Economic Outlook – 14 March 2021

• The Consumer Price Index rose 0.4% in February after climbing 0.3% the prior month. The result was in line with consensus expectations.
o The energy component sprang 3.9% thanks in part to a 6.4% jump in the gasoline segment.
o The cost of food, meanwhile, rose 0.2% on a 0.3% increase in the “food at home” category.
o The core CPI, which excludes food and energy, edged up 0.1% instead of the 0.2% expected by consensus.
o Prices for ex-energy services progressed 0.2% as gains for shelter (+0.2%) and medical care (+0.5%) were only partially offset by a decline (-0.1%) in the transportation segment.
o The price of core goods, for their part, cooled 0.2% on declines for apparel (-0.7%), used cars (-0.9%), and medical care (-0.7%).
o Prices for tobacco/smoking products were up 0.6%. Year-on-year, headline inflation clocked in at 1.7%, up three ticks from January.
o The core CPI index was up 1.3% year-on-year, down one tick from the month before.

• Core inflation came in weaker than expected, perhaps owing to lingering restrictions to prevent the spread of COVID-19 in some regions.
o A third consecutive 0.9% drop in the price of used vehicles also played a part.
o Headline inflation, meanwhile, continued to be lifted by rising energy prices.
o So long as the pandemic is not brought under control (estimates have this happening in Q2-Q3 if vaccine rollout continues at the current pace), the economic recovery will be incomplete and characterized by weak prices in the services segment.
o The first thing that will affect inflation is a positive base effect. At the same time as this positive base effect, rising commodity prices and the weaker US dollar will start to feed inflation as well.
o Already in January, import prices rose at their fastest annual clip since March 2012. However, the positive base effect will only last so long and commodity prices cannot rise forever.
o Consequently, for inflation to remain above 2.0%, more fundamental elements will have to kick in. Money supply comes to mind here.
o From the beginning of the pandemic, the Fed has been highly pro-active, cutting its policy rates to the floor and launching massive asset-purchase and lending programs.
o These moves have resulted in an unprecedented expansion of the money stock.

• The NFIB Small Business Optimism Index edged up 0.8 point in February to a still relatively depressed 95.8.
o In comparison, back in September and October when the pandemic outlook appeared much less encouraging than it does today, the index had struck 104.0.
o The net percentage of polled firms that expected the economic situation to improve crept up to -19%, just a touch better than the seven-year low posted in the first month of the year (-23%).
o This lingering pessimism among US small businesses is a bit surprising given that rapid vaccine rollouts have helped reduce uncertainty considerably.
o The ratio of firms planning to hire in the coming months improved marginally from 17.0% to 18.0%, as did the percentage of businesses planning capital investment, from 22.0% to 23.0%.
o Sales expectations sank deeper into negative territory from -6.0% to -8.0%.
o Given the more sombre sales prospects, the ratio of businesses that deemed now to be a good time to expand slumped to a nine-month low of just 6%.

• The Producer Price Index (PPI) for final demand advanced 0.5% on a monthly basis after gaining 1.3% in January.
o Goods prices rose 1.4% on a 6.0% jump in the energy segment.
o Prices in the services category, for their part, edged up 0.1% month-on-month.
o The core PPI, which excludes food and energy, climbed 0.2%.
o Year-on-year, the headline PPI advanced from 1.7% to a 28-month high of 2.8%.
o Excluding food and energy, it rose from 2.0% to 2.5%, the highest since April 2019.

• Citing low usage, the US Federal Reserve announced that it will allow three programs put in place at the height of the pandemic-related market crisis to expire as scheduled at the end of the month.
o As of 3 March, just 3.5% of these facilities’ capacity had been utilized.
o The programs to be phased out are the Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility and the Primary Dealer Credit Facility, while the Paycheck Protection Program Liquidity Facility will be extended by three months until 30 June.

