Economic Outlook – 15 May 2022


• The Consumer Price Index rose 0.3% MoM in April, slightly more than the +0.2% print expected by consensus. This came after a 1.2% increase in March, the biggest monthly jump since September 2005. Prices in the energy segment cooled 2.7% in April as a 6.1% drop for gasoline was only partially offset by gains for natural gas (+3.1%), fuel oil (+2.7%), and electricity (+0.7%). The cost of food, meanwhile, sprang 0.9%. The core CPI, which excludes food and energy, rose 0.6%, two ticks more than the median economist forecast of 0.4%. Prices for ex-energy services rose at the fastest pace since August 1990, springing 0.7% MoM on gains for shelter (+0.5%), medical care (+0.5%), and transportation services (+3.1%), this last category boosted by an 18.6% jump in airline fares. The cost of core goods, meanwhile, crept up 0.2% as declines for apparel (-0.8%) and used vehicles (-0.4%) were offset by gains for new vehicles (+1.1%), alcoholic beverages (+0.4%), and tobacco/smoking products (+0.4%). Year on year, headline inflation clocked in at 8.3%, down from 8.5% the prior month but still the second-highest print since the early 1980s. The 12-month advance in energy prices eased up somewhat (from +32.0% to +30.3%), while food inflation was the most acute in four decades (+9.4% YoY)

• The CPI report showed that a slowdown in the goods segment was more than offset by an acceleration in services. To some extent, this was to be expected given the easing of supply chain constraints in the manufacturing sector and the shift in consumer demand towards services in a post-pandemic context. Still, the sheer speed at which the price of services is increasing is nonetheless concerning given that inflation in this category tends to be stickier. The rise in the shelter component—up 5.6% annualized over the past six months—is particularly worrisome seeing how it accounts for about one-third of total spending

• After climbing 1.6% in March, the Producer Price Index for final demand rose a consensus-matching 0.5% in April. Goods prices sprang 1.3%, with gains for both energy (+1.7%) and food (+1.5%). Prices in the services category stayed flat. Meanwhile, the core PPI, which excludes food and energy, grew 0.4% on a monthly basis. Year over year, the headline PPI eased from an all-time high of 11.5% to 11.0%. Excluding food and energy, it fell from 9.6% to 8.8%. Higher input prices, long shipping delays, and mounting labour costs are to blame for the recent surge in producer prices

• The Import Price Index (IPI) stayed flat on a monthly basis in April instead or rising 0.6% as per consensus. The prior month’s result, meanwhile, was upgraded from +2.6% to +2.9%. The headline April result was negatively affected by a 2.9% decrease in the price of petroleum imports. Excluding this category, import prices rose 0.4%. On a 12-month basis, the headline IPI went from 13.0% to 12.0%. The less volatile ex-petroleum gauge eased from 8.2% to 7.8%

• The University of Michigan Consumer Sentiment index fell from 65.2 in April to 59.1 in May, its lowest level since August 2011. The deterioration was due to a worsening of assessment of current conditions, with the associated index dropping from 69.4 to a 13- year low of 63.6. The general pessimism likely reflected widespread concerns about rising inflation. Indeed, consumers expected prices to rise 5.4% over the next 12 months, the most since the early 1980s. Partly due to recent inflationary pressures, the share of survey respondents who felt their financial situation had improved over the past 12 months was the lowest since 2013

• After three consecutive drops from December to March, the NFIB Small Business Optimism Index remained stable in April at 93.2, its lowest point since the beginning of the pandemic. The net percentage of firms that expected the economic situation to improve sank further into negative territory, dipping from -49% to -50%, the lowest level ever recorded. Net sales expectations, on the other hand, recovered, climbing from -18% to a still-depressed -12%. Though hiring prospects remained relatively high (20%), 47% of firms reported not being able to fill one or more vacant positions. 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 (46%) or intended to do so in the next few months (27%) remained near the record highs reached earlier this year

