Economic Outlook – 24 January 2021


  • The Consumer Price Index increased 0.4% in December after climbing 0.2% the prior month. The energy index sprang 4.0% month-on-month thanks in large part to an 8.4% jump in the gasoline segment. The cost of food, meanwhile, progressed 0.4% on advances for both “food away from home” (+0.4%) and “food at home” (+0.4%). The core CPI, which excludes food and energy, edged up 0.1%.
  • Prices for ex-energy services ticked up 0.1%, helped by healthy gains for motor vehicle insurance (+1.4%) and hospital services (+0.3%), which more than compensated for a 2.3% drop in airline fares. Prices for core goods, for their part, rose 0.2%, thanks to gains for apparel (+1.4%), new vehicles (+0.4%), and tobacco products (+1.0%), among others. Year on year, headline inflation clocked in at 1.4%, up two ticks from November. Core inflation held steady at 1.6%.
  • The Markit flash composite PMI came in at 58.0 in January (vs. 55.3 the prior month), signalling the broadest improvement in private-sector activity since November. The degree of optimism towards future output remained very high, with survey respondents citing rollouts of vaccines as a confidence booster.
  • The manufacturing sub-index climbed from 57.1 to an all-time high of 59.1. Factory output expanded at its fastest pace in years, while new orders benefited from a resurgence in foreign demand.
  • 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.
  • Manufacturing payrolls expanded at the quickest pace in two years. The services sub-index, for its part, improved from 54.8 to 57.5 despite new orders accumulating at a slower pace because of restrictions put in place to limit the spread of the coronavirus.
  • Housing starts rose 5.9% to a 14-year high of 1,669K (seasonally adjusted and annualized), exceeding by far the median economist forecast of 1,560K. Adding to the good news, the prior month’s result was revised up from 1,547K to 1,578K. The increase in December was driven by the singles category, where starts jumped from 1,195K to 1,338K. Starts in the multi-unit category, meanwhile, eased from 383K to 331K.
  • The data above showed that building permits, too, registered a sizeable increase, with total applications rising 4.5% to a multi-year peak of 1,709K. Permits issued for single-family dwellings soared 7.8% to 1,226K, while those for multi-unit dwellings pulled back 3.0% to 483K.
  • While the resurgence of the virus may reduce momentum somewhat in the early goings of 2021, advance indicators continue to show strong demand.
  • The NAHB Housing Market Index remains elevated, building permits are at their highest since August 2006, mortgage applications are running far above levels seen in recent years, and inventories on the resale market are extremely depressed.
  • If anything, the extra stimulus announced by the Biden administration and the progressive re-opening of the economy later this year should help keep homebuilders busy in 2021 their highest since August 2006, mortgage applications are running far above levels seen in recent years, and inventories on the resale market are extremely depressed.
  • Aside from the resurgence in sales, the persistent tightness of the market can also be explained by an extreme shortage of listings. Indeed, the inventory of properties available for sale totaled just 1.07 million (not seasonally adjusted).
  • Initial jobless claims resumed their downward trend in the week to January 16, falling from 926K to 900K. This followed a brief resurgence the week before caused in large part by a deterioration of the health situation in the country.
  • Continued claims, meanwhile, eased from 5,181K to 5,054K, their lowest level since March (plus roughly 10 million people who received benefits in the week ended January 1 under the emergency programs introduced during the pandemic). Year-end confirmation that these programs were extended until mid-March was no doubt greeted as a lifesaver by the millions of people who remain unemployed because of the pandemic.
  • The major indexes moved higher for the week, hitting new intraday highs on Thursday before a pullback on Friday. Communication services shares led the gains in the S&P 500 Index, boosted by a sharp gain in Netflix shares following its report of surprisingly large subscriber gains in the fourth quarter. Facebook and Google’s parent company, Alphabet, were also strong, as were video-gaming stocks, while energy shares lagged as oil prices fell back on a surprising rise in US inventories.
  • As fast-growing technology-related stocks led the gains, the market’s recent rotation into small-caps and value stocks reversed, at least temporarily. Trading volumes remained exceptionally high, reflecting, in part, heavy participation by individual investors.
  • In terms of data release, the Federal Reserve will issue its first monetary policy decision of the new year. It should be a relatively quiet affair with no changes to the policy rate or the pace/composition of asset purchases expected.
  • Recall earlier in the month, Fed Chair Powell attempted to push back on the market discussing a 2021 taper after a handful of Fed officials suggested it might be a possibility. He noted that “when it does become appropriate to discuss specific dates for QE taper, we will let the world know”, implying such a time is still a way off. We expect him to continue to shy away from giving date-based guidance on an eventual reduction in QE.
  • There will be no updated economic projections as part of the meeting, however it must be monitored how the Fed thinks of President Biden’s fiscal plan of in the context of the economic outlook.
  • The Bureau of Economic Analysis will publish its advance estimate of Q4 GDP growth on Thursday. After a record print in Q3, the pace of the recovery likely slowed considerably in the three months to December, as rising COVID-19 caseloads forced some states to re-impose/reinforce social distancing measures.
  • Positive contributions are still expected from investment on equipment and the residential sector while the impact of consumption spending, structure investment, and trade might be more limited.


  • The eurozone Flash Composite PMI was 47.5 in January, slightly below expectations and below the 49.1 from the previous month.
  • Meanwhile, the Manufacturing PMI was 54.7 compared with 55.2 the month before (and above expectations), and the Services PMI was 45 compared with 46.4 (above expectations).
  • The deterioration in the composite index was the steepest decline since November, and the decline in activity was broad-based across sectors and core eurozone countries.
  • Manufacturing remains relatively resilient as the services sector bears the heaviest burden of the restrictions. Expectations of future business in both the manufacturing and services sectors declined as well.
  • The German Flash Composite PMI was 50.8 in January compared with 52 in December, the Manufacturing PMI was 57 compared with 58.3, and the Services PMI was 46.8 compared with 47; all indices except manufacturing were above expectations. Pandemic countermeasures pushed the services sector down, with the manufacturing sector remaining the bright spot. Employment growth was positive overall, driven by an uptick in the services sector even as manufacturing employment still remains in contraction territory. Survey responses also pointed to growing supply-chain disruptions in the manufacturing sector.
  • The French Flash Composite PMI was 49 in January compared with 49.5 in December, the Manufacturing PMI was 51.5 compared with 51.1, and the Services PMI was 46.5 compared with 49.1 a month earlier. All indices except manufacturing were worse than expectations. The decline was broad-based and largely due to the stricter restrictions, which contributed to the composite series having its fifth month in contraction. Although both output and new orders declined, the data also pointed to the first increase in employment in a year.
  • As expected, the ECB kept its policy stance unchanged. With regards to the policy instruments, the Governing Council decided to reconfirm its very accommodating monetary policy stance:
    • (1) Rates remained on hold, with the marginal lending facility and the deposit facility remaining unchanged at 0.00%, 0.25% and -0.50%, respectively. Furthermore, it reiterated its forward guidance that it expects key rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2.0% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
    • (2) The statement from the Governing Council noted that purchases under the pandemic emergency purchase programme (PEPP) will continue with a total envelope of EUR€ 1.85 trillion until at least the end of March 2022, and in a flexible manner over time, across asset classes and among jurisdictions. Principal repayments from PEPP will be reinvested until at least the end of 2022.
  • In addition, the ECB also added the following clarification: If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation. This last section is consistent with previous statements by Ms. Lagarde and Ms. Schnabel.
    • (3) Net purchases under the asset purchase programme (APP) will continue, at EUR€ 20 billion per month, together with the additional EUR€ 120 billion temporary envelope until the end of the year, and further details relating to the programme remained unchanged from the previous meeting statement.
      4) ECB will continue to provide ample liquidity through its refinancing operations and noted that the targeted longer-term refinancing operations remain an “attractive source of funding for banks.
  • Italian Prime Minister Conte won a confidence vote in the lower house of Parliament and scraped by in a Senate vote after the exit of a coalition partner last week precipitated a political crisis. He also won backing for a EUR€ 32 billion economic support package to deal with the coronavirus pandemic and its fallout. However, he is struggling to attract sufficient support among senators to strengthen his minority government and is considering whether to call fresh elections.
  • The STOXX Europe 600 Index finished the week roughly flat, as US economic stimulus doubts and renewed coronavirus concerns held back gains.
  • Germany’s Xetra DAX Index rose 0.63%, France’s CAC 40 fell 0.93%, and Italy’s FTSE MIB slid 1.31%.


