Economic Outlook – 16 January 2022

USA

• The Consumer Price Index rose 0.5% MoM in December after climbing 0.8% the prior month. The result was stronger than the +0.4% print expected by consensus. The energy component registered its first decline in seven months, retracing 0.4% thanks in part to a 0.5% drop in the gasoline segment. The cost of food, on the other hand, sprang 0.5%. The core CPI, which excludes food and energy, advanced a consensus-topping 0.6%. Prices for ex-energy services progressed 0.3% on gains for shelter (+0.4%) and medical care (+0.3%). Prices in the transportation services segment, for their part, cooled 0.3% on a 1.5% decline in the motor vehicle insurance category. The price of core goods, meanwhile, spiked 1.2% MoM, with steep increases for apparel (+1.7%, the fifth-largest print in the series history), tobacco/smoking products (+0.7%), and alcoholic beverages (+0.5%), as well as vehicles, both new (+1.0%) and used (+3.5%). For these last two cases, price hikes were driven again by the shortage of semiconductors, which continued to limit global car production

• Year on year, headline inflation clocked in at 7.0% (up from 6.8% the prior month), reaching its highest level since June 1982. The energy segment registered a very strong advance (+29.3%), while food inflation was at its most acute since October 2008 (+6.3%). Price pressures were not limited to these two segments, however, as evidenced by the sizeable increase of the core index. This measure jumped 5.5% on a 12-month basis (up from 4.9% the prior month), the most it had in 40 years

• Producer Price Index (PPI) for final demand increased 0.2%, which fell short of the 0.4% expected by consensus. This came after a 1.0% surge the prior month. Goods prices decreased 0.4%, with declines for both energy (-3.3%) and food (-0.6%). Prices in the services category, for their part, rose 0.5%. The core PPI, which excludes food and energy, climbed 0.4% on a monthly basis. Year over year, the headline PPI went from 9.8% in November, a record increase, to 9.7% in December, which was still very high on a historical basis. Excluding food and energy, it went from 7.9% to 8.0%, an all-time high. Higher input prices, long shipping delays, and rising labour costs are to blame for the recent surge in producer prices

• The NFIB Small Business Optimism Index crept up from 98.4 in November to 98.9 in December but remained significantly below the post-pandemic high reached in October 2020 (104.0). The net percentage of firms that expected the economic situation to improve moved into less negative territory, from the nine-year low of -38% to -35%. Net sales expectations, mean while, improved marginally, moving from 2% to 3%. Hiring prospects remained high, but an elevated 49% of firms reported not being able to fill one or more vacant positions. Fully 25% of firms also identified poor quality of labour as their most important problem, practically double the historical average for that indicator (12.7%)

• According to the latest edition of the Fed’s Beige Book, overall economic activity in the United States expanded at a “modest” pace the last week of 2021, that is, at a slower pace than in the previous period. While demand remained strong, growth was hampered by “supply chain disruptions and labour shortages”. Although optimism remained high generally, several districts cited reports from businesses that expectations for growth over the next several months cooled somewhat in the past few weeks

• Retail sales dropped 1.9% in December instead of edging down 0.1% as per consensus. The previous month’s result, meanwhile, was revised from +0.3% to +0.2%. Sales of motor vehicles and parts retraced 0.4%. Without the latter category, sales sank 2.3% as advances for miscellaneous items (+0.7%), building materials (+0.9%) and health/personal care item (+0.5%) were more than offset by sharp drops for non-store retailers (-8.7%), furniture (-5.5%), sporting goods (-4.3%), clothing (-3.1%) and electronics (-2.9%). In all, sales were down in 10 of the 13 categories surveyed. Core sales (i.e., sales excluding food services, auto dealers, building materials, and gasoline stations), which are used to calculate GDP, plunged 3.1% in the month

