Economic Outlook – 16 May 2021


• The Consumer Price Index rose 0.8% in April after climbing 0.6% the prior month. This result blew past consensus expectations calling for just a +0.2% print. The energy component edged down 0.1% thanks in part to a 1.4% decline in the gasoline segment. The cost of food, for its part, rose 0.1%. The core CPI, which excludes food and energy, also beat consensus expectations by a mile, progressing 0.9% MoM, the most since April 1982. Prices for ex-energy services rose 0.5% on strong gains for shelter (+0.4%), motor vehicles insurance (+2.5%), and airline fares (+10.2%). The price of core goods, meanwhile, surged 2.0% on gains for used vehicles (+10.0%), medical care (+0.6%), and new vehicles (+0.5%). Year on year, headline inflation clocked in at a 12.5-year high of 4.2%, up from 2.6% in March. The core CPI nearly doubled from 1.6% to 3.0%, its highest level since 1995. Alternative, less volatile measures of inflation, too, accelerated in April but at a slower pace. For example, the Cleveland Fed trimmed-mean CPI, which is a weighted average of one-month inflation rates of components whose expenditure weights fall within the 8th and 92nd percentile of price changes, rose 0.4% MoM. Year on year, the trimmed-mean CPI went from 2.12% in March to 2.44% in April, its highest reading since January 2012

• To get a better idea of underlying price movements, one needs to turn to the monthly data, which came in a lot stronger than expected in April. Indeed, headline prices registered their steepest monthly gain since 2009. Although roughly a third of that was due to a marked increase in the price of used vehicles (+10.0%, the largest gain since data collection began in 1953), other categories registered healthy gains as well. The core CPI, meanwhile, advanced at its fastest monthly rate since 1982. As strong as April’s CPI report was, the real question remains whether inflationary pressure will be sustained and, if so, for how long. The unprecedented surge in money supply is topmost among these. Also, the amount of fiscal aid rolled out by Washington has benefited not only those in need but also households that did not suffer financially during the pandemic. Factories were already showing signs of strain in April under soaring input prices and lengthening supplier delivery times. This reflected growing capacity pressure stemming from extensive supply shortages. According to the central bank, inflation cannot remain sustainably above 2% if employment does not erase the losses suffered during the crisis. However, several reasons are preventing workers from returning on the job market at the moment: fear of infection, school closures, skill mismatches, and generous government benefits (work disincentives). This distorts the impact on inflation normally expected when the labour force is underutilized

• The NFIB Small Business Optimism Index climbed 1.6 points to 99.8, a touch above its long-term average. It must be reminded, however, that the long-term horizon covers a prolonged period of depressed readings following the financial crisis of 2008. As was the case in many other business surveys, a large portion of respondents reported supply-chain problems, including difficulties filling job openings. The number of small-business owners that reported job openings that could not be filled increased two percentage points to 42%. Among respondents who were hiring, 92% reported few or no qualified applicants for their openings. In order to attract candidates, many firms offered hiring bonuses or other incentives and the net percentage of owners raising compensation rose to 31% (up three percentage points), its highest level in 12 months. Difficulties hiring qualified workers no doubt contributed to the seven-point increase that hoisted the net proportion of small-business owners planning capital investments in the next three to six months to 27%. Overall, the assessment of current sales and expectations for future sales remained relatively low

• Producer Price Index rose 0.6% MoM and 6.2% YoY. The core PPI, which excludes food, energy and trade services, rose 0.7% MoM and 4.6% YoY. Base effects and an 18.4% MoM increase in steel product prices contributed to the jump. Price increases were notable also for services which, according to the U.S. Bureau of Labor Statistics, accounted for about two-thirds of the monthly advance in the final demand index. The stronger-than-expected increase in the PPI followed the earlier release of the CPI, which also surprised on the upside (4.2%)

