This Week: US retail, GDP growth looking strong

22 Feb 2021

Chris Holdsworth

Chief Investment Strategist, Investec Wealth & Investment

A weekly macroeconomic overview from Investec Wealth & Investment's chief investment strategist, Chris Holdsworth.

Covid-19 update – cases continue to drop but at a lower rate, while vaccine progress slows.  2.6% of the global population has now received at least one vaccine jab, up from 2.2% last week. The 42 basis point increase in the global vaccinated population is the smallest seven-day gain since 30 January. Part of the global slowdown is attributable to a slowdown in the rollout in the US, which seems to be weather related and hopefully will quickly pass. Israel has now vaccinated over 80% of its population, the UK is at 26% and the US is at 18%.
In the meantime, the seven-day average number of new cases across the globe continues to decline, but at a lower rate than last week. The seven-day average number of new cases is at 356,000/day, the lowest reading since 17 October last year and down 8% week-on-week.
New cases in the US have dropped to 72,000/day, below the EU’s 85,000 (the first time that US cases have been below EU cases since November last year). Brazil is at 47,000/day, up 6% week-on-week. The seven-day average number of cases in the UK is down to 11,000/day, down 15% week-on-week.
The seven-day average number of cases in SA continues to collapse – now at 1,800/day, down 24% week-on-week and the lowest reading since mid-November last year.
While the global rollout may have slowed, there is good news on the horizon. Guidance from several vaccine manufactures suggest that there should be enough vaccines produced to vaccinate the full US population by mid-July. Currently the US government is supplied with 10-15m doses per week but a Bloomberg analysis of recent statements by vaccine producers suggests this should rise to 20m doses/week in March, 25m/week in April and 30m/week by June.
Tracking global GDP. We’ve now had a number of countries report Q4 GDP and we can expect the rest of the significant reports to come out over the coming three weeks. As with the data for Q2 and Q3, there is a fairly strong link between the average amount of time spent in retailers, in transit and at the workplace (‘tracking data’) and year-on-year GDP growth rates. Spain is a notable exception this quarter.
While there is still a reasonable relationship between the tracking data and GDP, the relationship has changed. Over the past nine months, GDP growth has become less sensitive to the amount of time people physically spend in retailers, in transit and at the workplace. In Q2, a tracking data reading of -30% relative to baseline would have corresponded with a year-on-year GDP print of -11%. By Q3 an equivalent tracking data reading would have corresponded with a GDP growth rate of -7.5% and based on the GDP data released so far, a similar tracking data reading for Q4 would have seen GDP growth of -6.9%. It seems that the global economy has been rapidly adjusting to the constraints imposed by working from home. People are better able to work and consume from home than was the case in Q2. Not only can we expect the tracking data to improve over the year ahead as the vaccine is rolled out, but we can also expect growth to improve for any given tracking data release.
US retail sales surprise on the upside. US retail sales for January came out at +5.5% month-on-month vs the consensus expectation of +1.1%. It wasn’t just a massive beat relative to consensus; the print was above every contribution to the Refinitiv consensus. It was the first time since September last year that retail sales surprised on the upside. The $600 stimulus cheques that went out in January no doubt played a part.
Based on the headline print, retail sales in the US are now up 7.4% year-on-year (i.e., up 7.4% relative to pre-Covid levels …). However, one needs to exercise a bit of caution in interpreting the headline retail sales numbers. The headline numbers are seasonally adjusted and, given the wildly changing underlying series, the seasonal adjustment might be exaggerating the recovery. Non-seasonally adjusted retail sales are up 5.8% year-on-year, still impressive but not quite as impressive as the headline number suggests. While the retail sales numbers are already remarkable, there is still a reasonable chance of a further $1400 stimulus cheque going out – although there is an active debate in Congress about the level of income one would need to have to get the third cheque.
US Q1 GDP print already looking like it will be strong, with upgrades to consensus to come. The US economy is showing strength across the board. January industrial production was up 0.9% month-on-month vs consensus of +0.5%. It was the fourth month in a row that industrial production growth had come in above forecast.
The K-shaped recovery and the US housing market. One of the key characteristics of the global economic reaction to the Covid-19 crisis has been the initial resilience and then strength of the US housing market. Record low interest rates, and a segment of the population that continued to receive unchanged income and managed to save, saw rapid growth in housing transactions. Sales of existing homes were up 23% year-on-year in January, above the consensus estimate of 21.7%. It was the fifth consecutive month that housing sales exceeded the consensus estimate.
Based on the New York Fed consumer credit panel data released last week, it was the top end that did the shopping for homes. More than 70% of mortgage originations in Q4 went to borrowers in the top credit tier.
During 2020, US consumers withdrew $188bn in home equity through refinancing, although again this was due to a minority of mortgage holders. Half of the refinancers only borrowed enough extra funds to cover the closing costs on a new mortgage. Borrowers who did not decide to take out extra cash through a refinance, saw an average monthly saving of $200 on their mortgage payment.
European trade surplus increases. EU exports were down 9.4% for all of 2020 relative to 2019. Imports fell by 11.6%. The net result was that the EU trade surplus reached €217.3bn up from €191.5bn in 2019. In 2020, China replaced the US as the main trading partner for Europe. During 2020, EU exports to China and imports from China both increased while both imports and exports to the US declined.
The net result was that Europe conducted more trade with China than the US for the first time since 2011.
Tracking the recovery in global industrial production. While retail sales are up year-on-year in nominal terms across the largest economies of the world, there is a marked dispersion in industrial production. Chinese industrial production was up 7.3% year-on-year in December vs -3.2% in the US, -0.8% in Europe and -4.2% in Japan.
The SA economy is on the mend. Retail sales in December came out at -1.3% year-on-year vs consensus of -3.5%. Just like the US, the print came out above all of the contributions to consensus.
Retail sales volumes were down year-on-year in December but up in nominal terms (+2.7%). This is consistent with the personal income tax data we saw two weeks ago – it seems incomes have picked up and SA consumers have started to spend.
We’ve now had December prints for mining, manufacturing, retail sales and electricity production. In Q4 manufacturing was up 22% quarter-on-quarter on a seasonally adjusted, annualised basis (qoq saar). Retail sales were up 12% qoq saar. Based on the releases from stats SA, along with estimates for the rest of the economy, our stats SA based model suggests that Q4 growth in SA was +4.3% qoq saar (consensus is +4.9% qoq saar). The SA GDP print comes out on 9 March. 
Quantifying the ESG premium. In June last year the German government issued €30.5bn worth of bunds, maturing in August 2030. What makes the issuance interesting is that in September the German government followed up with a green bund issuance of €6.5bn that had an identical maturity. The only difference was that the second bund was a green bond. Since issuance the green bund has traded at a consistent premium to its otherwise identical counterpart.

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