Economic Outlook – 6 June 2021


• Oil prices rises to the highest level in two years. This week OPEC stuck to the current plan of gradually normalising oil output. This led to Brent rising to just below USD72/bbl, as the market seems more concerned about risk of tight oil market in coming months than OPEC normalising output too fast. It follows a period of moving broadly sideways since March but demand is now about to pick up with travelling going up over the summer. Industrial metals continue to take a break from the strong rally, though, as copper and aluminium prices drift lower


• The ISM Manufacturing exceeded consensus expectations coming in at 61.2 in May, half a point higher than the prior month. The subcomponents moved in both directions. The story that emerges is one of a manufacturing sector that could be growing much faster were it not for supply-side growing pains. Supplier deliveries in May reached their highest level since 1974. Long wait times are having a predictable effect on output; the production index fell to 58.5 from 62.5. While any figure north of 50 signals expansion, the slowing in this measure has to be infuriating for factories that are seeing a once-in-a-lifetime demand surge, but are unable to take full advantage of it for lack of parts. This was captured in one of the featured respondents who said, “demand is strong, but what good is that if you cannot get the materials needed to produce your finished goods?” Price pressures remained front and center, with the prices paid index coming in at 88.0 in May and scarcity keeping a bid on limited supplies

• The services ISM shot up to a record high of 64.0 in May. It is increasingly apparent that manufacturers are not the only ones cursing the fact that they cannot source the materials they need. The supplier deliveries subcomponent in this week’s services ISM rose to 70.4, a figure exceeded only in the midst of last year’s lockdowns. Here too, demand is outstripping scarce supply, pushing the prices paid component to the second-highest reading on record. While some service industries, like finance and insurance, are not particularly parts-reliant, many are. Note that the ISM counts among services companies industries like construction, wholesale trade, transportation & warehousing as well as retail trade and mining. It is difficult to overstate the degree of euphoria across various industries within the service sector. 100% of industries report overall growth, 100% of industries report increasing business activity, 100% of industries saw an increase in new orders…and 100% of industries report paying higher prices. Contributing to upward price pressures are ongoing challenges to restaff after the pandemic. The employment components of both ISM measures slipped in May in a harbinger of what was to come with Friday’s disappointing jobs report

• Employers added 559K new workers to nonfarm payrolls in May, and while that was a near doubling of the prior month’s gain, it fell short of expectations for even faster hiring. Demand for labor is clearly strong, as evidenced by record job openings, elevated hiring plans and a leap in consumers viewing jobs as plentiful. But finding workers remains a clear hurdle to hiring. The fact that average hourly earnings increased more than double what was expected and is way above pre-pandemic trend points to the fact that materials are not the only things in short supply. The length of the average work week has been trending higher as well.

• Nearly four million Americans will be affected by the early withdrawal from federal unemployment programs. In the past month, 25 states have announced plans to end pandemic-era benefits slated to expire 6 September, with some states ending the aid as early as 12 June. The states include Alabama, Alaska, Arizona, Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Maryland, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, West Virginia and Wyoming. Those affected will lose the $300 weekly unemployment supplement, and most states are ending benefits entirely for the self-employed, gig workers and the long-term unemployed

• Some Fedmembers are starting to flag the need to start discussing tapering of its QE programme. The Fed’s Patrick Harker said on Wednesday that”it may be time to at least think about thinking about tapering”. He added, though, that “we will remove accommodation carefully and methodically as the economy continues to strengthen…Our goal here is to be boring.” He is the third member to suggest that the tapering discussion is likely to come up soon after similar comments from the more influential member Fed Vice Chairman Richard Clarida as well as FOMC Board member Randal Quarles. Despite the comments the Fed has so far succeeded in being boring as bond yields have reacted little to the twist in comments-

• The major indexes closed moderately higher in a shortened trading week, with markets closed Monday in observance of Memorial Day. Energy shares performed best within the S&P 500 Index as oil prices reached their highest level in two years. Consumer discretionary shares lagged, weighed down by a decline in Tesla. Trading volumes were generally light, as is typical of the start of the summer holiday season


• Banks and industrial stocks weighed on London’s FTSE 100, while airline stocks came under pressure as Britain tightened travel restrictions again. The blue-chip FTSE 100 index (.FTSE) edged 0.1% lower, with HSBC (HSBA.L), Prudential (PRU.L), Barclays (BARC.L) and Lloyds banking group (LLOY.L) down between 0.7% and 1.2% after weaker than expected U.S. jobs data pushed bond yields lower. Miners, including Anglo American (AAL.L), BHP Group (BHPB.L) and Rio Tinto (RIO.L) offered the biggest support. British airways owner IAG (ICAG.L) lost 0.9% after Britain removed Portugal from its quarantine-free travel list and added seven more countries to its red list

• British spending on credit and debit cards held at 95% of its pre-pandemic level last week, unchanged from the previous week’s reading, official data showed on Friday. The Office for National Statistics also said online job adverts last week stood at 127% of their February 2020 level, up 8 percentage points from the previous week, based on figures from online jobs portal Adzuna

• British construction activity surged in May at the fastest rate in nearly seven years, fuelled by a record increase in new orders as coronavirus lockdown measures lifted, a survey showed. The IHS Markit/CIPS Construction Purchasing Managers’ Index (PMI) jumped to 64.2 from 61.6 in April, its highest level since September 2014. A Reuters poll of economists had pointed to a reading of 62.3. Growth was fastest in the housebuilding sector, reflecting a boom in the housing market – with house prices rising by more than 10% in annual terms, according to the latest official data.


