Economic Outlook – 31 January 2021

US

• The Consumer Price Index increased 0.4% in December after climbing 0.2% the prior month. This result was in line with consensus expectations.
• 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 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 Bureau of Economic Analysis published the first estimate of Q4 GDP growth and the economy reportedly expanded 4.0% annualized in the quarter, slightly less than the +4.2% print expected by consensus.
  • Although it followed in the footsteps of the largest quarterly progression on record (+33.4% in Q3), this gain still left economic output 2.5% short of its pre-crisis level.
  • Domestic demand remained relatively strong in Q4, driven by non-residential (+13.8% quarter-on-quarter annualized) and residential (+33.5%) investment.
  • Personal consumption mustered a decent gain as well (+2.5% quarter-on-quarter annualized), thanks entirely to spending on services (+4.0%).
  • Consumption on goods, meanwhile, edged down 0.4% annualized after a stellar gain the prior quarter (+33.4%).
  • Government consumption cooled for the second quarter in a row as spending continued to normalize following massive fund injections in Q2 for such things as COVID-19 tests, protective equipment, and the Paycheck Protection Program.
  • Spending on equipment surged as well, adding no less than 1.7 percentage points to growth.
  • Household spending remained relatively strong but would certainly have been more robust had it not been for a surge in COVID-19 cases, which curbed consumer enthusiasm at the end of the year.
  • With the number of new cases and hospitalizations remaining quite high early in 2021, another growth slowdown is to be expected in the first quarter of the year (to about 2.0% annualized).
• Despite the deterioration of the short-term outlook, recent developments bode well for a solid rebound in the second half of the year.
  • Uncertainty surrounding the next round of fiscal stimulus dissipated with the announcement of a new USD$900 billion federal aid package that will provide cheques for most Americans, supplements to unemployment benefits, and aid to small businesses.
• Nominal personal income expanded 0.6% in December, erasing some of the prior month’s loses (-1.3%).
  • The wage/salary component of income progressed 0.5% while income derived from government transfers rose 2.3% on gains in both the unemployment insurance (+14.3%) and the “other transfers” (+5.6%) categories.
  • As a result, disposable income sprang 0.6%. Nominal personal spending, for its part, retraced 0.2% month-on-month. As income rose and spending declined, the saving rate jumped from 12.9% to 13.7%.
• Durable goods orders continued to recover in December, edging up 0.2% month-on-month, for an eighth consecutive increase. This left total orders down just 0.4% from their pre-crisis (February) level.
  • Bookings for transportation equipment fell 1.0% on a 5.0% drop in the defence aircraft and parts sub-category.
  • Orders for motor vehicles and parts, meanwhile, rose 1.4%.
  • Excluding transportation, orders advanced a healthy 0.7%.
  • The report showed, also, that shipments of non-defence capital goods excluding aircraft, a proxy for business investment spending, swelled 0.5% in December, capping a 17.5% annualized gain in the last quarter of the year.
  • As a result, core shipments stood 6.1% above their pre-pandemic level.
• Finally, core orders (+0.6%), which are indicative of future capital spending, climbed further past their pre-recession peak in the month.
• The Conference Board Consumer Confidence Index rose 2.2 points in January to 89.3. The result was tame compared with the jumps seen this fall and likely reflected heightened fears about the spread of the virus in the United States.
  • The muted improvement derived entirely from a 5.5-point increase in the expectations sub-index, which tracks consumer sentiment for the coming six months.
  • This indicator sprang from 87.0 to 92.5 as a larger share of respondents expected to see improvements in business conditions (from 29.5% to 33.7%) and employment (from 28.0% to 31.3%).
  • More people also planned to buy a home (from 6.0% to 7.2%) or an automobile (from 9.8% to 10.7%).
  • However, only 14.4% of those polled expected their income to increase in the next six months, the second lowest percentage recorded since the start of the pandemic.
• After increasing a whopping 71.8% from April to July and then decreasing 15.3% to November, sales of newly built homes stabilized at 842K in December (seasonally adjusted and annualized). This was below the 870K print expected by consensus but still significantly above their pre-pandemic peak of 774K in January.
  • Despite the slight increase in sales (+1.6% month-on-month), the inventory-to-sales ratio still ticked up to 4.3, as the number of homes on the market sprang from 290K to a 302K. Even at this level, the market remained very tight.
  • The number of properties sold but not yet built totaled 277K, near their highest point in data going back to 2014. Such a hefty backlog should continue to support residential construction going forward. In the short term, the new-home market should continue to be fueled by low borrowing costs.
• After nearly doubling between April and August, the pending home sales index recorded a fourth decline in a row in December, edging down 0.3% month-on-month. The index was still up 22.8% on a 12-month basis.
• According to the S&P CoreLogic Case-Shiller 20-City Index, home prices rose a seasonally adjusted 1.42% MoM in November after climbing 1.57% in October.
