Economic Outlook – 7 March 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 increased +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.

• In January, the goods and services trade deficit was USD$68.2 billion, USD$1.2 billion or 1.9% wider than the USD$67.0 billion deficit recorded in the previous month.
o Exports rose USD$1.8 billion to USD$191.9 billion and imports increased USD$3.1 billion to USD$260.2 billion.
o The January increase in the goods and services deficit reflected an increase in the goods deficit of USD$1.3 billion to USD$85.4 billion and an increase in the services surplus of USD$0.1 billion to USD$17.2 billion.
o The goods trade deficit with China decreased 3.4% month-on-month in January to USD$27.2 billion.
o In the fourth quarter of 2020, the goods and services trade deficit with China increased USD$4.2 billion to USD$80.0 billion, a 17.5% widening when compared to the 2019 fourth quarter.

• Non-farm payrolls came in stronger than expected in February. NFP rose 379K in February, more than the +200K print expected by consensus.
o The positive surprise was compounded by a 38K revision to the prior months’ results.
o The private sector added 465K jobs in February.
o Employment in the goods sector fell 48K as declines for construction (-61K) and mining/logging (-8K) was only partially offset by a gain in manufacturing (+21K).
o Services-producing industries in the private sector, meanwhile, expanded payrolls by 513K on gains for leisure/hospitality (+355K), professional/business services (+63K), health/social assistance (+46K) and retail (+41K).
o Employment in the public sector dropped 86K as state/local administrations shed 83K jobs.
o Average hourly earnings sprang 5.3% year-on-year, unchanged from the prior month.
o Released at the same time, the household survey reported a 208K job gain in February.
o The participation rate remained unchanged at 61.4% and the unemployment rate edged down one tick to 6.2%.
o Full-time employment fell 122K, while part time positions expanded 482K.
o As COVID-19 caseloads eased in the country, the sectors most affected by social distancing recovered strongly.
o 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 February had the opposite effect.
o As Fed Chairman Jerome Powell said in a speech last month: “Published unemployment rates during COVID have dramatically understated the deterioration in the labour market”.
o If participation levels had been the same in February as in the pre-crisis period, the unemployment rate would have been closer to 9.0%. There is, therefore, still a long way to go for the labour market.
o Of the jobs still to be regained, around 8.5 million are in the services sector, which should progressively recover as the positive effects of mass vaccination begin to be felt.

• In January, construction spending rose 1.7% to USD$1,521.5 billion, which is 5.8% above January 2020 levels.
o Residential spending sprang 2.5% month-on-month to a seasonally adjusted annual rate of USD$713.0 billion, while private non-residential activity was up a modest 0.4% month-on-month to USD$447.0 billion.
o Public expenditures rose 1.7% to USD$361.5 billion.

• The ISM Manufacturing PMI did not buck the trend in February, rising 2.1% points to 60.8. The last time it stood at such a height was in February 2018.
o The Manufacturing PMI has been this strong or stronger only four times since 1995, with a peak in May 2004 of 61.4.
o The New Orders Index rose 3.7% points to 64.8, extending its streak of printing above 60 to eight months.
o The Production Index climbed 2.5% points to 63.2, which is marginally above its six-month moving average of 62.6.
o Employment Index rose from 52.6 in January to 54.4, its strongest reading since March 2019.
o With all 18 industry groups surveyed reporting higher costs in February, the Prices Index hit 86, its highest level since the summer of 2008.
o Already slow supplier deliveries worsened in the month owing to weather conditions in Texas and storms that hit other parts of the country mid-month.
o The Supplier Deliveries Index rose 3.8 points to 72. On the whole, the situation suggested further price-pressure build-up down the road.

• Unlike the Manufacturing PMI, the Service Index came in below expectations in February, falling 3.4 points to 55.3, which was 1.7 points below its six-month average of 57.
o New orders dropped sharply to 51.9 from 61.8 in January.
o Business activity declined 4.4 points to 55.5, the lowest reading for this sub-index since May.
o The Employment Index printed at 52.7, down 2.5% points from the January reading of 55.2.
o The Service Index was nonetheless still comfortably in expansion territory.
o Only three of 18 industries reported decreased activity against 14 that reported increased activity.

