United States
  • Covid-19 infections are surging in much of the world, prompting new restrictions in Europe and dampening market sentiment early in the week.
  • U.S. data painted a clear picture of pandemic life. Inflation pressures for services hard hit by social distancing have cooled notably.
  • Meanwhile, American consumers continue to snap up goods that will help them to enjoy life at home. That strength in September retailing put markets in a better mood late in the week.



U.S. – Global Infections Surge


Markets had a choppy week as infections surged in parts of the world, and uncertainty about the next round of stimulus continued. A strong retail report for September did put markets in a better mood on Friday.

Earlier in the week, the IMF released their updated global forecast. It emphasized that the recovery will be long, uneven and uncertain. Their forecast contraction for 2020 (-4.4%) is slightly smaller than expected back in June, but the rebound is also shallower. So long as the pandemic is controlled next year, it expects the global economy to rebound 5.2%. Unfortunately, at the moment in many areas of the globe, the pandemic is far from controlled.

Infections have been on the upswing in Europe, where daily infections are well above their spring peaks, and have recently surpassed the U.S. (Chart 1). As a result, countries have imposed new restrictions to turn the tide, from curfews in France’s largest cities, to curbs on socializing indoors in London. New restrictions are more targeted relative to the spring, and therefore, the economic impact is likely to be much less severe. However, it still casts a pall over the outlook for Europe.

In the U.S., the latest inflation report should quiet the stagflation chatter that had emerged after a couple of hot months for core inflation. Both headline and core CPI rose a middling 0.2% in the month of September. However, removing an outsized 6.7% month/month increase in used vehicle prices leaves core inflation flat on the month.

During the pandemic, the prices of many goods have risen sharply. But services inflation has ebbed from 3% year-on-year in February to 1.9% in September, as demand has been hard hit by social distancing. Services account for 63% of the CPI basket, so the cooling heavily influences the overall trend. You have to go back to 2011 to see services inflation pressures as soft as it is today.

The good news came from consumers, who ramped up their spending at retailers in September. Retail sales rose 1.9% on the month, driven by a big jump up in clothing purchases (+11% m/m), department stores (+9.7% m/m), sporting goods, hobby, book and music stores (+5.7% m/m) and vehicle sales (+3.6% m/m). There is some speculation that the strength in clothing may be due to the delayed back-to-school in many parts of the country. Even removing that influence, it was a strong month, and puts some upside risk to our forecast for consumer spending in the third and fourth quarter.

Like price patterns, the trend in retail sales also tells the tale of pandemic life (Chart 2). The hardest hit area is restaurants and bars, which have faced closures and restrictions. Since most consumers are staying home a lot more, there is also less of a need to get dressed up to go out, and even with September’s jump, clothing sales are below their pre-crisis level, as are department stores which would include a fair amount of clothing purchases. The strongest areas, apart from online shopping in general, are for things that make staying home a bit more appealing, such as new gym equipment or other hobbies and materials for home and garden improvement projects.

Leslie Preston, Senior Economist | 416-983-7053

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