Economic Outlook – 20 November 2022


• Retail sales increased 1.3% in October, overshooting the +1.0% print expected by economists. There was no revision to the prior month’s flat line (+0.0%). Higher sales of motor vehicles and parts (+1.3%) contributed positively to the headline print in October. Without autos, retail outlays still advanced 1.3% on gains for gasoline stations (+4.1%), eating and drinking establishments (+1.6%), food and beverages (+1.4%), non-store retailers (+1.2%), and building materials (+1.1%). Sales were up in 9 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, were up a consensus topping 0.7% in the month. After stagnating in September, retail sales resumed their ascent in October, progressing at their fastest pace in nine months. Part of the gain was due to the automotive sector, which undoubtedly benefited from an easing of supply chain constraints and from excess demand generated by Hurricane Ian, which caused considerable damage to Florida’s car fleet. Gasoline stations receipts surged as well, reflecting a sharp rise in pump prices. However, even excluding these two categories, outlays progressed a healthy 0.9%, with a clear majority of surveyed categories showing gains. Increased spending in restaurants and bars was also good news, as it hints at a strong showing for services consumption in the month. It is worth noting, though, that October’s results were likely boosted by rising prices (CPI data showed goods prices advanced 0.5% in the month), as has often been the case in recent months. The sales volumes data, which will be released next week, will probably be a tad less impressive than the numbers published this week

• Industrial production shrank 0.1% in October instead of expanding 0.1% as per consensus. Adding to the disappointment, the previous month’s result was revised down from +0.4% to +0.1%. Manufacturing output edged up 0.1% thanks in large part to motor vehicles and parts (+2.0%) production, which continued to recover after being held back by semiconductor shortages last year. Excluding autos, factory output was flat as gains for electrical equipment (+2.0%), aerospace products (+1.9%), and machinery (+1.0%) were offset by declines for wood products (-2.5%), petroleum and coal (-1.9%), and non-metallic minerals (-1.2%). Utilities output (-1.5%) declined for the third month running, while production in the mining sector pulled back 0.4%. Oil and gas well drilling sprang 0.8% in the month, thus striking a mark 21.0% above its pre-crisis level

• The Empire State Manufacturing Index of general business conditions went from -9.1 to 4.5 in November, signaling the first expansion in factory activity in four months. The shipments subindex (from -0.3 to 8.0) swung back into growth territory and hiring accelerated (from 7.7 to 12.2). The new order gauge (from 3.7 to -3.3), however, signaled a contraction. Supplier delivery times (from -0.9 to 2.9) stopped shrinking but the index remained well below levels observed earlier this year. Meanwhile, input price inflation (from 48.6 to 50.5) picked up, probably on account of the rebound in commodity prices before the survey period. In an effort to protect their margins, manufacturers raised selling prices (from 22.9 to 27.2) at a faster pace than in the prior month

• The Philly Fed Manufacturing Business Outlook Index sank further into contraction territory in November (from -8.7 to a post-pandemic low of -19.4), thus painting a more downbeat picture of the situation in the manufacturing sector. New orders (from -15.9 to -16.2) continued to shrink while production (from 8.6 to 7.0) and employment (from 28.5 to 7.1) expanded at a slower pace. Supplier delivery times (from -12.6 to -8.8), meanwhile, shortened for the fourth time in five months. The index tracking future business activity improved from -14.9 to a still depressed -7.1.

• In October, the Producer Price Index for final demand rose 0.2% for the second month in a row. This fell short of the median economist forecast calling for a jump of 0.4%. Goods prices climbed 0.6% on sizeable increases for both energy (+2.7%) and food (+0.5%). Prices in the services category sank 0.1%, marking the first monthly decline in this segment in nearly two years. The core PPI, which excludes food and energy, stayed level in the month (analysts expected a 0.3% progression). YoY, the headline PPI slid from 8.4% to 8.0%, three ticks below the level expected by consensus. Excluding food and energy, it slipped from 7.1% to a 15-month low of 6.7%

• The Import Price Index (IPI) retraced 0.2% MoM in October, a smaller drop than expected by economists (-0.4%). The headline print was negatively affected by a 1.2% retreat in the price of petroleum imports but, even excluding this category, import prices still pulled back 0.2%, marking the sixth decline in a row for this indicator. On a 12-month basis, the headline IPI fell from 6.0% to a 20-month low of 4.2%. The less volatile ex-petroleum gauge slid from 3.8% to 3.0%, its lowest level since January 2021

• After eight consecutive declines from January to September, existing-home sales slipped another 5.9% in October to 4,710K (seasonally adjusted and annualized), bringing the total drawback since the beginning of the year to 31.7%. Excluding the first months of the pandemic, this was also the lowest level of sales observed in nearly 11 years. Contract closings sagged for both single-family dwellings (-6.4%) and condos (-2.0%). The inventory-to-sales ratio, for its part, rose from 3.1 to a 28-month high of 3.3. Despite the recent increase, this ratio remained low on a historical basis (<5 indicates a tight market for the National Association of Realtors), as supply continued to lag. The inventory of properties available for sale totaled just 1.22 million (not seasonally adjusted), the lowest level ever recorded in a month of October

• The index of leading economic indicators (LEI) declined 0.9 point in October to a 17-month low of 114.9. Six of the ten underlying economic indicators acted as a drag on the headline index, with the biggest negative contributions coming from consumer expectations (-0.25 pp), jobless claims (-0.21 pp), stock prices (-0.14 pp) and ISM new orders (-0.14 pp). The interest rate spread, on the other hand, contributed 0.11 pp to the headline figure. Historical analysis shows that an annualized drop of 3.5% in the LEI index over six months, coupled with a six-month diffusion index below 50%, is generally symptomatic of a pending recession. These conditions were met in September: the index dropped 6.3% annualized over six months and the six-month diffusion index stood at 40%

• Housing starts retreated from 1,488K in September (initially estimated at 1,439K) to 1,425K in October, which was still above the median economist forecast calling for a 1,410K print. The decline was almost entirely due to a 6.1% drop in the single-family segment to a post-pandemic low of 855K. Ground breaking in the multi-family category declined as well, albeit to a lesser extent (-1.2% to 570K)

• Homebuilder sentiment, meanwhile, is sliding fast. In November, the National Association of Home Builders Market Index fell five points to 33, its lowest point since June 2012 outside of the pandemic period. NAHB data also showed a significant drop in prospective buyer traffic. All told, these data suggest that there could be more pain in store for residential construction down the road

• Freddie Mac reported on Thursday that the average 30-year US mortgage rate declined to 6.61% from 7.08%, the largest weekly drop since 1981. Falling US Treasury yields in the wake of last week’s soft inflation data helped fuel the drop

• Initial jobless claims edged down from 226K to 222K in the week to November 12. Continued claims, for their part, sprang from 1,494K to 1,507K, their highest level since late March. Although these two figures remained very low on a historical basis, the latter has clearly been trending up in recent weeks. This discrepancy between stable initial claims and rising continuing claims suggests that, although few people are getting laid off right now, those who are having more difficulty finding a new job and must thus continue to claim unemployment benefits. A slowdown in hiring is usually the first signal of a trend shift on the labour market

• US Federal Reserve policymakers hit the speakers’ circuit hard this week in the wake of softer-than-expected inflation data released a week ago. While there were a variety of views expressed, the bulk of the commentary suggests that while rates will likely rise more slowly than they have in recent months, they will likely need to go higher than previously expected. Among the most hawkish views were those of Federal Reserve Bank of St. Louis President James Bullard, who in a presentation said that rates may have to rise to between 5% and 7% to be sufficiently restrictive to bring down inflation. A survey of consumer expectations published by the Federal Reserve Bank of New York this week said that inflation expectations increased in the short, medium and longer terms, an unwelcome finding for policymakers

• Most of the major indexes gave back a portion of the previous week’s strong gains and closed modestly lower. Growth stocks lagged value-oriented shares, which were supported by gains in the consumer staples sector. The energy sector underperformed, however, as European oil and natural gas inventories reached near-peak levels. Dispelled reports of a Russian missile strike on Polish territory sparked a brief sell-off on Tuesday, but trading volumes remained muted for much of the week. Markets will be closed on Thursday, November 24, in observance of the Thanksgiving holiday

• In terms of data release, durable goods print is out on Wednesday. The industrial sector is losing momentum. Durable goods orders increased 0.4% in September, but the details of the report suggest new demand is fading. Capital goods orders excluding defense and aircraft, a leading indicator for business investment spending, slipped 0.7% in September. A streak of moderating monthly gains preceded the decline and suggests the pipeline of new demand is starting to dry up. Separately-reported data from the ISM manufacturing survey support that notion, with the new orders component in contraction territory for four of the past five months

• New Home Sales is out on Wednesday. Skyrocketing mortgage rates have significantly eroded housing affordability this year, pushing many potential buyers to the sidelines. Sales of new homes slid nearly 11% to a 603K-unit annual pace during September. Year-to-date, sales were down 14.3%. On the supply side, home builders have contended with faltering demand amid still-elevated building material and labor costs. New home inventories rose to 462K units in September, up 23% over the year. Separately-released residential construction data show single-family home completions dropping 8% in October. The drop-off in completions is a possible sign that home builders are beginning to cancel new home projects


• The GfK consumer confidence indicator saw a welcome improvement in November, rising from a record low of -49 in September to -44. After the turmoil in financial markets after the so-called “mini-Budget”, this marginal improvement in sentiment is likely accounted for by reduced political instability in the UK following the selection of Rishi Sunak as Prime Minister. However, consumer confidence remains at highly depressed levels with the measure still registering at levels lower than during the peak of the financial crisis. On a MoM basis retail sales volumes nudged up by 0.6% in October – although the increase could be partly due to the additional bank holiday artificially suppressing retail sales in September. Non-food stores, non-store retailing and fuel volume purchases saw increases while sales volumes in food stores saw declines. Inflationary pressures, with latest YoY figures showing CPI at 11.1%, means the gap between growth in retail sales value and sale volumes continues to be stark. Compared with the same period a year earlier, volumes fell by 6.1% in the three months to October while sales values rose by 4.7%

• The Chancellor Jeremy Hunt has delivered what he has termed a “Fiscal Statement”, but which is in actuality a fairly major budget. Most of the significant changes have been well trailed in the media over the last week, testing potential market reactions. (That said, Hunt’s predecessor Kwarteng did something similar in September and it made zero difference to the poor reception his “mini budget” received). The Government is facing some difficult choices and it was determined to knock back inflation and in doing this, keep Gilt investors happy (immediate market reaction was for Gilt yields to rise, but by considerably less than was the case after September’s mini-budget). In practice, the Chancellor has adopted a very conservative fiscal stance and a budget that did not depend upon any heroic GDP assumptions. Indeed, the GDP is now forecast to be in recession in 2023, although the Office for Budget Responsibility is predicting growth to resume in 2024. Where the government has made a choice is where it is looking to deploy the limited amount of cash it has gathered in the wake of tax rises and spending restraint. Controversially for a Conservative Government, Hunt has chosen to protect a number of expensive capital spending commitments. Chief amongst these is the £100 billion High Speed rail link from London to the North West of England, HS2 (this is the answer to the question as to what the government is doing to “level up” wealth across the country (whether this is an effectual response is not discussed) and the “triple lock” on pensions (the state pension rising by the highest of inflation, wages or 2.5%), which will cost approximately £10 billion next year. This triple lock is being maintained at a time when considerable extra resources are now to be granted to the most vulnerable households and real wages are falling, leaving many people feeling as if (Conservative voting) pensioners are being bribed at the expense of workers. The expectation that longer-term investment programmes would face a cash crisis has not come to pass, while other areas that were set to be cut back, such as defence, are now subject to a broader review on future security needs