• These indexes constitute a diffusion index and do not say much about magnitude.
o There is no runaway inflation according to the latest Beige Book based on information collected on or before February 22nd.
o It indicated that, on balance, non-labor input costs rose moderately over the reporting period.
o Pricing power reports were mixed, with some retailers and manufacturers affected by input cost increases reporting the ability to pass prices through, while many others were unable to raise prices.
o Several Districts reported anticipating modest price increases over the next several months.”

• The US Census Bureau factory orders report showed total orders rose 2.6% to USD$509.4 billion in January after increasing 1.6% in December.
o Ex-transportation, orders rose 1.7%.
o Unfilled orders at factories edged up 0.1% after slipping 0.2% the month before.
o Orders for non-defence capital goods excluding aircraft, which are considered as a measure of planned business spending on equipment, were revised down to an increase of 0.4% instead of 0.5% as previously reported.
o Shipments of core capital goods, which are used to calculate business equipment spending in the GDP report, were revised down as well, from 2.1% month-on-month to 1.8%.

• Long term unemployment is another concern at the moment. The number of Americans who have been seeking work for 27 weeks or more continued to increase in February, to a seven-year high of 4.1 million.
o Since the consequences of unemployment increase with duration, the swelling of the ranks of the long-term unemployed is an indicator that will bear close watching in coming months.
o Hopefully, the vaccination campaign currently taking place in the United States will allow for a more lasting recovery in employment.
o In the meantime more federal aid is now on the way to support jobseekers. Congress looks set to approve an even bigger aid plan. The USD$1.9 trillion proposition (9.0% of GDP) includes a new round of cheques to household and an extension of the UI benefit enhancement until September.
o This should help the still-elevated number of job-seekers to bridge the gap to the post-crisis world.

• Global bond yields continued to rise this week as investors priced in a robust economic reopening that they fear will result in resurging inflation.
o The rise in yields elicited varied responses from central bankers this week.
o The Reserve Bank of Australia stepped up the pace of its bond buying program in an attempt to curb rising yields while European Central Bank officials intervened verbally ahead of a rate-setting meeting scheduled for next week.
o The US Federal Reserve was a relative outlier as Chair Jerome Powell once again avoided forcefully pushing back against the tide of increasing yields. Powell did say that the yield backup has caught his attention and that disorderly moves would be unwelcome, but bond bulls had hoped he would address the possibility of changing the composition of the Fed’s quantitative easing program or suggest other steps to keep the yield surge from derailing a nascent economic recovery.

• This rise in global bond yields, particularly in real, inflation-adjusted yields, has undermined prices of stocks with very high P/E multiples.
o A number of megacap technology companies have fallen over 20.0% from their recent highs.
o So too have the prices of SPACs (special purpose acquisition companies), so-called “blank check” companies, that provide an alternative means of bringing private companies public. An index tracing SPACs has plunged 20.0% in the past two weeks.
o MFS Global Investment Strategist Rob Almeida observes that the main risks to asset prices are near-term rising real yields and earnings disappointments amid elevated expectations.

• Progress in the Biden administration’s USD$1.9 trillion stimulus package appeared to further bolster growth expectations.
o The Senate approved debate on the package on a party-line vote, with Vice President Kamala Harris breaking the 50-50 tie in the Democrats’ favor.
o To secure the votes of some centrists in their party, Democratic leaders agreed to more quickly phase out direct payments to higher-income individuals, although it was unclear how much this would reduce the bill’s total size.
o Most elements of the bill, including the USD$400 per week in federal unemployment benefits, remained intact and in line with the legislation passed in the House of Representatives the previous week.

• In terms of data release, the NFIB Small Business Optimism Index started the year off on the wrong foot. The index declined 0.9 points to a reading of 95 in January, the third straight drop. The recent string of diminishing optimism is explained by the winter wave of COVID infections which led to a pullback in economic engagement toward the end of 2020. About 37% the NFIB survey are high-contact businesses such as full-service restaurants, retail shops, hair salons and dry cleaners, so the fall in COVID case counts and more relaxed restrictions stand to provide a boost to confidence.