• Retail sales came in flat in April, the median economist forecast was for a 1.0% gain. The disappointment was compensated by an upward revision to the prior month’s result, from +9.8% to +10.7%. Sales of motor vehicles/parts sprang 2.9% in April and stood no less than 32.2% above their pre-pandemic level. Excluding this segment, consumer outlays edged down 0.8% as declines for clothing (-5.1%), general merchandise (-4.9%) sporting goods (-3.6%), gasoline stations (-1.1%) and miscellaneous items (-1.1%) were only partially offset by a 3.0% gain in the food services category. In all, sales declined in 8 of the 13 categories surveyed, with 12 of them still sitting above last year’s February level. Core sales, which are used to calculate GDP and exclude food services, auto dealers, building materials and gasoline stations, slid 1.5% in the month

• According to the Job Openings and Labor Turnover Survey, the number of jobs available to be filled increased 597K to 8.1 million on the last business day of March, a new record high. The largest increases were recorded in the accommodation and food services sector (+185K), followed by state and local government education (+155K) and arts, entertainment, and recreation (+81K). The number of job openings decreased in health care and social assistance (-218K). Job openings were on the rise in both medium establishments with 50 to 249 employees and large establishments with 5,000 or more. The layoffs and discharges rate increased in large establishments with 250 to 999 employees but decreased in small establishments with 1 to 9, according to the U.S. Department of Labor. Total separations were little changed at 5.3 million, as were the quits rate and level at 2.4% and 3.5 million, respectively. Layoffs and discharges decreased to a series low of 1.5 million. The number of other separations was essentially unchanged in March at 334K

• Industrial production advanced 0.7%, a result roughly in line with the median economist forecast calling for a +0.9% progression. The prior month’s result was revised upward significantly, from 1.4% to 2.4%. April’s gain still left industrial output 2.7% short of its pre-crisis level. Factory production increased for the eleventh time in the past twelve months in April, rising 0.4% despite a 4.3% drop in the motor vehicles/parts segment (the latter likely caused by shortages of semi-conductors). Excluding autos, manufacturing output expanded 0.7% on gains for primary metals (+1.7%) and machinery (+0.7%). Production in the utilities segment improved 2.6%. Mining output, for its part, crept up 0.7% as oil and gas well drilling prolonged its rebound MoM (+4.6%). That said, production in the latter segment remained 20.8% below its level a year ago

• The Fed doesn’t seem to be worried about inflation. The Fed’s change in strategy to target an average inflation rate has a lot to do with its more relaxed attitude. Since inflation has undershot 2% for several years prior to the pandemic, it has to push above it for some time in order to hit 2% on average. Meanwhile, the unemployment rate is still 2.6 percentage points higher than its pre-recession level and there are still 8.2 million fewer jobs. Finally, the Fed’s composite measure of inflation expectations currently stands at ‘only’ 2.01% and expectations are for it to stay below 2% over the long-term

• Colonial Pipeline, which operates the largest refined products pipeline in the US, was the victim of a cybersecurity attack by a hacker group named DarkSide last Friday night. Colonial shut down 5,500 miles of pipeline that carries nearly half of the fuel for the East Coast, raising fears of spot shortages of gasoline, diesel and jet fuel. The company restarted operations Wednesday evening. It said it would take several days for the product delivery supply chain to return to normal. The average price for a gallon of gas in the US jumped above $3 for the first time since 2014. Gas shortages in the Southeast are most acute in North Carolina, South Carolina and Georgia, where 65%, 43% and 44%, respectively, of stations are out of fuel, according to data from GasBuddy

• Trillions of dollars stashed by US companies during the pandemic are starting to flow to shareholders after a 2020 drought. Roughly $360 billion in share repurchases were announced in the first four months of 2021 (compared with $190 billion in the same period of 2020), with US buybacks accounting for $300 billion of the total ($130 billion a year ago). Analysts attribute the buyback rebound to corporate cash piling up due to last year’s record borrowing and cuts to shareholder rewards

