Economic Outlook – 21 November 2021

• Retail sales rose 1.7% in October, topping the median economist forecast calling for a +1.4% print. The previous month’s result, meanwhile, was revised up from +0.7% to +0.8%. Sales of motor vehicles and parts progressed 1.8%. Without autos, sales still sprang 1.7% on advances for non-store retailers (+4.0%), gasoline stations (+3.9%), electronics (+3.8%), building materials (+2.8%), and miscellaneous items (+2.8%). These gains were only partially offset by retreats for clothing (-0.7%) and health/personal care items (-0.6%). In all, sales were up in 11 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, advanced 1.6% in the month. Consumer outlays on goods came in above consensus for the third straight month in October. Auto sales recorded a second consecutive gain after declining 13.2% between April and August. However, do not expect this to mark the beginning of an uptrend. Auto inventories remain extremely depressed in the United States and chip shortages continue to limit production worldwide. This, combined with a surge in sales earlier this year, has left dealer lots virtually empty and spurred prices. In fact, the increase in nominal auto sales in October might have been due more to higher prices than to a higher number of units sold

• Excluding the auto sector, sales were solid but, once again, it is difficult to say whether this performance merely reflected higher prices. (Recall that, according to the CPI report published last week, goods prices sprang 1.5% in October.) Sales at restaurants and bars were flat even though the health situation improved markedly. Spending in categories that benefit most from social-distancing measures, meanwhile, continued to improve, a sign that the habits adopted during the pandemic could persist in the post-crisis period. Indeed, outlays at non-store retailers jumped 4.0% to a new all-time high of $91.7 billion. That was 39.8% above the segment’s pre-COVID level. Even the categories most closely linked to the housing sector, namely, furniture (+0.4%) and building materials (+2.8%), did well despite the recent moderation in home sales. Gasoline stations, for their part, benefited from rising pump prices

• Industrial production advanced a consensus-topping 1.6% MoM, thereby surpassing its pre-pandemic level for the first time. Manufacturing output sprang 1.2% as production of motor vehicles/parts rebounded sharply (+11.0%) after being hit by semiconductor shortages the prior month. (Despite this gain, auto output remained 6.5% below its pre-pandemic peak attained in February 2020.) Factories benefited also from a strong showing in the non-durable goods segment (+1.3%), a gain the Federal Reserve attributed to “a return to operation for many chemical and energy facilities that had been offline due to Hurricane Ida”. Output rose 1.2% for utilities and 4.1% for mining. Within the latter category, oil and gas well drilling sprang an impressive 9.3%. That said, production in this segment remained 23.4% below its pre-crisis level

• The Empire State Manufacturing Index of general business conditions bounced back a strong 11.1 points to 30.9 in November. This was miles ahead of consensus expectations (22.0) and indicative of a very healthy pace of growth at factories operating in New York State and surrounding areas. Both the new orders sub-index (28.8 vs. 24.3 the prior month) and the shipments sub-index (28.2 vs. 8.9) mustered strong advances, while the employment gauge (26.0 vs. 17.1) signalled the strongest expansion in payrolls in data going back to 2001. Supply chain pressures were still evident in the report. Delivery times (32.2 vs. 38.0 the prior month) continued to lengthen while input prices (83.0 vs. 78.7) rose at the second-fastest clip ever. In an attempt to protect their margins, manufacturers raised selling prices (50.8 vs. 43.5) the most in the survey’s history. Business optimism for the next six months (36.9 vs. 52.0) cooled a bit but remained high on a historical basis. Capex (34.7 vs. 31.5) and technology spending intentions (28.0 vs. 26.9) improved strongly in the month, with both indices holding above their long-term averages

• The Philly Fed Manufacturing Business Outlook Index painted a similarly upbeat picture, as the headline index rose 15.2 points to a seven-month high of 30.7. Both the shipments (32.1 vs. 30.0 the prior month) and the new orders (47.4 vs. 30.8) indices saw vigorous advances, with the latter reaching its highest point in nearly 50 years. The number of employees tracker (27.2 vs. 30.7) eased back but remained consistent with a decent rate of hiring. Prices paid (80.0 vs. 70.3) continued to rise at a brisk pace, and the sharp rise in prices received (62.9 vs. 51.1) suggests that some of the increase was passed onto clients

