Economic Outlook – 14 February 2021

US

  • The Consumer Price Index increased 0.3% in January, in line with consensus expectations. It had climbed 0.2% each of the two previous months.
    • The energy component sprang 3.5% thanks in part to a 7.4% jump in the gasoline segment.
    • The cost of food rose 0.1% on a 0.3% advance in the “food away from home” category.
    • The core CPI, which excludes food and energy, was flat month-on-month (analysts were calling for a 0.2% increase).
    • Prices for ex-energy services were flat as gains for medical care (+0.5%) and shelter (+0.1%) were more than offset by a 0.3% decline in the transportation category.
    • Prices for core goods, instead, edged up 0.1% on steep increases for apparel (+2.2%) and tobacco/smoking products (+1.8%).
    • There were drops for both new (-0.5%) and used vehicles (-0.9%).
    • Year-on-year, headline inflation clocked in at 1.4% (unchanged from December), as did core CPI (down two ticks from December).
  • Prices in the services category are expected to recover rather quickly once vaccines become available to a larger portion of the population. Goods prices, on the other hand, might not return to their pre-pandemic trend quite as quickly.
    • ISM PMI reports indicate that supply chain disruptions are already plaguing the manufacturing sector, a situation that is exerting upward pressure on input/output prices. A broader re-opening of the economy would exacerbate these problems.
    • The US dollar’s depreciation and rising commodity prices are other factors that might support goods prices going forward.
    • A rebound can be expected  also  in  the  shelter  component,  which  accounts for almost one third of the total CPI. Housing costs have fallen over the past year but, unlike what happened in previous recessions, the decline is attributable  not  to  a  weak  residential  sector  but  to  federal  COVID   emergency   measures,   notably   the   moratorium   on   tenant   evictions.  Indeed, unpaid rent  that  landlords  forbear  from  collecting  is  counted as a rent reduction for CPI purposes.
  • The Job Openings and Labor Turnover Survey (JOLTS) showed that positions waiting to be filled rose from 6572K in November to a five-month high of 6646K in December.
    • Despite this gain, job openings remained down roughly 5.0% on their pre-pandemic level.
    • Based on these figures, the ratio of job offers to unemployed person in the US was 0.62. 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.
    • Gains in professional/business services (+296K), retail trade (+62K), and finance/insurance (+17K) in December were offset only in part by declines in leisure/hospitality (-127K) and construction (-37K).
    • The JOLTS report also showed 5539 hires, down significantly from 5935K the prior month to the lowest level that they have been at in eight months.
    • The marked increase in COVID cases during the month likely contributed to this drop.
    • There were 5460K separations reported, 1812K of which were layoffs or discharges.
    • The quit rate (number of voluntary separations/total employment), for its part, stayed put at 2.3%, which is just one tick below its pre-pandemic peak.
    • The rebound in quits is encouraging in that it may reflect growing confidence among employees and stiffer competition among employers
  • Initial jobless claims continued to trend down in the week to February 6, falling from 812K to a five-week low of 793K.
    • Continued claims eased from 4690K to 4545K, their lowest level since March.
    • Roughly 13.5 million people who received benefits in the week ended January 22 under the emergency programs introduced during the pandemic must be added to this (Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation).
    • Year-end confirmation that the programs were extended until mid-March was no doubt greeted as a lifesaver by the millions of people who remain unemployed because of the pandemic.
  • The NFIB Small Business Optimism Index edged down 0.9 point in January to an eight-month low of 95.0.
    • The net percentage of polled firms that expected the economic situation to improve dropped sharply, from -16.0% to a seven-year low of -23.0%.
    • This was not really surprising in light of the surge in COVID-19 cases across the country and the toughening of social-distancing measures in some states.
    • The ratio of businesses planning to hire in the coming months (17.0%) remained unchanged, as did the percentage of businesses planning capital investments (22.0%).
    • Sales expectations, meanwhile, sank deeper into negative territory (from -4.0% to -6.0%).
    • Given the more somber outlook, the ratio of businesses that deemed now to be a good time to expand remained relatively depressed at just 8.0%.
  • In an address to the Economic Club of New York, US Federal Reserve Chair Jerome Powell underlined what the central bank’s new approach to setting monetary policy will be.
    • Powell said the Fed will not consider raising rates until both “broad and inclusive” full employment and core inflation rates sustainably rise above the bank’s 2.0% target.
    • Markets anticipate that the Fed will allow the economy to “run hot” for a time, traditionally a supportive backdrop for many risky assets.
    • Powell noted that the official US employment rate, 6.3%, understates the true level of unemployment, which he estimates to be closer to 10.0%.
  • The US House is pushing to pass a USD$1.9 trillion fiscal relief bill within two weeks after Democrats  voted through  a  resolution  that  allows  them  to  approve  the  package  with  no Republican votes.
    • President Biden still aims for a bill with Republican support but he has paved the way for Democrats passing it on their own through the Budget Reconciliation Bill.
  • With health metrics continuing to move in the right di­rection, a loosening of restrictions and stronger consumer confidence should follow. Coupled with another likely jolt of fiscal stimulus, this bodes for the US economy to ex­pand at a solid clip this year.
    • If the full USD$1.9 trillion Ameri­can Rescue Plan package is passed, real GDP growth could run as high as 6.0% through 2021, enough to bring the level of GDP back to its pre-crisis trend by the end of the year.
  • President Biden and Chinese President Xi had their first conversation this week since Biden’s election.
    • Reports of the call appeared to be cooperative, with numerous topics discussed, but no new policy concerning tariffs was put in place.
    • Biden and his team have stressed that they intend to maintain a hardline approach against China, and while they are reviewing actions taken by the Trump administration, tariffs are expected to remain in place.
    • China failed to meet its 2020 year-end purchase targets put forth in the US-China Phase One trade deal, and purchases fell roughly 40.0% short of the target.
  • The major indexes notched a second week of gains and reached record highs, seemingly helped by the accelerating rollout of coronavirus vaccines and declining case trends.
    • Communication services stocks outperformed in the S&P 500 Index, boosted by solid gains in Twitter and video gaming shares.
    • Rising oil prices helped energy stocks, while weakness in Amazon and Tesla weighed on the consumer discretionary sector.
    • Mid- and small-caps built on their substantial year-to-date lead over large-cap stocks, and value shares also outperformed.
  • In terms of data release, retail sales might have expanded  in  January, helped by higher gasoline prices and an increase in sales of motor vehicles.
    • Still-high COVID-19 caseloads in some states probably continued to weigh on outlays in some categories (e.g. food  services  and  clothing). 
    • Headline  sales  may  have  expanded 0.8% while ex-auto outlays could have progressed at a  slightly  slower  pace.
  • The week will provide some important information about the state of the housing market with the publication of January’s building permits and housing starts.
    • This could have stayed roughly stable at 1670K, as builders likely kept trying to catch up with rising demand. Existing home sales, for their part, might have edged down in the month, judging from previously-released data on pending transactions.
  • The first clues on the state of the manufacturing sector in February will be available with the publication of the Empire State Manufacturing Index, the Philly Fed Business Outlook Survey, and Markit’s manufacturing PMI.

UK

  • GDP for December has come out at 1.2% month-on-month (consensus: 1.0%), 1.0% quarter-on-quarter (consensus: 0.5%) and the annual fall comes out at 9.9%, a record in modern times.
    • A double-dip recession has been avoided, as while Q1 or 2021 is undoubtedly going to show a fall, a recession requires two consecutive quarters of negative growth.
    • The hard-hit areas of accommodation and food services, as well as art and entertainment and recreation, were down by 80% in November to December.
    • The December rise in GDP of 1.2% was due to restrictions being eased early in the month in many parts of the UK, driven by increases to spending in accommodation and food service activities.
    • The figures give some indication how rapidly people will start spending money as and when the lockdown is eased.
    • Some businesses across the UK have adjusted to the challenges of lockdowns: in June 2020, 65.0% of firms said their revenues were down and 20.0% reported them to be broadly in line with historical norms.
    • Today, only 45.0% of firms report lower revenue, but 39.0% report that revenue is normal.
    • With high degrees of forced savings by consumers and business alike, a surge in overall GDP numbers is expected as the spring progresses as the lockdowns are eased, staring in March (but likely to slip by a week or more).
    • The ONS makes a point of highlighting the difference in methodology of calculating UK GDP compared to other advanced economies. For example, if school children are not being taught, measured output falls, even if teachers are still employed. This approach resulted in UK GDP figures falling more sharply than others in the pandemic, but equally, the restarting of schools will boost output figures in the recovery.
  • Industrial production was up 0.2% month-on-month (consensus: 0.5%) and down 2.5% year-on-year (consensus: -3.8%), with rises in manufacturing of 0.3%, and electricity and gas of 0.7%.
    • Manufacturing as a whole has held up well, at least compared to consumer expenditure, through the pandemic.
    • Given industrial production has also had to cope with the challenges of preparing for the end of the Brexit transition period, the outcome has to be welcomed.
  • Bank of England Chief Economist Andy Haldane said that he expects a sharp rebound in economic activity this year as the vaccine rollout gathers pace.
    • The economy, he opined, is like a coiled spring, ready to release enormous amounts of pent-up financial energy.
    • Haldane observed that unlike in past recessions, many UK households had strengthened their finances during the course of the pandemic due to forced restrictions on spending.
    • Companies, too, have amassed substantial war chests, he said, also commenting that as uncertainty over Brexit and COVID recede, and with a boost from government spending, these factors should support a solid economic rebound as early as this spring.
  • London’s FTSE 100 rose on Friday, clocking a second straight weekly rise, led by gains in healthcare stocks as investors remained optimistic of a vaccine-led economic recovery even as data showed the UK economy shrank by a record 9.9% last year.
    • The blue-chip FTSE 100 index rose 0.9%, with healthcare and financial stocks, mainly AstraZeneca Plc, GlaxoSmithKline and Prudential Plc leading gains.
    • Oil heavyweights BP and Royal Dutch Shell were also among the biggest gainers on the index as oil prices edged higher.
    • The mid-cap index rose 0.1%.

