Economic Outlook – 4 July 2021


• Nonfarm payrolls rose 850K in June, more than the +720K print expected by consensus. Adding to the good news, the prior months’ results were upgraded by 15K. The private sector added 662K jobs. Employment in the goods sector crept up 20K as a small decline for construction (-7K) was more than offset by gains for manufacturing (+15K) and mining/logging (+12K). Services-producing industries, meanwhile, expanded payrolls by 642K, thanks in large part to a 343K jump in the leisure/hospitality category. Sizeable progressions were also observed for professional/business services (+72K), retail trade (+67K) and education/health (+59K). Employment in the public sector progressed no less than 188K as state/local administrations added 193K jobs. Average hourly earnings rose 3.6% y/y in June, up from 1.9% the prior month

• Unemployment rate came in at 5.9%. Part-time employment surged 408K in the month, while full-time positions fell 183K. The June employment reports were rather mixed. While establishment data came in stronger than expected, the household survey showed a decline in jobs. When combined, these reports hinted at a slow recovery in the job market in a context of economic reopening. As has been the case for several months now, the sectors that had been most affected by social distancing measures – notably leisure/hospitality and education/health – registered strong gains as COVID-19 caseloads continued to ease and several states gradually removed pandemic-related restrictions. Hiring outside of these segments, meanwhile, remained relatively tepid, especially excluding public sector employment. Since the measures put forward to stem the spread of the virus tend to affect part-time employment disproportionately, the improvement in the health situation in June had the opposite effect. Part time positions surged, while full-time employment took a step back. After two consecutive declines in April and May, long-term unemployment trended up in June, a negative development since the consequences of joblessness tend to increase with duration. Full employment and low/stable inflation. These are the two elements on which the Federal Reserve sets its sights. To be fair, though, it seems the central bank has been far more concerned lately by the weakness of the former than by the strength of the latter. Is this asymmetric focus justified? And more importantly: Do recent employment gains constitute “substantial progress” in the eyes of the central bank? It is unlikely. After all, non-farm payrolls remain roughly 6.8 million (or 4.4%) below pre-crisis levels, a gap that bears monitoring by policymakers. Of the jobs still to be regained, roughly 6 million are in the services sector, which should progressively recover as the positive effects of mass vaccination begin to be felt more broadly

• The ISM Manufacturing PMI slipped 0.6 point to 60.6, a level still consistent with a healthy expansion in the sector. Output growth accelerated (60.8 vs. 58.5 the prior month), and new orders placed at factories piled up at a fast pace, albeit slightly less vigorous than in the preceding month (66.0 vs. 67.0). The export orders sub-index (56.2 vs. 55.4) rose for the third month in a row as improvement in the epidemiological situation in advanced economies allowed foreign demand to recover. Purchasing managers operating in several sectors complained of severe supply-chain constraints limiting their production capacity. Indeed, while supplier delays shortened a tad (75.1, down from a multi-year high of 78.8 the prior month), they remained quite long by historical standards. Input price inflation, meanwhile, was the most acute since July 1979 (92.1 vs. 88.0 the prior month), reflecting a scarcity of raw materials. Another issue raised by managers was widespread labour shortages, a factor that might explain why employment stagnated (49.9 vs. 50.9 the prior month) despite elevated demand and still-lengthy order backlogs (64.5 vs. an all-time high of 70.6 the prior month). Of the 18 manufacturing industries surveyed, 17 reported growth in June

• The Conference Board Consumer Confidence Index rose for a fifth straight month, jumping 7.3 points to a post-pandemic high of 127.3. Renewed optimism among U.S. consumers is certainly linked to the marked improvement in the health situation in the country, but also to the deployment of generous fiscal aid by Washington. The present situation sub-index recorded another strong advance, springing from 148.7 to a 15-month high of 157.7. This, however, was still short of its pre-recession peak of 166.7. The percentage of respondents who deemed jobs plentiful jumped from 48.5% to a 21-year high of 54.4%. Also, 24.5% of respondents had a favourable view of current business conditions, up from 19.9% the prior month

• According to the S&P CoreLogic Case-Shiller 20-City Index, home prices rose a seasonally adjusted 1.62% m/m in April after climbing 1.52% in March. The gain, the 109th running, was the largest since April 2013. All the cities in the index saw higher prices in April, led by San Diego (+2.96%), Phoenix (+2.89%), and Dallas (+2.44%). Year on year, the index was up 14.9% (+13.4% in March), the sharpest 12-month jump since December 2005. The rapid rise in home prices in recent months is consistent with low borrowing costs and greater demand on the resale market. Aside from a resurgence in sales, lack of supply, also, has contributed to boost prices. The number of homes on the market in May was equivalent to just 2.5 months of sales