  • Retail sales for the important month of December were up 0.3% month-on-month against the fully locked down November (consensus: +1.2%), although sales were up a more encouraging 2.7% when compared with February’s pre-lockdown level and 2.9% year-on-year.
  • The importance of online sales has been the story of 2020 and these figures bring home the changes in shopping habits. Annual declines were as follows for the various parts of the market:
    • Clothing stores (negative 25.1% for the year, although it did see good m-o-m growth of 21.5%), fuel stores (negative 22.2%), “other stores” (negative 11.6%) and department stores (negative 5.2%) when compared with 2019.
    • Total online retailing values increased by 46.1% in 2020 when compared with 2019, marking the highest annual growth reported since 2008.
    • These sales were not confined to specialist online retailers, with a range of online offerings doing well: food stores (up 79.3% on an annual basis), other stores (73.9%), household goods stores (73.4%) and department stores (65.9%).
    • Overall, it seems there is little difference for a good portion of Retail sales between fully locking the country down and December’s strict tiering system, which gives some insight into the recovery expected for this spring.
  • Bank of England Governor Bailey said that he expected a pronounced economic recovery in the UK later in the year due to the rollout of vaccines. Earlier, the BoEs Chief Economist Andy Haldane said he expected the economy to begin to recover quickly in the second quarter, potentially enabling the government to end its support for furloughed workers before the recovery is complete.
  • Britain’s scheme for compensating consumers hit by financial company failures has set itself a billion-pound (USD$ 1.37 billion) budget for the coming year to cope with a likely surge in collapses due to COVID-19.
  • The Financial Services Compensation Scheme’s (FSCS) budget of GB£ 1.04 billion for the 2021/22 financial year that starts in April is its highest in six years.
  • The FSCS also said it would add GBP£ 78 million to the current year’s budget due to more firms failing, pushing the total for 2020/21 to GBP£ 700 million. The body is responsible for compensation arrangements for the Financial Conduct Authority, which warned this month that around 4,000 financial firms in Britain were at heightened risk of collapsing due to fallout from the pandemic. The FSCS, which is financed by a levy on financial firms, also expects more claims for complex pension advice, and further failures in operators of self-invested person pensions (SIPPS).
  • The UK’s FTSE 100 Index fell 0.60%, partly held back by the British Pound’s strength relative to the dollar and fears that the strict coronavirus lockdown would not end anytime soon.


  • Real GDP expanded 2.6% quarter-on-quarter in Q4 (non-annualized), a tick below consensus expectations. More than compensating for this miss, the previous quarter’s result was revised up from +2.7% to +3.0%. Year-on-year, GDP grew 6.5% in Q4, accelerating from 4.9% the previous quarter.
  • For the year as a whole, the economy expanded 2.3%, its weakest showing in four decades but still pretty good under the circumstances. China should be the only major economy to report growth in 2020.
  • Some economic figures for December provided evidence of a sharp recovery on the supply side.
    • Industrial production progressed 7.3% on a 12-month basis, overshooting both the 6.9% print expected by consensus and the rate recorded in December prior to the coronavirus outbreak (+6.9%).
    • The rebound in consumer spending, on the other hand, remained incomplete, with retail undershooting expectations in December (+4.6% year-on-year instead of +5.5% as per consensus).
  • December economic data, including better-than-expected industrial production, showed that momentum in early 2021 remained strong. For some analysts, that has raised the risk of premature policy tightening. However, China’s National Economic Development and Reform Commission said that there will be no U-turn in policy support, even if some more aggressive measures are tapered.
  • Retail sales, a broad measure of consumer demand, rose 4.6% in December, lagging the overall recovery. But given Beijing’s recent focus on bolstering the domestic market as a growth driver, many analysts see a bright outlook for consumer spending.
  • Wealthy households in China appear particularly eager to spend, with overseas travel on hold due to the virus. Consumption of luxury goods is expected to surge 48% in 2020 to RMB 346 billion, according to a recent report by the consultancy Bain. A separate report by Shanghai-based wealth tracking group Hurun found that China has 1.58 million high net worth families with more than RMB 10 million in assets.
  • Chinese stocks rallied amid strong economic data and on hopes of warmer US-China relations under President Biden. The Shanghai Composite Index advanced 1.1% to 3,606.8 and the CSI 300 large-cap index rose 2.0%, closing at 5,569.8.
  • In an early test case for US-China relations, China’s three biggest telecom companies appealed the New York Stock Exchange’s recent decision to delist their US-listed shares, a move that is expected to receive a response within 25 days.
  • On the coronavirus front, China now has 22 million people under lockdown as officials try to contain a recent outbreak in Hebei Province. Case numbers remain low compared with other countries, though a high number of asymptomatic infections and the rural location of some clusters have concerned authorities.

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