Economic Outlook – 25 April 2021


• Initial jobless claims dropped from an upwardly revised 586K to a post-pandemic low of 547K in the week to April 17. Continued claims edged down, too, from 3,708K to 3,674K. Topping these up were the roughly 12.9 million people who received benefits in the week ended April 2 under two emergency programs: Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation

• New-home sales bounced back sharply in March after having been hit by the “deep freeze” in February. The number of transactions spiked 20.7% MoM to a 15-year high of 1,021K (seasonally adjusted and annualized). This was significantly stronger than the 885K expected by consensus and way above this indicator’s pre-pandemic peak (774K). The increase in sales, combined with stagnant listings, led to a decrease in the inventory-to-sales ratio from 4.4 to 3.6, a level indicative of very tight supply. Also worth noting, the number of properties sold but not yet built totaled 342K in April, the highest on record. Such a hefty backlog should continue to support residential construction going forward

• Existing-home sales cooled for the second time in a row, falling 3.7% to a seven-month low of 6,010K (seasonally adjusted and annualized). Despite the decline, sales remained 5.4% above their pre-crisis level (5,700K in 2020M02). Contract closings for single-family dwellings slid 4.3% to 5,300K, dwarfing a 1.4% increase in the condo segment to 710K. The inventory-to-sales ratio ticked up to 2.1 but continued to indicate extremely scarce supply. (According to the National Association of Realtors, a ratio of <5 indicates a tight market.) Aside from resilient sales, the persistent tightness of the market can be explained also by an extreme shortage of listings. Indeed, the inventory of properties available for sale totaled just 1.07 million (not seasonally adjusted) in the month. Not only was this down 28.2% from 12 months earlier, it also represented the lowest March level ever recorded. Lack of supply has been largely responsible for supporting prices since the beginning of the COVID-19 crisis. In March, the median price paid for a previously owned home progressed 17.2% y/y to an all-time high of $329,100. The 12-month gain in price was also the steepest ever recorded. The extra stimulus announced by the Biden administration and the progressive re-opening of the economy should sustain demand on the resale market. That said, sky-high prices, extremely low inventories and slightly higher borrowing costs could act as a damper

• The Markit flash composite PMI came in at 62.2 in April, up from 59.7 the month before and the highest reading on record. Operating conditions continued to improve in the manufacturing sector, as evidenced by a rise from 59.1 to an all-time high of 60.6 in the corresponding PMI gauge. Output growth accelerated, and new orders placed at factories piled up at the fastest pace since April 2010.Capacity issues at suppliers and ongoing port delays exacerbated supply chain disruptions in the month. As a result, supplier delivery delays lengthened the most on record. The rate of input price inflation, meanwhile, was the most acute since July 2008, thanks to “severe supplier shortages and marked rises in transportation fees.” Firms operating in the manufacturing sector were able to partially pass higher costs along to clients, as prices charged surged at the second steepest pace since data collection began. For its part, the services sector sub-index jumped from 60.4 in March to a record 63.1 in April. According to Markit’s report, “growth was reportedly driven by stronger client demand and the reopening of many businesses amid the easing of restrictions.” New business increased at an unprecedented pace, a development which caused work backlogs to expand the most since September 2020. In an attempt to deal with lengthening order books, firms operating in the services sector expanded payrolls the most since December. The degree of optimism towards future output remained very high across the private sector, with the vaccine rollout acting as a virtual shot in the arm for confidence

• The consumer price index (CPI) rose 0.6% in March, which pushed the year-over-year rate to 2.6%, helped by a low base comparison after last year’s shutdowns. Easy base comparisons will continue over the next two months, but inflation is picking up now. Over the past three months, the CPI has increased at an annualized rate of 5.0%. Core prices are also firming. Excluding food and energy, prices rose 0.3%, as a pickup in recreation and travel-related services prices signaled the services economy is beginning to reawaken

• Retail sales were certainly boosted by the latest round of direct checks, which were more than double the amount households received from the previous round of checks in January. This presents the natural question of how sustainable this consumer recovery is. Nearly 80% of the latest round of checks were sent to households by the end of March, but payments did not start going out till the second half of the month. This suggests that if sales are not due for payback in April, some payback will occur in May. Although some households are set to get another influx of cash from the temporary expansion of the Child Tax Credit sometime in the second half of the year, overall stimulus is fading. That said, consumers are still sitting on a pile of accumulated savings. Excess savings combined with the expected reopening of the service economy this summer, supports the forecast for a consumer spending boom this year that will rival any in living memory for most American

• The 67 S&P 500 companies that have beaten earnings estimates this reporting season have averaged a one-day drop of 0.62% following the release, according to data from Bespoke Investment Group. That is far below the long-term average gain of 1.86% following earnings beats over the past 15 years. In addition, cyclical stocks, such as airlines and cruise lines, rebounded as economic recovery plays benefited after declining to start the week. Small-caps also surged more than 2% mid-week and have gained over 13% this year

• Stocks finished little changed in an up-and-down week amid some of the lightest daily trading volumes of 2021. Small-caps performed slightly better than large-caps, and the technology-heavy Nasdaq Composite Index modestly lagged the broad market. No particular theme—such as companies that would most benefit from economic reopenings or stocks popular with individual investors—dominated the week’s activity, although semiconductor stocks were notably weak.

