U.S. retail data published this week is projected to jump +5.5% for the month of March, the third highest reading, excluding May 2020 reading of 18.3% due to base effects. Retail spending has been volatile in the last 12 months due to imposed lockdowns but also increased propensity to save as individuals have witnessed unprecedented levels of bankruptcies and redundancies. After a round of direct stimulus cheques distributed in March 2020, spending data remained positive for a few months. However, between the months of October-December 2020 retail spending contracted, only to expand again in January to +7.6%, when the second round of stimulus cheques was distributed. Should the history repeat itself, March data is likely to be bolstered once again by another round of stimulus cheques that were posted to eligible Americans last month.
However, Retail spending might not carry the economy much longer, since the direct stimulus payments are coming to an end and the savings rate has increased from pre-pandemic long-term average of 7% to current 13.6%. With 8 million unemployed individuals in the States and U6 unemployment rate of 10%, it seems nearly impossible to instigate organic recovery in retail spending, highlighting the importance of getting the infrastructure plan approved, at least partially, by the Senate in the first half of 2021. Consumer spending constitutes 70% of U.S. GDP, and retail spending covers 40% of consumer spending, making it one of the most important high frequency economic data point.
China reports its Q1 Gross Domestic Product this week and the consensus expects an expansion of 1.5%, compared to the previous quarter. The world’s second largest economy is on track to expand 6.5% this year, despite weak base effects when compared to 2020. China was the only major economy to grow in 2020 and is now on the path to overtake the U.S. as the largest economy by 2028 – two years earlier than predicted, according to estimates from the Brookings Institute. According to the 14th 5-year plan published last year, the focus for the next years will be on building out domestic markets, autonomous technology infrastructure, while ensuring the economy is protected from external shocks. The latter is achieved by securing supply chains for resources, including food and raw materials. Additionally, similar to Joe Biden, Xi Jinping has emphasized the importance of technological dominance through domestic semiconductor industry, high-tech manufacturing and investment in R&D. The leadership has put forward an ambitious plan of doubling the size of the economy by 2035.
China has proved time and time again its ability to recover from crisis through a centrally planned economy. Post-2008 economic crisis China orchestrated a large-scale domestic infrastructure spending, maintaining 9 to 10% GDP growth throughout 2008-2011. The construction of roads, bridges and cities bolstered a boom in commodities and exporting countries, such as Australia, Brazil, Peru and South Korea. In fact, China consumed more concrete, around 6.6 gigatons, in three years from 2011-2013 than the U.S. during the entire 20th century (around 4.5 gigatons). China’s growth in recent years has stabilized near 6% but the planned spending is likely to support commodities prices. According to Reuters, China has already bought record volumes of crude oil, copper, iron ore and coal in 2020. Trade data for December, shows the massive buying spree appears to be ending, which is evident also from commodities prices. There has been little price action since March in oil futures, copper futures, as well as in the CRB index. Longer-term effect on main commodities is still bullish with 2 major economies, China and the U.S., focusing on large-scale infrastructure spending.
S&P 500 rose 2.71% to another all-time high of 4,218.81, while Nasdaq-100 was up +3.87%. Russell 2000, representing U.S. small and medium companies, shed -0.46%. The dollar index DXY lost -0.91%, supporting gold to gain +0.80%. Oil futures dropped -2.75%.
Have a great trading week ahead!