• Wednesday brings the CPI reading. Market attention is expected to be sharply focused on February’s reading of the Consumer Price Index (CPI) next week. During January, the headline CPI rose 0.3% during the month and 1.4% over the year. The monthly increase was flattered somewhat by rising energy prices, with gasoline prices jumping 7.4%. Goods prices edged up 0.1%, while the services index was flat for a second consecutive month. Elsewhere, inflation pressures remained fairly tame. The core index, which excludes volatile food and energy prices, was essentially unchanged in January. The headline CPI is expected to advance 0.4% in February, a forecast that is in line with consensus estimates. Energy prices continue to rise, although it may take a month or two for the effects of February’s arctic blast that sent energy prices skyrocketing in many parts of the country to feed through to the overall index. Core prices are likely to pick up, but only modestly so

• The February flash annual consumer price index was slightly higher at 0.9% year-on-year compared to the previous month (but equal after rounding).
o All categories except energy had a lower year-on-year contribution to headline inflation than they did the previous month.
o Core inflation was 1.1% compared to 1.4% the previous month.
o Services inflation declined somewhat, likely due to lingering pandemic restrictions across much of the eurozone.
o Both headline and core inflation outcomes were in line with expectations.

• In France, headline inflation slowed to 0.7%, reflecting the delayed holiday sales compared to last year, but was nonetheless boosted to some extent by energy prices.
o After a large increase last month, this month’s reading from Germany was unchanged at 1.6%. Base effects from last year’s falling energy prices are likely to push inflation upward even further next month.
o The reduced weighting last month of travel- and package holidays implies that a seasonal uptick could have less of a contribution going forward.
o In Italy, a broad increase across most categories brought inflation up to 1.0%.
o In Spain, an unexpected slowing to -0.1% was largely the result of a drop in electricity prices, whereas hospitality services also reported lower growth rates.

• This week’s PMIs revealed that the manufacturing sectors continues to do well while the service sector activity is undermined by restrictions (restaurants, hotels etc.).
o Notably the German and Italian manufacturing sectors showed strong signs, while Ireland, Spain and France saw the sharpest contraction.

• January retail sales data were released for the Eurozone. The results were underwhelming on all fronts.
o On a year-on-year basis, Eurozone retail sales contracted 6.4% in January, a significant miss from the consensus forecast for a decline of 1.2%.
o On a month-on-month basis, data were just as bad. Retail sales contracted 5.9% month-over-month compared to estimates for a decline of just 1.4%.
o The retail sales data were likely a product of renewed COVID-related restrictions imposed across the region in late 2020.
o Over the winter months, the Eurozone experienced a renewed upturn in COVID cases and put strict lockdowns in place through at least April. Lockdowns are clearly having a harsh impact on consumer spending patterns and will likely take a significant toll on Eurozone GDP in the early parts of 2021.

• Shares in Europe ended higher, buoyed by the prospect that easing restrictions implemented to curb the coronavirus’s spread and supportive monetary and fiscal policies could set the stage for an economic recovery. However, gains were curbed by growing expectations that central banks would act to stem inflation. The pan-European STOXX Europe 600 Index rose 0.91% in local currency terms.

• On Thursday, the European Central Bank will hold a monetary policy meeting. Over the past few weeks, the ECB policymakers have been more vocal in regard to economic developments, both locally and globally.
o In recent weeks, ECB President Christine Lagarde has commented on the possibility of easier monetary policy, exchange rate developments as well as the sharp rise in global bond yields.
o The ECB is unlikely to make changes to monetary policy at this time; however, there is a possibility it could start to signal easier monetary policy is a real possibility.
o Softer-than-expected retail sales further complicates the economic outlook in the early parts of 2021.
o With economic activity under pressure as well as a stronger euro and higher bond yields to contend with, the Eurozone economic outlook could be deteriorating.
o In that sense, ECB policymakers may be forced to take action soon.
o At next week’s meeting, attention will be focused on any signals from Christine Lagarde regarding plans to increase asset purchases or other targeted actions to spark economic activity across the region.

