Macro Weekly

Macro week 25 by #1 Chief Economist Harald Magnus Andreassen, and Macro Analyst Tina Norden

Last week

The virus

The delta variant is gaining market shares, rapidly. In UK and Portugal, the delta is found in 96% – 98% of new cases, and the no. of cases in rising rapidly, even if 70% of the population UK is vaccinated (or have been infected). A second dose seems to be needed. Hospital admissions & deaths are up too, but not by much and the level (and rates vs. new cases) is still low
Elsewhere, the no. of cases is falling most places. Norway may be flattening out, at a low level.
Mobility is rising everywhere in DM as the negative drag from corona restrictions/cautious behaviour is easing – even in the UK

The Economy

China

May data were weaker than expected, and growth in very likely slowing. A tighter credit policy, and a slowdown in credit growth may explain the slowdown, as can perhaps supply chain challenges (but this argument does not sit that well). Both investments, which were revised down, construction starts, and retail sales have slowed. Manufacturing production is still going strong, growth has just slowed to a pre-pandemic pace – while staying well above the pre-pandemic growth track. Imports have been strong too, and the recent weakness in exports is from an extreme high level

USA

The members of Federal Reserve’s FOMC lifted their individual interest rate forecasts substantially, and the median member expects two hikes before Q4-23 (from none), and some members several more hikes – and almost half assume rates should be hiked in 2022. Growth forecasts were lifted marginally, and inflation forecasts substantially, at least for the ‘transitory’ 2021. We interpret inflation forecasts to be in line with Fed’ new price level target, 2% inflation, as an average, over time. Governor Powell sounded more dovish than these forecasts, and said that ’we are still a ways from our goal of substantial further progress’, even if he acknowledged that the economy has strengthened. The big uncertainty is how much spare capacity there is at the labour market. The Fed does not know, and neither do we. The next few months will yield extremely important new information. is at the labour market. The Fed does not know, and neither do we. The next few months will yields extremely important new information. Powell says the FOMC will announce well on beforehand before starting tapering (yes, they talked about it!). The short end of the curve rose sharply. When the dust had settled, the long end of the curve fell marginally (and implied rates 5 y 5y fwd fell sharply). A firmer Fed sent inflation expectations down, and real rates slightly up. The USD rose 2% last week (a 2.5 st.dev move). Stock markets did not enjoy the outlook for higher short term rates. But what about lower long bond yields?
Retail sales fell more than expected May but April was revised up even more, in sum better than assumed/expected. Goods sales are far above a reasonable long term level. Restaurant sales finally climbed above the pre-pandemic level – and should grow substantially from here. Housing starts/permits have peaked, and NAHB’s Housing Market Index declined further, and do not signal a new uptick in sales.
Manufacturing production is trending upwards, and is now close to a (sharply downward) pre-pandemic level. The first June manufacturing surveys signal slower growth ahead (but far from slow!)

The producer price index rose sharply, and more than expected. Not the best omen for consumer prices the coming months
Household bank accounts are swelling like never before, and over the recent years they have invested heavily in equities and fund shares too (which have been seen at parts of the market…). Household debt is rising faster, while growth in corporate credit is slowing, following the large jump last spring – but their liquid assets soared too

EMU

Inflation is still muted, the core at 1.0% (revised up 0.1 pp). Total inflation is at 2%, mostly due to higher energy prices – and they will not rise forever
Labour cost levels have normalised, and underlying growth in moderate. However, the unit cost level has soared during the pandemic – but will hopefully be reversed the coming quarters.

Annual inflation rose sharply in May, both due to a price decline m/m last May, and a lift in prices in m/m now. The core climbed 0.6% to 1.9%, the headline to 2.1%. Inflation may decrease the coming two months (base effect) but we suspect a substantial lift in August, due to the base effect from last year’s subsidy scheme
Retail sales fell 1.4% in May, expected +1.6%. However, since sales rose by 9.2% in April, and the may level is 9% above the Jan-20 level, we are not too worried

Sweden

House prices are still soaring m/m and are up 18% y/y. And Sweden is not the only place, prices are up in all OECD countries, and have accelerated in 21 of 26 countries, vs. the pre-pandemic rate of appreciation. Sweden, Canada, UK, Norway and New Zealand has accelerated the most. We assume the impact of last year’s cut in interest rates soon will fade

Norway

Norges Bank kept the signal rate at zero, but that’s all what markets got right. The Bank lifted the interest rate path even more than we expected, and far above the FRA-rates ahead of the meeting. NoBa signals close to 4 hikes the before June next year, and 2 more before until mid-24, following an up to 33 bps lift of the rate path. The economic outlook is strengthened, broadly, oil is up, and wage inflation is once more revised up. NoBa will hike rates even if inflation is, and is expected to remain below 2% because the activity level is expected to be well above normal and in order to reduce the risk for (further) build-up of financial imbalances. House price inflation is expected to come to a halt. Norges Bank is the most flexible inflation targeter of all central banks. Will others follow? Some should… FRA rates rose sharply but are still well below NoBa’s new path
Home builders report still decent new home sales & starts

This week: Inflation & vacant jobs in the US, ECB, NoBa network, CPI, GDP here

PMI

In May the global PMI reported the highest growth rate since 2006, as the manufacturing sector kept growing at record high pace, while services almost everywhere reported higher activity, and some places a record high growth pace. Growth in manufacturing sector may now be close to a peak, while services, at least in Europe, should report even higher growth, at least in June. Preliminary June reports from Japan, EMU, UK & US are the main macro events this week

USA

We ‘know’ the annual PCE inflation accelerated further in May (3.5% is expected), and the figure must be disastrous to change the market’s perception on inflation or Fed actions. Personal income will now return to more normal levels, while spending on services will increase further, taking the savings rate down
Durable orders are expected up again in May, following a small decline in April. The level is very high, following an impressive surge since last summer

EMU

Consumer confidence has recovered rapidly recent months, as is back to the pre-pandemic level

Bank of England will not hike the bank rate, and will continue buying bonds. But at some stage, tapering will be needed, here too

Macro week 25 report: Macro Weekly SB1 Markets 21-25.pdf

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