• Housing starts softened from 1,530K in September (initially estimated at 1,555K) to a six-month low of 1,520K in October, undershooting the 1,579K print expected by analysts. The monthly drop stemmed entirely from a decrease in the single-family segment (from 1,081K to 1,039K). Groundbreaking in the multi-family segment, meanwhile, progressed from 449K to 481K. Building permits, for their part, rose from 1,586K to 1,650K, with gains in both the single-family category (from 1,646K to 1,652K) and the multi-family category (from 545K to 581K)

• The Import Price Index (IPI) rose 1.2% in October, a stronger result than the +1.0% print expected by consensus. The headline print was positively affected by an 8.1% increase in the price of petroleum imports. Excluding this category, import prices rose 0.5%. On a 12-month basis, the headline IPI went from 9.3% in September to 10.7% in October. The less volatile ex-petroleum gauge rose from 5.5% to 6.1%

• Initial jobless claims stayed roughly unchanged in the week to November 13, moving from 269K to a post-pandemic low of 268K. Continued claims, meanwhile, eased from 2.209K to 2,080K, their lowest level since March 2019. A record number of Americans — 4.4 million, or 3% of workers — voluntarily quit their jobs in September while the number of job openings remained above pre-pandemic levels. The US Department of Labor’s monthly Job Openings and Labor Turnover Survey, or JOLTS report, reflected an uneven economy, with strong demand grinding against labor and goods shortages, driving overall inflation to its biggest annual increase in 31 years

• US President Joe Biden signed a bipartisan infrastructure bill that will cost more than $1 trillion. The package will put $550 billion in new funds into transportation, broadband and utilities, as well as $110 billion into roads, bridges and other major projects. The United States will invest $66 billion in freight and passenger rail, including potential upgrades to Amtrak, direct $39 billion into public transit systems, put $65 billion into expanding broadband and $55 billion into improving water systems and replacing lead pipes. Funding will be provided over a five-year period and it could take months or years for many major projects to start

• The major indexes ended the week mixed as investors weighed strong economic and profits data against inflation fears, ongoing supply strains, and a rise in coronavirus infections in some regions. Growth stocks handily outpaced value stocks, helping lift the Nasdaq Composite to another record intraday high on Friday. Sector returns also varied widely within the S&P 500 Index. A solid gain in shares and a partial rebound in Tesla boosted consumer discretionary stocks, while strength in Apple supported information technology shares. Energy stocks dropped alongside oil prices after China and the U.S. discussed releasing strategic reserves and U.S. inventories rose for the first time in five weeks

• In terms of data release, the print for existing & new home sales will be out on Monday and Wednesday. Demand for housing remains quite robust. Existing home sales jumped 7% in September to a 6.29 million-unit annual pace, while new home sales leaped 14% to an 800K-unit pace, or the strongest since March. The recent strength in sales suggests the slowdown in home buying this summer had more to do with limited inventory and builders struggling to deliver enough homes rather than faltering demand

• Durable goods is out on Wednesday. Durables goods orders slipped 0.3% in September, but weakness was tied entirely to the volatile transportation sector amid weak aircraft and motor vehicle orders. While durable goods orders were a bit stronger in October, rising 0.2%, transportation likely continued to weigh on orders

• UK Inflation for Oct has come out at 1.1% MoM, 4.2% YoY, certainly these numbers point to inflation being well on its way to meet the Bank of England forecast of 5% in the first half of next year. Housing and household services made the largest upward contribution to the change in the CPIH 12-month inflation rate between Sept and Oct, with further large upward contributions to change from transport, restaurants and hotels, education, furniture and household goods, and food and non-alcoholic beverages, as well as energy

• There is now going to be pressure to move in Dec despite the MPC merely reporting the outcome of the vote. It is likely that the MPC were anticipating much of the surge and thus the next rate rise will be in Feb, although look for lots of reassuring speeches from MPC members that they are alive to the inflationary challenges in the interim. Not that it will have much immediate impact, but the Asset Purchase program (Quantitative Easing) is also due to complete its £895 billion in bond purchases in Dec

