Economic Outlook – 21 February 2021

US

  • The Markit flash composite PMI came in at 58.8 in February (vs. 58.7 the prior month), signalling the broadest improvement in private-sector activity in almost 6 years. The degree of optimism towards future output remained very high, with rollouts of vaccines acting as a confidence booster.
    • The manufacturing sub-index edged down from 59.2 to 58.5, a level still consistent with a solid amelioration of factory conditions.
    • Manufacturing output and new orders continued to improve at a healthy clip, while payrolls expanded the most in over three years.
    • The report also noted mounting capacity pressure. Indeed, input cost inflation was the most pronounced since April 2011, while supplier delays hit a record high during the month.
    • Higher input prices seemed to have been at least partially passed on to clients, as evidenced by Markit’s report of the sharpest rise in charges since July 2008.
    • The services sub-index, for its part, improved from 58.3 to a 71-month high of 58.9, as virus restrictions were partially eased.
    • The input price sub-index reached an all-time high while prices charged grew at the second fastest pace on record.
  • In January, retail sales soared 5.3% month-on-month, blowing past consensus expectations calling for a +1.1% print. The prior month’s result, meanwhile, was revised down from -0.7% to -1.0%.
    • Sales of motor vehicles and parts sprang 3.1% and stood 12.9% above their pre-pandemic level.
    • Excluding this segment, consumer outlays jumped 5.9% on gains for furniture (+12.0%), electronics (+14.7%), non-store retailers (+11.0%), sporting goods (+8.0%), eating and drinking establishments (+6.9%), and general merchandise (+5.5%).
    • All of the 13 retail segments saw higher sales, with nine sitting above last year’s February level.
    • Core sales, which are used to calculate GDP and exclude food services, auto dealers, building materials and gasoline stations, were up 6.0% in the month. The retail report was nothing short of stunning.
    • Excluding the period immediately following the COVID-19 outbreak, when consumer spending collapsed and then rebounded stiffly, the retail sales growth in the first month of 2021 was the second biggest on record. The gains came from across the board.
    • All segments covered registered advances; a feat observed only five times since data collection began in 1992.
    • Nine sectors have now fully recovered from the pandemic shock.
    • Three of the remaining four are those most directly affected by social distancing measures, namely, eating and drinking establishments (off 16.4% from pre-pandemic peak), clothing (off 9.6%), and gasoline stations (off 5.0%).
    • January’s massive spike in spending can be explained by the fact consumers benefited from fiscal aid from Washington (Congress USD$900-billion federal aid package at year’s end provided for most Americans to receive a cheque of USD$600).
    • Looking ahead, consumers are unlikely to tighten the purse strings, given that the new Biden administration is working on yet another round of fiscal stimulus worth approximately 9.0% of GDP.
  • Industrial production grew a healthy 0.9% and stood just 1.9% below its pre-crisis level. As factories continued to deal with swollen work backlogs and lean inventories, manufacturing output sprang 1.0% month-on-month for a fourth consecutive increase.
    • Production of motor vehicles and parts shrank 0.7% (probably on account of a shortage of semi-conductors), but this decline was more than offset by gains for consumer goods (+1.1%), business equipment (+0.9%), and construction supplies (+0.7%).
    • Excluding autos, factory output expanded 1.1%.
    • Production in the utilities segment cooled 1.2% while output in the mining sector advanced 2.3%.
    • Oil and gas well drilling prolonged its rebound month over month (+11.3%) but was still down 50.5% on a 12-month basis.
    • Capacity utilization in the industrial sector rose from 74.9% to 75.6%.
    • In the manufacturing sector, it improved from 73.9% to 74.6%. In both cases, capacity usage was recovering fast but still remained significantly below pre-pandemic levels.
  • Housing starts fell 6.0% in January to 1,580K (seasonally adjusted and annualized), well short of the 1,660K starts expected by consensus.
    • The disappointing result was partially offset by an upward revision to the prior month’s figure, which was hoisted from 1,669K to a 14.5-year high of 1,680K. January’s decline was driven by the single-unit category, where starts dropped from a multi-year high of 1,323K to 1,162K. Starts in the multi-unit category, meanwhile, jumped 17.1% to 418K.
    • The latest data on building permits were very encouraging. Total applications rose 10.4% in January to 1,881K, a level not seen since 2006. Permits issued for single-family dwellings advanced 3.8% m/m to 1,269K, while those for multi-unit dwellings spiked 27.2% to 612K.
    • Sales of existing homes rose for the seventh time in the last eight months in January, rising 0.6% to 6,690K (seasonally adjusted and annualized). The increase lifted sales 17.4% above their pre-pandemic level. Contract closings in the month rose for both single-family homes (+0.2% to 5,930K) and condos (+4.1% to 760K).
