Economic Outlook – 20 February 2022


• Retail sales expanded 3.8% in January, quite a bit more than the +2.0% print expected by consensus. The good news was partially offset by a downward revision to the prior month’s result from -1.9% to -2.5%. Sales of motor vehicles and parts jumped 5.7% MoM but remained 6.3% below last April’s all-time high. Without autos, sales grew 3.3% as sizeable gains for non-store retailers (+14.5%), furniture (+7.2%), building materials (+4.1%), general merchandise (+ 3.6%) and food/beverage (+1.1%) more than offset declines for sporting goods (-3.0%), gasoline stations (-1.3%), and restaurants/bars (-0.9%). Sales were up in 8 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, soared 4.8% in the month. At first glance, it may look like the Omicron variant had no impact on consumer spending in the first month of the year. The reality of the situation is more complex, however. While the headline number might not show it, January’s gain was still largely due to changing consumer habits in the context of the pandemic. As might be expected when cases surge, households diverted their spending from categories necessitating close contact (e.g., restaurants/bars) to those requiring no interaction (e.g., online shopping). In addition, January’s stellar print was accentuated by atypical seasonal patterns. In normal times, retail spending skyrockets in December when consumers do their holiday shopping and drops off abruptly in January

• Industrial production grew a consensus-topping 1.4% MoM, reaching its highest level since December 2018. After being held down the prior month by unusually mild weather, demand for heating surged in the first month of the year with the arrival of colder-than-usual temperatures. This resulted in a record increase in output in the utilities segment (+9.9%). Elsewhere gains were more subdued. Manufacturing output edged up just 0.2%, hampered by a second consecutive contraction in the motor vehicles and parts segment (-0.9%). Excluding autos, factory output expanded 0.3% on a 1.1% gain for machinery. Production in the mining segment, meanwhile, advanced 1.0%. In this last category, oil and gas well drilling sprang an impressive 6.2%. That said, production in this segment remained 14.7% below its pre-crisis level

• Capacity utilization in the industrial sector improved from 76.6% in December to 77.6% in January, its highest level since 2019. In the manufacturing sector, it ticked up from 77.2% to 77.3%

• The Producer Price Index (PPI) for final demand jumped 1.0%, twice the pace expected by analysts and the biggest gain in eight months. This came after an upwardly revised +0.4% print the prior month. Goods prices jumped 1.3%, with gains for both energy (+2.5%) and food (+1.6%). Prices in the services category rose 0.7%. The core PPI, which excludes food and energy, climbed 0.8% on a monthly basis. Year over year, the headline PPI cooled from an all-time high of 9.8% to 9.7%. Excluding food and energy, it slid from 8.5% to 8.3%. Higher input prices, long shipping delays, and rising labour costs are to blame for the recent surge in producer prices

• The Import Price Index (IPI) rose 2.0% MoM in January, blowing consensus expectations for a +1.2% result out of the water. Partially compensating for this upward surprise, the prior month’s result was downgraded from -0.2% to -0.4%. The headline January print was positively affected by a 9.5% increase in the price of petroleum imports. Excluding this category, import prices still rose 1.4%. On a 12-month basis, the headline IPI went from 10.2% to 10.8%. The less volatile ex-petroleum gauge rose from 6.9% to 7.5%, the second-highest print in data going back to 1989

• Existing-home sales sprang 6.7% to a 12-month high of 6,500K (seasonally adjusted and annualized). Contract closings moved higher for both single-family dwellings (+6.5%) and condos (+8.8%). The increase in the number of transactions during the month resulted in a two-tick decline of the inventory-to-sales ratio, to an all-time low of 1.6. (According to the National Association of Realtors, a ratio <5 indicates a tight market.) Listed properties remained on the market for 19 days on average, a two-day increase from the record low set last year

• Housing starts sank from 1,708K in December to 1,638K in January, undershooting the 1,695K print expected by consensus. The monthly drop was due in large part to a 5.6% decrease in the single-family segment (to 1,116K). Starts in the multi-family category retraced as well, but to a lesser extent (-0.8% to 522K)

• Building permits edged up 0.7% to a 16-year high of 1,899K. A sizeable drop in the multi-family category (-8.3% to 694K) was more than offset by a substantial increase for single-family dwellings (+6.8% to 1,205K)

• The Empire State Manufacturing Index of general business conditions came in weaker than expected for the second month in a row in February but still managed to increase from a 20-month low of -0.7 to 3.1. This result was consistent with just a marginal pace of growth at factories operating in New York State and surrounding areas. After steep drops the prior month, the new orders sub-index and the shipments sub-index moved slightly higher (from -5.0 to 1.4 and from 1.0 to 2.9, respectively). The number of employees tracker, meanwhile, rose further above its long-term average (from 16.1 to 23.1). Supply chain pressures were still evident in the report although delivery times lengthened at the same pace as in the prior month (21.6) and input price inflation eased a bit (from 76.7 to 76.6). In an attempt to protect their margins, manufacturers raised selling prices at the fastest clip ever (from 37.1 to 54.1). Business optimism for the next six months softened (from 35.1 to 28.2), as did capex (from 39.7 to 37.8) and technology spending intentions (from 31.9 to 29.7)

• The Philly Fed Manufacturing Business Outlook Index declined from 23.2 in January to 16.0 in February but nonetheless painted a more upbeat picture of the situation prevailing in the manufacturing sector. Both the shipments sub-index and the new orders sub-index showed declines (from 20.8 to 13.4 and from 17.9 to 14.2, respectively). For its part, the number of employees tracker (up from 26.1 to 32.3) was consistent with one of the strongest rates of hiring in data going back to 1968

• Initial jobless claims unexpectedly increased from 225K to 248K in the week to February 12, but the less-volatile four-week moving average continued to trend down. Continued claims, on the other hand, declined from 1,619K to 1,593K, suggesting that the worst of the Omicron wave might now be over

• On inflation, minutes from the January 25-26 Federal Open Market Committee (FOMC) meeting showed growing concern over elevated inflation. There is no longer a question of whether the Fed will hike rates soon, but by how much. On this front, most participants believed a faster pace of hikes than that of the post-2015 period would likely be warranted this time around. In this vein, St. Louis Fed President Bullard, reiterated that without swift Fed action, inflation may become an even more serious problem. Bullard has advocated for the front-loading of rate hikes, calling for a cumulative full percentage point hike over the next three meetings. Market odds were in tune with some front-loading last week, briefly tilting towards a 50-basis point hike in March, but have since cooled. The Fed’s hiking pace will ultimately be heavily dependent on how the economy and especially interest rate sensitive sectors, such as housing, respond to higher rates

• The large-cap indexes suffered their second consecutive week of declines as worries over a Russian invasion of Ukraine and high inflation weighed on sentiment. A steep decline in Meta Platforms (Facebook) weighed heavily on the communication services sector. The typically defensive consumer staples sector outperformed within the S&P 500 Index, helped by gains in Walmart and Procter & Gamble. Trading volumes were relatively light in the face of the volatility, however, as investors awaited the upcoming long weekend. Markets are scheduled to be closed on Monday, February 21, in observance of Presidents Day

• In terms of data release, new home sales will be out on Thursday. While facing its fair share of challenges, the housing market remains strong. The shrinking pool of existing homes for sale has boosted new home construction Builders are selling virtually everything they can build amid solid demand. The chief concern for builders continues to be on the supply side, with shortages of building materials and labor extending completion times. For this reason, a decent chunk of sales in January likely continued to come from sales of homes still under construction or where construction has not yet started. With demand and supply so out of whack, home prices remain sky-high and affordability concerns are being amplified by the upward spike in mortgage rates since the start of the year. Mortgage rates are now hovering around 4.0%, or a level consistent with early 2019. This erosion of affordability may limit home sales in the months ahead

• Friday brings the personal income & spending print. January marked the first month in nearly two years without fiscal transfers making their way to households. The expiration of the Child Tax Credit at the end of last year was the final tap to be shut off and suggests somewhat of an income cliff to start this year. Beneath the headline estimate, however, there should be another solid gain in wages & salaries, the largest component of total personal income. A proxy for aggregate labor income, using data from the employment report, was up 8.9% on a three-month annualized rate in January and indicates another solid gain in wages & salaries


• UK retail sales for January came through at 1.9% MoM, 9.1% YoY; retail sales excluding fuel were 1.7% MoM, 7.2% YoY. This boost in sales, the highest since stores were reopened in April 2021, follows on from Omicron-fuelled falls of 4% seen in December 2021 when earlier Christmas trading than normal in October and November reduced retail footfall in December. As to the position compared to pre-COVID-19, retail sales are now 3.6% above February 2020 levels. The shortfall in overall consumer expenditure compared to pre-pandemic levels is largely accounted for by lower service sector (restaurant, hotel and entertainment) spending. These figures suggest that auto fuel was a major component of the spending increase, up 4.1% in January 2021 following a fall of 5.0% in December, when England’s move to Plan B Corona virus restriction measures contributed to fewer journeys by car. In January 2022, fuel sales volumes were 3.3% below their pre-pandemic February 2020 levels. The proportion of retail sales online fell to 25.3% in January 2022, its lowest since March 2020 (22.7%), continuing a broad downward trend since its peak in February 2021 (36.5%). Despite its downward trend, the percentage of retail sales made online was still higher than before the pandemic (19.8% in February 2020)