  • All of the cities covered by the index saw higher prices in November, led by New York (+2.1%), Seattle (+1.7%), and Boston (+1.7%).
  • Year-on-year, the index was up 9.1% (+8.0% in October), the steepest jump over a period of 12 months since May 2014.
  • 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 struck a 15-year high in December).
  • Aside from the resurgence in sales, lack of supply also contributed to boost prices.
• Initial jobless claims continued on their downtrend in the week to January 23, falling from 914K to 847K. This was the second consecutive decrease following a brief rebound early this year caused by a deterioration of the health situation in the country.
  • Continued claims, meanwhile, eased from 4,974K to 4,771K, their lowest level since March.
  • The roughly 12 million people who received benefits in the week ended January 8 under the emergency programs introduced during the pandemic must be also added (Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation).
• The FOMC left the target range for the federal funds rate unchanged this week at 0% to 0.25%. Its guidance regarding policy rates and asset purchases was also unchanged: The central bank indicated it would continue asset purchases at the current pace “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals”. The Fed also released a notice stipulating that it would “no longer offer regularly-scheduled one-month term repo operations following the current monthly scheduling period”.
• As for changes to the characterization of the economy/outlook, the Fed’s statement noted that “the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic”.
  • The Fed stressed that the recovery remained contingent on the course of the virus but now specified that this included “progress on vaccinations”.
  • Fed also mentioned that the public health crisis would continue to weigh on economic activity, employment and inflation (dropping “in the near term”) and pose considerable risks to the economic outlook (dropping “over the medium term”).
  • Fed Chair Jerome Powell explained that the minor tweaks to the language in Wednesday’s statement, namely, dropping “over the medium term” when it came to economic risks, referred to the fact that risks were now concentrated in the near term (i.e., virus trajectory, vaccine rollout). He underscored that the medium-term forecast was actually much improved.
  • In the press conference, Powell fielded a handful of questions on asset valuations, financial stability, and the ongoing high-profile volatility of certain stocks.
  • He noted that financial stability risks were “moderate” while reaffirming his trust in the regulatory framework.
  • Moreover, he suggested that monetary policy tools were not the most appropriate to address these risks.
  • Powell also spent some time discussing the inflation outlook. He noted that the decades-long disinflationary pressures, a flat Phillips curve and tepid inflation persistence were all expected to remain prominent even as we transition into a new economic era.
  • In this context, the Fed would remain very patient when it comes to assessing inflation developments and, consistent with their new mandate, would welcome inflation moderately exceeding 2.0%.
• Stocks declined sharply for the week amid much higher volatility and trading volumes. Large-cap indexes generally held up better than mid- and small-cap shares. On Wednesday, equities posted their worst day since October, with the S&P 500 Index falling almost 2.6%. Total trading volume hit a record high of 23 billion shares on Wednesday, a huge jump from the year-to-date average daily volume of about 14 billion.
• Despite a busy earnings week in which 37.0% of the S&P 500’s market capitalization was due to post quarterly financial results, unusual fluctuations in the prices of certain stocks that are popular with individual investors appeared to drive the market and received the bulk of media attention.
  • Encouraged by message boards on Reddit and other online forums, these investors seemed to collectively target stocks with high percentages of short interest through buying the shares.
  • In a short trade, which is a bearish position, an investor borrows shares and sells them, hoping to buy them back at a lower price in the future.  
  • In a “short squeeze,” a rising stock price can force short investors to buy back the shares at a higher price, incurring losses on their bearish positions as they “cover” their shorts.
  • If enough bearish investors cover their short positions, they can drive the stock price even higher.
  • GameStop, a video game retailer, and movie theater operator AMC Entertainment Holdings were two of the heavily shorted stocks that experienced short squeezes, causing huge price gains and major losses on short positions.  
  • According to media reports, major hedge funds were among the short investors, and they sold out of other stock positions to cover their losses.
• This activity appeared to drive much of Wednesday’s steep decline, although the firm’s traders also noted that generalized worries over elevated valuations in the market may have encouraged some profit-taking. Stocks recovered a portion of their losses on Thursday after some online brokerages restricted buying in certain stocks.
• The most important piece of news will be January’s non-farm payrolls. Hiring could have remained depressed in the month judging from a stagnation in the number of people claiming unemployment benefits between the December and January reference periods. Combined with still-high layoffs numbers, this may have translated into a 75K drop in payrolls.