• Rising home prices seem to have caught the attention of Fed officials. In an interview with the Financial Times this week, Eric Rosengren, President of the Boston Federal Reserve, stated that a boom-and-bust cycle in the housing market could threaten financial stability. Echoing these comments, Robert Kaplan, President of the Dallas Fed, suggested that the central bank might have to re-assess its support of the housing market via its monthly purchase of mortgage-backed securities ($40 billion per month)

• Yet the jury is still out on how temporary these price pressures are. In this week’s post, economists of the Federal Reserve Bank of Dallas provided an outlook on their trimmed mean PCE inflation rate, which excludes the most extreme price changes. In their view, the imbalances in a small set of PCE items have the potential to seep into a broader range of goods and lead to an upward move in prices. If this were to happen, the trimmed mean PCE inflation would increase to 2.4% by year-end 2022 and remain at that level through mid-2023

• The US House of Representatives approved a $715 billion surface transportation and water infrastructure bill that includes provisions from President Joe Biden’s initial $2.3 trillion infrastructure proposal. The plan authorizes additional spending for roads, bridges, highway safety, electric vehicle charging stations, rail and transit, as well as drinking water and wastewater infrastructure. According to a new study from the University of Pennsylvania’s Wharton School, the infrastructure deal would not only add to economic growth but also lower the national debt

• For the first six months of the year, the Dow Jones Industrial Average was up 12.7%, the S&P 500 Index rallied 14.4% and the NASDAQ Composite rose 12.5%. The S&P 500 notched its fifth positive month in a row, rising 2.2% in June and posting its best first half since 2019. Historically, strong stock market first halves bode well for the remainder of the year: Whenever there has been a double-digit gain in the first half, the Dow and S&P 500 have produced positive results, according to Refinitiv data going back to 1950

• The S&P 500 Index and Nasdaq Composite Index moved to new highs and closed out a fifth consecutive quarterly advance. Large-cap growth stocks led the gains, with the Russell 1000 Growth Index stretching its weekly winning streak to eight. Technology and health care stocks led the gains within the S&P 500, and consumer discretionary stocks were also strong, boosted by a solid rise in Nike shares. Small- and mid-caps underperformed after strong gains the previous week


• The Bank of England has released mortgage data for May. Net mortgage borrowing rebounded to GBP 6.6bn in May from GBP 3.0bn in April, but it remained below the record GBP 11.4bn in March. Mortgage approvals for house purchases were 87,500 in May, up very slightly from 86,900 in April, but lower than the recent peak of 103,200 in November 2020 (consensus: lending of GBP 4.6bn; approvals of 85,900). Two conclusions can be drawn. First, recent variability is driven by the reduction in the stamp duty tax, which was initially expected to end in March but has now been extended to the end of June. Second, expectations of a decline in house prices, anticipated earlier in the year, have completely vanished, although significant numbers of sales have been pulled forward over the course of 2021 are not expected

• Nationwide house prices for June were also released this morning (June 29), with prices up by 13.4 percent YoY and 0.7 percent MoM. The annual increase is primarily due to the base effect, as measurements are being made against a year ago when the country was in a significant lockdown. Looking ahead, house prices are expected to continue to rise, and while affordability remains above its long-run average, it is below its peak. This is particularly true for the percent of income taken up by mortgage payments for first-time buyers, which has just gone above its long-run average of 34 percent of income but is still well below the >50 percent peaks seen in 1998 or 2008

• Britain’s finance minister pledged on Thursday to “sharpen” the competitive advantage of the UK financial services sector as he set out his vision for its future after the City of London lost business to the bloc after Brexit. In his first Mansion House speech, traditionally an annual address given by the Chancellor of the Exchequer in the City of London financial district, Rishi Sunak said Britain’s departure from the European Union was a unique opportunity to tailor rules while maintaining high regulatory standards and open markets. Brexit has largely severed the City’s ties with investors in the EU, triggering a shift in over 7,500 financial jobs from London to new hubs in the bloc, with Amsterdam leapfrogging London to become Europe’s biggest share trading centre. Last year the finance ministry rolled out reviews to listings rules, fintech and insurance capital rules, and on Thursday it announced there would be further public consultations on financial reforms. Sunak’s ministry set out plans to change a slew of rules inherited from the EU, which could make Brussels think even harder about granting any direct City access to the bloc due to inevitable differences emerging in hitherto identical rules. Britain said it plans to scrap curbs on “dark” or off exchange trading favoured by big investors wanting anonymity but distrusted by EU regulators. Rob Moulton, a lawyer at Latham & Watkins, said it was clear the UK was unafraid to diverge from EU regulation and “may be seen in Brussels as an attempt to promote the City and walk away from common standards”. Sunak said there will be new sustainability disclosure requirements for companies to report on the impact they have on the environment, a step the EU has already taken


