigan Consumer Sentiment index fell from 58.4 in May to 50.2 in June, its lowest level on record and well below consensus calling for a 58.1 print. The deterioration was notably due to a worsening of assessment of current conditions, with the associated index dropping from 63.3 to a record low of 55.4. The general pessimism likely reflected widespread concerns about rising inflation. Indeed, consumers expected prices to rise 5.4% over the next 12 months, the most since the early 1980s as 46% of the respondents attributed their negative views to persistent price pressures. Only 13% of the people surveyed expect their incomes to rise more than inflation, the lowest share in almost a decade. Consumer expectations also dragged down the index, falling from 55.2 in May to 46.8 in June, the lowest level since March 1980. Rising interest rates are also being felt in the housing market as the index measuring whether it is a good time to buy a home dropped from 63 in May to 43 in June, its lowest level since 1982

• Since bottoming at 166,000 in mid-March, weekly US initial jobless claims have begun to trend higher, with the most recent print coming in at 229,000, above the pre-pandemic 2019 average of 218,000. Economists use the claims data as an early recession warning since, historically, once the number of claims bottoms out, recessions tend to follow within nine to 18 months. Lately, the waters have been muddied, however, because despite the uptick in initial claims, continuing claims continue to trend lower; even so, the data bear scrutiny

• Gary Gensler, chair of the US Securities and Exchange Commission, this week outlined a potential rule change that his agency may undertake to protect retail investors. The regulation would seek to limit the practice of market-making firms paying brokerages for order flow. Instead, Gensler envisions subjecting retail orders to an auction process. Critics of the potential change say it could have the unintended consequence of increasing trading costs. In recent years, commissions for many retail stock trades have fallen to zero

• US Secretary of the Treasury Janet Yellen said this week that the United States is considering ways to reconfigure tariffs on imports from China as a means of easing inflation. In congressional testimony, Yellen said she expects inflation will end up higher than the Biden administration’s projection for an of 4.7% average for 2022

• Consumer credit made bad headlines this week as it expanded by $38.1 billion in April after an already sizeable increase in March. This increase suggests that consumers are relying more on credit for their purchases, which could become a burden should they face trouble repaying this debt. Zooming in on details, however, much of this growth was due to an acceleration in revolving credit, which has only just recovered to its pre-pandemic level. This coincides with a normalization in spending on discretionary services, such as in-person entertainment and travel, which are usually financed by revolving credit, such as credit cards. As long as household income stays on the rise, credit growth should remain sustainable

• Stocks finished with steep losses despite some early-week strength. The equities market turned south on Thursday afternoon, and the selling accelerated on Friday following the release of hotter-than-expected consumer price index (CPI) data for May. At the beginning of the week, trading volumes were light, and volatility measured by the Chicago Board Options Exchange (CBOE) Volatility Index, known as the VIX, was relatively low, but volatility turned sharply higher at the end of the week

• In terms of data release, retail sales are out on Tuesday. Over the past few months, consumers have been pushing through inflationary headwinds the likes of which have not been seen in over 40 years. Retail sales rose 0.9% during April, the fourth consecutive monthly gain. Retail sales are reported in nominal terms, however, meaning they are not adjusted for price changes. Adjusting for inflation real retail sales is expected to rise a slightly stronger 1.2% during the month. The reason of real growth is that consumer goods prices declined during the same month and retail sales mostly capture spending on goods as opposed to services where prices rose during the period

• On Tuesday, there will be a FOMC decision. It is expected the June FOMC meeting will conclude with the announcement that the committee is raising the fed funds rate by 50 bps to a target range of 1.25%-1.50%. The Fed has been telegraphing that it would be stepping up its efforts to tamp down inflation for months. Because a 50 bps hike is all but assured, the market reaction to a hike should be fairly muted. Plans to adjust the balance sheet were adopted at the Committee’s meeting in May, leaving no changes to be made at this particular meeting


• British Prime Minister Boris Johnson survived a Conservative Party no confidence motion by a vote of 211 to 148 in the wake of the Partygate scandal that has dogged him for months. Under current Tory Party rules, a leader who wins a confidence motion cannot be challenged again for another year