    • The inventory-to-sale ratio stayed put at 1.9, its lowest level on record and indication of extremely scarce supply (according to the National Association of Realtors, a ratio <5 indicates a tight market).
  • According to data published by the Federal Reserve, total household debt increased 1.4% in the last quarter of 2020 (the fastest pace recorded since 2018Q3), capping a year where total borrowing rose 3.3%, a number roughly in line with the average for the 2014-2019 period (+3.5%).
    • These figures stand in stark contrast with the sizeable deleveraging that took place following the Great Recession.
    • Total household credit fell at an average pace of 2.2% from 2009 to 2013. This speaks to the effectiveness of Fed policy during the current crisis and to the smooth transmission of monetary policy to the real economy in a context where the banking system has been little affected by the pandemic.
    • While household debt continues to rise, its composition has slowly been changing. Since the beginning of the crisis, credit card balances have shrunk no less than 11.7% (-USD$108 billion). This has been more than offset by a 4.5% rise in residential debt (+USD$445 billion), which includes mortgage loans and home equity lines of credit.
    • Credit card balances now account for just 5.6% of total household debt (lowest share on record) while residential debt represents 71.4% of the total (highest share since 2017Q1). This transfer of debt towards the residential sector is a good thing for households, given that mortgage interest rates are much lower than those paid on credit card balances.
  • Initial jobless claims increased unexpectedly in the week to 13 February from an upwardly revised 848K to 861K. Continued claims, meanwhile, kept trending down, sliding from 4,558K to 4,425K, their lowest level since March.
    • We must add to these the roughly 11.7 million people who received benefits in the week ended 29 January under emergency pandemic programs (Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation).
    • Yearend confirmation that these would be extended until mid-March was no doubt greeted with relief by the millions of people still unemployed because of the pandemic.
  • The Federal Reserve published the minutes of its 26 January policy meeting. Some of the highlights:
    • The Committee’s guidance for asset purchases indicated that asset purchases would continue at least at the current pace until substantial further progress toward its employment and inflation goals had been achieved.
    • With the economy still far from those goals, participants judged that it was likely to take some time for substantial further progress to be achieved.
    • Participants observed that the economy was far from achieving the Committee’s broad-based and inclusive goal of maximum employment and that even with a brisk pace of improvement in the labor market, achieving this goal would take some time.
    • Participants generally viewed the risks to the outlook for inflation as having become more balanced than was the case over most of 2020, although most still viewed the risks as weighted to the downside.
    • As an upside risk to inflation, several participants noted the potential for pandemic-related supply constraints to affect price inflation somewhat more than anticipated or for price increases among industries most adversely affected by the pandemic to be more pronounced than projected.
    • Participants emphasized that it was important to abstract from temporary factors affecting inflation (such as low past levels of prices dropping out of measures of annual price changes or relative price increases in some sectors brought about by supply constraints or disruptions) in judging whether inflation was on track to moderately exceed 2.0% for some time.
  • US Secretary of the Treasury Janet Yellen reiterated her view that the risks of not going big on a coronavirus relief package far outweigh the costs.
    • Should the package, which is expected to cost almost USD$2 trillion, spark a surge in inflation, Yellen said that her former employer, the Fed, has the tools to deal with any upward price pressures.
    • She said the Biden administration intends to introduce an infrastructure package later this year and that tax hikes will likely be part of the proposal, though she did not provide details.
    • Yellen warned that equity valuations are very high in the current low-yield environment and cautioned investors to be very careful in certain sectors.
    • Tariffs on Chinese imports will remain in place while the administration determines the appropriate strategy on China going forward.
  • The major indexes ended mostly lower for the holiday-shortened trading week, with the large-cap benchmarks and technology-heavy Nasdaq Composite index hitting record intraday highs before falling back. An increase in longer-term interest rates weighed on fast-growing technology stocks by raising the discount rate on future earnings. Conversely, the increase favored bank shares by boosting lending margins and helped value shares (heavily weighted in financials) outperform growth stocks.
  • In terms of data release, the latest report on personal income could show a massive 9.9% increase in January, this gain having been generated by the sending of stimulus checks worth USD$600 by the federal government.