EU

  • Spreads between benchmark German 10-year bunds and same-maturity Italian BTPs fell below 90 basis points as markets were cheered by news that the Five Star Movement, the largest party in Italy’s Parliament, has backed the formation of a unity government headed by former European Central Bank President Mario Draghi. Draghi revealed his cabinet choices over the weekend and will lay out his governing agenda in Parliament this week.
  • European equity markets were volatile but ended generally higher. Improving coronavirus infection rates, the rollout of vaccination campaigns, and hopes of a large US economic stimulus supported equity markets, but concerns about extended valuations appeared to prompt some profit taking.
    • In local currency terms, the pan-European STOXX Europe 600 Index gained 1.09%.
    • Major indexes were mixed: Germany’s Xetra DAX Index was roughly flat, France’s CAC 40 added 0.78%, and Italy’s FTSE MIB rose 1.42%.
  • Core eurozone government bond yields fell on softer-than-expected US inflation, which the market interpreted as pushing back any moves from the Fed to wind down its accommodative policies.
    • Yields also came under pressure from the European Central Bank’s (ECB) perceived dovishness and the European Commission’s (EC) gloomy economic outlook.
    • Peripheral eurozone government bond yields also fell.
  • The EC forecast that the eurozone economy will grow 3.8% this year and next year.
    • The forecast for 2021 is lower than a previous projection published late last year, but the 2022 forecast calls for stronger growth than before.

China

  • New renminbi bank loans reached a record RMB 3580 billion in January, partly due to the seasonal boost ahead of the new year holiday.
    • Long-term loans to enterprises and households both rose, offering evidence that China’s recovery is still broadening.
    • Residential mortgage demand was also robust, possibly driven by fears of tighter restrictions on home purchases that made some buyers keen to close deals early.
  • China’s broadest measure of credit, a measure known as total social financing (TSF), grew a greater-than-expected 13.0% (or RMB 5.2 trillion).
    • Corporate bonds, a component of TSF, rebounded as investor appetite recovered following a spate of defaults, with corporate issuance hitting its highest level since April.
    • Fitch placed Chongqing Energy on negative rating watch after the company said it would close all Chongqing-based coal mines.
    • The US ratings agency also expressed concern over the continuation of local government support that underpinned the issuer’s BBB rating.
  • Headline CPI inflation in January rose 1.0% from December but slipped back into negative territory (-0.3%) from the year-earlier period.
    • Food prices contributed to the monthly increase as cold weather caused fresh vegetable prices to soar.
    • Core CPI price trends remain weak due to muted demand for services including transportation, hotels, and entertainment because of coronavirus-related restrictions.
    • Producer price inflation edged up in January from the prior month and year-ago periods, snapping a run of 11 monthly declines.
    • The increase in producer price inflation was driven by higher prices for coal and other raw materials.
  • The car industry remained a bright spot in China’s economic recovery.
    • Vehicle sales climbed 30.0% in January, the tenth straight monthly increase.
    • More than one-half of Chinese consumers who planned to buy a vehicle this year said they would choose a new energy vehicle, a category that includes electric vehicles, hybrids, and hydrogen fuel cells.
    • An early switch to electric is vital to China’s target of zero net emissions by 2060 announced by President Xi Jinping in September.
  • Chinese markets rallied ahead of the Lunar New Year holiday.
    • The Shanghai Composite Index rose 4.5% and the large-cap CSI 300 Index gained 5.9% in a holiday-shortened week that ended Wednesday.
    • Most markets across Asia were closed on Friday for the weeklong holiday.
    • Hong Kong stocks ended at a three-week high. As of the end of the week, record southbound inflows from mainland investors had propelled Hong Kong stocks up 18.0% to date in 2021, their best start since 1985.
    • Mainland Chinese investors had bought USD$ 49 billion of Hong Kong stocks year to date (more than half the total in 2020).

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

2021-02-14T18:56:52+00:00