Economic Outlook – 28 February 2021

• Nominal personal income spiked 10.0% in January as American households received the aid cheques included in the USD$900-billion stimulus package signed at the end of Donald Trump’s presidency.
o Income derived from government transfers surged 52.6% to USD$5,734.1 billion (seasonally adjusted at annual rates) on a massive gain in the “other” transfer segment (+256.9% month-on-month to USD$2,336.9 billion).
o USD$1,660.9 billion were received via “economic impact payments”.
o Insurance benefits also increased at a brisk pace (+85.4% to USD$570.6 billions), as some emergency programs were extended, notably the Pandemic Unemployment Compensation Payments.
o As the labour market continued to recover, the wage/salary component of income progressed 0.7%.
o All these gains translated into an 11.4% increase in disposable income, the second largest recorded in data going back to the late 1950s.
• Nominal personal spending, for its part, progressed 2.4% in January and stood just 1.0% below its pre-pandemic summit.
o While goods consumption stood 11.0% above its pre-crisis mark, services consumption was still 5.5% below its peak.
o The latter segment was hit harder during lockdowns and was recovering more laboriously because of rules of physical distancing imposed to limit the spread of the virus.
• Durable goods orders continued to recover in January, growing 3.4% month-on-month for a ninth consecutive increase.
o This far exceeded the 1.1% gain expected by consensus and hoisted total orders 4.2% clear of their pre-crisis (February) level.
o December’s growth was revised up from 0.5% to 1.2%.
o Bookings for transportation equipment sprang 7.8% in January on a 389.9% spike for non-defence aircraft.
o Orders for motor vehicles and parts, on the other hand, slipped 0.8%.
o Excluding transportation, orders advanced a consensus-topping 1.4% (+0.7% expected) on gains for electrical equipment (+4.2%), primary metals (+3.2%), and fabricated metals (+1.8%).
o Shipments of non-defence capital goods excluding aircraft, a proxy for business investment spending, swelled 2.8%, hinting at solid business investment in early Q1.
• The Conference Board Consumer Confidence Index rose 1.4 points in February to 91.3.
o Though the result surpassed consensus expectations, it remained relatively tepid given the marked improvement in the epidemiological situation during the month.
o By comparison, the index reached 101.4 last October when the health outlook looked much less promising.
o The improvement in February derived entirely from a 5.5-point increase in the present situation sub-index to 92.0, which nonetheless remained far below its pre-pandemic peak of 166.7.
o The percentage of respondents who deemed jobs plentiful rose from 20.0% to 21.1%.
o 16.5% of polled individuals had a favourable view of current business conditions, up from 15.8% the prior month.
• New-home sales climbed 4.3% in January to 923K (seasonally adjusted and annualized).
o This was better than the 856K expected by consensus and significantly above this indicator’s pre-pandemic peak (774K).
o Although the increase in sales was partially offset by a rise in the number of homes on the market, the inventory-to-sales ratio still ticked down to a four-month low of 4.0, which indicated a very tight market.
o The number of properties sold but not yet built totaled 284K, just shy of a 15-year high.
o Such a hefty backlog should continue to support residential construction going forward.
• According to the S&P CoreLogic Case-Shiller 20-City Index, home prices rose a seasonally adjusted 1.25% month-on-month in December after climbing 1.46% in November.
o All of the cities covered by the index saw higher prices in December, led by Seattle (+1.5%), Washington (+1.5%), and Cleveland (+1.5%).
o Year-on-year, the index was up 10.1% (+9.1% in November), the steepest jump over a period of 12 months since April 2014.
o The rapid rise in home prices in recent months is consistent with low borrowing costs and greater demand on the resale market (existing-home sales held near a 15-year high in January).
o Aside from the resurgence in sales, lack of supply, too, has contributed to boost prices.
o In January, the number of homes available on the market was equivalent to just 1.9 months of sales, their lowest level on record.
• Initial jobless claims decreased markedly in the week to February 20 from a downwardly revised 841K to a post-pandemic low of 730K.
o Continued claims, meanwhile, kept trending down, sliding from 4,520K to 4,419K, their lowest level since March.
o Roughly 12.6 million people who received benefits in the week ended February 5 under emergency pandemic programs must be added (Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation).
o Year-end confirmation that these would be extended until mid-March was no doubt greeted with relief by the millions of people still unemployed because of the pandemic.
o The Biden administration’s upcoming fiscal package is expected to include further extensions to these programs (perhaps through to September).
• The latest estimate of Personal Consumption Expenditure (PCE) deflator was also reported in the personal income and outlays report.
o The core PCE deflator, which is the Fed’s preferred measure of consumer price inflation, rose 0.3% during the month and 1.5%over the year.
o This outcome is slightly ahead of market expectations but still well below the Fed’s 2% inflation target.
• Revisions to the second GDP release were relatively minor.
o The economy grew 4.1% annualized in the final quarter of last year, slightly higher than the initial estimate of 4.0%.
o Government and household spending were both revised down 0.1 ppts.
o Non-residen-tial fixed investment was adjusted up 0.2 ppts, driven by stronger spending on equipment and intellectual property products.
o Residential investment was also revised higher by 0.1 ppts.
o Given the relatively minor adjustments to the quarterly data, there were no changes to the annual GDP, which shrank 3.5%.
• There is a growing disconnect between monetary policy and the US Treasury market.
o US Federal Reserve Chair Jerome Powell delivered the central bank’s semiannual monetary policy report to Congress, maintaining a decidedly dovish tone.
o He did not push back against the recent rise in bond yields, saying it is a sign of market confidence that a robust recovery is to come.
o Powell said that it will take some time for the economy to reach the Fed’s inflation and employment goals and that the central bank will continue to support the economy with near-zero interest rates and large-scale asset purchases “until substantial further progress has been made toward the committee’s maximum employment and price stability goals.”
o Market action saw futures markets price in the first rate hike by the end of 2022, a year sooner than the Fed forecasts.
• A move to include a federally mandated multi-year hike in the US minimum wage from USD$7.25 an hour to USD$15 over the next few years failed to win the approval of the US Senate parliamentarian to be included in COVD relief legislation under the body’s arcane budget reconciliation rules which allow legislation to be passed with a bare majority rather than the usual 60-vote super-majority.
o The US House of Representatives voted on the overall USD$1.9 trillion relief package after which the bill will advance to the Senate, where the price tag may be whittled down modestly.
• The major benchmarks pulled back sharply in response to a steep rise in longer-term Treasury interest rates.
o The S&P 500 Index recorded its biggest weekly decline in a month, while the Nasdaq Composite index suffered its worst drop since October.
o Consumer discretionary shares were particularly weak, dragged lower in part by a steep decline in automaker Tesla, while a drop in Apple shares weighed on the information technology sector.
o Energy stocks outperformed as oil prices rose and there seems to be a continued rotation into cyclical shares as vaccine progress fueled optimism about the reopening of the global economy.
o The shift led value stocks to handily outperform their growth counterparts, leaving them well ahead for the year-to-date period.
o Yields continued up with US 10 year government bond yields reaching a one-year high.
o Oil prices increased above USD$67/ barrel and industrial metals, particularly copper, have accelerated further as well, weakening safe haven currencies like JPY and CHF.
o This development has been backed by more positive vaccine news and a cautious Fed.
• In terms of data release, the most important piece of news will be February’s non-farm payrolls.
o Hiring could have picked up in the month as the epidemiological situation improved.
o These gains could have been partly offset by further layoffs, judging from the still elevated number of people claiming unemployment benefits between the January and February reference periods.
o All told, payrolls may have increased just 100K in the second month of the year.
• Markit’s PMI index is any guide, the ISM manufacturing index could have continued to signal a sharp amelioration in operating conditions in February.

