Economic Outlook – 17 October 2021


• The Consumer Price Index advanced 0.4% MoM in September after climbing 0.3% the prior month. The result was a touch stronger than the 0.3% print expected by consensus. The energy component rose 1.3% thanks in part to a 1.2% gain in the gasoline segment. The cost of food, for its part, increased 0.9%.The CPI, which excludes food and energy, registered a consensus-matching 0.2% advance. Prices for ex-energy services advanced 0.2% as gains for shelter (+0.4%) and motor vehicles insurance (+2.1%) were only partially offset by a steep drop in airline fares (-6.4%). The price of core goods progressed 0.2%
MoM, with decent advances for new vehicles (+1.3%), medical care (+0.3%), and tobacco/smoking products (+0.7%). The price of used vehicles, meanwhile, faded for the second month in a row (-0.7%) after increasing roughly 30% from March to July. YoY, headline inflation clocked in at 5.4%, up a tick from the prior month. Core inflation, meanwhile, stayed put at 4.0%

• The inflation report was a tad stronger than expected, with the headline print boosted by yet another rise in energy prices. The core index, for its part, fell in line with consensus expectations. It would have been stronger had it not been for yet another steep drop in airline fares, which was probably due to still-high COVID-19 caseloads in the country limiting travel during the month. The improving epidemiological situation could prompt a reversal in this category next month. Used vehicle prices, too, waned in August but that was to be expected after their sharp surge earlier this year

• The Producer Price Index for final demand increased 0.5%, the lowest monthly gain so far this year. Prices for final goods demand, which account for 32% of the index, rose 1.3% MoM. Price increases were less pronounced in construction (0.2% MoM) and in services. Representing 66% of the headline index, the latter, too, edged up 0.2% in the month. Relative to September 2020, the PPI for final demand increased 8.6%. Excluding food and energy, prices rose 6.8% from 12 months earlier.

• The Import Price Index (IPI) rose 0.4% in September, more than erasing the prior month’s losses (-0.3%). The headline print was positively affected by a 3.9% increase in the price of petroleum imports. Excluding this category, import prices crept up just 0.1%. On a 12-month basis, the headline IPI went from 8.9% in August to 9.2% in September. The less volatile ex-petroleum gauge fell from 5.9% to 5.4%

• Retail sales rose 0.7% in September instead of retracing 0.2% as per consensus. Adding to the good news, the previous month’s result was revised upwards, from +0.7% to +0.9%. Sales of motor vehicles/parts progressed 0.5%, snapping a streak that had seen outlays fell four 4 consecutive months in that category. Without autos, sales sprang 0.8% on advances for sporting goods (+3.7%), general merchandise (+2.0%), miscellaneous items (+1.8%), gasoline station receipts (+1.8%) and non-store retailers (+0.6%). These gains were only partially offset by declines for health/personal care (-1.4%) and electronics (-0.9%). In all, sales increased in 11 of the 13 categories surveyed. Retail outlays came in above consensus expectations for the second month in a row in September. Auto sales registered their first monthly gain since April, but don’t expect this to mark the beginning of an upward trend. Auto inventories remain extremely depressed in the U.S. and chip shortages continue to limit production worldwide. This, combined with a surge in sales earlier this year, has left dealers’ lot virtually empty

• The JOLTS survey shows that American workers quit their jobs in record numbers (4.3 million) at the end of summer. This trend is especially prevalent in the accommodation and food services industry, where a 6.8% quit rate towers over an already-elevated 2.9% total quit rate, itself the highest in two decades. An elevated quit rate is a sign of growing confidence among workers and supportive of continued solid wage growth

• The NFIB Small Business Optimism Index slipped a point to 99.1 in September. The net percentage of polled firms that expected the economic situation to improve over the next six months sank further into negative territory, to negative 33% (-5 points). This was the fifth-lowest reading since March 1974. The all-time low was recorded in November 2012 (-38%). As has been the case for the past eight months, firms had a hard time finding qualified workers. Small-business owners who reported job openings that could not be filled edged up a point to 51, a 48-year record high. A net 42% of respondents reported raising compensation in the past three months in a bid to attract candidates, while 30% planned to do so in the next three months. In that context, intentions to make capital investments edged down two points to 28

