Economic Outlook – 17 January 2021


  • The Consumer Price Index increased 0.4% in December after climbing 0.2% the prior month. This result was in line with consensus expectations.
    • The energy index sprang 4.0% month-on-month thanks in large part to an 8.4% jump in the gasoline segment.
    • The cost of food, meanwhile, progressed 0.4% on advances for both “food away from home” (+0.4%) and “food at home” (+0.4%).
    • The core CPI, which excludes food and energy, edged up 0.1%. Prices for ex-energy services ticked up 0.1%, helped by healthy gains for motor vehicle insurance (+1.4%) and hospital services (+0.3%), which more than compensated for a 2.3% drop in airline fares. Prices for core goods, for their part, rose 0.2%, thanks to gains for apparel (+1.4%), new vehicles (+0.4%), and tobacco products (+1.0%), among others. Year-on-year, headline inflation clocked in at 1.4%, up two ticks from November. Core inflation held steady at 1.6%.
  • Core inflation came in slightly weaker than expected in December, perhaps owing to the surge in COVID-19 caseloads in the United States, which forced several states to maintain or tighten social distancing measures. Headline prices, for their part benefited from a rebound in energy prices. Until the pandemic is brought under control, economic recovery will be incomplete, with the goods sector outperforming by far the services sector, which is more heavily affected by social distancing requirements. The shift in consumer spending towards goods will likely continue to affect inflation data. In December, core goods inflation registered its largest increase since 2012 while core services inflation recorded its smallest in more than nine years.
  • Prices in the services category are expected to recover rather quickly once vaccines are widely rolled out to the general public. Goods prices, on the other hand, might not return to their pre-pandemic trend as quickly. Indeed, recent PMI reports indicate that supply chain disruptions are already plaguing the manufacturing sector, a situation that is exerting upward pressure on input/output prices. A broader re-opening of the economy would only exacerbate these problems. The US dollar’s depreciation and rising commodity prices are other factors that might support goods prices going forward.
  • The Import Price Index (IPI) rose 0.9% month-on-month in December after climbing 0.2% the prior month. The headline index was positively affected by a 9.1% increase in the price of petroleum imports. Excluding this category, import prices still rose a healthy 0.4%. On a 12-month basis, the headline IPI went from -1.0% in November to -0.3% in December. The less volatile ex-petroleum gauge rose from 1.6% to a 31-month high of 1.8%.
  • Retail sales fell 0.7% month-on-month in December, a result significantly weaker than the flat print expected by consensus. Adding to the disappointment, the previous month’s result was revised downward from -1.1% to -1.4%. Sales of motor vehicles/parts sprang 1.9% in the month and stood 9.5% above their pre-pandemic level. Without autos, consumer outlays shrank 1.4% as gains for gasoline stations (+6.6%) and clothing (+2.4%) were more than offset by declines for non-store retailers (-5.8%), electronics (-4.9%), eating/drinking establishments (-4.5%) and food/beverages (-1.4%). In all, 7 of the 13 retail segments saw lower sales in the month; 8 were still sitting above their February level. Core sales, which are used to calculate GDP and exclude food services, auto dealers, building materials and gasoline stations, were down 1.9% in the month and tracking a 2.3% annualized contraction in Q4 as a whole. This could translate into a weak contribution to GDP growth from goods consumption in the final quarter of the year.
  • The Producer Price Index (PPI) for final demand advanced 0.3% on a monthly basis after gaining 0.1% in November. Goods prices rose 1.1% on a 5.5% jump in the energy segment. Prices in the services category edged down 0.1% m/m. The core PPI, which excludes food and energy, climbed just 0.1%. Year-on-year, the headline PPI stayed unchanged at 0.8%. Excluding food and energy, it cooled two ticks to 1.2%.
  • According to the Empire State Manufacturing Survey, manufacturing activity in New York State expanded only marginally in January. The general business conditions index remained in growth territory, though it edged down 1.4 point to 3.5 in the month. New orders accumulated at a faster pace (6.6 vs. 3.4 the prior month), while the growth in shipments (7.3 vs. 12.1) lost some steam. The index for number of employees (11.2 vs. 14.2) fell slightly but remained firmly into expansionary territory. The prices paid index gained 8.4 points to a 28-month high of 45.5.
  • Initial jobless claims totaled 965K in the week ended January 9, up from 784K the week before and the most since mid-August. The steep increase was undoubtedly linked to the sharp jump in COVID-19 cases in the country. Continued claims, meanwhile, sprang from 5,072K to 5,271K in the week to January 2, marking the first increase for this indicator since late-November. In addition, another 11.6 million people must be added who received benefits in the week ended December 25 under the emergency programs introduced during the pandemic (Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation).