• Persistent supply chain bottlenecks and soaring energy costs are slowing eurozone growth and will keep inflation high for even longer than had been thought, European Central Bank President Christine Lagarde said on Monday. The ECB has been banking on a rapid decline in inflation next year, but policymakers are now openly admitting that their forecasts, already revised up several times, are still too low. However, Lagarde continued to push back on calls and market bets for tighter policy, repeating the ECB’s message that conditions for higher interest rates are unlikely to be met next year as inflation is still expected to return to below the bank’s 2% target further out

• The European Automobile Manufacturers’ Association said that new passenger car registrations in the European Union dropped by 30.3% month over month in October to a record low of 665,001 units. This sharp contraction stemmed primarily from a shortage of semiconductors that has weighed on the supply of new vehicles

• Core eurozone bond yields fell on dovish comments from European Central Bank (ECB) President Christine Lagarde. She pushed back against interest rate increases on the grounds that inflation would fade and indicated asset purchases could continue beyond the expiry of the Pandemic Emergency Purchase Programme. Fears of further coronavirus restrictions in Europe after Austria’s announcement of a nationwide lockdown added to downward pressure on core yields. Peripheral eurozone bonds broadly tracked core markets

• Shares in Europe were little changed, as a surge in the number of coronavirus infections clouded the economic outlook. In local currency terms, the pan-European STOXX Europe 600 Index ended 0.14% lower. Major European indexes were mixed. Germany’s Xetra DAX Index gained 0.41%, France’s CAC 40 Index added 0.29%, and Italy’s FTSE MIB Index lost 1.42%

• Prices for new and resold homes fell amid deeper contractions in construction starts and investment by developers. Housing sales shrank 21.2% in October from September, while 52 of the top 70 cities recorded month-on-month price declines—16 more than in September.

• In other economic readings, fixed asset investments continued to slow, rising 6.1% in the year’s first 10 months from the prior-year period versus the 7.3% rise from January to September. October retail sales and industrial production each grew faster than expected, though industrial output recorded its second-lowest reading this year.

• Real estate firms dialed up their financing plans with a total of over USD 2.7 billion on Wednesday alone, taking the past week’s total more than USD 4.5 billion. Plans include Agile Group’s USD 310 million convertibles issue, China Evergrande Group’s sale of its stake in HengTen Networks Group Ltd. and Country Garden Services Holdings’ second share placement in six months. At least three other developers announced bond issues in the domestic market. Meanwhile, ratings agency S&P Global noted in a report that “an Evergrande default is highly likely.” Chinese developers owed RMB 33.5 trillion (USD 5 trillion) at the end of the second quarter—about one-third of China’s GDP—making it critical for Beijing to provide support, according to investment bank Nomura

• China Huarong Asset Management Co., a bad debts manager that has become a test of Beijing’s willingness to bail out troubled state-owned borrowers, said in an exchange filing that it plans to raise USD 6.6 billion via asset sales to state-run firms and dispose of more assets in a bid to stay afloat. Analysts are eyeing Huarong’s actions as a possible template that other highly indebted companies might follow as Beijing stays the course on its deleveraging campaign

• US President Joe Biden and Chinese President Xi Jinping met virtually Tuesday in the closest communication between the two countries’ leaders since Biden took office in January. Both sides noted points of tension and issued public statements after the meeting that emphasized ways to avoid conflict. The closely watched conversation between the leaders of the world’s biggest economies appeared to yield no immediate outcome but is widely seen as a joint effort to improve icy relations and avoid direct confrontation

• Chinese markets ended mixed as the CSI 300 Index closed flat and the Shanghai Composite Index edged up 0.5%. Disappointing earnings and revenue from e-commerce giant Alibaba Group Holding for the September quarter topped off a week that saw more negative headlines on the economy amid a scramble from real estate firms to raise funds. The People’s Bank of China (PBOC) continued to signal its support for the economy as it unveiled its latest targeted lending program, this time aimed at the domestic coal sector with RMB 200 billion in financing. Analysts have estimated that the central bank’s various programs are slowly adding up to 1% to 2% of China’s gross domestic product (GDP)

Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, MFS Investment Management, M. Cassar Derjavets