Economic Outlook – 28 November 2021

• Markit’s flash composite PMI came in at 56.5 in November, down from 57.6 the month before but still consistent with a solid rate of expansion in the private sector. Operating conditions continued to improve in the manufacturing sector, as evidenced by a rise from 58.4 to 59.1 in the corresponding gauge. New orders at U.S. factories accumulated at a faster pace and output growth accelerated despite being hampered by “raw material delays and labour shortages.” Payrolls continued to expand but the hiring of suitable workers remained a challenge. Capacity constraints at suppliers persisted in the month, as delivery times continued to lengthen. The rate of input price inflation, meanwhile, was the most acute since the inception of the survey, with surveyed purchasing managers reporting increased costs for “a vast range of materials.” Firms operating in the manufacturing sector were able to partially pass higher costs along to clients, as demonstrated by the second steepest increase in prices charged since data collection began in 2007

• Existing-home sales crept up 0.8% to a nine-month high of 6,340K (seasonally adjusted and annualized), their fourth increase in five months. Although this was down 5.8% from last October’s multi-year high of 6,730K, it remained comfortably above the pre-recession peak of 5,700K. Contract closings for single-family dwellings progressed 1.3% to 5,660K, while those for condos faded 2.9% to 680K. The inventory-to-sales ratio stayed unchanged at 2.4, indicating extremely scarce supply. (According to the National Association of Realtors, a ratio <5 indicates a tight market.) Listed properties remained on the market for 18 days on average, a one-day increase from the record low set the previous month. In addition to resilient sales, the persistent tightness of the market can be explained also by an extreme shortage of listings. The inventory of properties available for sale totaled just 1.25 million (not seasonally adjusted) in the month. Not only was this down 12.0% from a year earlier, it also represented the lowest October level ever recorded. Lack of supply and low borrowing costs have been the factors largely responsible for supporting prices since the beginning of the COVID-19 crisis. In October, the median price paid for a previously owned home was up 13.1% YoY

• New-home sales inched up from 742K in September (initially estimated at a much higher 800K) to a six-month high of 745K in October. As this slight progression was more than offset by a rise in the number of homes available on the market (from 378K to 389K), the inventory-to-sales ratio crept up from 6.1 to 6.3, indicating a roughly balanced market. The median transaction price, meanwhile, sprang 17.5% YoY in October to a record $407,700. As a result of this rapid increase (and buyer preference for larger houses since the onset of the pandemic), the proportion of new homes sold for more than $400,000 jumped to an all-time high of 54.4% in October, up from about 30% before the pandemic After the pandemic’s buying frenzy, the new-home market seems to be stabilizing at a level above that observed before the crisis. Down the road, however, high prices could very well dampen buyer enthusiasm: A record 66% of respondents to a University of Michigan poll deemed buying conditions for houses bad because prices were too high in November. On the other hand, rising inventories could help alleviate some of the pressure: There were more new homes available on the market in October than at any time since September 2008. A lot more are on the way judging from the number of homes currently under construction in the United States

Durable goods orders retraced for the second month in a row in October, slipping 0.5% MoM. Analysts were expecting a 0.2% gain. Orders in the transportation category dropped 2.6% as declines for civilian aircraft (-14.5%) and defence aircraft (-21.8%) were only partially offset by a rebound in the motor vehicles/parts segment (+4.8%). Excluding transportation, orders progressed a healthy 0.5% and hit a new all-time high. Notable gains were recorded for primary metals (+1.7%), electrical equipment (+1.2%), and computer/electronics (+0.7%). The report showed, also, that orders of non-defence capital goods excluding aircraft, a proxy for future capital spending, grew 0.6% MoM. This suggests that business investment has further room to improve in the last quarter of the year.

• Nominal personal income grew 0.5% in October. As the labour market continued to recover, the wage/salary component of income progressed 0.8%. Income derived from government transfers, on the other hand, declined 0.5% as emergency benefits continued to be phased out. In this regard, unemployment insurance transfers fell $51.7 billion in the month, with declines for Pandemic Emergency Unemployment Compensation (-$16.0 billion), Pandemic Unemployment Assistance (-$12.9 billion), and Pandemic Unemployment Compensation Payments (-$12.7 billion). All this translated into a
0.3% monthly increase for disposable income. Nominal personal spending, for its part, progressed 1.3% in October with gains for both goods (+2.2%) and services (+0.9%)

