• U.S. equities jumped early this week and continued to move higher over the course of it despite the prospect of higher corporate taxes announced by the Biden administration.
  • A few dark spots in the short-term outlook are supply chain disruptions, which are pushing up prices and weighing on deliveries in the services sector, as well as imports and exports.



Spring is Just Around the Corner

Financial News - Supply Chain Disruptions Are Starting to Affect ServicesU.S. equities jumped early this week and continued to move higher over the course of it despite the prospect of higher corporate taxes announced by the Biden administration. While still in the proposal stage, higher corporate income taxes would be a shock to earnings and equity valuations, though potentially offset by faster economic growth if invested well.

The economic calendar, meanwhile, was marked by reports on business activity, production prices and international trade. The Institute for Supply Management’s (ISM) service-sector index pleasantly surprised, hitting an all-time high. All 18 industries reported a revival of activity thanks to warmer weather and an accelerating pace of vaccinations. The rebound lifted the employment sub-index to 57.2, the best reading since June of 2019. Prospects for sustained reopening and a surge in demand could provide businesses with incentives for pre-emptive hiring, provided another wave of the virus does not lead to further restrictions.

Still, several factors warrant caution. First, the uptick in the supplier deliveries index indicates supply chain disruptions are spreading beyond manufacturing sector to services. Respondents in the accommodation & food services, arts & entertainment and information industries all commented on delays (Chart 1). Logistical challenges may result in product shortages and a reduce the ability of businesses to meet rising consumer demand.

Financial News - US Trade Deficit Widened in February Second, the price sub-index rose to 74, the highest level in over a decade. This does not mean immediately higher consumer prices, but it does mean that businesses are facing high costs that could eventually be passed on. Corroborating this, the Producer Price Index (PPI) increased by 1.0% in March. Most of the increase was attributed to higher demand for goods, notably energy, which jumped 5.9%. The final demand index for services rose by 0.7% in March, with prices for transportation and warehousing rising by 1.5%.

At the same time, February’s trade report is a reminder that until the whole world is over the pandemic, supply challenges and halting global demand will remain an important macro theme. The U.S. trade deficit rose to a record $71.1 billion, as exports declined more than imports (Chart 2). With major trading partners still struggling to contain the spread of the virus, demand for U.S. exports fell. At the same time, shipping congestion in ports of Los Angeles and Long Beach contributed to the decline in trade in the month. This has not yet been resolved, and alongside the disruption at the Suez Canal, will continue to show up in the economic statistics in the month ahead.

Maria Solovieva, CFA, Economist | 416-380-1195

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