• The substantial increase in Eurozone annual HICP inflation so far this year took a break in June when it decreased to 1.9 percent; a slight decline from 2.0 percent in May. This was expected, and was already suggested by German and Spanish numbers released yesterday. The pause was mainly due to the predictable milder upward annual base effects, both from energy and service prices. As should be expected, annual inflation on industrial goods (ex-energy) increased markedly, and food price inflation increased a tad. Hence, Core CPI inflation also slowed a notch in June to 0.9 percent. Looking ahead, base effects should keep inflation stable in July, but kick in again during second half of 2021, probably lifting annual inflation rates above 2.5 percent late this year. This second leg of the inflation rise is expected to be fuelled more by core prices

• These numbers will probably do little to alleviate ongoing speculation about inflation possibly trending higher than earlier expected. At the June policy meeting, the ECB stuck to the narrative of the inflation spike being due to temporary factors, but did raise inflation estimates for this year and to a lesser extent next year. Furthermore, some members of the governing council have begun to voice concerns about upside risks to inflation, unsurprisingly with Germany’s Weidmann being one of them. The ECB annual inflation profile is basically in line with the inflation picture, merely based on the average historical monthly price development. Given the present challenges in terms of capacity problems and higher commodity prices in the midst of a strengthening recovery and signs of higher food price inflation ahead, a case for risks to the upside on expected inflation this year could be made

• The European Commission’s Economic Sentiment Index improved markedly in June, rising from 114.5 to 117.9. Not only did this top the 116.5 print expected by consensus and the indicator’s pre-recession peak (104.0 in 2020M02), it was also the second-highest level recorded since data collection began in 1985. Confidence rose in all five sectors surveyed: manufacturing (from 11.5 to an all-time high 12.7), services (from 11.3 to a 14-year high 17.9), consumers (from -5.1 to a 41-month high -3.3), retail (from 0.5 to a 42-month high 4.5), and construction (from 4.9 to 5.1). At the national level, confidence improved in Germany (from 112.2 to an all-time high 117.2), France (from 110.9 to 112.2), and Italy (from 115.8 to 117.9). The progressive re-opening of the economy and ramping-up of the vaccination campaign should help lift sentiment further

• Shares in Europe were down slightly on worries that inflationary pressures might bring forward interest rate increases. Another headwind was the spread of a highly infectious variant of the novel coronavirus, which clouded the outlook for an economic recovery. In local currency terms, the pan-European STOXX Europe 600 Index slipped 0.18%. Major indexes were mixed. Germany’s Xetra DAX Index rose 0.27%, while France’s CAC 40 Index fell 1.06% and Italy’s FTSE MIB Index declined 0.89%


• China’s railway investment from January to May dropped 8% to RMB 203.6 billion from a year earlier, according to the country’s National Railway Administration. The decline was surprising given that Beijing has favored infrastructure investment to spur growth in the post-pandemic recovery

• June’s official manufacturing PMI met expectations. However, the nonmanufacturing PMI came in weaker than expected, which may have been due to a resurgence of COVID-19 infections in the southern province of Guangdong. The Caixin manufacturing PMI eased to 51.3 from 52.0, with firms recording slower increases in both output and new orders. In this regard, new export orders were more or less stagnant in the month. Factory payrolls continued to expand marginally in an effort to expand capacity. Input price inflation, meanwhile, softened to a seven-month low, which in turn led to a slower increase in prices charged. Supplier delays lengthened “solidly”, with firms mentioning that “a lack of stock at vendors and logistical delays related to the pandemic had hampered supplier performance.”

• Industrial profits growth also remained strong, according to the official monthly survey of profits at larger industrial enterprises. Filtering out pandemic base effects, industrial profits’ two-year average growth slowed slightly from 22.6% in April to 20.2% in May, leading some analysts to believe that industrial profits growth may have peaked this cycle. Sales revenues from January to May surged 9.9% on the same two-year average basis.

• On the property front, secondhand home prices in Shenzhen—one of China’s hottest property markets—declined in May, the first monthly retreat since July 2019, while transaction volumes in the city have fallen every month since February, according to local reports. The decline in transactions suggests that the government’s efforts to cool the property market nationwide and to curb speculation in Shenzhen may finally be working

• Investors had expected ample liquidity ahead of China’s celebration Thursday of the ruling Communist Party’s 100th anniversary, especially after a cash injection the previous week. The seven-day interbank rate rose to a level about 30 basis points above the official target, but analysts said the rise more likely reflected market pressures at quarter-end and did not necessarily signal tighter policy. In its latest policy meeting, the People’s Bank of China said that it would “keep the macro leverage ratio basically stable,” suggesting that the central bank would not tighten policy in the near term

• Chinese stocks fell for the week. Both the Shanghai Composite Index and large-cap CSI 300 Index posted a weekly loss after each index recorded its biggest one-day percentage drop since early March on Friday, Reuters reported. Reports of profit-taking by domestic investment funds and open market operations undertaken by China’s central bank to drain funds from the financial system may have contributed to the declines

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