Macro Weekly

Macro week 38 by #1 Chief Economist Harald Magnus Andreassen, and Macro Analyst Tina Norden

Last week

The virus

Most countries are still reporting a decline in new Covid-19 cases
The no. of hospitalisations has flattened or are falling almost everywhere – and even in the USA, from an elevated level there. Elsewhere in the rich part of the world, the pressure on the health system has been modest. In Norway just 19/mill are hospitalised (flattened last week), vs 100+ in the UK, and almost 300/mill in the US
In the West, mobility has not come down during the Delta outbreak, signalling that economic consequences are mild. The only remaining Covid-19 risk is another mutation that are resistant vs. vaccines. Some sectors have still reported a slowdown, like restaurants and travel
In the East, mobility is on the way up everywhere. India is back at full speed, following the May disaster. China have probably already beaten down the last (very limited) outbreak – though at substantial cost for services in July & August

The Economy

China

August data surprised on the downside, at least partly due to fight against virus. If so, some positive news should be expected the coming months
Industrial production rose just 0.3% m/m, half a normal pace, and the annual growth rate was down 1.1 pp, 0.5 pp below expectations. Still production is 3% above the pre-pandemic trend path.
The service sector contracted by 1.7%, following the 2.4% July drop, very likely due to the fight against corona. A substantial upside the coming months, from the present 4% below p-p trend path level.
Retail sales rose by 0.3%, following the 0.3% decline in July (volume, our est). Sales have expanded at just a 2% pace since November, and is 5% below the p-p trend. Nominal sales values grew just 2.5% y/y, down from 8.5%, and 4.5 pp below expectations!
Investments are growing at a slow pace too, and both residential and commercial construction is down 13% – 20% recent months – in tandem with a steep decline in steel and cement productions, amid some financial challenges for the largest Chinese builder, Evergrande…
Earlier, strong export and decent import data have been reported, as well as a continued slowdown in credit expansion – which remains above trend growth in nominal incomes though

USA

In August, employment clearly grew less in states which left the temporary federal unemployment benefit programs in June and early July than in those states that kept them open until these programs expired in early September. The unemployment still fell less in the early-leaver states, so the participation rate must have increased somewhat, a positive sign. However, the impact is very limited (0.2 pp, vs the 3% of working age population paid by these federal programs) and the employment did not respond. It is still to early to tell how many of those 7.5 mill. workers that have now lost their USD 300/week support will return to the labour market but so far the news are not that upbeat
CPI grew less than expected in August but both the headline annual rate (5.3%) and the core (4.0%) remain unusually elevated. Energy prices are now flattening, and used auto prices fell - and will very likely normalise (down some 25%) when new car production recovers – which may still take some time. In August, hotels and travel were hit by lower demand due to the virus, and it is far to early that price inflation has peaked here, even if prices fell last month
Retail sales were much stronger than anticipated in August, even after adjusting for a substantial downward revision of sales in July. Still, the trend is down – albeit from a still terrific level; Core sales are still up 18% vs. the Feb-20 level. The downside is huge!
Manufacturing production expanded 0.2% in August, and less than expected, and production is just 1% above the pre-pandemic level. Auto production is down 13%, and not due to weak demand. Capacity utilisation is well above average, according to the Federal Reserve while the ISM survey reported a record high rate of capacity utilisation already in H1.
The first two regional manufacturing surveys were much better than expected in September, both rose substantially! Small businesses do not complain about sales, but access to labour is the worst ever. They report almost unprecedented plans for price hikes. As we where close to the top of a business cycle?? (But Univ. of Michigan reports that consumers are really pessimistic in September, as in August)

EMU

Manufacturing production rose far more than expected in July, due a continued uptick in Belgium. Still, production remains 1.4% below the pre-pandemic level – and Germany is down 6%. Sometimes it’s hard to be an auto producer, activity is cut by 40% (and by 24% in the EMU)!!
HICP (CPI) annual inflation was confirmed sharply up – but just to the VAT cuts and other corona measured implemented last August. Energy is the main culprit behind the 3% headline rate but some other goods contributed as well. Still, the core HICP is up just 1.6% y/y
Labour cost inflation remains too low for the ECB to reach the new 2% target. Over the past 2 years Labour Cost Index is up just 1.7% p.a

Retail trade fell further in August, and back to the pre-pandemic growth path, possibly partly due to lack of supply (domestic distribution, Brexit challenges). CPI inflation rose sharply, due to tax cuts/subsidies introduced last August. However, in Aug this year, core prices rose 0.3%, and prices are accelerating somewhat. Wage inflation is still too high, but has slowed recent months

Norway

Norges Bank’s Regional network expects a further recovery the coming 6 months, but the growth forecast as well as their assessment of growth over the past 3 months are way too downbeat – and not useful taken at face value. However, it seems more realistic that most sectors now expect a growth slowdown, just commercial services expects faster growth. More companies are reporting capacity constraints, and labour shortages have not been more common since 2008. Estimates of wage inflation is ticking upwards, for good reasons
Homebuilders are reporting a gradual slowdown in new home sales, and starts have peaked too. Material costs are partly to blame – SSB’s index is up 23% y/y, with lumber up >100%. We think the peak is very near (but probably not the end)

This week: FOMC to taper (or not); BoE, Rix meeting + a NoBa hike; Sept PMIs, NOR LFS

PMI

The August Global PMI was weaker than expected due to a sharp decline in service sector PMIs in US, UK, Japan and in China, very likely due to the Delta outbreaks. It may be to early to expect a recovery in Sept but it is not unlikely, given that the no. of Covid cases/hospitalised persons are falling most places. (China is not reporting flash PMIs)

USA

To formally signal tapering now, or wait until the Delta is beaten down and the impact on the labour market from the termination of extra unemployment benefits for 7.5 mill workers can be assessed, that’s the question for the FOMC meeting at Wednesday. There are good arguments for both alternatives but given the impact of very low rates in a booming economy, the bank should have decided a late 2021 tapering start now. Still, we doubt it will, but no big deal if the decision is postponed to the next meeting. The ‘dot-plot’, the FOMC members individual rate outlook, will very likely be shifted upwards, and a majority will signal that the first hike is most likely in 2022, and some will even assume two or more hikes. Some doves will still think 2023 is the likely timing
The housing market is still tight but higher construction costs is a challenge. Starts, new and existing home sales and prices, as well as the home builder’s index out this week

The BoE has signalled a more hawkish stance, and an earlier tapering has been announced. Still, the BoE is probably not prepared to hike anytime soon – but the market is contemplating 2 – 3 hikes next year, and the Bank will now have to ‘respond’ to these expectations

Sweden

The Riksbank is still conducting a very expansionary monetary policy, while the economy is booming. Most other banks have signalled a change of tack recent months, and the Riksbank is always (a late though) follower of fashion. So, the bank should soon join in. A higher CPI print is perhaps not the best argument but it may be used. The mortgage backed QE program must be especially exposed for a tightening now

Norway

Norges Bank will no doubt lift the signal rate to 0.25%. We think the interest rate path will be lifted once more, but just by half as much as in June, and the adjustment will kick in from late 2022. More next page
The LFS survey has reported a rapid growth in employment, and the employment rate is back to the pre-pandemic level! An even faster, and for us surprisingly rapid increase in the participation rate, is responsible for the still high unemployment at 4.8%. We expect the unemployment rate to decline the coming months

Macro week 38 report: Macro Weekly SB1 Markets 21-38.pdf

Previous reports: