Economic Outlook – 13 February 2022

USA

• The Consumer Price Index rose 0.6% MoM in January after climbing 0.5% the prior month. The January result was two ticks stronger than expected by consensus. The energy component rose 0.9% despite the gasoline segment retracing 0.8% in the month. The cost of food sprang 0.9%. The core CPI, which excludes food and energy, advanced a consensus-topping 0.6%. Prices for ex-energy services progressed 0.4% on gains for transportation services (+1.0%), medical care (+0.6%), and shelter (+0.3%). The price of core goods, meanwhile, spiked 1.0% MoM on steep increases for apparel (+1.1%) and used vehicles (+1.5%). Where the latter category is concerned, prices continued to reflect a shortage of new cars caused by supply chain issues affecting global car production. Year on year, headline inflation clocked in at 7.5%, up from 7.0% the prior month and the highest it has been since February 1982. The energy segment registered a very strong advance (+27%), while food inflation (+7.0%) was at its most acute since August 1981. Price pressures were not limited to these two segments, however. The core index, too, recorded a sizeable increase, rising from 5.5% YoY in December to 6.0% YoY in January, the most in 40 years

• There is no denying that inflation ran hot in January. Most of the annual figures were at 40-year highs. Headline CPI rang in at a consensus-topping 7.5% year over year. Food inflation made a hefty contribution in the month (+0.9%) and sat at 7.0% YoY. Energy, too, climbed 0.9% in the month, but this translated into 27% increase over 12 months. Although gasoline did decline in January, fuel oil rose 9.5% MoM while electricity surged 4.2%, its second largest print since the 1950s. Although food and energy have certainly been major factors in the recent inflation figures, core CPI did not dispel the general state of affairs, notching in at 6.0% (also a 40-year high). Inflationary pressures appeared to be fairly diffused with multiple components contributing to both the monthly and annual prints. Used cars and trucks continued to be a standout, with prices rising 1.5% MoM and a whopping 40.5% YoY. The shelter component continued to rise as well, lifted by the rent index

• Financial markets also responded to the inflation report as equities fell and yields on the 10-Year Treasury touched 2% for the first time since 2019. These movements occurred on the expectation that persistent high inflation will result in tighter Fed policy. The market-implied probability of at least a 50-basis point rate hike at the Fed’s March meeting shifted to over 50% after the report, from 24% the day before, suggesting expectations of more aggressive tightening

• The trade deficit widened from $79.3 billion to $80.7 billion, drawing close to its all-time high of $80.8 billion reached in September. The increase was due in part to a gain of 1.6% in goods imports to a record $308.9 billion. Goods exports, for their part, increased 1.5% to $228.1 billion. With imports expanding at a faster pace than exports, the goods trade deficit swelled to an unprecedented $101.4 billion. On a country-by-country basis, the U.S. goods deficit tightened with Canada (from $5.4 billion to $4.2 billion) and the European Union (from $19.4 billion to $16.3 billion) but widened with Mexico (from $10.9 billion to $11.0 billion) and China (from $28.2 billion to 34.1 billion). The services surplus, meanwhile, grew from $18.9 billion to $20.7 billion as exports expanded 2.0% while imports decreased 0.7%. The steep increase in the U.S. trade deficit in recent months has been due in part to the faster re -opening of its economy. While foreign demand remains constrained by health measures elsewhere, the U.S. domestic economy is booming. This is driving imports up disproportionately

• The NFIB Small Business Optimism Index slid from 98.9 in December to 97.1 in January, its lowest mark in 11 months. However, the net percentage of firms that expected the economic situation to get better remained in negative territory but nevertheless improved slightly from -35% to -33% as the Omicron variant wave began to wane. Net sales expectations worsened, however, dropping from 3% to -3%. Hiring prospects remained high, but an elevated 47% of firms reported not being able to fill one or more vacant positions. Fully 23% of firms also identified poor quality of labour as their top problem, far above the historical average of 12.7% for this indicator. In an effort to attract qualified candidates, small firms had no choice but to sweeten salaries. The proportion of firms that reported raising employee compensation in the past 3-6 months increased from 48% to an all-time high of 50%. What’s more, an unprecedented 27% planned to raise compensation in the next few months

• Initial jobless claims sank from 239K to 223K in the week ending February 5, suggesting that the worst of the Omicron wave might now be behind us. Continued claims, which lag data on new applications by one week, remained stable at 1,621K after declining the week before

• Inflation worries were reflected in the University of Michigan’s preliminary gauge of consumer sentiment in February, released Friday morning. At 61.7, the index reading came in well below expectations of roughly 67 and hit its lowest level since October 2011. The survey’s chief researcher termed the drop “stunning” and pointed out that “nearly half of all consumers [are] expecting declines in their inflation-adjusted incomes during the year ahead.” According to FactSet, roughly three out of four S&P 500 companies that have reported earnings have referred to inflation in their earnings calls, but net margin estimates for the current quarter have fallen only slightly, suggesting that many businesses are successfully passing on higher input costs to customers

• Amid a rise in mortgage and auto debt, US households took on over $1 trillion in new debt in 2021 for the first time since 2007, the Federal Reserve Bank of New York reported on Tuesday. However, the increase is not a cause for concern as wealth increased across all income levels during the pandemic, the Fed reported, while delinquency levels continue to hover near record lows

• After another volatile week, the large-cap indexes ended the week lower, while the S&P MidCap 400 and small-cap Russell 2000 indexes recorded modest gains. The technology-heavy Nasdaq Composite fared worst and ended the week down roughly 15% from its recent peak, still in correction territory. The tug of war between healthy earnings growth and fears over monetary tightening continued to dominate sentiment. Warnings from U.S. officials that a Russian invasion of Ukraine might be imminent may have also contributed to a late-week sell-off

• In terms of data release, the main event will be the release of January’s retail sales report. Car dealers should have contributed positively to the headline number, as auto sales surged in the month. Gasoline station receipts, for their part, may have decreased slightly judging from a marginal retreat in pump prices. The expected headline sales is expected to have jumped 2.4% on a monthly basis. Spending on items other than vehicles may have risen at a slightly weaker pace, rising 1.6%

• January’s data on industrial production will also be released. Manufacturing output should have continued to expand, with the auto sector recovering from earlier production stoppages caused by the shortage of microprocessors. Production in the mining sector, meanwhile, could have improved judging from an increase in the number of rigs operating in the country

UK

• The UK GDP figures for December have come out, -0.2% MoM, 1.0% QoQ, these figures point to the latest wave of COVID-19 having had a slightly less negative impact than had been feared. In output terms, the largest contributors to this quarterly increase were from health, chiefly increased GP visits at the start of the quarter, and a large increase in the vaccination programme. Although the sustainability of an economy driven by public sector health spending has to be questioned. Once again it was the in-person service industries which were hardest hit, hotels and restaurants as well as entertainment. Looking forward, consumer expenditure can grow this coming year if household savings rates fall, (they are now at their long run average levels), which, given the substantial savings accumulated during the pandemic, is possible but this does need consumers to feel confident about their prospects moving forward. The level of quarterly GDP in Quarter 4 2021 is now 0.4% below its pre-pandemic level (Quarter 4 2019), while the monthly estimates (measured differently) show that GDP fell by 0.2% in December 2021 but is at its pre-pandemic level (Feb 2020). Overall GDP increased by an estimated 7.5% in 2021, following a 9.4% fall in 2020. Looking forward into 2022, concerns are already clearly shifting from the impact of further waves of COVID-19, to the impact of interest rates and Quantitative Tightening

• The Goods trade balance for December was -£12.4Bn for the EU and -£7.9 Bn for non-EU (consensus -£12.5 Bn for the EU alone). Total export volumes rose by 4.9% in Quarter 4 2021, driven by an 11.2% increase in the exports of fuels, chemicals, and machinery and transport equipment. Services exports, however, experienced a fall of 1.8%, driven by falls in telecommunications and financial services partially offset by rises in other business services, and insurance services

• Embattled UK Prime Minister Boris Johnson has appointed Jacob Rees-Mogg Brexit opportunities minister and tasked him with drawing up an action plan to remove 1,000 legacy European Union regulations

EU

• The US is not alone in seeing sovereign bond yields rising sharply. Most of the German yield curve, for example, is now positive yielding (from 5 years out through 30s) whereas before Christmas, the entire curve was in negative territory. Yields on the periphery of Europe have risen sharply since the European Central Bank signaled a more hawkish stance at its February meeting. To illustrate, the yield on Italy’s 10-year bond jumped from 1.33% in advance of the ECB meeting to 1.94%

