Economic Outlook – 13 June 2021


• The Consumer Price Index rose 0.6% in May after climbing 0.8% the prior month. The result was one tick stronger than expected by consensus. The energy component was flat in the month, with gasoline prices slipping 0.7%. The cost of food, for its part, increased 0.4%. The core CPI, which excludes food and energy, beat consensus expectations, too, progressing 0.7% after a 0.9% gain the prior month, which was the strongest recorded since April 1982. Prices for ex-energy services rose 0.4% on strong gains for shelter (+0.3%) and transportation (+1.5%), the latter boosted by a 7.0% increase in airline fares. Meanwhile, the price of core goods surged 1.8% on gains for used vehicles (+7.3% after jumping 10.0% the prior month), new vehicles (+1.6%), and apparel (+1.2%). Year on year, headline inflation clocked in at a 13-year high of 5.0%, up from 4.2% in April. The core CPI, meanwhile, climbed from 3.0% to 3.8%, its highest level since June 1992

• On a three-month annualized basis, the data were even more astounding, with headline inflation soaring 8.4% and the core index shooting up 8.3%. While the CPI has been extremely buoyant of late, the real question remains whether present inflationary pressures will be sustained. According to the Federal Reserve, the inflation overshoot is only temporary. But there are doubts. For one, business surveys already show that wage pressures are mounting and that business owners intend to raise prices. With the economy already in an expansionary phase and continuing to benefit from federal fiscal support and a loose monetary policy stance, the risk of further bottlenecks emerging cannot be ruled out

• In May, the NFIB Small Business Optimism Index slid to 99.6 from 99.8 the previous month. Again, small business owners reported supply-chain problems, including difficulty filling job openings. Among firms hiring or trying to hire, 93% (+1 point) reported few or no “qualified” applicants for positions they sought to fill in May. Also, a net 34% of owners (seasonally adjusted) reported raising employee compensation and a net 22% planned to do so over the next three months, up two points from April. In this context, 40% of owners (+4 pp) said they were raising their average selling prices. This is the highest such reading since April 1981. When asked about their plans over the next three months, 43% stated that they were looking to raise prices (+7 pp). This is not encouraging news for those who fear that inflation might end up being more persistent than originally expected by many FOMC participants. However, this was not the only cause for concern to be found in the NFIB’s survey. Indeed, the net percentage of small business owners who expected the economy to improve over the next six months fell 7 points in April and another 11 points in May

• According to the Job Openings and Labor Turnover Survey, the number of available jobs to be filled rose 998K to 9.3 million as at the last business day of April, a new record high. Among the industries, the largest gains were recorded in accommodation and food services (+349K), other services (+115K), and durable goods manufacturing (+78K). Educational services (-23K) and mining and logging (-8K) reported declines. Total separations sprang 324K to 5.8 million. Quits, which are generally voluntary separations initiated by employees, jumped 384K to just under 3.95 million, a new series high. Layoffs and discharges fell 5% to 1.4 million and other separations rose 6% to 364K. Hires were little changed (+1.1%) at 6.1 million. In the 12 months ending April, hires (75.4 million) outnumbered separations (64.0 million) for a net employment gain of 11.3 million. The ratio of unemployed people to job openings dropped from 5.0 a year ago to 1.06

• Initial jobless claims fell 9K to 376K in the week ending June 5. The advance number for seasonally adjusted insured unemployment (i.e., continued claims) fell 258K to 3,499K in the week ending May 29. The jobless claims report shows that, in the week ending May 22, the number of people receiving benefits under all programs, including those introduced since the start of the health crisis (i.e., Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation) fell 95K to 15.3 million. In the corresponding period the year before, recipients totaled 30 million