• Stocks slipped back from record highs as investors confronted stark signs of higher inflation, but a late rally moderated the week’s declines. Weakness in Tesla weighed especially on consumer discretionary shares, and Elon Musk’s announcement that electric vehicle maker would no longer accept Bitcoin as payment because of its carbon footprint sparked a sell-off in the cryptocurrency. At its low point on Wednesday, the technology-heavy Nasdaq Composite index was down roughly 8.5% from its intraday April 29 peak, still above the widely accepted 10% threshold for a correction

• In terms of data release, the Housing Start print is out on Tuesday. During March, new residential construction rebounded from the weather-related weakness the month prior. Total housing starts jumped over 19% to a 1.74-million unit pace, which marks the fastest pace in more than a decade. Single-family starts rose 15.3% during the month, and multifamily starts surged 30.8%. Home building clearly has a lot of underlying momentum currently. Starts through the first three months of 2021 are running 8.6% ahead of their year-ago pace

• The Leading Economic Index is out on Thursday. The Leading Economic Index (LEI) jumped 1.3% in March, a gain that was consistent with the strong results seen across a wide array of other indicators during the month. The monthly rise in the LEI was broad-based, with all 10 index components registering a substantial improvement


• Monthly GDP was 2.1% (consensus: 1.0%), quarterly was -1.5% and annual was 1.4% (consensus: 1.0%). The level of GDP is now 8.7% below where it was before the pandemic in Q4 (Oct-Dec) 2019. These are good numbers and forecasts for the remainder of 2021 are being raised across the board, with the Bank of England taking its GDP forecast for 2021 as a whole up from 5% to 7.25% earlier this week. Looking into the figures, school closures and a large fall in retail sales earlier in the quarter dragged down GDP growth; with both now gone, or going, and the removal of further restrictions next week, the expectation is for a further significant boost consumer spending. Education was the biggest driver of GDP growth in March, while manufacturing output rose by 2.1%, the fastest pace since July 2020. The justification for continuing quantitative easing, despite strong overall economic growth, is going to be increasingly questioned

• The trade figures for March were also released: the balance of trade was GBP -2bn and the goods trade balance for March was -11.7% (consensus: -14.4%). There was some concern about the figures in January, as the immediate impact of Brexit was a significant dip in UK/EU trading volumes. However, pre-Brexit stockpiling and broader trade disruptions were also significant factors. The trade figures began to rebound in February and today’s data points to further recovery, although imports in particular remain markedly lower than in 2020 and it is notable is that this is the first time since January 1997 that imports of goods from non-EU countries are higher than from EU countries

• London’s FTSE 100 rose on Friday, supported by banks and energy stocks but clockedits worst weekly performance since February on inflation worries, while Sanne Group topped the mid-cap index after rejecting a $1.90 billion buyout proposal. The blue-chip index (.FTSE) rose 1.2%, with Banks (.FTNMX301010) and oil majors BP (BP.L) and Royal Dutch Shell (RDSa.L) being the biggest boosts to the index. The index is down 1.2% for the week, its biggest weekly fall since February. “Monday, the UK unlocks another part of the lockdown. That has given confidence to the market and we have had boisterous commentary from players of the Bank of England this week about growth picking up steam,” said Keith Temperton, a sales trader at Forte Securities.

• Bank of England Governor Andrew Bailey said there might be a role for a state-backed digital currency in Britain although there would be big implications ranging from the setting of interest rates to privacy. “It may well be that we do end up with a digital currency. It’s a few years off at the moment,” Bailey said at a public event organised by the BoE. The use of cash was falling but creating a central bank-backed currency would have significant impacts on the financial system and beyond, Bailey said. “Security, that is an issue for us. Privacy, that’s a big issue, a very big issue,” he said. Plans developed by Facebook for a digital currency “set off a lot of alarm bells” about access to information, Bailey said. Earlier on Thursday, Deputy Governor Jon Cunliffe said he saw good reasons for a BoE digital currency. British Finance Minister Rishi Sunak asked the BoE and other regulators in April to look at the case for creating a central bank digital currency to respond to the challenge from cryptocurrencies such as bitcoin