• Britain’s competition watchdog has been asked by the government to review the retail fuel market to see whether a cut in duty has been passed onto consumers as prices at the pump hit unprecedented highs. Business Secretary Kwasi Kwarteng said on Sunday the investigation would find out why fuel prices were always quick to rise but slow to come down. The price of oil has surged worldwide, driven by Russia’s invasion of Ukraine and economies reopening after the pandemic. Britain reduced fuel duty by 5 pence per litre for one year in March in a 5 billion pound ($6.2 billion) package to ease the burden on motorists amid a worsening cost-of-living crunch for households. However prices have continued to rise, and the average cost of filling a family car rose above 100 pounds for the first time last week, according to data firm Experian Catalist. “The British people are rightly frustrated that the 5 billion pound package does not always appear to have been passed through to forecourt prices and that in some towns, prices remain higher than in similar, nearby towns,” Kwarteng said in a letter to the Competition and Markets Authority (CMA)


• The ECB’s monetary policy statement laid down the foundations for its coming rate hiking cycle. It noted that it had updated its inflation projections, with numbers above the inflation target even in 2024 for both headline and core inflation. It stated that the conditions for raising rates have now been met, and even though key interest rates were left unchanged at today’s meeting, the ECB said it would raise them “by 25 basis points” at its July meeting. It also indicated there would be a further hike at the September meeting, but left the magnitude unsaid. Specifically, it said that “the calibration of this rate increase will depend on the updated medium-term inflation outlook. If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.” Beyond September, the ECB foresees a “gradual but sustained path” of further increases in interest rates, where the pace will depend on incoming data and “how it assess inflation to develop in the medium term.” The ECB also decided to end net purchases of APP by July 1st 2022. Otherwise, the sections on APP, PEPP, and TLTROs were largely identical to the previous statement. The commitment to continue APP reinvestments “for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance” was noteworthy, as some expected the hawks to push this out of the text. But even though the possibility of a backstop QE facility to limit unwanted fragmentation in euro rates had been widely discussed ahead of the meeting, the statement included no information on this

• Seasonally adjusted German industrial orders fell for a third consecutive month in April, declining 2.7% sequentially, amid uncertainty caused by the Ukraine conflict and weaker demand. The revised March data showed a month-over-month decline of 4.2%

• European shares fell sharply after the European Central Bank (ECB) suggested that it may increase interest rates at a faster-than-expected pace after July, when it plans to end its ultra-loose monetary policy. In local currency terms, the pan-European STOXX Europe 600 Index ended 3.95% lower. Germany’s DAX Index pulled back 4.83%, while France’s CAC 40 Index lost 4.60%. Italy’s FTSE MIB Index dropped 6.70% amid concerns about the country’s ability to manage its national debt load without central bank support


• Exports grew at a double-digit pace and imports expanded for the first time in three months in May, as factories reopened and supply chain issues improved. China’s trade surplus rose to a higher-than-expected USD $78.76 billion last month, up from USD $51.12 billion in April. The private Caixin services purchasing managers’ index rose to 41.4 in May from April’s 36.2 reading. Despite the monthly improvement, the gauge remains well below the 50-point mark separating growth from contraction as coronavirus lockdowns and other restrictions weighed on the services sector.

• New bank lending in China rose more than expected in May, and broader credit growth also quickened, reflecting policymakers’ efforts to reverse the country’s coronavirus-driven slump. Factory-gate inflation cooled to its slowest pace in 14 months in May, and consumer inflation also stayed subdued, raising expectations that China’s central bank will roll out more stimulus to spur the economy

• China’s regulators are ending their probe into DiDi Global and will restore the ride-hailing giant’s mobile apps back on domestic app stores, The Wall Street Journal reported. Separately, media outlets reported that authorities are in talks about reviving the initial public offering for Ant Group, which was pulled in December 2020 after the fintech company’s founder Jack Ma made critical comments about China’s financial regulators. Both developments signaled that Beijing is dialing back its regulatory clampdown on the tech sector that started in late 2020. In a further sign of policy relaxation, China’s gaming regulator granted publishing licenses to 60 online games, the biggest approval of titles for computers and smartphones since July 2021

• Stocks in China rallied amid hopes for looser monetary policy and signs that Beijing was easing its years long crackdown on the technology sector. The broad, capitalization-weighted Shanghai Composite Index rose 2.7% and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, climbed about 3.7% in its biggest weekly gain since February 2021, according to Reuters

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