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Weekly Economic & Financial Commentary: The U.S. Economy Continues to Start 2021 on a High Note

U.S. Review

The U.S. Economy Continues to Start 2021 on a High Note

  • In January, personal spending increased at a robust 2.4% pace, while personal income soared 10.0%. The core PCE deflator rose 0.3% during the month and 1.5% over the year. Fed Chair Powell testified in front of Congress and underscored the FOMC’s commitment to keep monetary policy accommodative, as the U.S. economy continues to recover from the COVID crisis.
  • Pending home sales dropped 2.8% in January, reflecting some moderation in the housing market. Durable goods orders jumped 3.4% in January, besting consensus estimates. Jobless claims unexpectedly fell to 730K during the week ending February 20. The Leading Economic Index (LEI) jumped 0.5% in January. Consumer sentiment (University of Michigan) dipped to 76.8 in February.

Global Review

Central Banks on Hold This Week

  • The Reserve Bank of New Zealand (RBNZ) met this week to discuss policy, opting to maintain its Official Cash Rate at 0.25% and leaving its Funding for Lending program and Large Scale Asset Purchase program unchanged. Separately, the New Zealand government instructed the RBNZ to keep house price sustainability in mind when making its policy decisions.
  • The Bank of Korea also held policy steady, leaving its seven-day repo rate unchanged at 0.50%, a record low. The central bank maintained its growth forecasts, but noted that its inflation expectations for 2021 have risen.
  • The Swedish economy unexpectedly contracted in the fourth quarter of 2020, driven mainly by a fall in household consumption and changes in inventories.

U.S. Review

The U.S. Economy Continues to Start 2021 on a High Note

Most of the economic data released this week handily beat market expectations, which is just the latest sign that the economic recovery is regaining momentum after slowing toward the end of 2020. During January, personal spending increased at a robust 2.4% pace. The strong monthly gain in consumption arrived alongside a 10.0% surge in personal incomes. Many households received a second round of pandemic-relief checks during the month, which helped provide a jolt to consumer spending. The saving rate shot up to 20.5% from 13.4%, which we expect to help propel consumer spending forward in the months to come. The latest estimate of Personal Consumption Expenditure (PCE) deflator was also reported in the personal income and outlays report. The core PCE deflator, which is the Fed’s preferred measure of consumer price inflation, rose 0.3% during the month and 1.5% over the year. This outcome is slightly ahead of market expectations but still well below the Fed’s 2% inflation target.

The Fed Appears Unmoved by Rising Long-Term Rates

Fed Chair Powell underscored the FOMC’s commitment to keep monetary policy accommodative as the U.S. economy continues to recover from the COVID crisis. Powell appeared in front of Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday, and emphasized that “the economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.” Powell’s comments arrived against a backdrop of rising long-term rates and inflation expectations. However, in our view, this is just the latest piece of evidence that the Fed is unlikely to alter the pace of asset purchases or lift the federal funds target