• The University of Michigan’s preliminary gauge of consumer sentiment for March spiked to 83 from 76.8.
o The continued decline in COVID cases and news of another round of fiscal stimulus both played a role in improving confidence.
o Because the stimulus checks won’t start hitting bank accounts until next week, the final reading of sentiment released towards the end of the month could conceivably produce an even higher reading.

• The Job Openings and Labor Turnover Survey (JOLTS) showed that positions waiting to be filled rose from 6,752K in December to an 11-month high of 6,925K in January.
o Following this gain, job openings stood just 1.4% below their pre-pandemic level in February.
o Based on these figures, the ratio of job offers to unemployed person in the United States was 0.68. 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.
o Gains in health care/social assistance (+57K), manufacturing (+36K), and education (+21K) in January were offset only in part by declines in professional/business services (-123K after a 217K improvement the prior month) and accommodation (-32K).
o The JOLTS report also showed that hires were down from 5,411K in December to 5,301K, their lowest level in nine months. Elevated COVID caseloads during the month likely contributed to the drop.
o There were 5,307K separations reported, 1,687K of which were layoffs or discharges. The quit rate (number of voluntary separations/total employment), for its part, dipped to 2.3%, one tick below its pre-pandemic peak.
o The rebound in quits since the depth of the crisis is encouraging in that it may reflect growing confidence among employees and stiffer competition among employers.

• Initial jobless claims decreased from an upwardly revised 754K to a post-pandemic low of 712K in the week to 6 March.
o Continued claims kept trending down, sliding from 4,337K to 4,144K, their lowest level since March.
o Roughly 13.8 million people who received benefits in the week ended February 19 under emergency pandemic programs (Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation).
o Recent confirmation via the Biden’s administration stimulus package that these would be extended until September was no doubt greeted with relief by the millions of people still unemployed because of the pandemic.

• US President Joe Biden signed a massive USD$1.9 trillion stimulus bill.
o Checks in the amount of USD$1,400 will be distributed to Americans below certain income thresholds, and billions in aid will flow to state and local governments.
o Secretary of the Treasury Janet Yellen said funds will begin to be deposited in individuals’ accounts as early as this weekend.
o According to a recent survey of individual investors by Deutsche Bank, some of the money may make its way into financial markets. The bank found that they plan to put an average of 37% of any stimulus payments into equities.
o With regard to the pandemic, Biden asked state governments to make vaccine doses available to all adults by 1 May with the aim of beginning a return to normal by the 4 July Independence Day holiday.
o This new fiscal package increased the child tax credit, provides aid to states and local governments, supports schools and expands vaccination efforts. Substantial income supports have enabled Americans to maintain strong balance sheets through this crisis.
o According to the Fed’s data, US households’ and non-profit organizations’ net worth reached a record high of USD$130 trillion, growing 10.0% in the last quarter of 2020.
o Nevertheless, income and wealth disparities, exacerbated by the crisis, continue to pose risks to the recovery.

• The news of muted price growth gave the market’s inflation anxiety a short break.
o The 10-year US Treasury yield subsided from its last week’s peak of 1.6% to just under 1.5%, before bouncing back to almost 1.62% at the time of writing.
o Despite solid demand in this weeks’ three US Treasury auctions, investors are increasingly betting on higher inflation.
o The Fed will be mindful of mounting price pressures, but its new frame-work gives it more wiggle room for letting inflation move above 2.0%.

• Stocks moved broadly higher for the week, lifting most of the major benchmarks to new records.
o Investors seemed to remain focused on fluctuating longer-term bond yields and the discount they place on future earnings, resulting in substantial swings in the technology-oriented Nasdaq Composite Index.
o Shares in heavily weighted automaker Tesla rebounded after the previous week’s sell-off, lifting the consumer discretionary sector.
o The small real estate sector also outperformed within the S&P 500, while health care and energy shares lagged.
o The small-cap Russell 2000 Index outperformed and extended its recent market leadership, ending the week up roughly 19% on a price (excluding dividends) basis for the year to date.

