Economic Outlook – 22 March 2021

• Retail sales fell 3.0% month-on-month in February after gaining a revised 7.6% in January (up from an earlier 5.3% estimate). The decline was broad based but for two exceptions.
o Sales were flat at food and beverage stores and increased at gas stations (3.6%).
o The control measure, which excludes sales at food service places, auto dealers, building materials outlets and gasoline stations and which serves as a good proxy for consumer spending in the GDP report, fell 3.5% in the month after springing an upwardly revised 8.7% in January (from 6.0% earlier).
o Whereas January`s retail sales were boosted by stimulus payments to households under the December pandemic-relief package, February`s sales suffered from the winter storms that hit most of the central states in the month and from the power outages in Texas.
o Despite February`s much larger than expected decline in retail activities, sales from December 2020 to February 2021 were up 6.0% from the same period a year earlier, according to advance estimates.
o Looking forward, the USD$ 1.9 trillion fiscal plan approved in early March, which includes direct USD$ 1,400 cash payments to many Americans, combined with the large pool of household savings accumulated during the pandemic and vaccine distribution to ever broader portions of the population, not to mention the warmer weather on the way, should translate into rather powerful tailwinds for retail sales in the coming months

• The message from the Philadelphia Fed Manufacturing Business Outlook Survey was also quite encouraging as far as the activity level is concerned.
o The index for current manufacturing activity jumped from 23.1 in February to 51.8 in March, its highest point since April 1973. New orders gained 23.4 points to 50.9.
o The current employment index rose 4.8 points to 30.1, well above its long-term average of 3.8 when recession periods are excluded.
o However, the situation carries its share of headaches for employers. Of the surveyed firms, 64.3% reported labour shortages and 44.6% reported having positions that were vacant for more than three months. Under the circumstances, 42.9% of the firms indicated that they had hired workers who were less qualified than initially sought in order to meet their labour needs.

• The Empire State Manufacturing Survey recorded a five-point gain to 17.4 and stood two ticks above last July’s level.
o The new orders index, however, was softer than the month before, slipping 1.7 points to 9.1, but nonetheless indicated mounting orders.
o The percentage of respondents who indicated lower employment grew from 7.8% to 11.4%, and the diffusion index slid 2.7 points to 9.4.
o The price paid index reached its highest level in a decade, with 65.8% of respondents reporting higher prices paid and only 1.3% reporting lower prices. This propelled the diffusion index to 64.4, up 6.6 points from a month earlier.
o The index for future business conditions edged up 1.5 points to 36.4, just above its six-month moving average of 34.4, suggesting that firms remained optimistic about future conditions.

• Initial jobless claims increased 45K to 770K in the week ending March 13. The previous week’s level was revised up 13K from 712K to 725K.
o The advance number for seasonally adjusted insured unemployment (i.e., continued claims) fell 18K to 4,124K in the week ending February 27.
o Data on claims for benefits under all programs, including those introduced since the start of the health crisis (i.e., Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation), are available only after a longer lag.
o In the week ending February 27, continued claims for UI benefits across all programs fell 1.9 million to 18.2 million, basically erasing the previous weekly increase.

• Housing starts fell 10.3% in February to 1,421K (seasonally adjusted and annualized), their lowest level since August.
o Severe weather conditions in the month acted as strong headwinds for such a weather-sensitive sector.
o Overall, single-family starts fell 8.5% to a 1,040K-unit pace over the month and January data were revised to 1,136K from the initially reported pace of 1,162K.
o On a regional basis, housing starts fell 39.5% in the Northeast, 34.9% in the Midwest and 9.7% in the South.
o In the West, starts rose 17.6%, driven by single-family units, which rose 22.9% to a 317K annualized pace.

• Industrial production fell 2.2% in February, largely due to the extreme weather that hit many central states. Freezing temperatures damaged petroleum refineries, petrochemical facilities, and plastic-resin plants, which remained close in the month. The situation has had ripple effects in March.
o Corporations such as Honda Motor, Toyota Motor and paint makers indicated that petrochemical shortages would affect production in the coming weeks, according to the Wall Street Journal.
o The situation has only worsened the production difficulties faced by the car industry, which was already having to deal with a global shortage of semiconductors.
o Compared with the previous month, manufacturing output and mining production in February fell 3.1% and 5.4%, respectively.
o However cold weather boosted heating demand, which contributed to drive output for utilities up 7.4% in the month.
o Total industrial production in February was 4.2% lower than its year-earlier level. Capacity utilization for the industrial sector decreased 1.7 percentage points in February to 73.8%, which was 5.8 percentage points lower than its long-run average (1972-2020).
o In the manufacturing sector, capacity utilization fell 2.3 percentage points to 72.3% and operating rates for mining (77.5%) and utilities (78.5%) remained below their long-run averages.

• Import prices rose 1.3% in February after jumping 1.4% the previous month. Fuel import prices (+11.1%) boosted the headline number.
o Excluding fuel and food, import prices rose 0.3% in the month.
o Compared with the year before, total import prices increased 3.0%, fuel import prices sprang 6.5%, and nonfuel prices climbed 2.8%.

• Export prices, too, were higher in February, gaining 1.6% month-on-month.
o This came on the heels of a 2.5% rise in January, which was the largest monthly increase since the data have been published (December 1988). Compared with a year earlier, total export prices rose 5.2%, agricultural export prices 16.1%, and non-agricultural export prices 4.1%

• The FOMC voted unanimously to leave the target range for the federal funds rate unchanged at 0% to 0.25% at the conclusion of its March two-day meeting.
o The Federal Reserve said it will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least USD$ 40 billion per month.
o it was stressed that the recovery remained contingent upon the course of the virus, including progress on vaccination.
o The statement did not push back against the recent rapid increase in interest rates, reiterating that “overall financial conditions remain[ed] accommodative”.
o It reiterated that the crisis would continue to weigh on economic activity, employment and inflation and that it posed considerable risks to the economic outlook.
o The key focus leading up to the March FOMC meeting was the Fed’s updated Summary of Economic Projections and dot plot.

• US Secretary of the Treasury Janet Yellen said she would not rule out a US wealth tax but that the tax proposals laid out by President Biden during last year’s campaign, if adopted, would have similar impacts. She sees the economy returning to full employment next year and said the deficit will need to be reduced over time but is manageable now due to low borrowing costs.

• The major indexes continued to move to record highs early in the week but then lost ground as bond yields reached their highest levels in over a year.
o Energy stocks fell sharply as oil prices saw their biggest daily drop since the summer, seemingly driven by rising US inventories and demand concerns due to renewed lockdowns and the slow vaccine rollout in Europe (see below).
o The increase in yields augured well for banks’ lending margins and supported financials shares for most of the week, but the sector fell back on Friday after the Federal Reserve announced that it was not extending an exemption put in place early in the pandemic that allowed banks to hold lower capital reserves.
o The small-cap Russell 2000 Index fell the most, giving back some of its leadership for the year to date.

• In terms of data release, Existing Home Sales/New Home Sales will be out on Monday and Tuesday respectively.
o The housing market continues to be white-hot, but there are some signs of a modest cool down on the horizon. Sales improved during January, with existing home sales advancing 0.6% and new home sales rising 4.3%.
o The robust pace of sales recently has been mostly owed to increased household space needs and low mortgage rates. While larger space requirements are still driving purchase demand, mortgage rates have begun to creep up alongside a climbing 10-year Treasury yield.
o Mortgage rates are still very low by historical standards, but rising financing costs together with low inventories and double-digit home price appreciation may be starting to damper buying conditions.

• On Wednesday, the Durable Goods Order print will be available.
o The factory sector is off to a strong start in 2021. During January, durable goods orders jumped 3.4%, more than three times the expected gain of 1.1%.
o Civilian aircraft lifted both orders and shipments as Boeing began long-delayed deliveries after addressing problems with its key 737-MAX.
o Nondefense capital goods shipments rose 3.2%, which means equipment spending should be supportive of Q1 GDP growth. What’s more, the recent strength extends beyond aircraft. Primary and fabricated metals, computers and related products as well as transportation equipment all posted notable gains in both orders and shipments.
o Durable goods orders are expected to rise 2.1% during February, with transportation again providing a boost to orders. Excluding transportation, a 0.7% improvement is achievable.
o Overall, the recent strength in durable goods orders and shipments points to a strong year ahead for manufacturing and business fixed investment.

• The BoE’s policymakers voted unanimously to keep the benchmark interest rate at an all-time low of 0.1% and to continue its existing bond-buying program.
o The central bank said that global economic developments “had been a little stronger than anticipated” last month and noted that the US fiscal stimulus package should provide “significant additional support.” It said bond yields had increased to reflect the stronger recovery while observing that the prices of risk assets had held up.

• British consumer morale struck a one-year high this month as the public became increasingly confident that an economic recovery from the COVID-19 pandemic is approaching and that they would benefit directly, a survey showed on Friday.
o The monthly consumer confidence index from market research firm GfK rose to -16 from -23 in February. While still some way below the its long-run average of -9, the survey showed rising optimism in all of its components. Economists polled by Reuters had expected a smaller increase to -20.
o The readings came a day after the Bank of England said Britain’s economic recovery was gathering pace thanks to the speed of COVID-19 vaccinations. But its policymakers are split over the prospects for longer-term improvement, dampening speculation about a reversal of stimulus.

• The Bank of France (BoF) increased its 2021 forecast for economic growth to 5.4% from 4.8% and said that activity at the end of last year held up better than estimated. The new projections may prove conservative, as they assume that coronavirus restrictions remain through the first half of 2021

• Shares in Europe ended little changed. Although central banks maintained their dovish policy stance to support an economic recovery, concerns about a resurgence in coronavirus infections in some countries limited upside.
o In local currency terms, the pan-European STOXX Europe 600 Index ended the week roughly flat. Major European indexes were mixed. Germany’s Xetra DAX Index gained 0.82%, while Italy’s FTSE MIB Index advanced 0.36%. However, France’s CAC 40 Index fell 0.80%.

• Core eurozone bond yields ended slightly higher. Germany’s 10-year bund yield climbed midweek, tracking US Treasuries in response to expectations for an uptick in inflation.
o Yields eased somewhat on Friday on concerns about the increasing number of coronavirus infections in Europe and consequent constraints on economic activity.
o Peripheral eurozone yields largely tracked core markets.

• The German Ifo is published on Friday and will also paint a similar story of a divided economy, but in light of the continued German lockdown it will be important to watch if business expectations maintain their uptrend from last months or show some signs of weakness. This week Merkel’s panel of economic advisers already warned that the recovery could be endangered by a continued lockdown

• Retail sales in the combined January – February period rose 33.8% year on year, according to the National Bureau of Statistics (NBS).
o The large increase was due to last year’s lockdowns to contain the coronavirus pandemic, which shuttered economic activity in large parts of China.
o Retail sales still increased 6.4% over the combined January – February period in 2019, according to the NBS. In other releases, industrial output rose 35.1% year on year in January – February over a year ago and 16.9% over the same two-month period in 2019.

• In money markets, the seven-day reverse repo rate (the cost of funds in China’s interbank market) hovered close to the central bank’s target of 2.2%, signaling that liquidity fears that rattled markets earlier this year have eased. In currency trading, the renminbi was little changed, closing at 6.509 versus the US dollar.

• China’s largest semiconductor producer, Semiconductor Manufacturing International Corp. (SMIC), said it will partner with the Shenzhen government to build a USD$ 2.4 billion plant to make 28 nanometer chips. News of SMIC’s plant comes as China is trying to reduce its reliance on US technology and bolster its domestic semiconductor industry amid rising tensions with Western countries.
o SMIC and several other companies were put on a US investment blacklist in December by the Trump administration, which alleged that the companies had ties to China’s military.
o China’s Semiconductor Industry Association recently announced a new working group with its US counterpart to discuss issues such as export curbs, technology standards, and supply chain security.

• Diplomats from China and the US sparred on Thursday in their first meeting since US President Joe Biden took office, dampening any hopes for a near-term rapprochement between the world’s two largest economies.

• Chinese stocks fell for the week, with the Shanghai Composite Index slipping 1.4% and the large-cap CSI 300 Index shedding 2.7%.
o Chinese stocks underperformed other Asian markets on Friday after negative headlines about the first day’s talks at the US – China meeting in Alaska, with each side criticizing the other.
o The yield on China’s sovereign 10-year bond rose following the release of strong economic data for January and February but fell on Friday to end at 3.26%, unchanged from the prior week.

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