• Chancellor of the Exchequer Rishi Sunak unveiled the British government’s 2021 budget this week.
o It includes GBP£65 billion in additional spending to counter the effects of the pandemic and introduced significant incentives for corporations to invest in the United Kingdom.
o Some of the new spending will be offset by a hike in the tax rate for large companies that will raise the rate to 25.0% in 2023 from 19.0% today.
o By the middle of the decade, the UK is on pace to face its highest total tax burden in over 50 years.

• London Stock Exchange shares tumbled on Friday with analysts saying markets were “spooked” by costs for integrating data and analytics company Refinitiv, which it acquired in January for USD$27 billion.
o The 300 year old bourse will transform into a one-stop shop for data, trading and analytics with the Refinitiv takeover and offered shareholders a final dividend of 51.7 pence a share as a reflection of the “good performance and confident outlook” for the new group.
o But after a conference call with analysts, its stock fell 13.0% to 8,237 pence, its biggest one-day fall in a year.
o Credit Suisse said the results, which included a 3.0% rise in revenue driven by growth in the FTSE Russell and clearing businesses and a 5.0% jump in adjusted operating profit, were broadly in line with expectations but guidance for mid-single digit cost growth for 2021 had “spooked the market”.
• The EU accused the UK of breaking the terms of the Northern Ireland Protocol, a key part of the UK’s post-Brexit deal with the EU, after Britain unilaterally extended grace periods for border checks on food imports to Northern Ireland.
o The EU said it would take legal action, with a view to imposing tariffs and fines.
o Irish paramilitary groups said in a letter to Prime Minister Boris Johnson they would temporarily withdraw support for the 1998 Good Friday Agreement because of the disruption to trade caused by the Northern Ireland Protocol.

• Official purchasing managers’ indexes for manufacturing and services in February came in below expectations.
o The below-consensus PMI readings reflected a number of factors, including the disruption of the weeklong Lunar New Year holiday and renewed travel restrictions after a coronavirus outbreak in northern China earlier this year.
o February’s weakness in the official data was confirmed by the private Caixin survey, whose manufacturing index fell to a nine-month low.
o Analysts were not alarmed by the weak PMI readings from China, the only major economy to expand in 2020.
o Many workers who couldn’t travel home for the Lunar New Year returned to factories earlier than usual, which should support activity in the near term.
o Strong export demand, rising domestic consumption, and a faster pace of vaccinations are also seen as tailwinds for China’s economy in 2021.

• The yield on China’s sovereign 10-year bond rose to end the week at 3.36%, and the renminbi currency ended broadly flat against the US dollar.
o Analysts believe that the People’s Bank of China has little reason to tighten monetary policy at this point, given the absence of inflation pressures.
o A rate hike would encourage strength in the renminbi, which Beijing is trying to avoid.

• This year’s NPC coincides with the first year of China’s 14th Five Year Plan. Analysts expect that lawmakers will focus on long-term goals, such as doubling the size of the economy by 2035 and achieving full decarbonization by 2060, with peak emissions in 2025.
o The question of how soon China will normalize economic policy after the coronavirus crisis is a more pressing concern to investors.
o On Friday, China unveiled its official 2021 growth target of above 6.0%, a goal widely seen as conservative.
o A target of over 6.0% will enable all of us to devote full energy to promoting reform, innovation, and high-quality development, Premier Li Keqiang stated at the opening of the NPC.
o Beijing also reduced its fiscal deficit target to 3.2% of gross domestic product from 3.6% in 2020, as widely expected.

• Chinese shares fell in choppy trade as rising US yields and inflation expectations spilled into the country’s stock market.
o The large-cap CSI 300 Index fell 1.4%, while local currency A shares shed 0.2%.
o Technology shares fell in sympathy with recent highflying names related to consumers, electric vehicles, and property management.
o Hawkish remarks from China’s banking and insurance regulators signaling the need to deleverage and avoid financial bubbles, along with a dovish article in the state-run China Securities Journal mentioning possible interest rate cuts, fueled significant volatility in financial and technology stocks.
o Overall, the tone for Chinese stocks was cautious ahead of the annual National People’s Congress (NPC), the country’s highest-profile political gathering that kicked off on Friday.

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