• Eurozone inflation increased in May to 2% YoY, compared to 1.6% in the previous month, and slightly above expectations. The increase from the previous month was to a significant part driven by higher energy prices and services. The only component that had less of a positive contribution compared to the previous month was the category food, beverages, and tobacco. Meanwhile, core inflation rose to 0.9% this month, compared to 0.7% last month, which was in line with expectations. Unemployment in April was 8%, and slightly below expectations, compared to 8.1% from the previous month. Youth unemployment, meanwhile, was stable at 17.2% compared to the previous month. A number of arguably transitory factors are exerting upward pressure on annual inflation at the moment. Compared to January, headline inflation as of May is roughly equal to the median over the past 17 years. Combined with the weighting changes that caused a jump in January this year and the soft readings from last year make for large YoY inflation numbers. The contribution from energy prices, however, is bound to lessen somewhat in June, although the base effect from last year’s drop in energy prices will continue to weigh on inflation throughout most of the year. That said, base effects in core inflation will widen again in the latter half of the year, due to the slump in services inflation during the second wave of the pandemic

• Final purchasing managers’ survey data for the eurozone confirmed a revival in the service sector that was accompanied by booming manufacturing activity. IHS Markit said the data indicated that gross domestic product (GDP) “should rise strongly in the second quarter.” Meanwhile, retail sales in the bloc fell in April by a greater-than-expected 3.1% sequentially, although they rose 23.9% YoY on a calendar-adjusted basis

• Following a decision last July to raise €750 billion ($917 billion), the European Union is set to raise much-needed funds from public markets and boost the economies of its 27 members. Now that the legislative steps have been taken, the European Commission can tap capital markets in search of those funds as early as this month. The stimulus comes on top of what the individual governments have already deployed in the wake of the pandemic. EU capitals will receive an initial disbursement of 13% of the total amount they are to receive in the coming months, with future payments hinging on whether countries have implemented necessary reforms

• Shares in Europe rose amid optimism about the prospect of an economic recovery. However, worries that central banks might begin withdrawing stimulus sooner than expected because of inflationary pressures curbed equities’ advance. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.80% higher. Italy’s FTSE MIB Index climbed 1.59%, Germany’s Xetra DAX Index gained 1.11%, and France’s CAC 40 Index added 0.49%


• China’s monetary officials continue to rely on macroprudential policies to tighten credit. On June 1, the China Banking and Insurance Regulatory Commission (CBIRC) warned smaller banks not to increase their property loans as bigger banks reduced their lending to the sector. Meanwhile, regulatory pressure to tighten the flow of capital to the property sector appeared to be working. Total onshore and offshore bond financing by developers fell 18% from January to May over the prior-year period to a three-year low, according to HSBC. As a result, many economists in China believe that residential construction activity will decline later this year and become a growth headwind. Property sector loans posted the slowest growth in eight years in April, according to the CBIRC

• China’s finance ministry plans to transfer its stakes in the country’s big four asset management companies into a new holding company, Bloomberg reported. The move would reduce the government’s controlling stakes in the state-run companies and aims to separate its dual roles as regulator and shareholder. In currency trading, the renminbi weakened slightly against the U.S. dollar to end at 6.40 per dollar

• After China’s surprise May 31 announcement that it would relax the current two-child policy and allow couples to have a third offspring, many economists believe that the measure will do little to alter the trajectory of the country’s looming demographic crisis. Many analysts point to the relatively low number of births that occurred the last time China relaxed its birth policy starting January 2016, when the government allowed two children per family

• Chinese stocks retreated after recording three weeks of gains. The large-cap CSI 300 Index shed 0.7% and the benchmark Shanghai Stock Exchange edged down 0.2%, according to Reuters. Foreign investors bought USD 8.7 billion of Chinese stocks in May, the highest single month this year, Reuters added. In the bond market, the downtrend in yields took a breather. The yield on the 10-year Chinese government bond (CGB) rose 2 basis points to 3.11%, a relatively high level compared with other major government bond yields. Over the last six months, Bloomberg’s local currency index for CGBs returned 3.4%, while the spread over comparable 10-year U.S. Treasury yields tightened almost 100 basis points

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