• In terms of data release, the focus next week will be squarely on Federal Reserve’s monetary policy decision.
o No change is expected on either the policy rate or bond buying, an updated Summary of Economic Projections should reflect substantial improvements to the US outlook relative to its December meeting.
o As part of the updated SEPs, there will be a new dot plot, which should show at least some FOMC participants moving policy rate tightening expectations into 2023 (back in December, just 5 of 17 ‘dots’ pointed to a higher fed funds rate by the end of 2023).
o Even with the Fed’s new flexible average inflation targeting framework, the more optimistic outlook makes it difficult to justify showing no tightening through the forecast horizon.
o As for the tone of the message, Powell will likely continue to argue for a patient, cautious approach going forward. While he’s unlikely to push back against the rapid interest rate increases over the past couple of months, he will likely remind markets that the coming rise in inflation is (in the Fed’s view) transitory. He might also highlight that the labour market is still far from full employment, a fact which argues in favour of maintaining accommodative policy longer than would otherwise be the case.

• GDP for January has come through at -2.9%, a significant fall but well above the -4.9% consensus forecast.
o The most significant declines were recorded by consumer-facing services industries (retail trade) and education, which drove a contraction of 3.5 percent in the services sector in January 2021.
o The drop in GDP was smaller than during last April’s lockdown (-18.3% month-on-month), but bigger than during November’s (-2.3% month-on-month), and left the economy 9.0% below its pre-pandemic level.
o More recent PMI data suggest that February has been flat on January and that with at least some easing of the lockdown in early March (children returned to school) a slight pick-up can be expected.
o The real boost should come later in the spring with further easing of the lockdown, and if all goes well a complete removal of domestic lockdown restrictions by 21 June.

• The UK recovery is going to depend upon three things.
o A surge in consumer spending, which is going to be a function of the willingness to spend a portion of the accumulated forced savings of 2020.
o Business investing, which involves a degree of confidence about the UK’s longer-term position post-Brexit, as well as figuring out how consumer behaviour has changed and therefore where investment returns are to be had.
o A continuation of the interest rate environment that allows the government’s significant debt and deficit to be financed without any additional tax rises other than those set out in the recent budget.

• Trade between the United Kingdom and the European Union was hammered in the first month of their new post-Brexit relationship, with record falls in British exports and imports of goods as COVID-19 restrictions continued on both sides.
o British goods exports to the EU, excluding non-monetary gold and other precious metals, slumped by 40.7% in January compared to December, the Office for National Statistics said on Friday.
o Imports fell by 28.8% (another record). The ONS said the COVID-19 pandemic, which left Britain under lockdown measures in January, made it hard to quantify the Brexit impact from new customs arrangements, and there were changes in the way data was collected too.

• An annual survey of 5,000 business leaders conducted by PwC showed that Britain is a more attractive proposition for multinational companies today than it was before Brexit. The survey found that the United Kingdom, edging out India, is the fourth-most-promising growth opportunity (after the US, China and Germany).

• The ECB (European Central Bank) press release included one significant change from its previous release, namely that “based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year.”
o A statement that changed from the previous meeting related to financing conditions. In the January statement, PEPP purchases were to be conducted “to preserve favourable financing conditions over the pandemic period”.
o In the March statement, the reasoning is “to prevent a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation”.
o One interpretation of this could be that doves now have a mandate for a higher rate of purchases, while the hawks have ensured the purpose has slightly shifted. Beyond this, the statement was similar to the one from January.
 Rates remained on hold, with the marginal lending facility and the deposit facility remaining unchanged, at 0.0%, 0.25% and -0.5%, respectively.
 Furthermore, it 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, 2.0% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
 The statement from the Governing Council noted that purchases under the pandemic emergency purchase programme (PEPP) will continue with a total envelope of EUR1.85 trillion 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”.
 Net purchases under the asset purchase programme (APP) will continue, at EUR20 billion per month, together with the additional EUR 120 billion temporary envelope until the end of the year, and further details relating to the programme remained unchanged from the previous meeting statement.
 Finally, the ECB will continue to provide “ample liquidity” through its refinancing operations and noted that the targeted longer-term refinancing operations remain an “attractive source of funding for banks.