UK

  • Retail sales figures for January have been released, -8.2% month-on-month (consensus: -2.5%), -5.9% year-on-year (consensus: -1.3%). Even excluding fuel, obviously down as a result of the lockdown, the figures were -8.8% month-on-month and -3.8% year-on-year.
    • This makes for grim reading and the figures are far lower than during the second lockdown in November.
    • However, seen in the context of the entire pandemic, retail sales volumes were 5.5% lower than in February 2020 (before the first lockdown), indicating that the impact of restrictions on the retail sector in this lockdown was not as large as that seen in April when the first full month of retail restrictions saw sales fall by 22.2%.
    • Food was up 0.9% month-on-month and non-store retailing was up 0.5% month-on-month, non-food stores were down 8.7%, with clothing stores down 35.6%, household goods down 19.4% and department stores -14.9%.
    • A portion of clothing sales have been shifted to supermarkets, which at least shows that consumers are shopping where they can, rather than not shopping at all.
  • The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose 0.9% in the 12 months to January 2021, up from 0.8% to December 2020.
    • Consumer Prices (CPI) for January came were 0.7% year-on-year (consensus: 0.6%) and -0.2% month-on-month (consensus: -0.4%). Producer Price inflation was -0.2% year-on-year (consensus: -0.4%) and 0.4% month-on-month (consensus: 0.2%).
    • Expectations for overall inflation have clearly been held in check by the ongoing lockdown.
    • The largest contribution to the CPIH 12-month inflation rate came from recreation and culture (0.35%), clearly this is an area with capacity constraints and those who are able to offer services are also able to demand at least modest price increases.
    • Food (-0.05%) and clothing (-0.22%) continued to be negative, clothing is notable in having seen the largest overall annual fall, undoubtedly attributable to the increased competition between online and the high street.
  • Britain will make financial support available to more businesses in the fishing and shellfish industry after they were hit by post-Brexit export problems and low demand during the COVID-19 pandemic.
    • It will expand the eligibility criteria to include catching and shellfish aquaculture businesses.
    • “Our fishermen are at the heart of many of our coastal communities and we recognise the impact of coronavirus and the end of the transition period on them,” Environment Secretary George Eustice said. “This expansion of our GBP£ 23 million support package will ensure many more businesses can benefit from government support.”

