Economic Outlook – 23 May 2021


• Housing starts moved from a 15-year high of 1,733K in March to 1,569K in April (seasonally adjusted and annualized). This was significantly below the 1,704K print expected by analysts. The monthly decline was driven by the single-family category, where starts dropped 13.4% to 1,087K. Starts in the multi-family segment, meanwhile, crawled up 0.8% to 482K

• Building permits proved more resilient in April, as applications climbed 0.3% to 1,760K. Permits issued for single-family units retraced 3.8% to 1,149K, while applications for multi-unit dwellings progressed 8.9% to 611K

• After spending the month of March trying to catch up with construction backlogs accumulated during February’s “deep freeze”, homebuilders took a pause in April. Although housing starts remained relatively high on a historical basis, the number of permits issued in recent months stoked expectations for a stronger result. Other advanced indicators, too, were flashing green before the release. Indeed, the NAHB Housing Market Index continued to hover near its recent peak, while the number of homes purchased for which construction had yet to begin stood at an all-time high. Borrowing costs, although higher than at the start of February, remained very accommodative for buyers. What, then, might explain the slowdown in April? Perhaps it was only a temporary blip, as seen so often in monthly data. Or perhaps April’s weakness reflected more fundamental problems in the construction industry. Above all, labour shortages certainly appear to be a concern in the sector

• The IHS Markit flash composite index of purchasing managers rose to 68 in May, on the back of strong activity in the services sector. Indeed, the Services PMI rose 5.4 points in the month to 70.1, its highest point since data collection started in 2009. Supported by expansions in new orders and output, the manufacturing PMI edged up 1 point to 61.5. Again, the May survey added further concerns in relation to inflation, while had it not been for supply shortages and difficulties filling job vacancies activity would have been stronger according to Markit

• Initial jobless claims dropped from an upwardly revised 478K to a post-pandemic low of 444K in the week to May 15. Continued claims, meanwhile, rose unexpectedly from 3,640K to a seven-month high of 3,751K. Topping these up were the roughly 11.7 million people who received benefits in the week ended April 30 under two emergency programs: Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation

• The Federal Reserve published the minutes from its two-day policy meeting of April 27th and 28th. You might recall that this had been a very quiet meeting with just a few tweaks to the statement’s text and Powell remaining extremely dovish/patient in the subsequent press conference. The tone of the minutes sounds surprisingly hawkish, at least relative to prior communications. While they noted that the pandemic continued to pose risks to the economic outlook, these risks were no longer described as “considerable”. Participants highlighted progress on vaccinations and strong policy support contributing to strengthen economic activity and employment, including in the most COVID-sensitive sectors. While participants generally still expected inflation to ease after some transitory factors faded, at least a couple acknowledged the notion that price pressures might not be as transitory as they had thought. Also noteworthy, “a number” of participants pitched the idea that it might be appropriate “at upcoming meetings” to discuss a plan for adjusting the pace of asset purchases

• Despite an improved outlook and nascent concerns regarding inflation and financial stability, the Fed has made very clear that it is going to wait to see demonstrable progress towards its policy goals. Whether it turns out to be transitory or not, the Fed will be looking through inflation for at least the next several months. The key is really the labour market. In order to get a taper announcement this summer, there must be a resumption of strong payroll reports, as employment still sits 8+ million jobs shy of its pre-COVID levels

• The United States and the European Union declared a trade truce of sorts this week, beginning talks aimed at avoiding a scheduled 1 June escalation in tariff rates linked to the 2018 imposition of levies on steel and aluminum. Separately, the administration of US President Joe Biden announced that while it remains opposed to the Nord Stream 2 natural gas pipeline between Russia and Germany, if has waived sanctions against the company leading the project and on its chief executive. German officials welcomed the move, calling it a constructive step. European officials also welcomed a move by the Biden administration to lower to 15% from 21% its proposed minimum global corporate tax

• Stocks posted mixed results in a volatile week of trading, with the large-cap S&P 500 Index ending modestly lower and the tech-heavy Nasdaq Composite Index gaining a little ground. These mixed results likely reflect strength in the U.S. economy, as well as concerns about inflation and the timing of when the Federal Reserve might begin to rein in its accommodative policies. Within the S&P 500, the health care posted the largest gain. Energy and industrials lost ground

• In terms of data release, the latest report on personal income out this week could show a 15.8% decrease in April after a steep gain in March caused by the sending of stimulus checks worth $1,400 by the federal government. Personal spending, meanwhile, could have advanced 0.4%, with higher outlays on services likely offsetting a small pullback in the goods segment


• UK retail sales for April were reported this morning up 9.2% MoM and 42.4% YoY. The numbers for retail sales excluding fuel were up 9.0% MoM and 37.7% YoY. These are a strong set of numbers that reflect just the first phase of reopening of all non-essential retail from April 12 in England and Wales and from April 26 in Scotland. The annual figures clearly reflect the base effect, measured against the depths of the downturn 12 months ago. All sectors of retail sales (except food stores) reported growth and the overall volume of sales is now well above the pre-pandemic trend, as was the case in the initial recovery from the first and most severe lockdown last spring/summer. The leap of 69.4% in clothing sales was remarkable; clearly people want to look good now that they are allowed to socialise once more, although such a surge in sales growth only takes the index back to its long-term pre-pandemic level. Look for the recovery to shift to a surge in spending on services next month

• The degree of online sales is also interesting. degree of online sales as it is a good indicator of how consumer habits have changed as a result of the pandemic. In 2019, the UK was among the leaders in Europe in virtual retailing, with 20% of retail sales being online and online sales accounted for 36% of all retail sales in January this year. The question now is how quickly and to what extent will sales on the high street recover? Evidence from these figures is that the shift back to the high street has been swift, with overall online retail sales now at 30% (down from 34.7% in March), in line with a level of sustainable online market share in the future. It is notable that retailers with no physical store presence have reported the largest growth, 56.0%, when compared with April 2019