• Initial jobless claims fell 36K to 293K (seasonally adjusted) in the week ending October 9. The last time initial claims printed below 300K was in mid-March 2020. The advance number for seasonally adjusted insured unemployment (i.e., continued claims) fell 134K to 2,590K in the week ending October 2. During the week ending September 25, forty-three states reported continued weekly claims for Pandemic Unemployment Assistance benefits for a total of 549.1K and forty-five states reported continued claims for Pandemic Emergency Unemployment Compensation benefits for a total of 440.4K. In that week, Extended Benefits were still available in four states. The total number of continued weeks claimed for benefits across all programs for the week ending September 25 was 3.6 million, a decrease of 523K from the previous week

• The Empire State Manufacturing Index fell from 34.3 in September to 19.8 in October. This was below consensus expectations (25.0) but still consistent with a decent pace of growth at factories operating in New York State and surrounding areas. The new orders (from 33.7 to 24.3), shipments (from 26.9 to 8.9) and employment (from 20.5 to 17.1) sub-indexes all retreated, with the latter still consistent with a healthy expansion of payrolls. Supply chain pressures were still evident in the report. Delivery times (from 36.5 to 38.0) lengthened the most on record and input prices (from 75.7 to 78.7) continued to soar. In an attempt to protect their margins, manufacturers once again raised selling prices, albeit at a slower pace than in September (from 47.8 to 43.5). Business optimism for the next six months continued to improve: The corresponding index sprang from 48.4 to a 16-month high of 46.5

• The Federal Reserve published the minutes of its two-day policy meeting held September 21 and 22. Uncertainty seems to be the dominant theme in the document, although it has been the story for a number of months now. Indeed, there was little there that was not know or that had not been communicated already. While the Fed is still largely sticking with its transitory inflation narrative, it is clear that there is growing anxiety regarding the inflation outlook. Most participants are seeing upside risks to inflation forecasts and are keeping a very close eye on inflation expectations and key components (particularly owner’s equivalent rent), which have been perking up of late. It is largely the same story on the jobs front. While there is general agreement that the labour market should continue to improve, there is disagreement on what the “new normal” will look like. While some view labour market participation as having been structurally changed, others view a return to pre-COVID conditions as entirely possible, if not likely. Among those who believed that the test of “substantial further progress” toward maximum employment had been met, some suggested “that labor supply constraints were the main impediments to further improvement in labor market conditions rather than lack of demand.” They noted that “adding monetary policy accommodation at this time would not address such constraints or that the costs of continuing asset purchases might be beginning to exceed their benefits.” Where there did seem to be more agreement was on the taper timeline. Tt seems that a November taper announcement is all but assured and the Fed staff’s illustrative path for reducing purchases (monthly reductions of $10 billion in Treasuries and $5 billion in MBS) is likely to be implemented. The minutes indicated that such a reduction could start with the monthly purchase calendars beginning in either mid-November or mid-December

• After earlier appealing to OPEC to increase production quotas, the Biden administration this week implored domestic energy producers to help curb rising prices. This is a significant shift for the administration, which has pledged to move the country away from fossil fuels and has halted oil and gas development leases on public lands and canceled the Keystone XL pipeline. Energy producers say they are reluctant to ramp up production, which requires significant capital investment, amid an increasingly hostile regulatory environment

• Stocks built on the previous week’s gains, helped by some strong economic signals and positive earnings surprises. The S&P MidCap 400 Index outperformed and briefly pulled within roughly 0.1% of its all-time intraday high on Friday. The small real estate sector fared best within the S&P 500 Index as longer-term bond yields fell, and consumer discretionary shares got a boost from Tesla. Communication services shares lagged, weighed down by declines in traditional media providers

• In terms of data release, housing starts is out on Tuesday. During August, housing starts rose 3.9% to a robust 1.615 million-unit pace during August. The monthly gain was entirely owed to a jump in multifamily starts. Single-family construction slipped for the second straight month, although the current pace of 1.076 million-units still represents an exceptionally strong pace of activity

• Existing home sales is out on Thursday. Sales of existing homes fell 2% in August to a 5.88 million-unit pace. Existing home sales have moderated over the past few months, which reflects some easing of the buying frenzy that occurred for much of 2020 and early 2021. The slowdown is partially owed to exceptionally tight inventory levels. The number of homes available for sale at the end of August totaled just 1.29 million units, down 13.4% over the year. Affordability is another factor. Home price appreciation has moderated somewhat in recent months, but the median price of an existing home is still up almost 15% YoY


• UK gross domestic product (GDP) in August grew 0.4% MoM as the hospitality industry benefited from the first full month of reopening. Revised estimates indicate that GDP contracted by 0.1% in July due to staff absences linked to the spread of the coronavirus. Although the UK economy has recovered to near the levels last seen before the downturn caused by the coronavirus pandemic, GDP is still about 5% less than it would have been if it had continued to grow at its pre-pandemic pace.