• The headline PCE deflator came in at 5.0% YoY, up from 4.4% the prior month and reaching its highest point since November 1990. The core PCE measure, meanwhile, climbed from 3.7% to a 30-year high of 4.1%

• Seasonally adjusted initial jobless claims plummeted in the week to November 20, from 270K to a 50-year low of 199K. Without wishing to minimize this decrease, it should be mentioned that it was accentuated by atypical seasonal trends. Unadjusted for seasonal effects, claims normally increase roughly 90K at this time of the year. However, in the current re-opening context, they rose just 18K. Consequently, adjusted claims showed an outsized improvement. Even taking these anomalies into account, the data continued to signal a strong recovery in the labour market. Continued claims, for their part, eased from 2,109K to 2,049K, their lowest level since March 2019

• The second estimate of Q3 GDP growth pegged in at +2.1% in annualized terms, a shade stronger than the preliminary estimate (+2.0%). The details of the report showed a slight downgrade to business investment in equipment/intellectual property, but this was more than offset by stronger showings for household consumption, government spending and business investment in structures. Trade’s contribution was upgraded to reflect slightly weaker growth in imports. The report also showed pre-tax corporate profits advancing an annualized 4.3% from the prior quarter following a +10.5% print in Q2. On a 12-month basis, profits were up 20.7%

• On Monday, US President Joe Biden reappointed Jerome Powell to a second term as Fed chair and nominated the other candidate for the job, Fed Governor Lael Brainard, as vice chair. The US 10-year Treasury note yields backed up to 1.65% in the wake of the announcement, partially on the belief that Powell is less dovish on monetary policy than Brainard. Also contributing to the rise in rates were comments from several Fed policymakers — echoing those at the November meeting of the Federal Open Market Committee, minutes showed — backing a faster tapering of asset purchases amid more-persistent-than-expected inflation. During the Thanksgiving holiday, Goldman Sachs forecasted that the Fed will conclude tapering its bond buying by March instead of June and hike rates as early as June, with additional hikes projected for September and December

• President Biden formally announced that the U.S. will release oil from the Strategic Petroleum Reserve to try to pressure gasoline prices, which are a key part of headline consumer price inflation figures, lower. Oil prices actually rose on the news, which was widely anticipated, as the market seemed to think that the Organization of the Petroleum Exporting Countries and Russia (known as OPEC+) will simply reduce its production to offset the move.

• Stocks declined for the holiday-shortened week after Friday’s news about the emergence of a new, potentially more contagious, coronavirus variant in South Africa triggered a sharp sell-off in riskier assets such as equities. Before the Thanksgiving holiday, information technology stocks suffered as rising Treasury yields made expected corporate profits far in the future less valuable in today’s terms

• In terms of data release, Construction spending is out on Wednesday. It declined 0.5% during September, as building material pricing, availability and skilled labor shortages continue to weigh on the entire construction industry. The weakness during the month was mostly broad-based, with residential and nonresidential categories both falling over the month. Residential construction, which has slowed recently amid intensifying labor and material shortages, is still up 19.0% over the year. On the other hand, the knock-on effects of the pandemic continue to hold back the nonresidential sector, which is down 1.3% on a year-to-year basis

• The ISM manufacturing index is also out Wednesday. It dropped to 60.8 last month from 61.1 in September, consistent with a blistering pace of expansion in the factory sector. The details of the report continue to reveal how pervasive supply chain challenges are weighing on manufacturing activity. Unsurprisingly, the largest gains last month came from two components at the center of supply issues: prices paid and supplier deliveries. Both have marched considerably higher over the past year and continue to exemplify the severity of bottlenecks. That said, purchasing managers across industries continue to cite strong demand


• Expectations among the British public for inflation over the next year fell for the first time in six months in November and were steady looking further ahead, according to a survey by Citi and polling firm YouGov.With the Bank of England keeping a close eye on the risk of a recent jump in inflation becoming self-reinforcing, the survey showed expectations for price growth over the next 12 months receded to 4.0% from 4.4% in October. Britain’s main consumer price index hit a 10-year high of 4.2% in October and the BoE has said it expects it will rise to around 5% in the second quarter of 2022. The British central bank has said increases in interest rates are likely in coming months if the economy performs as it has forecast

• The UK’s blue-chip share index slumped on Friday, suffering its biggest drop in more than a year as fears over a newly detected and possibly vaccine-resistant coronavirus variant gripped stock markets around the world. The FTSE 100 index (.FTSE) closed down 3.7% at its lowest in more than seven weeks, with commodity, travel, and banking stocks leading the sell-off