EU

  • The eurozone Flash Composite PMI was 48.1 in February (slightly above expectations) compared to 47.8 from the previous month.
    • The Manufacturing PMI was 57.7 (above expectations) compared with 54.8 the month before, and the Services PMI was 44.7 (below expectations) compared with 45.4.
    • The pandemic-hit service sectors continued to decline this month, driven by restrictions that have recently been extended amid a slow-starting vaccination rollout and stubbornly high COVID-19 cases.
    • Strong readings from both France and Germany boosted the manufacturing sector in the region.
    • Supply chain disruptions were nonetheless evident in the sector, as price pressures for some inputs increased significantly.
    • Near-term optimism about the future further increased, even though employment (despite the strong readings in France and Germany) remains in contracting territory.
  • The German Flash Composite PMI was 51.3 (above expectations) in February compared with 50.8 in January, the Manufacturing PMI was 60.6 (far above expectations) compared with 57.1, and the Services PMI was 45.9 (below expectations) compared with 46.7.
    • The strong showing in the manufacturing sector was to a large extent driven by export orders despite record delays in input delivery, even as the service sector continued to be hampered by pandemic countermeasures.
    • Private sector employment remained in expansive territory, as the gap between the hiring service sector and the firing manufacturing sector closed somewhat
  • The French Flash Composite PMI was 45.2 in February compared with 47.7 in January, the Manufacturing PMI was 55 compared with 51.6, and the Services PMI was 43.6 compared with 47.3 a month earlier.
    • All indices except manufacturing were below expectations.
    • French business activity declined at the quickest rate in a quarter, amid persistent pandemic restrictions, and output has now fallen subsequently for six months.
    • Manufacturing served as a contrast, posting a marginal uptick further into expansive territory.
    • A brighter spot could also be found in employment indices where added staff numbers in the services sector boosted composite employment into expansion for the second month in a row.
  • Prime Minister Mario Draghi’s new unity government in Italy received overwhelming support from both houses of Parliament. In Draghi’s maiden speech to the Senate, he pledged to accelerate the coronavirus vaccination program and outlined plans for investing EUR€ 210 billion in EU recovery funds and for structural reforms to the legal system and public administration.
  • The ECB minutes were interesting with arguments for both dovish and hawkish twists in several places. On balance, however, the minutes support the expectation that the ECB will increase bond buying (using the flexibility of its current programme) in response to higher yields. The main question remains how much they are willing to buy right now. A lot of focus on very low real rates supporting the economy.
  • Shares in Europe ended the week modestly higher, supported by companies posting encouraging quarterly earnings. However, these gains were tempered by concerns that rising inflation and higher bond yields might prompt central banks to begin tightening monetary policy. In local currency terms, the STOXX Europe 600 Index advanced 0.21%. Equities in Germany and Italy fell, while France’s CAC 40 Index gained ground.

China

  • Economic data over the Lunar New Year holiday were atypical due to efforts to discourage travel following a flareup of coronavirus infections in northern China.
    • Travel plummeted 71.0% over the three weeks from 28 January, reflecting the government’s campaign to dissuade people from using public transportation in what is normally China’s peak travel season.
  • Consumer spending was strong as people redirected their spending into other outlets.
    • Retail and catering spending climbed 29.0% from the year-ago period when the virus was still spreading and from the corresponding period in 2019, according to China’s Commerce Ministry.
    • Migrant workers (who typically endure long journeys to return to their hometown for Lunar New Year) fueled a steep rise in parcel deliveries and in telecom charges as travel restrictions kept most people in place for the holiday.
    • Other consumer-driven categories that reported sharply higher sales were online takeaways and recreational spending.
    • These gains, however, were offset by losses recorded by hotels, transportation, and tourism-related industries.
  • Chinese shares ended on a mixed note on a holiday-shortened week. The large-cap CSI 300 Index slipped 0.5%, while the benchmark Shanghai Composite Index rose 1.1%. China’s financial markets reopened Thursday 18 February, after a weeklong Lunar New Year holiday. In fixed income markets, the yield on China’s 10-year government bond closed at 3.31%, five basis points above its pre-holiday level.
  • The People’s Bank of China (PBOC) drained RMB 260 billion from the financial system, which dampened buying momentum. Now that China’s economy is on firm footing, analysts expect that the PBOC will gradually dial back pandemic stimulus measures. In currency trading, the renminbi closed at 6.487 against the US dollar, slightly weaker from its pre-holiday level.

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

2021-02-22T09:39:15+00:00