• UK inflation continues to break new records. The CPI measure rose by 5.5% YoY – the highest level since March 1992 – and the CPIH measure saw an increase of 4.9% YoY, which is the biggest rate since the National Statistics series began in January 2006. Core inflation, which excludes volatile components of inflation, also crept up to 4.4% YoY, sitting at well over double the Bank of England’s inflation mandate target and emphasizing that the UK’s record high inflation is being driven by broad factors.
The CPI and CPIH inflation rate YoY only increased by 0.1 % this month, with upward contributions coming from clothing and footwear, housing and household services, and furniture and household goods. This is a marginal increase in inflation compared to the previous month, but it is above market expectations and suggests that the UK is on course to hit inflation of well in excess of 7% in April when consumers are hit by the increase in the energy price cap. Expectations are that the inflationary impact of energy will eventually wash through as prices cease to increase any further, however, many other elements of inflation could prove much stickier

• The number of workers on payroll increased by 108,000 to a record of 29.5 million in January. The unemployment rate decreased to 4.1% in the final three months of last year. Labor shortages across all sectors continued to squeeze the market, with the number of open positions rising to a record level of almost 1.3 million in the three months to January. Average weekly wages, including bonuses, grew 4.3% in the final quarter of 2021

• Great Britain’s tax watchdog has seized three non-fungible tokens in what is thought to be the first seizure of NFTs by a UK enforcement agency. Officials at Her Majesty’s Revenue and Customs say they seized the NFTs during an investigation into a suspected value-added tax (VAT) fraud case involving £1.4 million ($1.9 million). Three suspects have been arrested on suspicion of attempting to defraud the taxman.


• European Central Bank (ECB) President Christine Lagarde and Governing Council members Francois Villeroy de Galhau and Pablo Hernandez de Cos emphasized that any adjustment to monetary policy would be gradual and guided by key economic data. However, ECB Chief Economist Philip Lane changed his position on inflation, suggesting there may be a growing consensus for stimulus to be withdrawn faster than planned. Lane said in a webinar that inflation was unlikely to drop below the ECB’s 2% target in the next two years because investors, analysts, and consumers now had higher inflation expectations and structural shifts had occurred in the economy

• The eurozone’s trade deficit in goods widened by a seasonally adjusted EUR 9.7 billion in December—the most since August 2008—due to soaring energy prices, official data showed. The trade deficit with the bloc’s biggest energy supplier, Russia, rose to EUR 69.2 billion in 2021 from EUR 15.7 billion in 2020

• Shares in Europe fell amid continuing geopolitical tensions over Ukraine and uncertainty about monetary policy. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.86% lower. Germany’s DAX Index tumbled 2.48%, Italy’s FTSE MIB Index gave up 1.70%, and France’s CAC 40 Index slipped 1.17%


• China’s producer price index (PPI) and consumer price index (CPI) inflation both came in lower than expected in January. The latest inflation data and the PBOC’s dovish comments reflected the divergence in monetary policy between the China and the U.S., where the Federal Reserve is seen embarking on an aggressive hiking cycle this year

• News from developers continued to highlight the financial troubles weighing on the property sector. Shimao Group, long considered among the industry’s financially stronger players, asked for an extension to pay back RMB 6 billion (USD 101 million) of high yield trust products over three years, Bloomberg reported, citing unnamed sources. Meanwhile, Reuters reported that a Chinese court ordered the freezing of RMB 640.4 million (USD 101 million) in assets held by a subsidiary of China Evergrande Group, the world’s most indebted developer. Finally, the chairman of China Vanke, one of the country’s largest developers by revenue, warned staff members that the property sector’s best days were over and that the company was changing its business mix.

• In other corporate news, Meihua International Medical Technologies Co. became the first China-based company to have an initial public offering (IPO) in the U.S. since July after ride-hailing app Didi Global’s IPO sparked a regulatory backlash in China. The medical device maker priced its IPO at the midpoint of a marketed range, raising hopes that its share sale might lead to the resumption of Chinese companies seeking to go public in the U.S

• In a State Council meeting, China’s Premier Li Keqiang reportedly pledged that Beijing would swiftly roll out a slew of measures to provide stronger support to the economy, parts of which are still suffering from the effects of the coronavirus pandemic. Separately, China’s top finance minister vowed to further cut corporate tax rates, strengthen targeted fiscal spending, and tighten fiscal discipline. Finally, the head of the People’s Bank of China (PBOC) said that the central bank would maintain supportive monetary policy this year

• Chinese markets rose as supportive comments from government officials and lower-than-expected inflation data increased investors’ risk appetite. For the week, the Shanghai Composite Index added 0.8% and the CSI 300 Index gained 1.1%. The yield on the 10-year sovereign bond ended flat at 2.814% and the yuan strengthened slightly against the U.S. dollar to 6.33 per dollar from 6.36 the prior week

Sources: T. Rowe Price, National Bank of Canada, MFS Investment Management, Handelsbank Capital Markets, Wells Fargo, TD Economics