• The eurozone flash Composite PMI rose to 55.8 in November compared with 54.2 in the previous month. This was the first time that the index has risen in four months. Manufacturing PMI rose to 58.6, compared with 58.3 the month before, and Services PMI was 56.6 compared with 54.6. All indices were above expectations. Growth, driven by the services sector, accelerated in France and, to a lesser extent, in Germany. However, employment growth declined in both countries even though the corresponding eurozone aggregate index rose

• Supply chain pressures showed some signs of peaking, despite the continuing rise of both input and output prices. Markit noted that shortages, shipping costs, rising energy prices and increased staff costs were the main drivers of price pressure. Backlogs of existing orders rose, inventory levels increased as did new order intake. Employment was largely unchanged compared to the previous month. Manufacturing output increased marginally, although it remains low when compared with both the previous quarter and the previous year. Overall, expectations of future output increased somewhat but fell significantly in the services sector, which drove down the corresponding composite index

• The European Commission’s consumer confidence index fell for the second month running in November, dropping from –4.8 to a seven-month low of -6.8. The steeper-than-expected monthly decline was no doubt linked to a new surge in COVID-19 cases across the single-currency area. Despite the pullback, the index remained above its long-term average of -10.0

• Social Democrat leader Olaf Scholz will succeed Angela Merkel as chancellor of Germany after clinching a deal with the Greens and the liberal Free Democrats (FDP) to form a coalition government. FDP Chairman Christian Lindner, a fiscal conservative, will be finance minister. The alliance said its main aims are to upgrade infrastructure to modernize the economy, accelerate measures to combat climate change, and increase the minimum wage and social housing

• Shares in Europe fell sharply on fears that the economic recovery might be derailed by the imposition of tight coronavirus restrictions and the spread of a new variant of the virus. In local currency terms, the pan-European STOXX Europe 600 Index ended the week more than 4% lower. The main indexes of Germany, France, Italy, the Netherlands, and Spain also tumbled


• Premier Li Keqiang said that China should step up efforts to stabilize employment, financing, and other key areas and that the government was studying policies on tax and fee cuts, along with some reforms, to support businesses. Last week, China kept its loan prime rate unchanged for the 19th straight month. However, monetary policy easing has been taking place through other channels, including looser mortgage lending, deposit rate reforms, and reductions to domestic banks’ reserve required ratio

• The property sector remained under duress. Kaisa Group, the latest high-profile developer trying to avert default, announced a bond exchange program for its creditors. Kaisa has unpaid coupons totaling over USD 59 million that were due on November 11 and 12, with 30-day grace periods for both. If the offer to bondholders fails, “we may not be able to repay the Existing Notes upon maturity on December 7, 2021, and we may consider alternative debt restructuring exercise,” the developer said in a stock exchange filing. Kaisa made headlines in 2015 when it became the first Chinese builder to default on its dollar bonds. The company has the most offshore debt in China’s property sector coming due over the next year after embattled China Evergrande Group

• Analysts think that China is readying markets for an easing of monetary policy after the People’s Bank of China removed language from its most recent monetary policy report that suggested restrained policy. In the quarterly report, the central bank said the economic recovery faces headwinds from temporary, structural and cyclical factors, making it more difficult to maintain a stable economy. Adjustments to the reserve requirement ratio are seen as more likely than policy rate cuts in the near-term, analysts said

• The U.S. Federal Communications Commission (FCC) asked a federal appeals court to reject China Telecom’s bid to continue providing services in the U.S., arguing that China Telecom’s ownership allows Beijing to access and possibly disrupt or misroute U.S. communications. The FCC’s action followed its designation of China’s Huawei Technologies and ZTE Corp as U.S. national security threats last year. Reports that China’s tech watchdog has asked the management of China’s ride-hailing app Didi Global to delist the company from the New York Stock Exchange due to data security concerns also underscored the depth of mistrust between both countries

• Chinese markets weakened, with the CSI index easing 0.6% and the Shanghai Composite Index ending flat amid U.S.-China tensions and rising economic pressures that raised expectations for supportive government measures. Yields on China’s 10-year government bonds fell to 2.881% from the prior week’s 2.946% as investors sought safe-haven assets. The yuan gained marginally to 6.3917 per U.S. dollar from last week’s 6.4009 per dollar

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