Still on track for a robust recovery even after soft data this week

Summary

U.S. Review

• The worse-than-expected outcomes for February retail sales, industrial production and housing starts were in part due to the severe winter weather that hit much of the country last month. However, other factors contributed to each sector's decline, including payback for January's stimulus-fueled spending spree in retail sales, semiconductor shortages holding back manufacturing production and rising costs crimping building activity.
• With the largest direct checks of the COVID crisis hitting household bank accounts this week, we do not believe retail sales are starting to roll over. Similarly, the supply challenges roiling the manufacturing sector are only a temporary setback. Demand for manufactured goods remains exceptionally strong, evidenced by the Philadelphia Fed manufacturing survey hitting nearly a 50-year high this week. And while housing activity may be cooling from its exceptionally strong pace late last year, low inventories should continue to support home-building even as mortgage rates move somewhat higher. In other words, we still expect a robust recovery in the coming months despite much of this week's data coming in below expectations.

Global Review

Emerging Central Banks Surprise Market Participants

• It was a busy week for global economic data and central bank announcements. Swedish inflation unexpectedly slowed, with headline CPI and CPIF inflation easing in February and extending the period of below-target prices.
• Among the G10 central banks, the Norges Bank unanimously opted to hold the current policy rate at zero percent, but more notably, the central bank indicated that the policy rate will likely be raised in the latter half of 2021. Elsewhere, the Bank of England voted to keep its Bank Rate at 0.10% and maintained the pace of its government bond purchases.
• On the emerging market front, Brazil's central bank surprised markets with a 75-bp rate hike to 2.75%, the first rate increase in roughly six years. The Central Bank of the Republic of Turkey delivered a large 200-bp rate increase, bringing the one-week repo auction rate to 19.00%, more than expected.

Interest Rate Watch

FOMC Appears to Be in No Rush to Tighten

• As expected, the FOMC made no policy changes at its meeting this week, but members did make sizable upward revisions to GDP and inflation forecasts for this year. While a few more officials see the fed funds rate rising in 2022 or 2023, the majority of the committee still expect rates to be on hold through 2023.

Topic of the Week

When the Chips Are Down: Macro Implications of Semiconductor Shortages

The global shortage of semiconductors continues to intensify and is leading to industry disruptions. Semiconductors account for just about 2% of total inputs used in the U.S. manufacturing process, but we analyze if shortages could cause broader macro disruptions.

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