• German state elections to provide signals for September federal elections. State elections in Baden-Württemberg and Rheinland-Pfalz coming up on Sunday will be seen as a bellwether for the German federal elections in September this year (and eventually Angela Merkel’s succession race). Merkel’s ruling CDU/CSU party has recently been hit by a scandal regarding mask procurement practices and a poor showing in the state elections could spell some trouble for the party in the coming months (especially since the CDU/CSU chancellor candidate question remains yet open).

• Shares in Europe rose as the US prepared to inject a massive amount of fiscal stimulus into the economy and the ECB pledged to buy more bonds to counter rising borrowing costs.
o In local currency terms, the pan-European STOXX Europe 600 Index ended the week 3.5% higher.
o Germany’s Xetra DAX Index climbed 4.2%, France’s CAC 40 advanced 4.6%, and Italy’s FTSE MIB gained 5.0%.

• China’s merchandise exports for January and February combined surged about 61.0% year on year in US dollar terms, while imports rose 22.0%, according to customs data.
o Both sets of trade data beat economists’ expectations and were attributed to last year’s coronavirus-depressed levels.
o Even so, most analysts viewed China’s underlying trade performance in the first two months of this year as remarkably strong across the board.

• China February Industrial Production figures will rise due to base effect caused by the collapse in industrial production and retail sales a year ago, consensus for industrial production is 32.6 % year-on-year.
o As such, the high figure should not be interpreted as a pick-up in Chinese growth momentum.
o In the US, the previous round of USD$600 stimulus checks boosted retail sales in January, and it will be interesting to see if the momentum carried on to the February figures.
• China’s consumer price index (CPI) declined 0.2% in February from a year earlier, while the producer price index (PPI) jumped 1.7% year on year at the fastest clip since 2018, according to Reuters.
o Last month’s increase in PPI, or factory gate inflation, was driven by price increases in energy, basic materials, and capital goods.
o Analysts pay attention to China’s producer prices for their impact on global inflation as supply chains have become more intertwined in recent decades.
o Recent reports of African swine fever in parts of China have raised concerns that the virus’s spread could lead to higher prices for pork, which has a large weighting in the CPI.
o However, policymakers have previously brushed off inflation caused by soaring pork prices, most recently last year when a viral outbreak pushed the CPI above 5.0%.

• On Thursday, China concluded its annual National People’s Congress (NPC) meeting, the country’s highest profile political gathering, at which lawmakers set economic targets and other economic policy.
o Days after unveiling China’s 2021 GDP growth target of above 6.0% that was widely viewed as conservative, Premier Li Keqiang said that the forecast could still be exceeded and was “intended only to provide guidance for further development”.
o Li’s comments suggested that the official growth target leaves scope for flexibility as China’s economy is in the process of normalizing.
o In a departure from previous NPC meetings, however, officials did not reveal official targets for credit growth.
o However, many China policy analysts expect a gradual deceleration in credit this year with no sharp rise in funding costs. With consumer prices falling, analysts see little reason for Beijing to withdraw monetary stimulus at present.

• Chinese stocks posted a weekly loss as the Shanghai Composite Index fell 1.4% and the large-cap CSI 300 Index shed 2.2%.
o Despite recent weeks’ underperformance, investor appetite for Chinese stocks appeared undiminished.
o Net inflows into Chinese stocks have turned neutral for the first time since November, according to data from global custodian bank State Street, reflecting improving demand from China’s major trading partners and the country’s ongoing recovery.
o The recent weakness in Chinese stocks comes as Beijing appears to be focusing more on longer-term economic restructuring and financial deleveraging amid a strong post-pandemic recovery. In the bond market, the yield on China’s sovereign 10-year bond declined nine basis points to 3.27% for the week.

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