Economic Outlook – 22 May 2022


• Retail sales increased 0.9% in April on top of an upwardly revised gain of 1.4% in March. The April increase in sales could not be entirely attributed to higher prices. Overall consumer prices increased 0.3% in April, but goods prices fell 0.3% in the month.

• With the retail sales report mostly covering goods spending, the decline in goods prices suggests real retail sales rose a stronger 1.2% during the month. This 1.2% gain in real sales bodes well for Q2 consumption and suggests consumers continue to spend in the face of higher inflation. Consumers could rely on their balance sheets to meet near-term spending. Whether they are relying on credit, drawing down excess savings or simply saving less to fund purchases, the April data show little signs of an impending slowdown

• Industrial production increased 1.1% in April, while manufacturing output (which comprises about 75% of total industrial output) increased 0.8%. There was a major lift from autos, which rose 3.9% and marked the second consecutive solid monthly increase, as well as a solid gain of 1.1% from durables industries more broadly. Mining output, which includes oil and gas production, climbed 1.6% in April after an even stronger 1.9% increase in March. U.S. manufacturing production is well-above its 2019 levels. Despite all the supply chain woes, labor shortages and uncertainty, American factories are producing more goods than they were before the pandemic

• However, goods demand remains well above its pre-pandemic trend, although there are some tentative signs that this pattern is reversing. In addition, production elsewhere in the world, most notably China, has been disrupted due to strict COVID policies and disruptions from the war in Ukraine. In short, supply chains are not fixed, demand is still somewhat unbalanced and the labor market is still tight, but the industry appears to be steadily returning to some semblance of normal

• Housing starts inched down 0.2% in April to a 1.724-million unit annualized pace. The percentage drop would have been larger if not for a substantial downward revision to March’s print. Single-family starts came in weaker than expected, falling 7.3% in April. Existing home sales also declined in April, hitting the lowest level since June 2020. Echoing soft housing starts and sales data, the National Association of Home Builders/Wells Fargo Housing Market Index fell by eight points to 69, its lowest level since April 2020. Still, the rapid pace at which homes continue to sell is evidence that demand is unlikely to completely collapse even as borrowing costs climb higher. Furthermore, while home price growth looks set to slow, remarkably low inventory levels stand to keep home price appreciation firmly in positive territory

• Credit spreads across both global investment-grade and high-yield markets have widened as investor appetite for risk has declined amid continued volatility in the equity markets. Bond sales slowed in May, with several new issue deals pulled due to unfavorable market conditions. The rout in equity markets continued after several attempted bounces failed, with the tech-heavy Nasdaq Composite Index leading domestic indices lower on the year. The S&P 500 Index is nearing a bear market from January levels and is down 19% year to date while the Nasdaq appears firmly entrenched in a bear market, having fallen around 27% year to date

• Comments from Federal Reserve officials during the week did little to calm inflation and interest rate fears. On Wednesday, Fed Chair Jerome Powell told The Wall Street Journal that taming inflation was an “unconditional need” and that policymakers wouldn’t hesitate to raise rates as much as necessary, even if it meant “some pain [was] involved.” On Thursday, Kansas City Fed President Esther George acknowledged to CNBC the “rough week” in equity markets but seemed to welcome it as “one of the avenues through which tighter financial conditions will emerge.”

• Wall Street continued its weekly losing streak as fears grew that inflation was causing consumers to pull back on discretionary spending, setting the stage for a coming recession. At its low point on Friday, the S&P 500 Index was down roughly 20.9% from its January intraday high, exceeding the 20% threshold for a bear market and placing it back at levels last seen in February 2021. The index’s biggest declines came on Wednesday, when it suffered its biggest daily loss since June 2020. Market activity was surprisingly subdued, however, with trading volumes more than 10% below recent 20-day averages and below every day of the previous week

• In terms of data release, new home sales is out on Tuesday. The housing market is facing some tough challenges. Builders continue to face scarce materials and high input prices, which continue to put upward pressure on prices. At the same time, rising mortgage rates are eroding affordability with the average 30-year commitment rate for a fixed-rate mortgage at almost 5% in April, according to Freddie Mac, which is about two percentage points higher than the 2021 average. These dynamics led existing home sales to decline 2.4% in April, the third straight monthly decline. New home sales also declined last month and slid to a 748K-unit pace from 763K previously

• Durable goods orders are out on Wednesday. Fairly steady growth in durable goods orders has signaled demand for equipment remains strong, and when data prints next week, orders are expected to advance another 0.6% in April. The transportation component may weigh on growth a touch amid lower aircraft orders data from Boeing in April


• Retail sales volumes rose by 1.4% in April 2022 MoM, exceeding expectations of -0.2% and reversing a negative trend seen in the previous two months. Growth in food stores sales drove retail sales in April, but this was mostly driven by higher spending on alcohol and tobacco. Supermarket food sales were broadly unchanged. The proportion of online sales saw a jump to 27% in April from 25.9% in March – although despite this increase, the proportion of online sales has broadly fallen since its peak in February 2021 (37.6%) but, of course, is substantially above its pre-pandemic level of roughly 20%. It is notable that sales volumes are still in negative territory for the three months to April, falling by 0.3% compared to the previous three months. This does not suggest consumers are showing positive sentiment on the UK economy and readings from the GfK Consumer Confidence Index, a monthly barometer tracking consumers’ views of their finances and the economy, shows worrying levels of pessimism. The measure for May 2022 has hit a new low of -40, which is a lower reading than any observed during the financial crisis