• After a record of 109 new SPAC deals in March, issuance has now come to almost a standstill with just 10 SPACs thus far in April, according to data from SPAC Research. Special purpose acquisition companies celebrated a milestone in the first three months of 2021 by breaking its 2020 issuance record. SPACs raise capital in an initial public offering and use the cash to merge with a private company and take it public. The drastic slowdown stemmed from accounting guidance issued by the Securities and Exchange Commission that would classify SPAC warrants as liabilities instead of equity instruments

• President Joe Biden will seek to raise taxes on millionaire investors to fund education and other spending priorities. As part of the plan, Biden will pursue an increase on the tax on capital gains to 39.6% from 20% for those Americans earning more than $1 million. The president is expected to release the proposal formally next week as a way to fund spending in the $1 trillion American Families Plan, which could include measures aimed at helping US workers learn new skills, expand subsidies for childcare and make community college tuition free for all

• In terms of data release, the Federal Reserve’s monetary policy decision will attract a lot of attention. The meetings should be a relatively quiet affair, after the March decision provided us with a fresh Summary of Economic Projections and dot plot. While solid progress has been made in the labour market over recent months, it’s unlikely to change the ultra-dovish and patient Fed stance, at least for now. Moreover, Powell and company have made clear they’ll be looking past above-2% readings of inflation given that, in the Fed’s view, they’re largely driven by base-year effects and transitory factors. Also, its flexible average inflation targeting framework entails that it needs to make up for past inflation undershoots going forward

• The Bureau of Economic Analysis will publish its advance estimate of Q1 GDP growth on Thursday. The pace of the recovery likely accelerated in the quarter, as reduced COVID-19 caseloads and the progress of the vaccination campaign allowed several states to loosen social distancing measures. Positive contributions are expected from consumption spending, investment on equipment and the residential sector. Structure investment and trade, on the other hand, might have weighed on growth


• UK Retail Sales for March have come out at 5.4% MoM and 7.2%YoYY/Y (consensus: 1.5% and 3.5%); retail sales ex-fuels for March were 4.9% MoM and 7.9% YoY (consensus; 1.9% and 4.5%). While these are strong numbers, they are of course being measured against the depths of the lockdown we were enduring a year ago and good growth should be expected. Moreover, while the country was still largely in lockdown in March 2021, businesses and consumers had figured out how to cope far better during this lockdown than they were able to in March 2020. In more detail, non-food stores provided the largest positive contribution to the monthly growth of 17.5% and 13.4% in clothing stores and other non-food stores, respectively. Petrol stations also reported strong monthly growth of 11.1% as travel restrictions were eased towards the end of the reporting period, although car travel remains 20% below normal. Overall retail sales volumes have reached the level they were enjoying in the summer of 2019 and expectations of rapid growth for the rest of the year look good. A slightly more subdued outlook came from the GfK consumer confidence survey, which rose to its highest level (-15) since the pandemic struck last year, although it fell someway short of consensus expectations (-12)

• UK Inflation for March has come in at 0.3% MoM and 0.7% YoY (consensus: 0.3% and 0.8%). PPI output inflation for March was 0.5% MoM, 1.9% YoY (consensus: 0.3% MoM 1.7% YoY), while Retail Price Inflation was 0.3% MoM, 1.5% YoY (consensus: 0.3% MoM, 1.6% YoY). The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 1.0% YoY, up from 0.7% in February. The largest upward contribution to the CPIH inflation rate came from transport, essentially petrol and oil (0.44%), followed closely by recreation (0.30%). The negative effects of lower food prices also faded between February and March (-0.11%). None of these numbers are going to be seen as alarming and the Bank of England will be able to maintain its present policy stance. What does come into doubt is the BoE March forecast that inflation would move to its target of 2% towards the end of this year

• Bank of England Deputy Governor Ben Broadbent has forecast consecutive quarters of rapid growth but also warned that inflation will prove less predictable, according to an interview with the Telegraph newspaper. It may be too soon to call a “roaring twenties” scenario, but it certainly means “very rapid growth at least over the next couple of quarters” particularly as the economy will be boosted by people simply saving less, Broadbent said in remarks published Saturday evening in the Telegraph newspaper. Broadbent said in the interview that there has been “less of a disinflationary effect” as households have also switched spending into other areas. “The price rises for those hitting capacity limits are going to be bigger than the falls in prices for those seeing falls in demand”, he told the newspaper


• The eurozone Flash Composite PMI was 53.7 in April compared with 53.2 in the previous month. Meanwhile, the Manufacturing PMI was 63.3 compared with 62.5 the month before and the Services PMI was 50.3 compared with 49.6 previously. All indices were above expectations. Private sector activity grew faster in the eurozone, the fastest since last July, despite a slight slowing of growth in Germany. Whereas the boost from the manufacturing sector was largely due to increased supply-chain pressures, the services sector saw improvement across the board. And in both sectors, employment growth continued to increase. Overall, the service sector still lags manufacturing, due to pandemic restrictions. Expectations about the upcoming 12 months also increased, especially for the service sector. Input prices for the manufacturing sector increased further into historically extreme territory

• The German Flash Composite PMI was 56 in April compared with 57.3 the previous month, the Manufacturing PMI was 66.4 compared with 66.6, and the Services PMI was 50.1 compared with 51.5. All indices except services were above expectations. The slowdown in growth, especially in the service sector, comes amid a third wave of the pandemic and a vaccination rollout that has only recently gathered speed. Nonetheless, employment growth continued to gather speed in all sectors

• In Germany, CDU/CSU decided that Armin Laschet will be the conservative Chancellor candidate in the upcoming German election in September

• The French Flash Composite PMI was 51.7 in April compared with 50 the previous month, the Manufacturing PMI was 59.2 compared with 59.3, and the Services PMI was 50.4 compared with 48.2 a month earlier. All indices were above expectations. The French release signalled a return to growth for the private sector, the quickest in nine months. Optimism about the upcoming year was also the strongest it had been for three years. Employment growth slowed somewhat

• As expected, the ECB kept its main policy measures unchanged and restated its determination to keep borrowing costs low, saying it would maintain its recently increased pace of bond purchases until the eurozone’s economy is firmly on the path to recovery. “The governing council expects purchases under the PEPP [Pandemic Emergency Purchase Programme] over the current quarter to continue to be conducted at a significantly higher pace than during the first months of the year,” Lagarde said

• Shares in Europe slipped on concerns that a rising coronavirus caseload could slow the pace of the economic recovery. These fears overshadowed strong corporate earnings. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.78% lower. Major country benchmarks also fell: Italy’s FTSE MIB declined 1.45%, Germany’s Xetra DAX Index slid 1.17%, and France’s CAC-40 Index pulled back by 0.46%


• No major economic data were released this week. First-quarter profits at China’s central state-owned enterprises (SOEs) totaled RMB 415.3 billion, a roughly 31% increase over the same period in 2019 before the coronavirus pandemic disrupted the economy, reported Caixin, a financial news outlet. The surprisingly strong performance over the two-year period was noteworthy given the widely held view that China’s SOEs are inefficient entities that drag on the country’s overall economic growth

• New rules from China’s financial regulators appear to have lifted investor sentiment. After the market close the previous Friday, April 16, the China Securities Regulatory Commission (CSRC) announced a number of new market reforms, including a pledge to curb the “unregulated” expansion of fintech firms. It also amended qualification requirements for companies applying to list on Shanghai’s Star Board—a technology-focused, Nasdaq-styled stock market—including a ban on property and financial firms. While the new rules may seem unfavorable for the country’s property developers and internet companies, investors had mostly expected the CSRC measures, which they noted could help reduce regulatory uncertainty

• In other financial markets reform news, the Shanghai and Shenzhen Stock Exchanges on Thursday issued new guidelines aiming to tighten the onshore bond approval process. Credit assessment, corporate governance, financial disclosure, capital structure, and the pledging of assets are among the areas covered by the guidelines. The guidelines also singled out for criticism China’s property and local government financing vehicles (LGFVs) bond issuers for having strong operating subsidiaries but financially weak holding companies. LGFVs with assets below RMB 10 billion, or a credit rating of AA or less, were discouraged from issuing bonds, except for refinancing. Analysts generally welcomed the new rules, which they said reflected China’s continued efforts to increase discipline in the onshore bond market after a wave of missed debt repayments by state-linked companies in recent months

• In China, the large-cap CSI 300 Index advanced 3.4% for the week, while the country’s benchmark Shanghai Composite Index added 1.4%. Chinese stocks rose steadily since Monday, when mainland equity markets received inflows totaling USD 2.5 billion from Hong Kong via Stock Connect, marking the third-largest single-day inflow from Hong Kong investors. In the bond market, the yield on China’s sovereign 10-year bond increased one basis point to 3.18%. The People’s Bank of China left the loan prime rate (LPR), a reference rate for new bank loans, on hold for the 12th straight month. In currency trading, the renminbi strengthened slightly against the U.S. dollar to close at 6.491

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