• UK Inflation, CPI, for October has come out at 2.0% MoM, 11.1% YoY, while CPIH was 1.6% MoM 9.6% YoY and core inflation is 0.7% MoM, 6.5% YoY. The Retail Price Index is now 2.5% MoM, 14.2% YoY, which given that floating rate Gilts use RPI to determine interest payments, means that 25% of the Governments debt stock is that much more expensive. These numbers are expected to mark the peak of inflation and forecasts from the Bank of England and others expect gradual falls over the coming few months and more significant falls as 2023 progresses. The largest upward contributions to the annual CPIH inflation rate predictably came from electricity and gas, food, although transport (principally petrol) was notable in that it is rapidly falling as a driver of this month’s inflation picture. Although these numbers are affected by the Government’s Energy Price Guarantee (EPG), which started in October and caps the average home’s energy cost at GBP 2500 per annum through the end of next March, it has to be remembered that the average home only spent approximately GBP 1300 per year on home energy before the Ukrainian crisis came about; a rise of 88.9% in 12 months. The cost to debt servicing alone is one of the reasons the EPG (which because of its broad base, statistically lowers inflation) is unlikely to be altered in tomorrow’s Fiscal Statement


• Germany’s largest trade union, IG Metall, agreed to a below-inflation pay deal after five rounds of talks and warning strikes. Wages will rise 5.2% from June 2023 and 3.3% from May 2024, with lump sums of EUR 1,500 to be paid in both years. The pay deal, which was below the 8% originally demanded by the union, sets a benchmark for Germany’s 3.9 million metal and electrical sector workers. Separately, investors became less pessimistic for a second month in November, apparently on hopes that inflation could soon slow, according to the ZEW economic institute

• European Central Bank President Christine Lagarde said on Friday that interest rates may need to rise to levels that restrict economic expansion to drive down inflation. The risk of recession has risen, she said, but a downturn alone won’t be sufficient to tame soaring prices

• The pan-European STOXX Europe 600 Index ended modestly higher in local currency terms. Major regional stock indexes mostly gained ground. Germany’s DAX Index gained 1.46%, France’s CAC 40 Index advanced 0.76%, and Italy’s FTSE MIB Index added 0.90%


• The impact of zero-COVID and the troubled housing sector on the consumer was evident in Monday’s October retail sales report, which showed sharp year-on-year declines in nearly all categories; sales of home appliances fell by over 14%, for example. Nevertheless, investors appeared to remain hopeful about recently announced support measures for the property sector. According to Reuters, officials have unveiled 16 new programs to shore up the property markets, including extending loans to both developers and homebuyers. Late in the week, the People’s Bank of China injected liquidity into the banking system in order to stem a recent rise in bond yields. The rise had prompted retail investors to withdraw funds from fixed income funds, according to Bloomberg, threatening an upward spiral in withdrawals and yields

• News that Chinese officials have taken additional measures to support the country’s beleaguered property sector helped boost market sentiment early in the week. The initiative centers around a 16-point plan that includes additional loans for developers, steps to insure property completions, and the easing of caps on bank lending to developers and for mortgages. The package is seen as far from a panacea, but could help stem the bleeding in the sector, analysts said. Analysts note that the scope for further easing in monetary policy by the People’s Bank of China is limited given that the central bank is bracing for higher inflation as the economy reopens

• China’s Xi Jinping and the President Biden meet in Bali on Monday on the sidelines of the G20 summit. While no major diplomatic advances were made, both sides agreed to keep the lines of communication open. Next steps in that process include a diplomatic mission to China by US Secretary of State Anthony Blinken. According to the Council on Foreign Relations, “While the meeting between Biden and Xi did not lead to any breakthroughs in the US-China relationship, that was a bar too high given the state of relations. Instead, both sides signaled that they wanted to establish a floor for the relationship and build guardrails to prevent competition from turning to conflict

• Mainland Chinese stocks were modestly positive for the week, with the Shanghai Composite Index rising 0.32%, while Hong Kong’s Hang Seng Index performed better, gaining 3.85%

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