• The heads of the Dutch and German central banks, both of whom are members of the European Central Bank’s (ECB’s) governing council, separately commented that the ECB should wind down its asset-purchase programs to set the stage for potentially raising interest rates before year-end. However, ECB President Christine Lagarde, the head of France’s central bank, and ECB Chief Economist Philip Lane pushed back against potentially tightening policy prematurely, citing the view that record-high inflation could subside and approach the central bank’s 2% target in the medium term. Lagarde seemed to adopt a more cautious stance, saying there was no need for “measurable tightening” of policy. She added that the ECB saw “no need to rush to any premature conclusion at this point in time—the outlook is way too uncertain.” She then stressed in an interview at the end of the week that an increase in interest rates would not bring down inflation and could undermine the economic recovery

• In the press statement, President Lagarde acknowledged the upside surprise to January inflation upfront, saying that this was “primarily driven by higher energy costs that are pushing up prices across many sectors, as well as higher food prices.” Moreover, she acknowledged further that “inflation is likely to remain elevated for longer than previously expected, but to decline in the course of this year.” Flexibility and optionality in the conduct of monetary policy is needed “more than ever”, she said. In terms of economic activity, President Lagarde noted that economic activity and demand will likely remain muted in the early part of this year, primarily due to factors such as containment measures, high energy costs, as well as supply chain disruptions. There are signs that these bottlenecks may be starting to ease, but they will still persist for some time. The ECB continues to see no evidence of higher wage growth, although the expectation that this will increase is an important foundation for its inflation outlook

• The EC lowered its 2022 outlook for economic growth in the European Union (EU) and eurozone to 4.0% from its previous forecast, issued last fall, for a 4.3% expansion. The winter update to the EC’s forecasts also said inflation was expected to accelerate to 3.9% in the EU and 3.5% in the eurozone—faster than previously expected—before easing to less than 2.0% in 2023

• Shares in Europe rallied, buoyed by strong corporate earnings. In local currency terms, the pan-European STOXX Europe 600 Index ended 1.61% higher. Value-oriented stocks and those in cyclical industries fared well, reflecting inflationary pressures and the possible implications for key central banks’ monetary policies. Germany’s Xetra DAX Index advanced 2.16%, Italy’s FTSE MIB Index gained 1.36%, and France’s CAC 40 Index tacked on 0.87%

CHINA

• A report released by the Peterson Institute for International Economics found that China did not fulfill its 2020 commitment to increase imports of certain US goods and services by $200 billion in 2020 and 2021 as part of the phase one trade agreement with the US and in fact did not increase imports from the US at all. According to the report, China bought only 57% of the US exports it had committed to purchase under the agreement. That’s less than China purchased from the US before the trade war started

• The People’s Bank of China (PBOC) said that loans for affordable rental housing would not count toward the limited amount banks can lend to the property sector. An editorial in the Communist Party newspaper People’s Daily stated that China’s economy still required capital for growth despite needing rules on the use of capital to reduce monopolistic behavior. Another article suggested that regulatory curbs on the internet sector would become more rules-based, raising the prospect that the government’s crackdown on the tech sector would ease

• Credit growth in China beat expectations in January, but the expansion was concentrated in infrastructure — largely the buildout of 5G telecom — and does not yet indicate that a broad reflationary narrative has taken hold. The property sector did not see an infusion of new credit

• The private Caixin/Markit services purchasing managers’ index (PMI) fell to 51.4 in January, a five-month low, from December’s 53.1 reading. Growth momentum slowed amid the renewed rise in COVID-19 cases across China and restrictions to stop its spread, Caixin said in the release

• China’s foreign currency reserves fell in January by roughly USD 28 billion to USD 3.22 trillion, a lower-than-expected level in a month when the dollar gained. New aggregate financing and new loans rose more than forecast to record levels in January, central bank data showed, providing evidence of frontloading lending to local governments and companies. China’s credit growth will likely continue to accelerate in the coming months amid declines in borrowing costs, a looser fiscal stance, and easing constraints on mortgage lending, analysts believe

• In property sector news, cash-strapped developer China Evergrande Group plans to pay off its debt by restoring construction and sales activity, not by selling assets on the cheap, and vowed to complete 50% of pre-sold homes this year, Reuters reported. However, worries about cross defaults and delayed payments in China’s debt-laden property sector continued to keep investors on edge. Shares and bonds of Zhenro Properties, a mid-size developer in Shanghai, plunged by over 65% and 20%, respectively, on Friday amid speculation that the company wouldn’t be able to pay a USD 200 million bond in March, Bloomberg reported

• Chinese stocks rose amid supportive official comments and a perception that the country’s regulatory crackdown cycle had peaked. The Shanghai Composite Index gained 3% and the CSI 300 Index added 0.8% since January 28, the last day of trading before a weeklong Lunar New Year holiday

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

2022-02-14T10:26:26+00:00