March 26, 2021 | 13:03
Sleepless in Suez
Amid a generally robust global economic outlook over the next two years, key risks we identified were supply chain disruptions and bottlenecks. As if on cue, the aptly named Ever Given ship stuck in the Suez Canal has given us ever more concern on this front. Under normal economic circumstances, the vessel’s plight would be of mostly passing curiosity to markets. But in these times of widespread stresses across many supply chains, and when investors are already acutely sensitive to inflation risks, the canal’s blockage is a highly visible and tangible problem for global trade. Even the world’s supply of instant coffee is reportedly at risk, after all.
The high drama in the Suez added to some broader rumblings in the markets around the strength of the recovery. Last week, we labelled this year’s rise in bond yields as “remorseless”; apparently, there was some remorse this week, as Treasury yields backed down modestly after an 8-week losing streak. A variety of commodity prices have started to flag after a powerful run, with copper dipping back below $4/pound after reaching a 10-year high a month ago above $4.60. Even oil, which see-sawed on the Suez news, dipped on the week and is off almost 10% from two weeks ago. Stocks were mostly mixed, with the Nasdaq and TSX slipping on tech softness, and the S&P 500 up modestly—but up massively from year-ago levels, as the one-year anniversary of last year’s lows were marked on Tuesday.
Weighing on the global outlook, beyond supply chain issues, are widening restrictions and lockdowns in Europe, an unnerving back-up in new cases in many other regions (including Canada), a variety of hiccups in the vaccination roll-out, trauma in Turkey, and more signs that even the U.S. economy stumbled in February. On the latter, this week’s mostly second-tier slate of data showed broad weakness in housing (which had been an area of clear strength), a pullback in durable goods orders, and a sharp retreat of incomes and spending. However, the February lull appears to have been caused by harsh weather, the Texas freeze, and the (anticipated) reversal from January’s stimulus payments.
We fully expect the softness to prove fleeting for U.S. growth, with more current indicators now pointing due north. Just as one example, the New York Fed’s weekly economic index reading (which syncs with GDP growth) has leapt to more than 4% above year-ago levels. That’s the first positive in a year and is the strongest in a decade. On balance, our expectation of 6.5% growth for 2021 remains on track, and consensus is rapidly moving in that direction.
However, at the same time as the conventional wisdom is gelling around the view that U.S. growth is poised for its best year since 1984 at above 6%, the consensus on Europe remains in retreat. After cresting above 6% around the middle of last year, the consensus call on 2021 GDP growth for the Euro Area has since dropped almost 2 full percentage points (to 4.3%). And we have trimmed our call by a further half-point to 4.0% for this year, while also nudging up next year by a similar tally to 4.5%. Notably, industry surveys for March were surprisingly upbeat in Europe, with the composite PMI pushing above 50 (to 52.5) and Germany’s Ifo solid at 96.6. Still, the big picture is that growth revisions in the U.S. and the Euro Area have been the mirror image since last summer, with the two large economies trading places. The foreign exchange market continues to reflect this significant change in fortunes, with the euro sagging further this week to below $1.18; that’s down more than 4% from its early-year peak of just above $1.23.
Even the mighty Canadian dollar backed off a tad this week, dragged by softer commodities. But the bigger picture is that the loonie is one of the few currencies in the world that has managed to gain ground against the greenback in 2021. Indeed, even with a small slip this week, it retained its perch as the leading major currency in Q1. Canada’s data calendar provided even lighter fare this week, but flash estimates for February wholesale and manufacturing sales both disappointed with dips. Even so, we believe that this week’s concerns over the broader global recovery will fade, and that Canada remains on course for a strong 6% advance this year. Note that the two largest provinces assumed 4% growth or better in 2021 and 2022 in their budgets this week, forecasts that were widely seen as cautious.
If this is starting to seem like a very long month, it’s not just your imagination. March is the only month of the year, at least in Canada, that can possibly have as many as 23 working days. And even then, Good Friday has to be in April (check), and the month has to start on a Monday, Tuesday, or Wednesday (check). So, yes, this is our lucky year, where March offers the full meal deal of 23 days of working from home. But if that seems long, we are now looking at a record 25-month interval between federal budgets. Ottawa announced that the budget will be released on April 19. We respectfully offer some advice: