Economic Outlook – 14 November 2021

• The Consumer Price Index rose 0.9% MoM in October after climbing 0.4% the prior month. This result was significantly stronger than the +0.6% print expected by consensus. The energy component advanced 4.8% thanks in part to a 6.1% gain in the gasoline segment. Electricity prices, for their part, rose at the quickest monthly pace since May 2014, jumping 1.8%. Meanwhile, the cost of food increased 0.9%. The core CPI, which excludes food and energy, sprang a consensus-topping 0.6%. Prices for ex-energy services progressed 0.4% on gains for medical care (+0.5%), transportation services (+0.4%), and shelter (+0.5%). The cost of rent jumped 0.4% MoM. Coming on the heels of a +0.5% print the prior month, it marked the steepest two-month gain since 1992

• Contrary to what was anticipated, airfares fell for a fourth consecutive month, but a reversal is possible in the situation next month as the improving epidemiological situation encourages people to travel for Thanksgiving. The price of core goods, meanwhile, jumped 1.0% MoM, with steep increases for tobacco/smoking products (+1.9%), medical care (+0.6%), new vehicles (+1.4%), and used vehicles (+2.5%). For the last two cases, price hikes were again driven by the shortage of semiconductors, which continued to limit global car production

• The Producer Price Index (PPI) for final demand jumped 0.6% in line with consensus expectations. This came after a +0.5% print the prior month. Goods prices rose 1.2% as a sharp gain for energy (+4.8%) more than compensated for a dip for food (-0.1%). Prices in the services category, for their part, rose 0.2%
MoM. The core PPI, which excludes food and energy, climbed 0.4% on a monthly basis. YoY, the headline PPI held put at an all-time high of 8.6%. Excluding food and energy, it remained unchanged at 6.8%, another record. Higher input prices, longer shipping delays, and rising labour costs are to blame for the recent surge in producer prices

• The NFIB Small Business Optimism Index slipped from 99.1 in September to a seven-month low of 98.2 in October. The net percentage of polled firms that expected the economic situation to improve sank further into negative territory, sagging from -33% to a nine-year low of -37%. Net sales expectations, meanwhile, held more or less stable at 0%. Hiring prospects remained high but an elevated 49% of firms reported not being able to fill one or more vacant positions. Fully 24% of firms also identified poor quality of labour as their most important problem, a share far above the historical average for that indicator (12.3%). 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 climbed to a new all-time high of 44%. What’s more, an unprecedented 32% were planning to do so in the next few months

• The Job Openings and Labor Turnover Survey (JOLTS) showed positions waiting to be filled easing a little in September, from an all-time of 10,629K to 10,438K. Despite this slight decline, the ratio of job offers per unemployed persons continued to rise, from 1.27 to an all-time high of 1.36. The report also showed that hires edged down from 6,497K to a still elevated 6,459K. Total separations, for their part, sprang from 6,032K to 6,218K as quits reached a new record high of 4,434K. (The quit rate, the number of voluntary separations/total employment ticked up to 3.0%, the highest ever.) The high number of quits is encouraging in that it may reflect growing confidence among employees and stiffer competition among employers

• The University of Michigan Consumer Sentiment Index fell from 71.7 in October to a 10-year low of 66.8. The current condition tracker fell from 77.7 to 73.2, below the trough reached in the early days of the pandemic (74.3 in April 2020). The expectations sub-index, meanwhile, sank from 67.9 to 62.8. he details of the report showed that the drop in confidence was closely linked to the rise in inflation. Indeed, the proportion of respondents who expected their family’s income to beat inflation over the next 1-2 years dropped from 20% to a near 7-year low of 17.0%. Real income expectations also took a hit

• Bloomberg reported this week that President Biden interviewed Fed Governor Lael Brainard last week for the position of Fed chair. Biden interviewed current Chair Jerome Powell as well. Powell, once thought a shoo-in for the top job, has received pushback from progressive Democrats for easing banking regulations adopted in the wake of the global financial crisis and for a trading scandal that forced the resignation of two regional Fed bank presidents. Brainard, who has been a governor since 2014, is seen as tougher on the regulatory front and as having a more dovish approach to monetary policymaking. Also this week, Fed Governor Randal Quarles announced that he will resign from the Fed’s board of governors at the end of this year, when his term as chair of the Financial Stability Board, an international body, expires. Until October, when his tenure as vice chair for supervision expired, Quarles was the Fed’s top bank regulator. His term as a Fed governor would not have expired until 2032