• Consumer outlays on goods came in a lot weaker than expected in December and that’s before accounting for inflation. Recall that, according to the CPI report published earlier this week, goods prices sprang 0.8% in the final month of the year. This doesn’t bode well for sales volume s in the month (data on real retail sales will be published next week). Adding to the bad news, losses were quite diffuse, with no less 10 out of 13 categories recording declines. Auto sales continued to be affected by chip shortages limiting production worldwide, but ex-autos sales fared even worse

• Industrial production decreased 0.1% MoM, below the consensus expectation of a 0.2% increase. Overall, industrial production still remained over its pre-pandemic level. Manufacturing output decreased 0.3% as production of motor vehicles/parts dropped 1.3% after the strong print of +1.7% in November. With this dip, auto output continued to be 6.5% below its level of February 2020. Excluding this category, factory output slip 0.2%. Output sagged 1.5% in the utilities segment but progressed 2.0% in the mining sector. In this last category, oil and gas drilling surged 3.7%. That said, production in this segment remained 19.9% below its pre-crisis level

• The Federal Reserve’s highly anticipated pivot turned, out to be more hawkish than expected. The FOMC now see three rate hikes in 2022. While FOMC members only revised up its 2022 (Q4/Q4) inflation forecast somewhat, its “dot plot” of members’ policy assessments was lifted aggressively compared to the September forecasts. The Fed is speeding up the tapering of asset purchases, doubling the pace of reductions from USD 15 to 30 billion per month. Thereby the tapering process ends in March, which according to Fed Chair Jerome Powell sets the FOMC “in a good position to deal with the risk” of persistently high inflation. Indeed, this hawkish pivot seems to much about “risk management”, a theme Powell touched upon in November as well

• In the press conference Powell outlined a series of events behind the hawkish pivot, with the unexpected inflation surge in the October CPI report being the main one. The FOMC now sees a real risk of persistent inflation, that could drive up inflation expectations and make high inflation entrenched. First of all, the switch to risk management mode resulted in the description of inflation as “transitory” being wiped from the Fed’s statement, despite inflation forecasts keeping the transitory profile. Secondly, the Fed now views the inflation target as achieved. Overall, the difference since November is stark: Going from “Inflation is elevated, largely reflecting factors that are expected to be transitory” and pointing out the FOMC’s “aim to achieve inflation moderately above 2 percent for some time” (to fulfill FAIT), all the way to this short “With inflation having exceeded 2 percent for some time…”. Lastly, it turns out the Fed’s employment goal could become a mere sideshow in 2022. While the FOMC expects it will keep the current near-zero policy rate “until labour market conditions have reached levels consistent with the Committee’s assessments of maximum employment”, Powell’s press conference delivered other scenarios. If inflation risks endure, but the labour market situation remains non-satisfactory the FOMC will prioritise the inflation target, as it is now further away from being achieved. Fortunately, Powell does not expect to be forced into living with such a trade-off, since the “all FOMC members forecast the maximum employment criteria to be met in 2022”. Conclusion, there will be rate hikes in 2022 irrespective of labour market developments, barring a severe shock, with COVID-19 still considered a risk. Other labour market analysis by Powell also pointed in direction of rate hikes

• The large-cap indexes recorded their second consecutive weekly loss to start the year—and the technology-heavy Nasdaq Composite its third—as the unofficial start of earnings season began. Financials shares came under pressure on Friday as JPMorgan Chase and Citigroup, typically among the first major companies to release results, reported lower profits in the fourth quarter. Utilities, real estate, and health care shares were also weak within the S&P 500 Index. Energy shares outperformed as oil prices continued their climb back to late-October highs.

• In terms of data release. House starts is out in Wednesday. Housing starts managed to increase 11.8% in November to a 1.679 million-unit pace. While, the gain could be partially attributed to favorable weather and a later Thanksgiving, that marked the second consecutive month of growth. Next week, the index is expected to start slightly weakened to a 1.670 million-unit pace. Despite the softening, this final data point of 2021 solidifies a strong end to 2021, as demand has remained strong. That said, the pace of housing starts has been hampered by an uphill battle against material and labor shortages lately, which has translated into higher input costs and extended project deadlines. These struggles were apparent in November’s data as both single-family and multifamily units currently under construction rose to their highest since 2007 and 1974, respectively

• Leading Index is out on Friday. After surging a greater-than-expected 1.1% in November, leading economic index (LEI) increased another 0.7% in the final month of last year. December’s gain will likely be fueled by a stellar month for initial jobless claims as the monthly average drifted to 200K, which is lower than any weekly print in over 50 years before the pandemic. Improved consumer confidence may also have finally helped lift the consumer sentiment component in December, as the index rose to 115.8 and November’s initial decline was revised to a slight gain. Granted, this data were taken in the beginning stages of the Omicron-related surge in COVID cases, and there could be some payback in January. Although the uptick in cases also led to sharp declines in the market midmonth, the S&P 500 was able to rally to just beneath 4,800 points by the end of the month. This means stock prices have the potential to meaningfully contribute to the LEI once more after having their largest monthly contribution to the headline in seven months in November

UK

• UK GDP for November has come out at 0.9% MoM, 8.0 YoY, this takes monthly GDP above its pre pandemic level by 0.7%. The general consensus is that there was a good deal of early Christmas shopping in anticipation of a lockdown in December (Black Friday sales were particularly strong) and while December’s lockdown was not as strict as previous lockdowns, shoppers anticipating it were not to know that. In the latest month, output in consumer-facing services grew by 0.8%, mainly because of a 1.4% increase in retail trade, while all other services rose by 0.6%; consumer-facing services are still 5.0% below their pre-coronavirus levels, while all other services are 2.9% above. If there are no other data revisions, quarterly GDP for Quarter 4 (Oct to Dec) 2021 will either reach or surpass its pre-coronavirus level (Quarter 4 2019). At the sub-sector level, the largest contributors to monthly GDP were human health and social work activities (where there is a degree of impact from the way in which locked down government services are measured), wholesale and retail trade (pre-Christmas), and the hard hit sector of arts, entertainment and recreation (people desperate to get out before another lockdown)

• Manufacturing and industrial production data for November have also been released: Ind Prod: 1.0% MoM, 0.1% YoY; Manuf Prod 1.1% MoM, 0.4% YoY. Construction output increased 3.5% in November 2021 following a fall of 1.7% in October 2021. This is the largest monthly rise seen in construction output growth since March 2021 (4.5%). At the sector level, the main contributors were infrastructure (HS2) and private new housing, which increased by 11.4% and 5.5% respectively. There is some anecdotal evidence to suggest that housing materials supply constraints are easing, which will be a relief to builders. Construction output is now 1.3% above its pre-pandemic leve

EU

• The eurozone flash Composite PMI fell to a nine-month low at 53.4 in December compared with 55.4 in the previous month. Manufacturing PMI held up better but still fell to 58, compared with 58.4 the month before, and Services PMI was 53.3 compared with 55.9. All indices except manufacturing were above expectations. Germany experienced a particularly large decline in activity, seeing the economy stall for the first time in one and a half years, with manufacturing falling further into contractionary territory. In contrast, France showed another month of strong growth, but the expansion in the services sector nonetheless hid a decline in manufacturing output

• The December release was the first survey to include some of the impacts of the new pandemic wave and, as expected, saw a slowing of economic growth in the eurozone, as renewed increases in infection rates and increased restrictions hindered economic activity. Services saw the bigger one-month decline as manufacturing held up relatively better, with output flat compared to the previous month and supply chain pressures alleviating somewhat. Price pressures also receded somewhat but still remain at extreme levels. New orders in manufacturing and incoming business in services both declined, but indicators of future business remained steady. Employment increased in manufacturing but declined in services

• In the ECB’s monetary policy statement, the bank left policy rate instruments unchanged as expected and reiterated its rates guidance relating to overall inflation, core inflation, and its tolerance to allow inflation to overshoot the target for a transitory target. The ECB further announced that PEPP purchases in the coming quarter will be conducted a lower pace than in previous quarters and that it intends to discontinue net purchases by the end of March 2022. The Governing Council also decided to extend the reinvestment horizon for the PEPP with the period extended at least through 2024. It further stated that “in the event of renewed market fragmentation related to the pandemic”, reinvestments “can be adjusted flexibly across time, asset classes and jurisdictions at any time”. It also added that “purchases of Greek bonds could be included “over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction.” Finally, the ECB stated that “net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.”

• As for the APP, the ECB announced it is increasing the APP purchasing pace to EUR 40bn in the second quarter, and EUR 30bn in the third quarter, and then revert back to EUR 20bn in the fourth quarter continuing “for as long as necessary to reinforce the accommodative impact of its policy rates.” The Governing Council also reiterated its rates and QE sequencing, noting that it “expects net purchases to end shortly before it starts raising the key ECB interest rates.” Greece appears to remain outside the APP, but this could be made moot but then announced flexibility with regards to reinvestments and potential reopening of PEPP regarding this jurisdiction. The new decisions have a dovish tint. The APP purchase pace for Q2 and Q3 next year was slightly above expectations (35 and 20 respectively). The open-ended policy horizon for APP was also a dovish surprise. That said, initial market reactions saw the euro appreciating and yields rising on both German and Italian bonds. One reason why peripheral bond yields sold off could be that adding only one year of additional reinvestment of PEPP as well as the emphasis on roll-off of the PEPP portfolio could have dominated the news on the boosted purchases in the APP

• Shares in Europe pulled back on signals that the U.S. Federal Reserve would tighten monetary policy at a faster rate than the market had previously expected. In local currency terms, the pan-European STOXX Europe 600 Index ended the week about 1% lower. France’s CAC 40 Index pulled back 1.06%, Germany’s Xetra DAX Index slipped 0.40%, and Italy’s FTSE MIB Index eased 0.27%

CHINA

• Consumer and producer price inflation slowed more than expected in December, while new bank lending fell more than expected. China’s trade surplus rose to a record USD 676.43 billion in 2021, the highest since 1950, when the country began recording data. The moderating inflation signs raised expectations that China’s policymakers would lower interest rates and possibly the required reserve ratio for banks to bolster the economy. Any easing in China would mark a divergence with policy in the U.S., where Federal Reserve officials have telegraphed the central bank’s intention to raise interest rates several times this year to curb a surge in inflation

• China Evergrande Group, the world’s most indebted property company, secured a crucial approval from onshore bondholders to delay payments on one of its bonds. Shimao Group, which missed payment on a USD 101 million trust loan earlier this month, will meet with creditors to vote on payment extension proposals after denying reports of a fire sale, Reuters reported. Credit rating agencies Moody’s and S&P downgraded their ratings on Shimao again last week, and S&P said it withdrew its rating at the company’s request. A severe and prolonged downturn in China’s real estate sector would have significant economy-wide reverberations, the World Bank warned in its Global Economic Prospects report

• China’s largest banks have grown more selective about funding real estate projects by local government financing vehicles, while several developers scrambled to obtain creditors’ consent for maturity extensions and exchange offers, Bloomberg reported. Other developers have intensified fundraising campaigns as traditional financing routes like presales have dried up

• Ahead of an important Communist Party Congress this fall, Chinese officials announced plans to accelerate work on over 100 major infrastructure projects in a bid to keep the country’s growth rate above 5%. The move is designed to offset the economic drag from declining housing investment and still sluggish household demand. Among the areas targeted for investment include 5G telecom, renewable energy, transportation and social housing

• Chinese markets fell for the week. The Shanghai Composite Index shed 1.6%, and the CSI 300 Index retreated 2%, weighed by headlines about refinancing difficulties in the country’s troubled property sector

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

2022-01-26T16:53:05+00:00