• Unemployment was reported at 5.1% (consensus 5.1%) for December, while average earnings (including bonuses) were up 4.7% (consensus 4.1%).
o The rate of employment is 75%, only down 1.5% over the past 12 months. The number of hours worked increased again.
o These are good unemployment figures, given the severity of the broader economic reaction to this third lockdown, and indicate that many businesses have found ways to continue serving customers.
o Businesses are clearly holding onto employees as they see light at the end of the tunnel and aim to survive until mid-summer, when all restrictions are expected to be relaxed.
o Unemployment is expected to rise for the next few months at a pace dependent on the speed of the withdrawal of the various support programmes put in place by the chancellor.
o Thus, much rests on next week’s budget. Although the number of vacancies has fallen by 26.0%, compared to a year ago, the expectation remains that unemployment will peak at 6.5% towards the middle of the year and fall reasonably rapidly thereafter, as the economy recovers more fully.
• Next week’s budget is expected to raise the corporation tax rate from 19.0% to between 23.0% and 25.0%.
o If the US raises its own corporate tax rate from 21.0% to 28.0%, as recently called for by Secretary of the Treasury Janet Yellen, the UK would maintain the crown as having the lowest corporate tax rate in the G7.
o British finance minister Rishi Sunak will set out plans to raise income tax by GBP£ 6 billion.
o The chancellor will say he needs to raise more than GBP£ 40 billion to tackle the budget deficit and protect the economy from rising rates of interest on government borrowing.
o The government will announce GBP£ 5 billion of additional grants to help businesses hit hard by pandemic lockdowns.
o Sunak is also expected to announce an initial GBP£ 12 billion of capital and GBP£ 10 billion of guarantees for the new UK Infrastructure Bank.

• The export-heavy FTSE 100 fell on Friday as a broader sell-off in bonds spread to global equities, while British Airways owner IAG rose 4.2% even as it posted a loss of more than USD$5 billion.
o The FTSE 100 slipped 0.2%, tracking losses in Europe and Asia as surging bond yields sparked fears of higher interest rates despite assurances by the world’s major central banks.
o Oil producers BP and Royal Dutch Shell and mining stocks, including Rio Tinto, Anglo American, and BHP, were the biggest drags on the index, tracking a fall in oil and metal prices.
o The FTSE 100 has risen more than 3.0% in February, helped by mining, energy and banking stocks on expectations of a vaccine-led economic recovery, but increasing concerns about inflation have sparked a pullback this week.
• In the euro area, detailed HICP figures confirmed that the spike in January inflation was primarily due to transitory effects.
o Smaller clothing sale and package holiday weight cut to 1/3 of the 2020 weight alone can explain 0.5 pp of the 1.2pp increase in headline inflation.
o French inflation is expected to decline somewhat again in February, while for the flash February figures for the euro area next week are of interest

• European Central Bank officials have pushed back against a rise in European government bond yields brought on by the spike in US rates.
o ECB President Christine Lagarde said the central bank is carefully monitoring the evolution of long-term yields, a veiled warning to the market.
o Executive Board Member Isabel Schnabel, who is in charge of the ECB’s quantitative easing program, said that the ECB may need to boost its monetary support of the economy if rising borrowing costs hurt growth.
o Though benchmark German 10-year bund yields are still deeply negative at -0.27%, they have risen from -0.55% in the past month.
• The European Commission’s Economic Sentiment Index improved in February, rising from 91.5 to an 11-month high of 93.4.
o This remained below the long-term average for this indicator (99.9).
o Confidence rose in four of the five sectors surveyed, led by manufacturing (-3.3 vs. -6.1 the prior month).
o Sentiment in the retail segment, for its part, continued to slide (-19.1 vs. -18.5).
o At the national level, confidence improved in Germany (95.8 vs. 92.8 in January), France (91.0 vs. 90.1), and Italy (94.6 vs. 90.2).
o The progressive re-opening of the economy and ramping up of the vaccination campaign could help lift sentiment further.
• Fourth-quarter German gross domestic product (GDP) data were revised up unexpectedly to a growth rate of 0.3% from an initial estimate of 0.1% on strong exports and solid construction activity.
o The full-year figure was increased to -4.9% from -5.0%.
• Shares in Europe fell along with global markets.
o Trading was volatile during the week as concerns grew that central banks might have to act sooner than expected to quell inflationary pressures that could accompany an economic recovery.
o In local currency terms, the STOXX Europe 600 Index ended the week 2.38% lower.

• In credit markets, the yield on China’s sovereign 10-year bond was broadly flat.
o The official loan prime rate (a reference rate for new renminbi loans) was unchanged for the 10th straight month.
o February marked the second month of net liquidity withdrawal by China’s central bank, something not seen since March 2019, possibly signaling an inflection point for monetary policy.
o A news outlet affiliated with the People’s Bank of China (PBOC) stated that investors should focus more on official interest rates rather than on money market liquidity operations in order to gauge monetary policy.
o For some analysts, a more accurate description of PBOC policy might be “neutral with a bias toward tightening.”
o Historically, tighter liquidity conditions have posed a significant headwind for Chinese A-shares, a market that is dominated by retail investors and includes many rate-sensitive state-owned companies.
• In foreign exchange trading, the renminbi was firm versus the US dollar, rising 0.4% to close at 6.461 against the greenback.
o China is considering a change in how its citizens can invest in overseas assets.
o Currently, Chinese citizens can purchase foreign currencies up to USD$ 50,000 annually for overseas travel, study, or work but are not permitted to buy overseas financial assets or property.
o The rule change would allow them to buy overseas securities and insurance policies within the USD$ 50,000 foreign exchange limit, according to a State Administration of Foreign Exchange official.
o Some analysts view the proposal as an attempt to slow the renminbi’s appreciation after it gained about 6.5% against the dollar in 2020.
• In a week devoid of economic readings, China investors are focusing on the National People’s Congress (NPC) that starts on Friday 5th of March.
o In addition to reviewing the past year’s performance, the annual parliament meeting will offer a road map for future economic plans, including goals for 2021 and Beijing’s latest five-year development plan.
o China has unveiled its annual gross domestic product and other official targets at past NPC meetings, although last year it did not, due to the coronavirus pandemic.
• A rebound in PMIs is expected next week after declines the past two months.
o Both because the decline seemed overdone but also because US retail sales reaccelerated in January, which is good for Chinese exports, and seasonal adjustment distortion will also give a boost to the number.

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