Economic Outlook – 20 June 2021


• Retail sales fell 1.3% during the month. The magnitude of the decline in sales was a bit more than anticipated; however, positive revisions to April’s sales cushioned the blow. The dip in sales for the month is largely explained by consumers redirecting their spending away from the cars, home furnishing and other “stay-at-home” goods toward the high-contact services that have now been unlocked by vaccinations

• Industrial production continues to get back on track. During May, industrial production beat expectations and rose 0.8%. Mining production posted a solid improvement alongside the pickup in energy prices and oil and gas drilling activity. The outturn in overall production, however, was mostly owed to a sturdy rise in manufacturing production, which comprises about three-quarters of all industrial output. Considering the exceptionally strong consumer demand environment, industrial production would likely have been even stronger were it not for pervasive supply-chain bottlenecks, which have made procuring everything from raw materials to labor a challenge for most producers

• Total housing starts rose 3.6% to a 1.57 million-unit pace during May. Demand for single-family homes, townhomes, condos and apartments remains strong; however, building material pricing and availability have led to project delays and have become an obstacle for new development. Total building permits declined in May, with both single-family and multifamily permitting declining during the month. Similarly, the NAHB/Wells Fargo Housing Market Index fell two points to 81 in June. Overall, builders remain upbeat, but difficulties obtaining materials and soaring costs are clearly starting to weigh on confidence.

• Inflationary pressures generated by these widespread supply constraints continue to heat up. The Producer Price Index (PPI) for final demand increased 0.8% in May, pushing the index up 6.6% over the past year. Higher food and energy costs pushed goods prices up, while prices in the larger service sector continued to surge higher. Prices for unprocessed goods for intermediate demand jumped during the month, which is an indication that prices further back in the pipeline are also on the rise

• The FOMC met this week and maintained its target range for the fed funds rate between 0.00% and 0.25%. The committee also did not alter its monthly pace of asset purchases. Rising inflation and supply-side issues notwithstanding, the U.S. economy continues to strengthen. Success on the vaccine front has a lot to do with it. As the Fed’s policy statement noted, “progress on vaccinations has reduced the spread of COVID-19 in the United States. Amid this progress and strong policy sup-port, indicators of economic activity and employment have strengthened.” While Chair Powell was cautious to add that the economy is not fully out the woods and the fast spreading delta variant could still lead to setbacks, most members were confident enough to raise their forecasts. The median projection for real GDP growth in 2021 was upgraded to 7.0% (from 6.5% in March). With respect to the labor market, Fed chair Powell struck an optimistic tone. Powell said that “there’s every reason to think that we’ll be in a labor market with very attractive numbers, with low unemployment, high participation and rising wages across the spectrum.”

• While 13 FOMC members think the first hike could happen in 2023, seven members see it happening in 2022. This could well be the start of a trend. With the economic recovery set to continue at a healthy pace, more Fed members are likely to continue to signal an earlier start to the rate hiking cycle. As Chair Powell noted, this is “the beginning of the transition phase.” It could well mark the beginning of the end of pandemic-era ultra-accommodative monetary policy and the shift to a more hawkish Fed

• The Fed’s more hawkish tone set off a number of notable market moves. The reflation trade that had favored value stocks and commodities and undermined the dollar came under immediate pressure following the shift. Commodities had been giving ground in advance of the meeting, but the Fed helped accelerate a sizable position unwind. Markets had anticipated that the Fed’s new average inflation target framework would allow price pressures to run hot for longer before the central bank would react, but this week’s news changed that calculation. Among the most significant occurrences this week was the sharp decline in long-term Treasury yields, with the 30-year bond dropping 16 basis points in yield on Thursday. Growth stocks have outperformed value stocks since the Fed meeting on the assumption that tighter policy will keep a lid on price hikes.

• The Leading Economic Index (LEI) rose another 1.3% in May after reaching its first post-COVID high in the prior month. Yet another improvement in the LEI is consistent with expectation for a robust 7.3% real GDP growth rate this year, which, if realized, would be the fastest year of growth since 1951

• US Senate Majority Leader Chuck Schumer (D-NY) triggered the reconciliation process this week, opening the door to the passage of an infrastructure package with a bare majority of votes in the upper chamber. Schumer also plans to bring an alternative, scaled-down, bipartisan package to the Senate floor under regular order, meaning its passage would require 60 votes. The move comes after a bipartisan group of 10 senators tentatively agreed to back this $974 billion, five-year proposal, which addresses roads, bridges and broadband but not progressive priorities such as climate change and childcare. With a few swing state Democrats reluctant to sign onto the large package, there is no easy path to its passage. Talks continue on the smaller bill, though its passage is not assured either

• The Wall Street Journal estimates that US nonfinancial corporations issued $1.7 trillion of debt last year. Total debt among nonfinancial corporates reached $11.2 trillion, roughly half the size of the US economy. Record low interest rates engineered by the Fed in response to the pandemic, helped companies “term out” their borrowings, but some investors fear the highly leveraged companies could be vulnerable in the next economic downturn

• In terms of data release, monthly private consumption data for May is out on Friday. It is particularly interesting to check whether service consumption is making a comeback at the expense of goods consumption

• Durable goods are out on Thursday. They fell 1.3% in April, due to ongoing issues in the auto sector and a sharp decline in defense spending. Excluding transportation, orders were up 1.0% in April, building on the prior month’s jump. This pattern is expected to reverse some in May and look for headline orders to bounce back 2.8%, with ex. transportation up a more modest 0.6%