• The UK’s FTSE 100 pulled back 1.21%, in part because the British pound appreciated relative to the U.S. dollar after local election victories for the ruling Conservative Party. The FTSE 100 Index tends to fall when the pound rises because many companies in the index are multinationals that generate a meaningful proportion of their revenue abroad


• Industrial production in March rose 0.1% (seasonally adjusted) MoM and 10.9% YoY. According to Eurostat, from February to March, production grew 1.9% for non-durable consumer goods, 1.2% for energy, and 0.6% for intermediate goods, but shrank 1.0% for capital goods and 1.2% for durable consumer goods

• The minutes of the ECB’s most recent policy meeting suggested that the governing council was satisfied with market developments going into the April meeting. There was broad agreement that euro area financing conditions had remained broadly stable since the March meeting. The statement also noted that measures of underlying inflation continued to hover around levels seen in spring 2020. The EC revised its economic growth forecasts to 4.3% for 2021 and to 4.4% for 2022—an increase from previous estimates of 3.8% in both years. Rising vaccination rates, the prospect of lockdowns easing across the region, and improving export demand prompted these upward revisions

• Shares in Europe fell with global markets amid signs of accelerating inflation, stoking fears that interest rates could increase. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.54% lower. Major indexes were mixed. Germany’s Xetra DAX and France’s CAC 40 were little changed, but Italy’s FTSE MIB rose 0.63%


• China’s top leaders are considering a residential property tax, a reform that Beijing has debated in recent years, reported the South China Morning Post. News of the proposal follows recent statements by Premier Li Keqiang regarding rising home unaffordability as a concern for the government. The Ministry of Finance is consulting with other ministries, local governments, and industry experts on a pilot scheme for taxing real estate, one means of keeping a lid on surging home prices. Analysts expect China’s property sector will remain strong this year, given stable mortgage rates, low supply, and strong land sales in 2020. New housing starts and completions in March declined 3.7% and 2.2%, respectively, from the same period in 2019. Home prices are a concern for Beijing because they are seen as a factor behind China’s declining birth rate, which has implications for the labor supply and pension system. China’s delayed 2020 census data showed a shrinking working-age population and continued drop in birth numbers. The country’s population recorded an average annual growth rate of just 0.53% in the past decade, a six-decade low, while new births dropped 18% in 2020 for the fourth straight year. The census also revealed that China’s total fertility rate—or the average number of children born to a woman over her lifetime—was well below the number for Asia and the rest of the world. Analysts believe that the government will respond by postponing the retirement age, relaxing urban residency rules, and offering child-care services to encourage families to have more children

• Auto sales increased for the 13th straight month in April, rising 8.6% over a year ago. China’s producer price index jumped 6.8% in April, the largest gain since 2017, as raw materials prices surged. However, the CPI rose a less-than-expected 0.9%, restrained by lower food prices. Despite the muted CPI reading, analysts see core consumer inflation on the rise as prices in the services sector start to normalize after the coronavirus pandemic. Aggregate finance—a broad measure of credit in the economy—rose 11.7% in April, down markedly from the previous month and the slowest growth pace since March 2020, when China’s economy started to reopen, according to CLSA. In corporate news, e-commerce leader Alibaba reported better-than-expected revenue in the first quarter, but its earnings lagged forecasts owing to higher costs for new strategic initiatives

• Chinese stocks rose strongly. The benchmark Shanghai Stock Exchange Composite Index gained 2.1%, while the large-cap CSI 300 Index advanced 2.3%. The yield on China’s sovereign 10-year bond ended unchanged at 3.17% after a week of mixed economic data. China reported net inflows of USD 9 billion into the country’s government bonds in April. Beijing is keen to attract foreign investment into its domestic “green bond” market, used to finance renewable energy and other green projects. In currency trading, the renminbi gained 0.3% against the U.S. dollar, closing at 6.434 per dollar

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