Economic Outlook – 7 February 2021

US

  • January nonfarm payrolls rose 49K, less than the +105K print expected by consensus. The negative surprise was compounded by a 159K downward revision to the prior months’ results.
    • The private sector added 6K jobs in January.
    • Goods sector employment edged down 4K as a gain in the mining/logging segment (+9K) was more than offset by small declines for construction (-3K) and manufacturing (-10K).
    • Services-producing industries in the private sector, meanwhile, expanded payrolls by 10K on gains for professional/business services (+97K) and information (+16K).
    • Alternatively, cuts were observed in leisure/hospitality (-61K), health/social assistance (-41K), retail trade (-38K) and transportation/warehousing (-28K).
    • Employment in the public sector advanced 43K on the back of a solid rise at the state/local level (+67K). Average hourly earnings sprang 5.4% year-on-year, unchanged from the prior month.
    • The household survey reported a 201K job gain in December. Effective with data for January 2021, updated population estimates were incorporated into the household survey. These annual population adjustments can affect the comparability of household data series over time. If the distorting impact of that practice on the data reported for January are removed, it would show a 381K gain as opposed to the 201K reported. However, unemployment rate, employment-population ratio, and labor force participation rate were unaffected by the adjustment. Thus, with the 1-tick drop in the participation rate, the unemployment rate fell from 6.7% to 6.3%.
  • Non-farm payrolls came in weaker than expected in January. Without wishing to minimize this miss, it must be said the weakness was concentrated in only a few industries.
    • Indeed, the leisure/hospitality, education/health and retail segments continued to shed jobs in the first month of the year, which is not surprising considering still-high COVID-19 caseloads and hospitalizations in the US.
    • Although these three categories represent around 35.0% of total payrolls, they account for about 60.0% of the jobs lost since the beginning of the crisis.
    • As has been the case since the beginning of the crisis, the deteriorating health situation impacted part time employment a lot more than it did full-time positions, something which tends to limit pass-down effects on GDP.
    • Despite these few mitigating circumstances, non-farm payrolls remained 6.5% (or 9.9 million) below their pre-pandemic level in January, a shortfall similar to the 6.3% recorded at the worst point of the recession of 2008-2009.
    • Of the jobs still to be regained, around 9 million are in the service sector, which will remain more fragile until the positive effects of mass vaccination begin to be felt, something that may have to wait until the second quarter of the year.
  • Given that the consequences of joblessness increase with duration, the swelling of the ranks of the long-term unemployed is an indicator to be watched closely in coming months.
  • The $900 billion fiscal stimulus recently passed in Washington includes provisions for the sending of checks worth $600 to most Americans and the extension of special unemployment insurance programs set up to deal with the pandemic (Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation).
  • The ISM Manufacturing PMI slipped 1.8 points to 58.7. The drop, which was somewhat steeper than expected, indicates that the pace of growth in the sector remained strong, only slightly less vigorous.
    • New orders fell 6.4 points to 61.1, contributing heavily to the headline index’s retreat.
    • It should be noted that, while the percentage of firms that reported higher new orders slid 3.3 points to 37, a majority of respondents (51.0% compared with 45.1 in the previous month) indicated that new orders held steady.
    • Down 4 points to 60.7, current production, too, contributed to pull back the headline index. Again, however, the percentages of firms that reported higher, stable and lower activity are more suggestive of plateauing than outright softening of production growth.
    • The employment component rose for a second month in a row, hopping from 51.7 to 52.6. The prices paid component, instead, surprised on the upside, jumping 4.5 points to 82.1, its highest reading since April 2011.
    • Transportation bottlenecks and labour market constraints combined to slow down supplier deliveries in January, as evidenced by a 0.5-point jump in the index to 68.2.
    • On the whole, the situation pointed to further price-pressure build-up down the road.
  • New orders for manufactured goods rose 1.1% to US$ 493.5 billion, after growing 1.3% the previous month.
    • Orders for durable goods increased 0.5% to US$ 246.4 billion, while orders for non-durable goods swelled 1.7% to US$ 247.1 billion.
    • Orders for non-defence capital goods excluding aircraft rose 0.7% in December, revised up a tick from the earlier estimate of 0.6%. All in all, the December data showed good momentum going into 2021.
  • Construction spending rose 1.0% to US$ 1,490.4 billion after increasing 1.1% (revised up from 0.9%) in November. Since December 2019, it was up 5.7%.
  • Residential spending sprang 3.1% month-on-month to a seasonally adjusted annual rate of US$ 691.0 billion, while private non-residential activity was down 1.7% to a seasonally adjusted annual rate of US$ 446.6 billion.
  • Public expenditures rose 0.5% to US$ 352.8 billion.
  • The goods and services trade deficit were US$ 66.6 billion, US$ 2.4 billion less than the US$ 69.0 billion deficit recorded in the previous month.
  • Export rose US$ 6.2 billion to US$ 190.0 billion and imports increased US$ 3.8 billion to US$ 256.6 billion. According to the US Department of Commerce, the December narrowing of the goods and services deficit reflected a decrease in the goods deficit of US$ 2.8 billion to US$ 84.2 billion and a decrease in the services surplus of US$ 0.4 billion to US$ 17.5 billion.
  • The goods trade deficit with China decreased US$ 2.3 billion to US$ 28.1 billion in December. In 2020, the goods and services deficit were US$ 678.7 billion, the equivalent of 3.2% of GDP, compared to 2.7% in 2019.
  • While President Biden has done much in the early days of his administration to reverse policies put in place by the administration of former President Donald Trump, thus far he has maintained many of Trump’s trade policies.
    • A case in point is his administration’s decision to maintain aluminum tariffs on the United Arab Emirates that had been scheduled to be lifted by Trump.
    • Biden is also retaining Trump’s tariffs on imports from China and there seems to be no reason to remove Huawei and other Chinese companies from the US blacklist.
  • The major benchmarks rebounded from the previous week’s steep losses, helped by fiscal stimulus plans and vaccine optimism.
    • The large-cap S&P 500, Nasdaq Composite, and small-cap Russell 2000 indexes all reached record highs.
    • Energy stocks outperformed as domestic oil prices hit their highest level in over a year on a surprising drawdown in US reserves.
    • Health care shares lagged. It was an active earnings week, with 112 S&P 500 companies scheduled to report fourth-quarter results, according to Refinitiv.
    • Shares in Google parent Alphabet rose sharply after the company beat earnings and revenue estimates on better-than-expected advertising growth.
  • The social media-coordinated “short squeeze” targeting hedge funds with short positions in GameStop and a few other companies also abated, but buyers turned their attention instead to the silver market, sending silver prices to their highest level since 2013.
  • In terms of data release, lot of attention will be on January’s CPI report.
    • While the economic recovery is losing steam, supply issues in the manufacturing sector should have continued to exert upward pressures on prices.
    • The core index is expected to have gained 0.2% month-on-month following a weak print the prior month (+0.1%). As a result, the annual core inflation rate should remain at 1.6%.
    • Headline prices could have risen 0.3% month-on-month on a steep increase in the gasoline segment, allowing the annual rate to rise one tick to 1.5%.