• UK inflation (CPI) for April was reported at 0.6% MoM and 1.5% YoY (consensus: 0.6% MoM and 1.4% YoY). Given that annual CPI was 0.4% as recently as February, the UK could reach its inflation target as soon as June. The Retail Price Index was reported at 1.4% MoM and 2.9% YoY (consensus: 0.8% MoM and 2.4% YoY). Price movements for household utilities, clothing and transport (e.g. fuel) were the main causes of an increase in the monthly rate, while the biggest negative contribution to the inflation rate was recreation and culture (-0.18%). However, the prices of domestic holidays (the only sort likely to be available this year) have clearly skyrocketed and this will make a significant contribution to inflation in the coming months. Finally, it should be noted that input prices are up 9.9% YoY (consensus: 9.0%), as the price of energy and commodities such as copper made itself felt. It should be noted that the value of commodities represents between 4% and 7% of final consumption

• After the surprise surge in inflation in the US last week, there is even more focus on inflation across the developed world. UK inflation has remained below its 2% target since mid-2019 and the BoE has indicated that it would require inflation to be above target for a period, as well as a substantial unwinding of GBP 895bn in quantitative easing (QE), before it would consider raising interest rates substantially. With the economy growing at a near record rate, there has to be growing sympathy with the BoE’s outgoing chief economist, who (alone) voted to begin to wind down QE stimulus. The lower-than-expected peak in unemployment, with the latest figure reported yesterday at 4.8%, also points to the economy recovering more rapidly than expected even two months ago.


• The eurozone Flash Composite PMI was 56.9 in May compared with 53.8 in the previous month. Meanwhile, the Manufacturing PMI was 62.8 compared with 62.9 the month before and the Services PMI was 55.1 compared with 50.5 previously. All indices were above expectations. Eurozone private sector growth ticked up significantly in May as pandemic restrictions receded, reaching the highest level of the index since February 2018. The monthly increase was predominantly a result of a recovery in services as manufacturing remained largely flat. The headline services sector was supported by a significant increase in business activity, and new businesses also witnessed a very large monthly increase. In the manufacturing sector, however, the main index hid a deceleration in output and future output, as supply chain pressures continued to wield upward pressure on the headline measure

• The German Flash Composite PMI was 56.2 in May compared with 55.8 the previous month, the Manufacturing PMI was 64 compared with 66.2, and the Services PMI was 52.8 compared with 49.9. All indices except services were below expectations. A significant uptick in the services sector drove the composite index into higher growth this month even as the manufacturing sector lost momentum. The ongoing supply chain bottlenecks resulted in measures of cost-push inflation increasing further. The survey also saw signs of these supply chain pressures weighing on new orders and production levels. Meanwhile, composite employment growth declined for the first time since December last year

• The French Flash Composite PMI rose significantly to 57 in May compared with 51.6 the previous month, the Manufacturing PMI was 59.2 compared with 58.9, and the Services PMI was 56.6 compared with 50.3 a month earlier. All indices, and especially the service sector one, were above expectations. This month saw the strongest output growth since July last year, and rose for the second month in a row. Staffing bottlenecks appear to have resulted in the significant increase to a three-year high in both backlogs as new orders rose substantially. Also, employment growth declined for the second month in a row

• European companies have traditionally favored dividends over buybacks, but after preemptively issuing close to $1 trillion in corporate debt in the early days of the pandemic, many firms are now redeploying that cash by buying back shares. French bank Société Générale estimates that European buybacks will rise 25% above their five-year average this year to around €150 billion. Firms are reluctant to issue dividends that may later have to be cut as the medium-term outlook remains uncertain despite the receding pandemic

• Shares in Europe rose on signs that the economy is rebounding as restrictions instituted to control the coronavirus’s spread begin to ease. However, worries about inflation curbed gains. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.43% higher. Major indexes were mixed: Italy’s FTSE MIB Index advanced, while Germany’s Xetra DAX Index and France’s CAC 40 Index were little changed


• Economic data were mixed, with strong external demand offsetting softer domestic demand as residential construction and infrastructure investment slowed. Retail sales growth slowed to 4.3% in April on the two-year average—which analysts use to minimize distortions from the 2020 pandemic—down from March retail sales growth of 6.4%. A resurgence of coronavirus cases in several Chinese provinces has raised worries that COVID-19 still has potential to stifle a recovery in household consumption

• China named a new president to state-owned Huarong Asset Management, whose onshore bonds sold off after the company delayed reporting its annual results at the end of March, raising questions about Beijing’s willingness to backstop state-linked companies. News of the appointment, however, was overshadowed by a report that the Chinese government is planning an overhaul of Huarong that will require foreign and Chinese bondholders to accept significant losses on their investments, The New York Times reported. Huarong’s onshore bonds sold off as investors worried that Beijing’s stance toward the company may have hardened and that the government might not be willing to inject enough money to pay off all the company’s bonds

• Chinese stocks recorded a mixed week. The benchmark Shanghai Composite Index shed 0.1%, while the large-cap CSI 300 Index, whose growth stocks have fallen in recent weeks, added 0.5%. In the fixed income market, yields on Chinese bonds fell following disappointing April economic data. In currency trading, the renminbi ended the week roughly unchanged versus the U.S. dollar. The renminbi has strengthened since early April against the dollar, driven by China’s widening current account surplus, foreign direct investment, and foreign portfolio investment in Chinese bonds and stocks

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