  • According to the Job Openings and Labor Turnover Survey (JOLTS), positions waiting to be filled fell from 6,632K in October to 6,527K in November after plunging to a six-year low of 4,996K back in April. The slight drop means job openings in November sat roughly 6.8% from their pre-pandemic level. Based on this data, the ratio of job offers to unemployed person in the US was 0.61. 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 worst of the 2008-09 recession.
  • Industrial production grew a healthy 1.6% in December but remained 3.3% below its pre-crisis level. As factories continued to catch up with swollen work backlogs, manufacturing output sprang 0.9% for a seventh consecutive increase. Production of motor vehicles/parts retraced 1.6%, but the decline was more than offset by gains for machinery (+2.1%), construction supplies (+1.9%) and consumer goods (+1.0%). Excluding autos, factory output expanded 1.1%. Production in the utilities segment jumped 6.2% while output in the mining sector advanced 1.6%. Oil and gas well drilling extended its rebound month over month (+10.7%) but was still down 55.6% on a 12-month basis. On a quarterly basis, industrial production sprang 8.3% in annualized terms in Q4 following a 42.6% surge the prior quarter.
  • The NFIB Small Business Optimism Index cooled from 101.4 in November to a seven-month low of 95.9 in December. The net percentage of polled firms that expected the economic situation to improve plunged from 8% to a near five-year low of -16%. This was not really surprising in light of the surge in COVID-19 cases across the US and the toughening of social distancing measures in some states. Also, the ratio of businesses planning to hire in the coming months retraced from 21.0% to 17.0%. The net percentage of businesses planning capital investments sagged from 26.0% to 22.0% and the net percentage of respondents expecting higher sales going forward sank from 10.0% to -4.0%. Given the more somber outlook, the ratio of businesses that deemed now to be a good time to expand fell from 12.0% to 8.0%.
  • The December retail report came in weaker than expected. After an impressive streak of positive gains between May and September, consumer outlays decreased for the third month in a row, adding to signs that the US economic rebound is losing its spring amid surging cases of COVID-19. Even some of the categories that typically benefit from physical distancing measures were hit in the last month of the year. This was the case for non-store retailers, which probably suffered from scaled-down Christmas celebrations. Other segments that generally do well during the holiday period recorded steep drops, notably electronics, eating/drinking establishments and food/beverages. Still, headline retail sales remain relatively elevated (+2.6% since February) after their impressive recovery over the past few months. The real question remains whether household spending can be sustained. The announcement of a new $900-billion federal aid package in Washington will certainly help. The agreement reached by Congress provides for most Americans to receive a cheque for $600; for an extension of the special Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation programs; and for a $300 supplement to regular unemployment insurance through to mid-March.
  • The topic of a sooner-than-anticipated rate hikes or asset purchase tapering has recently risen to the fore alongside vaccine deployment, additional fiscal relief and overall brighter prospects for economic growth. Several Fed officials pushed back on that notion this week. Governor Brainard emphasized that “the Fed is far from its goals” and Vice Chair Clarida said the FOMC would “not raise rates until inflation hit 2.0% for a year.” With regard to bond tapering, Fed Chair Powell commented that “now is not the time to talk about exit,” and that the Fed would “let the world know” before that process begins.
  • The major benchmarks finished the week mixed, but not before all but the S&P 500 Index hit record intraday highs on Thursday. Energy stocks pulled back sharply at the end of the week but led gains within the S&P 500, helped by a surprisingly large drawdown in domestic oil inventories. Communication services shares underperformed after social media companies Twitter and Facebook announced bans of President Trump and others on their platforms, citing concerns over the incitement of violence. Information technology shares were also weak, due, in part, to poor performance by payments processors. Small-caps outpaced large-caps, and value shares outperformed growth stocks, helping both building on their leads to start 2021.
  • On Thursday evening, the incoming president announced his plans for USD$ 1.9 trillion of stimulus, although it appeared to contain few market-moving surprises. Questions also remained about how quickly the incoming administration could move on the plan and how much Republican opposition would slow or reduce the package. Without sufficient Republican support in the Senate, Democrats will have to rely on the so-called reconciliation process, which places limits on the types of spending that can be increased.
  • In terms of data release, a read which must be watched is the state of the housing market with the publication of December’s building permits and housing starts. The latter could have risen to 1,575K, as builders continued to make up for the time lost during lockdown. Existing home sales, for their part, might have edged down in the month, judging from previously-released data on pending transactions.
  • January’s iteration of the NAHB Housing Market Index will also be released.