• Existing home sales are out on Tuesday. They have slipped over the past few months, despite still seemingly strong demand, as a lack of homes for sale has limited transactions. The pipeline for new homes has thinned, as builders have been unable to secure the necessary labor and materials to move forward with projects as fast as they would like. This dearth of new homes for sale and concerns about showing one’s home during a pandemic, among other factors, have held back resales


• UK retail sales figures for May have now been released. Retail sales growth has come in at 24.6 percent YoY and -1.4 percent MoM. Looking at retail sales excluding fuel, the figures were 21.7 percent YoY and -2.1 percent MoM. These are the first full month of data since the re-opening of shops in mid-April. The strongest monthly declines in sales came from food stores and online sales, which fell by 5.7 percent and 4.2 percent respectively; both sectors were affected by the easing of restrictions for hospitality and non-essential retail. Non-food stores continued to report monthly sales volumes growth of 2.3 percent in May, following growth of 25.6 percent in April, pointing to the continued recovery of the physical store retail sector. Fuel sales increased by 6.2 percent from April 2021, as people continued to increase their amount of travel. The decline in the overall monthly figures will be a surprise to many, but it does point to the limits of the UK’s recovery, and with GDP now expected to reach 2019 levels towards the end of the year or early 2022, some sort of reallocation of spending should have been expected

• UK Inflation (CPI) for May is at 2.1% YoY and 0.6% MoM, pushing inflation over the BoE target of 2% by the end of the year. Transport costs were the biggest driver (largely driven by fuel prices), followed by clothing, recreational goods, and meals and drinks consumed. These sectors have been hit hard by the pandemic and lockdowns, thus a degree of friction has been forecast as a surge in consumption hits reopening businesses. In addition to this frictional inflation, there is evidence of the base effects (measuring prices today against those of a year ago during the depths of the first wave of the pandemic) which are distorting figures. Producer Price Input Inflation was up 10.7% YoY and 1.1% MoM, while the retail Price Index was 3.3% YoY and 0.3% MoM. For some, this may confirm that this inflationary surge is temporary and will naturally subside over the course of the next year or so

• British finance minister Rishi Sunak is considering blocking a near 6% rise in old-age pension payments as part of a wider effort to rein in the cost of Prime Minister Boris Johnson’s spending, the Sunday Times newspaper said. Under a pension promise in the Conservative Party’s 2019 election campaign, state pensions are meant to rise each year by the highest of the annual inflation rate, wage growth or 2.5%. Due partly to distortions from the coronavirus pandemic, annual wages in the three months to April grew by an annual 5.6% – creating an extra 4 billion pound ($5.5 billion) annual cost for future pensions. The Sunday Times said the finance ministry wanted to break the link between pensions and wages for a year. “Pensioners are going to be doing extremely well. It’s not politically that difficult a thing to smooth it out for a year,” the newspaper quoted an unnamed minister as saying


• The European Commission signed off on the first two national recovery plans—those of Spain and Portugal—supported by the EUR 800 billion Next Generation EU fund. Italy’s plan is next in line, with approval expected in coming days.

• Industrial production in the eurozone was stronger than expected in April, rising 0.8% sequentially and 39.3% year over year, as the output of consumer goods more than doubled.


• Weaker-than-expected May economic data from the National Bureau of Statistics led some China economists to conclude that the country’s growth momentum has peaked. Retail sales grew a below-forecast 4.5% based on a two-year average annual growth rate, barely above April’s pace and roughly half of its pre-pandemic rate. Analysts believe that some of the weakness was due to a recent COVID-19 flareup in the southern coastal province of Guangdong, which accounts for one-tenth of China’s sales. On a positive note, urban unemployment in May fell close to its pre-pandemic rate, while year-to-date employment increased by 5.74 million, more than half of Beijing’s annual target

• Chinese consumer spending was cautious during the Dragon Boat Festival holiday from June 12–14, based on high frequency data. Tourist numbers declined slightly from 2019 levels, but total spending fell 25%, a similar shortfall with the May Day holiday. Weak box office revenue at China’s cinemas also offered evidence of a sluggish recovery in consumer services

• The renminbi (RMB) weakened slightly against the U.S. dollar to end at 6.44 per dollar. China’s trade-weighted currency basket, the CFETS index, hovered close to its 2018 high of 98 and is up 3.0% this year, compared with the RMB’s 1.6% gain against the dollar. Unlike other Asian countries, most of the shift toward monetary policy normalization has already occurred in China, which some analysts believe could help support the Chinese currency ahead of U.S. policy tightening expected to occur later this year

• Chinese stocks recorded their third weekly loss. The large-cap CSI 300 Index fell 2.3% and the Shanghai Composite Index shed 1.8%. Domestic brokerage CITIC Securities reported tighter A-share liquidity in June as northbound Stock Connect inflows dried up, while domestic mutual funds experienced greater redemption pressures. New energy vehicle (NEV) stocks rallied on Friday after an official at the 2021 China Association of Automobile Manufacturers projected that the NEV share of new vehicles would increase from 20% to 30% within five to eight years. Industry data showed a NEV penetration rate of 12.0%, a historic high, while domestic NEV sales in May jumped 8.3% from April and more than doubled from a year ago.

Sources: T. Rowe Price, Wells Fargo, MFS Investment Management, Handelsbanken Capital Market, Reuters, TD Economics, M. cassar Derjavets