UK

  • The Nationwide House Price index came out at 6.4% year-on-year, -0.3% month-on-month for January 2021 (consensus: 6.9% year-on-year, 0.2% month-on-month).
    • The bigger decline is attributable to the slowdown in December, when growth had been 7.3% year-on-year and 0.9% month-on-month.
    • House prices have been one of the surprises throughout the pandemic, not only holding their own in the face of the worst recession in three centuries, but actually increasing.
    • Nationwide notes that much of the ongoing interest in housing is due to people seeking more living space as a result of changes to lifestyle brought about by COVID-19.
    • These numbers are supported by Bank of England data on mortgage lending, which saw lending decline slightly from GBP 5.7bn to GBP 5.6bn, although this was still above consensus which had been GBP 5.4bn.
  • The Bank of England meeting drew more attention than usual as they assessed the question of negative rates. While the BoE does not rule out negative rates all together, it does not seem to be the current strategy, hence, supporting  expectations of no cut into negative.
  • Britain plans to tax retailers and tech companies whose profits have soared during the COVID-19 pandemic.
    • The government has summoned companies to discuss how an online sales tax would work, while plans are also being drawn up for a one-off “excessive profits tax”.
    • Finance minister Rishi Sunak is unlikely to announce these taxes at the budget announcement scheduled for 3rd March.
  • British mid-caps rose scoring their best week since November, as power equipment supplier Aggreko Plc soared following a buyout proposal and faster vaccine rollouts supported hopes for a brisk economic revival.
    • Aggreko surged 32.9% after saying it was in talks over a possible GBP£ 2.25 billion (USDD$3.09 billion) buyout by private equity groups TDR Capital LLP and I Squared Capital.
    • The mid-cap index rose 1.2% and the blue-chip FTSE 100 index fell 0.2%, with Unilever Plc and AstraZeneca Plc the biggest drags on the latter.
    • Progress in vaccine distribution and expectations of a large stimulus by US President Joe Biden’s administration helped global markets trade near their record highs and led to the FTSE 100 gaining 1.3%.
  • The January flash annual consumer price index was 0.9 % year-on-year compared to -0.3 % the previous month, and above expectations.
    • Core inflation was 1.4 %, reaching a five-year high, compared to 0.2 % the previous month, and significantly above expectations.
    • The almost 1.2% one-month rise in year-on-year core inflation is the largest ever.
    • Recent country releases had already indicated this data release would be higher than expected.
    • France, Germany, Italy and Spain saw headline (harmonised) inflation rates of 0.8, 1.6, 0.3, and 0.6 % respectively year-on-year in January.
    • Delayed winter sales, tax rises, and methodological changes in the harmonised index of consumer prices all contributed to the large increase in inflation.
    • Hence, despite its magnitude, the January jump will likely prove a one-off.