• In April, the goods and services trade deficit amounted to US$68.9 billion, down US$6.1 billion from US$75.0 billion in March. Exports rose $2.3 billion (1.14%) to US$205.0 billion, while imports fell $3.8 billion (-1.37%) to US$273.9 billion. MoM, goods exports increased US$1.6 billion to US$145.3 billion. The largest increase both in dollar and percentage terms was in the capital goods category, which grew US$2.07 billion (+4.9%). However, automotive vehicles and parts continued to be a source of weakness, as exports fell US$1.03 billion (-7.9%). Goods imports decreased $4.5 billion (-1.9%) to $232.0 billion in April, as consumer goods imports shrank US$2.6 billion (-3.9%). Again, autos and parts were a drag on imports, falling US$1.06 billion (-3.5%). As a result, the goods deficit fell US$6.2 billion to US$86.7 billion. In constant dollars (2012), the real goods deficit decreased US$7.2 billion to US$98.6 billion. The services side of the trade report showed that exports increased US$0.7 billion to $59.7 billion in the month and that imports rose from US$41.2 billion in March to US$41.9 billion. The services surplus edged down US$0.1 billion to US$17.8 billion

• Sales of merchant wholesalers rose 0.8% in April to US$570.8 billion, following a 4.3% m/m gain in March. Sales of durable goods jump 2.1% in the month while those of nondurable fell 0.3%. Wholesale inventories rose 0.8% in April to US$698.0 billion. At April’s sales pace it would take wholesalers 1.22 months to clear shelves, for a second month in a row. That is the shortest period since September 2014

• The University of Michigan’s survey of consumer sentiment, released Friday, showed that Americans expected prices to rise 4% in the current year, versus the previous month’s read of 4.6%. Consumers also grew more confident, with the survey’s overall sentiment gauge reversing much of May’s decline

• US Treasury Secretary Janet Yellen said that US President Joe Biden’s $4 trillion spending proposal would be positive for the country, even if it leads to higher interest rates. The former US Federal Reserve chair said the president’s plans would total about $400 billion each year, a level of spending she maintained was not enough to create an inflation overrun. Yellen opined that a slightly higher interest rate environment would actually be a plus from a societal and Fed point of view since the Fed has been combatting low inflation and interest rates for a decade. She added that if the spending helps alleviate these problems then it is a good thing

• In a forecast that is contrary to the consensus of policymakers and Wall Street, Deutsche Bank issued a dire warning on inflation. The bank said that focusing on stimulus while dismissing inflation fears will prove to be a mistake, if not in the near term then in 2023 and beyond. The firm believes that the Fed’s intention not to tighten policy until inflation shows a sustained rise will have grim impacts. The bank feels that aggressive stimulus and fundamental economic changes will lead to inflation that the Fed is not prepared to address. Deutsche Bank said the coming inflation could resemble the experience of the 1970s, a decade during which inflation averaged nearly 7% and was well into double digits at various times. Soaring food and energy prices along with the end of price controls helped push that era’s soaring inflation. However, most on Wall Street agree with the Fed’s view that current inflation pressures are transitory, and they doubt there will be any policy changes soon

• In parsing future Fed decisions, the evolution of their forecasts is of particular relevance. Fed members will clearly have to adjust their near-term inflation views, but longer-term views will be more informative. Similarly, on the economic front, the near-term is likely to see more improvement, but with an increasing chance of even more fiscal stimulus down the road – the Senate this week showed their ability to pass funding for infrastructure when the logic is keeping up with China – upgrades in future years could also come with higher expectations for the federal funds rate

• A sharp decrease in longer-term bond yields appeared to help push the S&P 500 Index to a record high in a week of relatively light summer trading. The decline in yields favored growth stocks by reducing the implied discount on future earnings while weighing on financials by threatening bank lending margins. The technology-heavy Nasdaq Composite Index outperformed and marked its fourth consecutive weekly gain, while the narrowly focused Dow Jones Industrial Average recorded a modest loss. Health care stocks led within the S&P 500, boosted by gains in Biogen

• In terms of data release, retail sales are out on Tuesday. They were unchanged in April after stimulus checks in the prior month drove the second-largest increase on record. The monthly retail sales figures are typically a good proxy for consumer spending more broadly, but because of the unique characteristics of this cycle, it may not be the best barometer. Most of the heavy lifting when it comes to consumer spending will be done on the services side. Services do show up in some places in retail sales; one of the first lines to be checked is the line for spending at bars and restaurants. But because the report is a better reflection of goods spending, it is likely to be hit and miss for the next several months

• The print for industrial production is also available on Tuesday. It will be a double header for economic data on Tuesday morning with the retail sales report being followed 45 minutes later with Industrial Production. Although core capital goods orders are already well-above their pre-pandemic peak, output still has a long way to go. Again, the culprit here is long wait times for deliveries and the lack of critical input components. The May figures are expected to show an increase of 0.6%. If realized, that would be roughly in line with last month’s gain, but the bigger point here is how much faster production could be ramping up were it not for these kinks in the supply pipeline. Just as autos may hold back retail sales, they could have an outsized influence on manufacturing production as well


• UK monthly GDP figures for April have come out 27.6% YoY, 1.5% QoQ, 2.3% MoM (Consensus: 27.6% YoY, 1.5% QoQ, 2.2% MoM), this is the fastest rate of monthly growth since July 2020. April’s GDP remains 3.7% below the pre-pandemic levels seen in February 2020; however, it is now 1.2% above its initial recovery peak in October 2020. Services were the key driver in April, with an overall increase of 3.4% MoM, 5.8% since Jan, with hard hit food and accommodation services up a whopping 46.1% and education up 18.7% since the beginning of the year. Construction output for April increased by 77.9% YoY, below consensus expectations of 83.4%, suggesting that even a couple of months ago the material shortages of everything from lumber to concrete were making themselves felt, a situation that will have only worsened in the intervening months

• The question looking forward is now at what point is the level of GDP registered at the end of 2019 going to be passed? Equally critically, when a slowing in the rates of growth is possible, it will be some way short of the level of the trend level of GDP that could have been expected without a Pandemic (the gap between the two could be as much as 5% of GDP by the beginning of 2022). Much of the vigour of the recovery depends on consumer confidence and with every indication that the long-promised ending of lock-down on 21 June will likely be delayed, there may well be an impact on consumer confidence. For guidance on what this might mean, it is worth remembering that the recovery in monthly GDP of last summer was progressing well for several months, before slowing below expectations in September, leaving the UK economy some way short of the expected recovery

• London’s FTSE 100 index ended higher on Friday, helped by gains in mining and financial stocks, while a record annual jump in domestic economic output in April strengthened views of a stronger recovery from last year’s pandemic-driven disruption. The blue-chip index (.FTSE) rose 0.7%, with precious metal miners (.FTNMX551030) and base metal miners (.FTNMX551020) jumping 0.7% and 1.8%, respectively, while insurance stocks (.FTNMX303010) rose 1.3%. The index was up 0.95% for the week, its biggest percentage gain since the week ending May 7. Miners including Rio Tinto (RIO.L), Anglo American (AAL.L), Glencore (GLEN.L) and BHP (BHPB.L) rose between 0.1% and 2.88%

• Outgoing Bank of England (BoE) chief economist Andy Haldane warned that the BoE could face an inflationary spiral if it does not act quickly. The economy expanded 2.3% in April, the fastest rate since July, driven by growth in services as lockdown measures eased

• Britain wants to ease tensions with the European Union over trade with Northern Ireland, British foreign minister Dominic Raab said on Sunday, repeating a warning that the bloc had to realise the province was part of the United Kingdom. “We want tensions eased, we want a flexible, pragmatic approach. What we cannot have is both the Northern Ireland protocol being applied in a very lopsided way or the Good Friday Agreement being undermined as a result of it,” he told Sky News at a G7 meeting in southwestern England


• The ECB press release was largely unchanged from the previous meeting. The most noteworthy part was that the ECB stated that “based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects net purchases under the PEPP over the coming quarter to continue to be conducted at a significantly higher pace than during the first months of the year.”. The statement also clarified that the referenced purchases would be net of redemptions.

Furthermore, largely unchanged aspects of the press release included the following:

1) Rates remained on hold, with the marginal lending facility and the deposit facility remaining unchanged, at 0.00 percent, 0.25 percent and -0.50 percent, respectively. Furthermore, the ECB reiterated its forward guidance that it expects key rates to remain “at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 percent within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”

2) The statement from the Governing Council noted that purchases under the pandemic emergency purchase programme (PEPP) will continue with a total envelope of EUR 1.85tn until “at least the end of March 2022”, and in a “flexible manner over time, across asset classes and among jurisdictions.” Principal repayments from PEPP will be reinvested until at least the end of 2023. In addition, the ECB reiterated: “If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.”

3) Net purchases under the asset purchase programme (APP) will continue, at EUR 20bn per month, together with the additional EUR 120bn temporary envelope until the end of the year, and further details relating to the programme remained unchanged from the previous meeting statement.

4) Finally, the ECB will continue to provide “ample liquidity” through its refinancing operations and noted that the targeted longer-term refinancing operations play a “crucial role in supporting bank lending to firms and households.” A previous sentence about TLTRO-III registering a high take-up of funds was removed from the latest text.

• German industrial production and factory orders unexpectedly declined in April, a sign that the economic rebound could be stuttering. Industrial output fell by 1.0% sequentially, confounding expectations for an increase. Auto output weakened for a second month and was 24% below its February 2020 level. Factory orders contracted by 0.2%, whereas one consensus estimate had called for a 1.0% increase

• Shares in Europe gained ground for a fourth consecutive week, lifted in part by the European Central Bank’s (ECB) pledge to continue its high rate of bond purchases into the coming quarter. In local-currency terms, the pan-European STOXX Europe 600 Index ended 1.09% higher. France’s CAC 40 Index rose 1.30%, while Italy’s FTSE MIB Index advanced 0.57%. Germany’s Xetra DAX Index was little changed


• China’s inflation data for May were mixed. The producer price index (PPI) rose to 9.0% year over year from 6.8% in April due to higher commodity prices. The bigger-than-expected jump in the PPI marked its highest level since 2008, according to Bloomberg, raising worries that rising factory gate inflation in China would contribute to inflationary pressures globally. Meanwhile, the consumer price index (CPI) rose a below-forecast 1.3% in May from 0.9% in April, with the increase driven by higher energy prices. Many analysts believe there is little risk of an interest rate hike at this point given that CPI inflation remains well below the central bank’s 3.0% target. Moreover, a rate hike would run counter to Beijing’s other policy goals, including restraining the rate of currency appreciation and spurring household consumption

• Many analysts believe that China’s central bank wants to maintain stable financial conditions ahead of the ruling Communist Party’s centennial celebrations on July 1. New local currency bank loans grew by RMB 1.5 trillion, up slightly from April, according to May credit data released by the central bank. Total social financing (TSF), China’s broadest measure of new credit, also rose slightly to RMB 1.92 trillion. While the growth in bank credit came in slightly above the consensus forecast, TSF growth slowed to 11.0% year over year from 11.7% in April.

• China’s slowing credit growth this year is mostly due to the very high base last year when the government unleashed more credit to support the pandemic-hit economy. Companies and state-owned enterprises substituted bank loans for cash flow, while net government bond issuance rose with increased fiscal stimulus. Economists expect that China’s credit growth will level out rather than continue declining

• Chinese stocks fell for a second week. The CSI 300 Index of large-cap stocks fell 1.1%, while the broader Shanghai Composite Index edged down 0.1%, according to Reuters. News that the authorities in Guangzhou renewed COVID-19 controls in the face of a fresh outbreak in the southern coastal city weighed on sentiment early in the week. In response, Macau banned nonresidents from entering the offshore enclave via neighboring Guangdong province, causing casino shares to weaken

• More positively, state media reported that the U.S. and China agreed to renew talks on improving trade and investment ties, while U.S. President Biden said he would review a Trump administration decision to ban Chinese mobile apps TikTok and WeChat. T. Interest in renewable energy stocks rose after China’s President Xi Jinping announced plans to develop Qinghai province as a clean energy hub and green agricultural produce supplier.

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