• Stocks retreated from record highs, as investors confronted data showing the highest inflation in three decades. On Tuesday, the S&P 500 Index registered its first decline in nine sessions, ending its longest winning streak since 2017. Consumer discretionary shares led the declines in the S&P 500 following a steep fall in Tesla, after CEO Elon Musk announced plans to sell some of his shares. Energy shares were also especially week as oil prices backed away from recent peaks. The small materials sector performed best, seemingly helped by the recent passage of the Biden administration’s USD 1.2 trillion infrastructure bill in the House of Representatives. The week was also notable for the initial public offering of electric vehicle maker Rivian—the largest for a U.S. company since Facebook’s in 2012. Fixed income markets were closed on Thursday in observation of Veterans Day.

• While market expectations had been for the Bank of England to raise rates to 0.25%, the Bank’s Monetary Policy Committee has by a vote of 7-2 decided to keep rates on hold at 0.1% for the moment. The next meeting is in Dec and if expectations had been for a rise, there will be even greater expectation for a rise next month. A rise this month was always something of an uphill task, given it meant moving on from last MPC meetings 9-0 vote to hold rates. Investors concerned about inflation and viewing the BoE Governor Bailey’s expressing his concerns about inflation as a hawkish signal will be disappointed, and the inflationary concerns are not set to fade anytime soon. The latest data puts inflation at 3.1%, well above the BoE target rate of 2% and inflation looks set to rise further over the autumn and winter as energy prices are passed through to consumers. It is possible that much of the inflation story is transitory, and that the base effect as well as frictional effects in the labour market opening up post COVID will pass over the course of 2022. But there have equally always been longer-term inflationary concerns as well, from the potential for above productivity justified wage rises seen in recent months becoming a widespread expectation, through to the ultimate impact of significant expansion of the monetary base

• With the Fed indicating that it is to begin winding down its Quantitative Easing program, it is also notable that the Bank of England, by a vote of 6-3, is not following suit. The UK programme of buying bonds (GBP 875bn Gilts, GBP 20bn in corporate bonds) is due to reach its target next month. The precise economic impact of the QE programme is open to some speculation (as highlighted in the House of Lords report on the subject earlier this year), but as a signal that they understand the inflationary pressure it could have been a useful measure. Without such a signal the MPC is left with either raising rates, giving lots of speeches that they understand people’s inflationary concerns or finding some new ways of reinforcing their credibility

• In terms of data release, retail sales is out on Tuesday. High-frequency data indicate a modest improvement in consumer activity in October, with new COVID cases moving lower and mobility measures continuing to recover. Confidence measures remain a bit shaky, as higher prices and supply problems might have weighed on the minds of consumers headed into the holiday shopping season. Squaring these developments. But this gain in sales must be taken in the context of sharply higher prices for many consumer goods during the month. Since retail sales are reported in nominal dollars, which are not adjusted for inflation, higher prices tend to boost the gains in spending. With the consumer price index up 0.9% in October and goods prices up 1.4%, higher prices will certainly be a large factor behind the October gain in nominal sales

• Industrial production is also out on Tuesday. The severe supply problems that have limited the pace of industrial activity showed little signs of improvement over the past month. Supplier deliveries remain long with congestion across the transportation network, while transportation costs are elevated, inventories are lean and quality workers are still difficult to find. Industrial output slipped 1.3% in September, in part due to the harsh effects from Hurricane Ida, which the Fed estimated to have accounted for about half (-0.6%) of the decline in production