• Regarding stablecoins, part of the financial infrastructure of the crypto market, The US Federal Reserve warned this week in its Financial Stability Report that the coins could become illiquid or lose value in times of stress. That proved prescient as TerraUSD, a token meant to trade at a constant $1, fell to $0.30 on Wednesday, the same day that US Secretary of the Treasury Janet Yellen again called on Congress to authorize the regulation of the coins. On Thursday, Tether, an $80 trillion stablecoin, also broke the buck

• Fed Chair Jerome Powell reiterated that 50-basis-point rate increases at the June and July FOMC meetings will remain appropriate if the economy performs about as expected. He also said 75-basis- point hikes are not under active consideration, though the Fed will do more if needed. The central bank aims to achieve a soft landing, but that will be quite challenging, Powell opined

• The US Senate confirmed Jerome Powell as Fed chair for a second term. Lisa Cook and Phillip Jefferson were confirmed as members of the central bank’s Board of Governors. One seat on the seven-member board remains open. Michael Barr, a former Treasury official nominated last month by President Joe Biden, awaits a confirmation hearing

• Stocks recorded another week of losses, as investors appeared to grow increasingly skeptical that the Federal Reserve will be able to achieve a “soft landing” for the economy by raising rates enough to tame inflation without causing a recession. The Cboe Volatility Index (VIX) remained elevated but slightly below its recent intraday high on May 2. Many cryptocurrencies plunged in value, further suggesting a strong risk-off environment. It marked the sixth consecutive weekly decline for both the S&P 500 Index and the Nasdaq Composite and the seventh for the Dow Jones Industrial Average—the longest stretch for the latter since 2001, according to The Wall Street Journal. At its low point on Thursday, the S&P 500 was down nearly 18% from its peak, well into correction territory but just above the -20% performance threshold that typically defines a bear market. The benchmarks pared some of their losses on Friday, helped by a rally in Tesla shares after CEO Elon Musk tweeted that his deal to buy Twitter—partly funded by sales of a portion of his considerable stake in the electric car maker—was “on hold.”

• In terms of data release, retail sales is out on Tuesday. Persistent price pressures are raising concerns about if strength in consumer spending can be sustained. The retail sales report next week will give us a first look at how spending fared in April, and contrary to previous months, the spending estimates will actually likely be held back by inflation. While overall inflation has remained hot, goods prices have started to cool. The overall consumer price index rose more than expected, up 0.3%, in April, but goods prices declined 0.3%, the first decline in a year and a half. Since retail sales are reported in nominal dollars, the decline in prices during the month will weigh on the overall gain in sales

• Housing starts is out on Wednesday. Demand for housing has ripped higher throughout the pandemic amid a change in preferences and an acceleration in already-favorable demographic tailwinds. But rapid demand has been met with an inadequate supply of homes available for sale, which has given way to a rapid rise in home building. Housing starts were 16% above the prior cycle peak through March. Affordability is a growing concern with home prices up nearly 20% on a year-ago basis and mortgage rates at a 13-year-high. Momentum in home building is expected to begin topping out in April and the indicator is likely to decline slightly to an 1.789-million-unit pace


• Preliminary UK GDP for Q1 2022 has come out at 0.8% QoQ, 8.7% YoY (consensus 1% QoQ, 9% YoY), this leaves GDP 0.7% above its pre-pandemic level. The MoM GDP figure for March, which is calculated separately to the quarterly and annual figures, was -0.1% MoM, 6.4% YoY (consensus 0% MoM, 6.8% YoY). These figures clearly show the economy is slowing, indeed shrinking in the most recent month, suggesting the expected negative growth will come earlier in the year than the recent Bank of England forecast. Notably if government spending were excluded, GDP would still be 1% below its 2019 level. UK Trade for Q1 has also come out at -23.8B GBP (consensus -18.5B GBP), recent reports have suggested that while that overall UK trade figures are holding up better than some might have anticipated, smaller UK exporters are increasingly being put off looking to EU markets due to the rise in bureaucracy involved. Trade data widening to a record -5.3% of GDP (-4.1% excluding gold) has been driven by surging imports of goods (service imports fell) and a failure of exports (particularly financial services) to compensate. Look for Sterling once again to take much of the pressure

• The service industries, which had been hit hard in the pandemic, continue to grow lead by information and comms (+0.28%), transport and storage up 3.6%, and warehousing by 4.3%, the latter two reflecting both changes to consumer consumption behaviour (20% of retail sales were online before the pandemic, this has now steadied at 27%) as well as businesses being less reliant on just in time supply chain management. While air transport, up by 14.5%, is still clearly recovering from pandemic depressed levels. Health services saw a dip as free at the point of use NHS test and trace spending was wound down. Real Estate activities were once again marginally down in Q1, giving further support to the view that house prices are likely to stagnate over the remainder of the year

• Unless the European Union radically changes its approach, the United Kingdom may introduce legislation as early as this week that would rescind elements of the Northern Ireland protocol, part of the Brexit agreement with the EU, the Financial Times reported


• European Central Bank (ECB) President Christine Lagarde said in Slovenia that the ECB’s bond-buying program could end “early in the third quarter” and be followed by a rate increase “only a few weeks” later. The comments are the clearest sign yet from Lagarde that the ECB could move on rates sooner rather than later. Since the April policy meeting, a growing number of policymakers have appeared to lend their backing to increasing interest rates in July. Joining their ranks during the week were German central bank President Joachim Nagel, who said he “will advocate a first step normalizing ECB interest rates in July,” and Frank Elderson, the newest member of the executive board, who said that the ECB could consider raising rates in July “dependent, as always, on the incoming data.”

• Bloomberg reports that the European Commission will propose a €195 billion plan to wean itself off Russian energy by 2027. The proposal is said to rely heavily on renewables and meeting energy savings goals such as a reducing energy use by 13% of 2020 levels

• Shares in Europe rebounded from earlier weakness to finish higher, despite ongoing concerns about inflation, tightening monetary policy, and the economic outlook. In local currency terms, the pan-European STOXX Europe 600 Index ended 0.83% higher. The main market indexes advanced. Germany’s Xetra DAX Index climbed 2.59%, Italy’s FTSE MIB Index tacked on 2.44%, and France’s CAC 40 Index added 1.67%


• Credit demand in April weakened as new loans fell to a worse-than-forecast CNY 645.4 billion yuan (USD 95.14 billion) from CNY 3.13 trillion in the previous month, as lockdowns in cities across the country hit economic activity. Export growth in U.S. dollar terms plunged to 3.9% YoY in April from 14.7% in March, while import growth in April was flat over a year ago and roughly unchanged from March’s pace. Both sets of data were higher than economists’ estimates

• On the inflation front, factory gate inflation jumped a higher-than-expected 8% in April following the previous month’s 8.3% increase. Consumer inflation rose at an above-expected 2.1% YoY rate and accelerated from March’s 1.5% pace. Analysts said that higher fuel and food prices drove the increases for the factory gate and consumer inflation readings

• The yuan weakened to CNY 6.80 per U.S. dollar from CNY 6.67 a week ago. The currency has fallen more than 5% against the greenback in the last three weeks amid rising U.S. interest rates, the Russia-Ukraine war, slowing domestic growth, and speculation that the central bank will act to slow its depreciation. The yuan’s slump is an unwelcome development for issuers of dollar bonds, many of which are in the debt-laden property sector and struggling with slowing sales, weak prices, and refinancing pressures. The property sector’s liquidity crisis continued as Sunac China Holdings and Zhongliang Holdings became the latest developers to discuss debt solutions on their repayment obligations

• The China Securities Regulatory Commission aims to increase the participation of institutional investors in the country’s stock markets and expand the investible universe of the exchange link with Hong Kong, according to an interview carried on state media with Vice Chairman Wang Jianjun

• Chinese stocks rallied as a fall in coronavirus cases and reassuring comments from the securities regulator lifted investor sentiment. The broad, capitalization-weighted Shanghai Composite Index added 2.7%, and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, rose 2.1%

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