• UK employers added 207,000 staff to their payrolls in September, taking the total number of payroll employees to a record 29.2 million, returning to pre-pandemic levels, data from the Office of National Statistics showed. Headline unemployment fell to 4.5% in the three months ended August 31, continuing a decline from the five-year peak of 5.2% hit in November 2020.


• In the Euro area, industrial production fell 1.6% from July to August. Of the five sectors covered, only energy recorded greater output (0.5% MoM) in August. Production fell 3.9% for capital goods, 3.4% for durable consumer goods, 1.5% for intermediate goods, and 0.8% for non-durable consumer goods. Relative to the year before, industrial production was up 5.1%, according to Eurostat

• Germany saw its output shrink 4.1%, thus contributing to the MoM contraction in industrial production in the Euro area. Obviously, global issues facing the auto industry also weighed heavily on German carmakers. Meanwhile, activity in France rose 1.0% in August after increasing 0.5% in July and 0.4% in June. Industrial production rose 0.1% in Spain but slipped 0.2% in Italy

• Shares in Europe rallied on optimism about the continuing economic recovery and strong corporate earnings. In local currency terms, the pan-European STOXX Europe 600 Index added 2.65%. Major indexes were mostly higher: France’s CAC 40 Index tacked on 2.55%, Germany’s Xetra DAX Index gained 2.51%, and Italy’s FTSE MIB Index advanced 1.68%


• Consumer prices were unchanged in September from August. As a result, YoY inflation printed at 0.7%, down one tick from the previous month. However, at the factory level, price pressures were much stronger: The PPI was up 10.7% from the year before. This was the fastest pace in 25 years, according to the National Bureau of Statistics. Coal and some energy-intensive products were among the main contributors explaining the recent acceleration in the PPI. Also in September, China’s trade surplus reached US$66.8 billion. YoY, exports were stronger than expected, growing 28.1% to US$305.7 billion, while imports climbed at a slower pace (17.6% YoY)

• Investors have been spooked by a deepening energy crisis as cold weather swept into much of the country and power plants scrambled to stock up on coal, sending prices of the fuel to record highs. Oil and natural gas prices, which have also soared to multiyear highs, have also sent jitters across China, a net energy importer. Several Chinese energy companies are in advanced talks with U.S. exporters to secure long-term liquefied natural gas supplies, Reuters reported, underscoring the urgency of the crisis as natural gas prices in Asia have jumped more than fivefold this year and raised fears of power shortages this winter

• China’s policymakers are being forced to choose between supporting the economy and further stoking producer prices, as the official producer price index jumped 10.7% in September from a year earlier, marking the biggest rise since the government began compiling the data in 1996. Exports in September were surprisingly robust. However, bank loans rose less than forecast, and broader credit growth slowed amid Beijing’s strict controls on property and debt issued by local government financing vehicles. The muted economic data coincided with the release of weak presales data from some of China’s leading developers

• Despite continued concerns about China’s property sector, a central bank official said that the spillover effect of China Evergrande Group’s debt problems on the banking system is controllable and that risk exposures are not big. However, during the week, Sinic Holdings, a mid-size developer, said it continued to hold talks with lenders over bond payments that are due. Modern Land China, another developer, is seeking creditors’ consent to postpone payment on a bond

• Meanwhile, cash-strapped property giant Evergrande owes the equivalent of USD 28 million for land in the northeastern city of Changchun it bought in June, government officials said. Evergrande, which is shouldering more than USD 300 billion in liabilities, failed to pay nearly USD 150 million worth of coupons on three bonds due Monday after missing two other bond payments in September. Investors are now awaiting several key dates when Chinese property companies are due to make payments on their debt, with at least USD 92.3 billion of bonds coming up for payment in 2022, according to Refinitiv data

• US Trade Representative Katherine Tai and Chinese Vice Premier Liu He met virtually, the second high-level trade meeting since President Biden took office. Tai emphasized US concerns relating to China’s state-led, nonmarket policies and practices that the government contends harm the American economy. The meeting helped set the stage for a virtual summit between Biden and China’s president Xi Jinping in coming weeks.

• Chinese markets ended nearly unchanged ahead of next week’s quarterly GDP report. The large-cap CSI 300 Index edged up 0.3% and the Shanghai Composite Index dipped 0.6%. China’s economic expansion slowed in the third quarter, Premier Li Keqiang said ahead of Monday’s release, but did not elaborate

Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, TD Economics, M. Cassar Derjavets