• UK inflation (CPI) for April came out this morning at 2.5% MoM, 9.0% YoY, certainly the highest since 1997 and while the data series is different, probably the highest since 1982; CPIH was 2.1% MoM, 7.8% YoY. Before the problem is all attributed to energy costs, core inflation (excluding energy and food) was 0.7% MoM, 6.2% YoY. Producer Price Inflation has come out at levels that indicate there is much more inflation in the system to come out in the coming months. PPI Input, a good portion of which is energy costs, was 1.1% MoM and 18.6% YoY, while output PPI was 2.3% MoM and 14% YoY. While these numbers are generally a shade under consensus, they are still alarming indeed. Clearly, inflation has become the most important issue in economics at the moment. The largest upward contributions to the change in the CPIH 12-month inflation rate between March and April came from housing and household services (1.27%), much of which is directly attributable to the raising of the residential energy price cap on 1 April. Household services and transport (e.g. petrol) together were responsible for 4.23% of the rise in CPIH, more than half the total. Their combined weight comprises 42.5% of the CPIH basket. Also rising was the cost of restaurants and hotels (0.11%), and recreation and culture (0.10%), which are both industries where trying to recruit new staff members has often been necessary and difficult and thus where wage rises have been particularly prevalent

• The headline rate of unemployment continues to drop, now sitting at just 3.7% over the period January to March 2022, according to the Labour Force Survey measure (previous: 3.8%; consensus: 3.8%). Vacancies have hit a new record of 1.295m but the rate of growth continues to slow. Tightness in the labour market has in large part been driven by an increase in inactivity levels during the pandemic yet there are signs that this unwelcome trend may now be in reverse. While the number of inactive people remains 460k higher than pre-pandemic levels, economic inactivity has fallen by 27k comparing Dec 2021 – Feb 2022 to Jan 2022 to Mar 2022. Growth in average nominal regular pay (excluding bonuses) inched up to 4.2% in January to March 2022, increasing marginally from 4.1% in the previous month. Growth in average total earnings (inc bonuses) came in unexpectedly high at 7% (previous: 5.6%), in part due to high bonuses in the finance and business services sectors. In real terms, total pay is +1.4% and regular pay is -1.2%. The headline figures conceal large differences in pay rewards: for example, average total pay growth in the private sector was 8.2% in January to March 2022 but just 1.6% for the public sector over the same period.


• The eurozone economy was more resilient than previously thought in the first quarter. Gross domestic product (GDP) growth was revised higher to 0.3% sequentially from the previous estimate of 0.2%. Even so, the European Commission (EC) cut its forecast for 2022 GDP growth to 2.7% from 4.0% and raised its estimate for inflation to 6.1% from 3.5% to reflect higher energy prices

• German producer prices rose by a record amount in April, surging 33.5% year over year. Energy prices increased 87.3% over this period due mainly to soaring prices for natural gas

• The EC announced a EUR 300 billion plan called REPowerEU that aims to end the European Union’s (EU’s) dependence on Russian energy imports before 2030. It is based on four pillars: saving energy, substituting Russian energy with other fossil fuels, boosting green energy, and financing new pipelines and liquefied natural gas terminals. Unused loans from the pandemic recovery program will provide most of the cash for the plan

• Shares in Europe pulled back amid fears of slowing economic growth and faster interest rate increases. In local currency terms, the pan-European STOXX Europe 600 Index slipped 0.55%. Germany’s Xetra DAX Index dropped 0.33%, France’s CAC 40 Index lost 1.22%; Italy’s FTSE MIB Index, on the other hand, advanced modestly


• Economic data released last week pointed to slowing growth. Retail sales and industrial output data for April lagged estimates amid continued pandemic lockdowns reflecting China’s zero-COVID approach. Fixed asset investment rose 6.8% from January to April from a year ago but also missed the consensus forecast. Home prices in China fell in April for the eighth straight month, declining 0.3% from March, marking the fastest decline in five months

• The People’s Bank of China (PBOC) cut the five-year loan prime rate (LPR), a reference for home mortgages, by an unexpectedly large 15 basis points to 4.45%. That rate cut came after the central bank cut the lower limit of mortgage rates for first-time homebuyers the previous Sunday. The PBOC’s rate cuts followed data showing a plunge in home sales in April. (China’s five-year and one-year LPRs are based on interest rates that 18 banks offer to their best customers. Banks use the five-year LPR to price mortgages, while most other loans are based on the one-year rate.)

• The reduction in the five-year LPR signals that China’s government is trying to bolster homebuying demand. Given that the rate cut was done at a national rather than a regional level makes the PBOC’s move more significant, they added. Local-level rate cuts have so far failed to spur much demand after China’s government has stepped up efforts to regulate the housing market in recent years, which has affected how people view housing as an investment. China’s policymakers are trying to strike a balance between supporting first-time homebuyers and discouraging speculation and not offering relief to developers

• Chinese stocks rose as the central bank cut interest rates to support the country’s flagging property sector even as disappointing economic data weighed on sentiment. The broad, capitalization-weighted Shanghai Composite Index advanced 2.0% and the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, climbed 2.2%

Sources: T. Rowe Price, MFS Investment Management, TD Economics, Wells Fargo, M. Cassar Derjavets.