EU

  • In Germany the consumer price index (CPI) measure of inflation increased to 1.0% and the harmonised index of consumer prices (HICP) increased much more to 1.6%.
    • Common factors that drove these inflation rates upwards were arguably energy prices (to a large extent via a new carbon tax) and transport inflation, as well as upward pressure in January due to delayed winter sales.
    • The HICP-specific increase above and beyond that observed in the CPI measure likely pertains to methodological shifts as weights were updated after the new year, as well as differences in owner-occupied housing costs.
    • The divergence between HICP and CPI could be seen in Germany and to some extent in France, but the differences were smaller in Italy and non-existent in Spain.
  • Flash estimates of eurozone GDP in the fourth quarter of 2020 showed a clear decline, as quarter-on-quarter growth was -0.7% compared to a (revised downwards) 12.4% in the previous quarter.
    • The corresponding year-on-year growth rate was -5.1%, compared to -4.3% in the earlier period.
    • Country-specific estimates for France, Germany, Italy, and Spain showed economies exhibiting quarter-on-quarter growth rates at -1.3%, 0.1%, -2.0%, and 0.4% respectively.
    • The euro-wide declines in GDP in the fourth quarter are largely the consequence of ongoing COVID-19 containment measures and follow a remarkable uptick in the third quarter.
    • Whereas the better-than-expected fourth quarter results show signs of some resilience amid the second wave lockdowns, concerns over economic activity ahead have, if anything, increased.
    • The persistent spread of the virus, the arrival of mutated virus strains, an increasingly messy vaccination rollout, and extended containment measures will likely weigh heavily on GDP growth in the eurozone even in the first quarter.
    • The risk of a double-dip recession has thus increased significantly in the near term. Beyond this, however, is also the risk that delays in the vaccination rollout, due to supply issues and a resurgence in case numbers, could push the recovery further out in time.
  • Former European Central Bank President Mario Draghi has been given a mandate by Italy’s President Sergio Mattarella to form a unity government after Giuseppe Conte resigned as prime minister.
    • Draghi is meeting with Italy’s disparate political parties to see if a stable coalition can be formed. The former central banker is set to meet with the leadership of the anti-establishment 5-Star Movement, the largest bloc in Italy’s parliament.
    • Spreads between Italian government debt and German bunds narrowed on the prospect of a Draghi-led government.
  • Shares in Europe rose with global markets on hopes of a quicker economic recovery, spurred in part by hopes that the pace of coronavirus vaccinations would improve and by the prospect of more US fiscal stimulus.
    • The pan-European STOXX Europe 600 Index ended the week 3.5% higher.
    • Germany’s Xetra DAX Index and France’s CAC 40 posted solid gains but lagged Italy’s FTSE MIB Index, which rallied 7.00% after Mario Draghi, the former president of the European Central Bank, was given a mandate to form a new government.

China

  • Official gauges of industrial and services activities missed expectations in January, though both readings showed that activity remained in expansionary territory.
    • The slowdown in manufacturing activity was confirmed by the private Caixin/Markit survey, which showed that manufacturing in January grew at its slowest rate in seven months.
    • The below-forecast growth in services was likely due to the government’s campaign to discourage travel for the Lunar New Year holiday.
    • This showed how China’s services and consumption-driven sectors have lagged the broader economic recovery as coronavirus flare-ups continue to dampen sentiment.
  • Chinese stocks rose. The large-cap CSI 300 Index gained 2.5% and outperformed the Shanghai Composite Index’s 0.4% rise.
    • Sentiment improved following reports that Chinese e-commerce leader Alibaba Group, which has been the target of unfavorable regulatory actions, reached an agreement with regulators over the restructuring of its fintech affiliate Ant Group, whose record USD$ 34.4 billion initial public offering (IPO) was canceled in November.
  • In Hong Kong, a record over-subscription by retail investors for the USD$ 5.4 billion initial public offering of Kuaishou Technology revealed huge investor appetite for Chinese tech companies.
    • Shares of the video app company surged 161.0% in its Hong Kong public trading debut, making it the largest internet IPO since Uber went public in 2019, according to Bloomberg.

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

2021-02-07T18:31:18+00:00