UK

• Unemployment for November 2020 was 5.0% (consensus: 5.1%). The UK employment rate for the three months to November 2020 was estimated to be 75.2%, which is 1.1% lower than a year earlier and 0.4% lower than the previous quarter.
  • Heavily public transport and services (both badly hit by pandemic restrictions) dependent London saw unemployment at 6.9%, while the lowest was in Northern Ireland, with 3.2%.
  • Unemployment is of course always a lagging indicator, but now there is the additional complication of the furlough programme, most recently (beginning of January) estimated to be affecting 16% of the workforce.
  • Expectation remains that as the government business support programmes are withdrawn over the course of the spring, businesses will restructure and insolvencies will rise, and with those business restructurings and failures rising, so too will unemployment.
• Average earnings for November were 4.7% (consensus: 3.2%), largely driven by a fall in the number of lower paid people employed, which has driven up the average of those remaining in work.
  • The ONS has estimated that underlying wage growth (if the effect of the change in the profile of jobs is removed) is likely to be under 2%.
  • Given the state of the overall economy, people are clearly still happy to simply be employed. There is little sign of inflationary pay increases or an erosion of productivity in the figures.
• The FTSE 100 ended lower on Friday and recorded its worst weekly performance since October, as stalled vaccine rollouts and lockdowns to curb the spread of contagious new coronavirus variants kept investors from jumping into riskier assets.
  • The blue-chip FTSE 100 index dropped 1.8%, with energy and mining sector being top drags for the week, while the mid-cap index fell 0.7%.
  • Drugmaker AstraZeneca fell 3.7% for the week and was the third biggest drag to the FTSE 100 on Friday as a tussle with the European Union on vaccine rollouts weighed on the stock.

EU

• Germany, Spain and France reported relatively resilient GDP numbers for the fourth quarter, spurring hopes that the eurozone might avoid a deeper recession.
  • The German economy expanded 0.1% sequentially, thanks to strength in exports and construction.
  • Spain’s GDP unexpectedly grew 0.4%, driven, in part, by increased household consumption. 
  • France’s economy shrank 1.3% in the fourth quarter, an upside surprise relative to a consensus estimate that had called for a 4.1% contraction. Bright spots for the French economy in the fourth quarter included robust exports, steady business investment, and a rebound in consumer spending. 
• After losing his narrow majority in the Italy’s Senate, Giuseppe Conte resigned as prime minister this week. Conte will now attempt to form a broader coalition at a time when 80% of Italians oppose early elections amid a still-raging pandemic.
  • Italian president Sergio Mattarella is holding talks with party leaders aimed at finding a lasting solution and avoiding an early return to the polls.
  • Conte’s resignation came after he lost the support of a small-party coalition partner that disagreed with his government’s intended use of funds allocated by the European Union’s rescue fund.
• European shares fell amid worries that the economy could slow due to the raging coronavirus pandemic and delays in the distribution of coronavirus vaccines. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 3.11% lower. Major European indexes also declined.
  • Germany’s Xetra DAX Index fell 3.18%.
  • France’s CAC 40 dropped 2.88%.
  • Italy’s FTSE MIB slid 2.34%.

China

• Statistics bureau reported that the average home price rose in November for the 33rd straight month, a record since the series began in 1991. In response to worries about a property market bubble forming, four major Chinese cities, including Shanghai, announced tougher prudential curbs to control local property markets. Despite the recent tightening measures, China’s central bank has sought to telegraph a measured policy stance. At the virtual Davos summit, PBOC Governor Yi Gang stated that “Monetary policy will continue to prop up the economy, but at the same time we will watch for the risks.”
• China reported that industrial profits rose 20.0% in December from a year ago and increased roughly 4.0% for the full year after a slight decline in 2019. Next month, China celebrates its weeklong Lunar New Year holiday, albeit with tighter restrictions on traveling and gatherings as officials try to contain new virus outbreaks. This year’s restrictions are more targeted than the widespread lockdowns in 2020, however, making it unlikely that they will have a big impact on the broader economy.
• Repeated Chinese military incursions into Taiwanese airspace prompted countermeasures from Taiwanese forces this week, raising tensions between Beijing, which views Taiwan as a renegade province of China, and Taipei.
  • The Chinese defense ministry said on Thursday that any move toward independence for Taiwan would mean war.
  • As a result of the rising tensions, the Biden administration moved a carrier battle group into the South China Sea and reaffirmed the US commitment to Taiwan as “rock solid.”
  • Biden signaled the US will maintain pressure on China, including retaining tariffs and delisting Chinese stocks.
• Chinese stocks recorded a weekly drop amid fears that the country’s central bank was turning more hawkish after it drained USD$12.1 billion in liquidity from the financial system and a senior central bank official warned of potential asset bubbles.
  • The Shanghai Composite Index fell 3.4%, while the large-cap CSI 300 lost 3.9%. 
  • Southbound equity flows from mainland China to Hong Kong reached a record high during the week, driven by a large number of mutual funds putting cash to work at a time when Hong Kong offered large arbitrage opportunities in Chinese dual-listed shares.
  • Hong Kong’s benchmark Hang Seng Index hovered near a 20-month high, lifted by record inflows from mainland China via the Stock Connect program.
  • Hong Kong has benefited as the exchange of choice for mainland Chinese companies seeking to go public, particularly for domestic tech firms and US-listed Chinese companies seeking a secondary listing.
  • Last year, mainland Chinese companies accounted for 98.0% of Hong Kong’s initial public offerings, up from 73.0% in 2019 and 51.0% 10 years ago, according to the South China Morning Post.

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