  • The headline was the GDP for the renewed lockdown month of November; year-on-year -8.9% (previously: -8.2%, consensus: -12.1%); quarter-on-quarter 4.1% (10.2%, 3.4%) and month-on-month -2.6% (0.4%, -5.7%). This compares to the month-on-month figure of -20.1% seen during the first lockdown in April 2020. These numbers are far better than forecast and would give credibility to the ONS data that has been showing that businesses that have been able to remain open, have becoming far more adept at maintaining revenue despite lockdown. Recent data shows that only 43.0% of business operators surveyed in December say turnover has decreased, against 40.0% saying it has not. The corresponding figures in June were 65.0% and 20.0%. At least two more months of negative data can be expected, with December reflecting widespread near lockdown and January the renewed national lockdown, before some sort of steadier path upwards can be anticipated.
  • The services sector was the main drag on growth in November, falling by 3.4% as restrictions on activity were reintroduced in some parts of the UK in response to the pandemic. The services sector is now 9.9% below the February 2020 level. Naturally, this was particularly true for consumers facing services such as restaurants and hotels, as well as car sales and repairs.
  • Bank of England Governor Andrew Bailey said it was too soon to say if more stimulus would be needed in the UK after the central bank increased its bond-buying program to almost GBP£ 900 billion in November.


  • Italy’s coalition government lost its parliamentary majority when three ministers from former Premier Matteo Renzi’s Italia Viva party resigned. Renzi has been a vocal critic of Prime Minister Giuseppe Conte’s leadership style and his management of the country’s worst recession since World War II. Political analysts said that if Conte cannot form a new majority coalition, a general election would ensue, barely five months after the government took office.
  • The Dutch coalition government, led by Prime Minister Mark Rutte, resigned en masse over a child-care subsidies scandal. National elections are expected to be held in March.
  • German gross domestic product (GDP) contracted by a smaller-than-forecast 5.0% in 2020 as coronavirus restrictions curtailed activity, preliminary data showed. A wave of recovery and stimulus measures during the year helped support the economy. Growth probably stagnated in the fourth quarter.
  • Shares in Europe fell as the resurgence in coronavirus infections dented optimism surrounding plans for further fiscal stimulus in the US. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.81% lower, while Germany’s Xetra DAX Index declined 1.86%, France’s CAC 40 lost 1.67%, and Italy’s FTSE MIB slipped 1.81%.
  • In terms of data release, the ECB meeting this week is set to be a fairly uneventful one, which is expected  to be a stock-taking meeting with no new policy signals. As the Euro area economy is still in lockdown and could be all through Q1, it is likely the services sector will continue to drag economic sentiment lower but with the rollout of the vaccines and improvement in the weather conditions, activity is set to pick up. The press conference is expected to convey this ray of optimism. The recent recalibration of the policy instruments from the ECB in December has been well absorbed by markets, which means the ECB has no urgency to signal a new policy stance.


  • December exports climbed a better-than-expected 18.1% year-on-year in US dollar terms. For all of 2020, exports grew 3.6% year over year to a record USD$ 2.6 trillion, while imports declined 1.1%. The latest trade data showed that China continues to record the strongest export growth in Asia and underscored the country’s economic strength as most major economies are struggling to control the pandemic.
  • In other economic news, China’s consumer price index (CPI) edged higher in December, driven by recently rising food prices that have spurred inflation concerns. However, stripping out food and energy prices, the CPI declined. Total social financing, China’s broadest measure of credit, declined more than expected in December to CNY 1.7 trillion. Bank loan growth was broadly flat, reflecting Chinese companies’ reluctance to borrow in the uncertain economic environment.
  • Chinese stocks fell as the US added another nine Chinese companies to its investment blacklist on Thursday, taking the total to 44 names that the Trump administration claims have ties to China’s military. For the week, the country’s large-cap CSI 300 Index declined 1.4% and the Shanghai Stock Exchange Composite Index shed 0.6%, according to Reuters. Shares of Chinese internet leaders Alibaba and Tencent were volatile on reports that they too would be added to the US blacklist, though this had yet to happen by Friday. Shares of Xiaomi, a well-known domestic consumer electronics and smartphone maker, fell sharply on its unexpected addition to the list. Banks, however, rose following strong fourth-quarter earnings.
  • The yield on China’s 10-year sovereign bond yield declined and ended the week at 3.15% despite further signs of economic recovery. The yuan currency ended the week flat against the US dollar at 6.47 per dollar.
  • In terms of data release. The Chinese Q4 2020 GDP data is out this week and is expected to show growth of 6.2% year-on-year, up from 4.9% year-on-year in Q3 2020.

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