Economic Outlook – 20 December 2020


  • The November retail sales report came in a lot weaker than expected. After an impressive run of positive gains from May to September, consumer outlays decreased for the second month in a row, adding to signs that the US economic rebound is losing its spring amid the surging number of COVID-19 cases. The real question remains whether household spending can be sustained. Up to now, US consumers have been able to maintain a high level of spending by tapping into excess savings accumulated in the past few months, but these could be depleted quickly without further government help going into 2021. However, the news on this front is encouraging. After months of stalling, a fiscal package providing an injection of USD$ 748 billion has been proposed by a bipartisan group of senators.
  • In November, industrial production grew 0.4%. Although it has rebounded significantly from its low in April, industrial production still stands about 5.0% below its February pre-pandemic level. Warmer than usual weather contributed to a utilities output decline of 4.3%, while mining output rose 2.3% after declining 0.7% the previous month. Manufacturing, which accounts for about 75.0% of industrial production, rose 0.8% after gaining 1.1% in October.
  • The IHS Markit Flash US Composite Output Index edged down 2.9 points in December to 55.7. Although the index is indicative of sustained economic growth, it also shows a loss of momentum. According to respondents, surging COVID-19 cases and the reimposition of restrictions in many states weighed down on activity. As might be expected, the impact was more noticeable in the services sector. The Services PMI Business Activity Index slipped 3.1 points to 55.3, whereas the Manufacturing PMI Business Activity Index dipped to 56.5 from 56.7 in November.
  • According to the Empire State Manufacturing Survey, manufacturing activity in New York State expanded only marginally in December. The general business conditions index remained in growth territory, though it edged down 1.4 points to 4.9 in the month. Among respondents, 26.0% reported improved conditions against 21.0% that reported worsened conditions. New orders were little changed (-0.3), pegging in at 3.4. The index for number of employees hit its highest point (14.2) since December 2018 (17.9). The average workweek index was unchanged at 4.8. The prices paid index gained 8 points to 37.1, while the prices received index stayed put at 10.0. Finally, survey respondents remained optimistic about future business conditions as the corresponding index gained 2.4 points to 36.3.
  • Initial jobless claims increased 23K to 885K in the week ending 12 December. Although weekly claims can be volatile around this time of the year due to seasonal-adjustment issues, the fact remains that the number of claims was larger than expected. With COVID-19 cases on the rise and restrictions newly reinstated, the near-term outlook is not encouraging.
  • In November, housing starts rose 1.2% to a 1.547-million-unit pace. This came on the heels of a 6.3% jump in October. Demand for single-family homes remained high as work from home has become the norm for many people in the wake of the COVID-19 pandemic. After gaining 7.7% in October and 7.3% in September single-family starts rose 0.4% in November to a 1.186-million-unit pace. Single-family starts have now topped the 1-million mark for four straight months, an event last witnessed in July 2007. Compared with a year ago, single-family starts increased 27.1% while multi-family starts sank 17.6%, despite a 4.0% month-on-month gain in November.
  • Imports prices rose 0.1% month-on-month, reversing the previous month’s decline. Higher fuel prices (4.3%) more than offset lower nonfuel prices (-0.3%) in the month. Despite their latest increase, import fuel prices were down 24.6% compared with 12 months earlier. Prices of US exports increased 0.6% in the month. They have been on an uptrend since April, when they recorded a 3.5% decline. Still, compared with November 2019, export and import prices were down 1.1% and 1.0%, respectively. Excluding fuel and foods, import prices were 1.6% higher than the year before while export prices rose 1.7%.
  • The Fed decided to steer clear of more stimulus, but offered some verbal stimulus through vague, outcome-based guidance on the duration of asset purchases. The Fed Funds Rate was left in the current 0.00% to 0.25% target range. There were no explicit changes in the composition of asset purchases towards long-term debt, which was partly expected by the market. Judging by the policy guidance, dovish tone and upgraded economic forecasts.
  • The Fed links the duration of the asset-purchase programme to its policy target. Previously, it had signalled willingness “to continue to buy assets at the current pace”. Now it says it will “continue to increase its holdings of treasury securities by at least USD$ 80 billion per month and of agency mortgage-backed securities by at least USD$ 40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
  • Even though the latest statement does not amount to outcome-based guidance with explicit numerical conditions, it still represents a shift towards signalling that the Fed will only start tapering off its quantitative easing when growth is on track to fully recover from the pandemic and inflation is meeting the Fed’s new target of averaging 2.0% a year. This will give the Fed the flexibility to respond to changes in the outlook, while avoiding early tapering in 2021. This verbal promise offers support without the need to immediately reinforce asset purchases.
  • The Fed also extended through September of next year its temporary dollar swap lines and its repurchase facility. These two programmes were designed to help maintain the international supply of dollars and the smooth functioning of the Treasury market. The Fed did not focus on rolling out any additional emergency lending facilities, which were announced to expire at the end of the month. This includes two facilities set up to purchase corporate debt, five facilities to support small-and-medium-sized businesses and one that lends to state and local governments.  The Fed appears comfortable with the current policy settings and financial conditions.
  • The major indexes reached record highs as expectations grew for the passage of another federal coronavirus relief package. Information technology stocks outperformed within the S&P 500 Index, helped by gains in Apple and Microsoft. Energy stocks lagged despite oil prices touching nine-month highs on strong demand from India and China. Trading volumes were muted through much of the week in advance of the rebalancing of the S&P 500, which electric carmaker Tesla was set to join the following Monday. USD$ 110 billion in shares were expected to change hands on Friday, as mutual funds and exchange traded funds (ETFs) that attempt to mirror the returns of the S&P 500 adjusted their portfolios. Several large ETFs that target other benchmarks also rebalanced.
  • In terms of data release, the recovery in durable goods orders could have extended into November judging from previously-released indicators such as Markit’s PMI.
  • The latest report on personal income, for its part, could show a 0.3% decrease in November, with gains for wages/salaries likely to have been offset by a retreat in the government transfer segment. Personal spending, meanwhile, could have stayed flat based on retail sales data.


  • Brexit deadlines have come and gone since mid-October, but the European Parliament insists that this time they really mean it and that Sunday is the last day to secure an agreement with the United Kingdom over the contours of future trade and security relations. However, there is talk that member states are willing to provisionally apply any deal negotiated after the weekend to avoid no deal. British Prime Minister Boris Johnson on Thursday warned that a no-deal scenario is very likely unless the EU’s position changes substantially
  • UK retail sales for November declined 3.8% month-on-month, exceeding consensus expectations of a 4.2% month-on-month decline. Retail sales excluding fuel declined 2.6% month-on-month, exceeding consensus expectations of a 3.3% month-on-month decline. High-frequency data had continually suggested that the effects of the November lockdown would be less severe than the previous one, as many schools remained open and people found ways to cope and consume, albeit at a reduced level. While at first glance these numbers look bad, but reasonable in the circumstances, the more nuanced story is that the impact varies considerably by sector.
  • UK inflation (CPI, PPI, RPI) for November came out below expectations, in general hovering just above zero. The consumer prices index (CPI) 12-month rate was 0.3% in November 2020, down from 0.7% in October. Producer price inflation y-o-y remained negative, although slightly less so than previously (-0.8% vs. -1.4% previously).
  • A gauge of confidence among British consumers jumped by the most in eight years in December, boosted by the launch of the country’s coronavirus vaccine programme, a survey showed on Friday. The consumer confidence index from market research firm GfK rose to -26 from -33 in November. A Reuters poll of economists had pointed to a much smaller improvement to -31. Consumers are looking for good news and they have found it in the form of the UK’s COVID-19 vaccination programme getting underway, which has lifted the mood pre-Christmas 2020.
  • The BoE held interest rates at 0.1% and kept the target for its asset purchase program unchanged, as expected. Policymakers reiterated that they did not intend to tighten monetary policy until there is evidence that “significant progress” is being made in achieving the 2.0% inflation target, at least suggest that deflation remains less likely in the UK than in some other European countries.


  • The eurozone Flash Composite PMI was 49.8 in December compared with 45.3 in the previous month. Meanwhile, the Manufacturing PMI was 55.5 compared with 53.8 the month before, and the Services PMI was 47.3 compared with 41.7. All indices were above expectations. Even though services kept contracting in December, manufacturing helped the region’s composite index to stabilise somewhat. Expectations of future output jumped to their highest in more than two-and-a-half years, largely driven by vaccine news.
  • The German Flash Composite PMI was 52.5 in December compared with 51.7 in November, the Manufacturing PMI was 58.6 compared with 57.8, and the Services PMI was 47.7 compared with 46; all indices were above expectations. As in previous months, manufacturing strength continued to offset services weakness. The manufacturing sector also showed signs of supply supply-chain issues and associated increases in input prices.
  • The French Flash Composite PMI was 49.6 in December compared with 40.6 in November, the Manufacturing PMI was 51.1 compared with 49.6, and the Services PMI was 49.2 compared with 38.8 a month earlier. December saw its first uptick in the Composite PMI since July, although it still reflected an overall decline in French business activity. Despite quite strict restrictions during the second wave, private businesses remained surprisingly resilient.
  • The European Central Bank lifted a ban on European banks paying dividends but capped payouts and share repurchases at a combined 15.0% of an institution’s 2019 and 2020 profits or 0.2% of a lender’s key capital ratio, whichever is lower.
  • Shares in Europe rose on optimism surrounding coronavirus vaccinations, better-than-expected readings from purchasing managers’ indexes in key eurozone economies, and signs of progress in US congressional negotiations for another round of fiscal stimulus. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.48% higher, while Germany’s DAX Index rose 3.94%, France’s CAC 40 ticked up 0.37%, and Italy’s FTSE MIB added 1.26%.


  • Demand for Chinese assets has stayed resilient amid ample evidence that the economy is firmly recovering after being among the first countries to contain the pandemic. On Tuesday, official data revealed that November industrial output, fixed asset investment, and retail sales grew strongly from year-ago levels. The November data raised expectations that China’s fourth-quarter economic growth would accelerate from the third quarter, when gross domestic product grew 4.9% from a year earlier. Despite signs of growing economic momentum, the yield on China’s sovereign 10-year bond ended nearly unchanged for the week until Friday morning.
  • On Friday, the US Commerce Department said that it was adding Semiconductor Manufacturing International Corp. (SMIC) to its so-called Entity List, which deprives targeted companies from accessing US technology ranging from software to circuitry. The addition of SMIC to the export blacklist came after the US found “evidence of activities between SMIC and entities of concern in the Chinese military industrial complex,” according to the Commerce Department’s statement. The US’s move against SMIC, which is central to Beijing’s drive to build a self-sufficient chip industry, marked the latest in a string of Trump administration-directed actions targeting Chinese tech companies. Deteriorating Sino-US relations have dampened investor sentiment this year as both sides clashed on issues, including trade, Hong Kong protests, and managing the coronavirus outbreak.
  • Chinese stocks posted a weekly gain despite recording mild losses on Friday, when the US announced that it was blacklisting China’s top chipmaker and more than 60 other companies for national security reasons. For the week, the large-cap CSI 300 Index rose 2.3%, while the country’s benchmark Shanghai Stock Exchange Composite Index added 1.4%.

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