• UK GDP for Q3 has come out at 1.3% QoQ, 6.6% YoYO and the monthly for September 0.6% MoM. This slightly mixed message comes from the fact that monthly and quarterly data have differing calculation methods and so do not always exactly match. From a monthly GDP perspective, this means that the UK GDP is now only 0.2% below its pre-pandemic level. The two big drivers were household consumption, where there was a fall in underlying inventories, likely reflecting some of the recent supply chain challenges, and a negative contribution from net trade. There was also a continuation of consumer spending shifting to hospitality, arts and recreation and health following the further easing of restrictions and reopening of the economy over the summer

• UK household savings have been reverting toward more normal spending patterns, but latest data are that savings are still approximately 10% of income, as opposed to a pre-pandemic average of 7.5%, suggesting there is still scope for further uplifts in consumer spending, how much of this will be devoted to areas where spending remains far below pre-pandemic levels (foreign travel for instance) and how much will be devoted to rising tax demands of 2022, remains to be seen. Overall, these figures will mean that the Bank of England is even less inclined to move in December, preferring to wait until February 2022 for raise rates to 0.25%.

• Eurozone industrial production fell in September, although the magnitude of the decline was less than expected due to increased output of nondurable consumer goods. Output shrank 0.2% sequentially, for an annual increase of 5.2%. Economists polled by Reuters had expected a monthly decline of 0.5%. In its fall report, the European Commission (EC) raised its 2021 economic growth forecast for the eurozone to 5.0% from 4.8%. However, it said that the economy now faced “mounting headwinds,” including supply chain disruption, rising energy costs, and an acceleration in the number of coronavirus cases. The EC estimated that the eurozone economy would grow 4.3% in 2022 and 2.4% in 2023, with inflation projected to come in at 2.4% in 2021, before slowing to 2.2% in 2022 and 1.4% in 2023
• Shares in Europe rose as continuing ultra-loose monetary policy and optimism about economic growth helped allay inflation concerns. In local currency terms, the pan-European STOXX Europe 600 Index gained 0.68%. Germany’s Xetra DAX Index tacked on 0.25%, France’s CAC 40 Index climbed 0.72%, and Italy’s FTSE MIB fell 0.23%

• On Thursday, China’s Communist Party adopted a historical resolution that elevated China’s President Xi Jinping to a status equaled only by previous rulers Mao Zedong and Deng Xiaoping, deeming him a pivotal historical figure. The move paves the way for Xi to remain in office for a third term and perhaps for life

• On Wednesday at the COP26 conference in Glasgow, China and the United States issued a surprise joint declaration on boosting climate action. The statement comes less than a week before a planned virtual summit between Presidents Biden and Xi on Monday. Though the accord was criticized as vague in some quarters, China’s climate envoy Xie Zhenhua said the two sides are committed to more pragmatic and concrete cooperation. The joint declaration says the two countries plan to cooperate on reducing methane emissions, protecting forests, improving technology and increasing the use of renewable forms of energy

• China’s producer price index (PPI) accelerated to a greater-than-forecast 13.5% in October over a year ago, a 26-year high, from September’s 10.7% rise. However, stagflation fears remain muted as analysts point to China’s ability to export inflation amid strong external demand. New bank lending fell sharply in October from the previous month, indicating that tight loan supply could pose a headwind to growth

• An increase in China’s foreign currency reserves—the world’s largest—has also supported the renminbi. China’s foreign reserves rose to USD 3.218 trillion at the end of October, the foreign exchange regulator reported, the first monthly rise since July. The growth came as overseas investors increased their holdings of Chinese government bonds (CGBs) to a new high in October. Foreign investors held CGBs totaling RMB 2.3 trillion (USD 359.49 billion) at the end of October, according to China Central Depository & Clearing Co

• Cash-strapped developer China Evergrande Group averted a last-minute default for the third time in the past month. Meanwhile, Kaisa Group, which has the most offshore bonds of any Chinese developer after Evergrande, approached default as the company reportedly informed creditors that it “may not be able to pay the coupons” on its bonds because of legal and cross-default issues domestically and offshore. Kaisa was the first Chinese builder to default on its dollar bonds in 2015, a landmark event at that time

• Chinese stock markets advanced amid speculation that Beijing would announce easing measures to help indebted property companies as the specter of defaults continued to loom over the sector. The large-cap CSI 300 Index rose 0.95%, and the Shanghai Composite Index added 1.4%

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