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by  Eric Lascelles Jun 8, 2021

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This week’s note reviews the latest pandemic developments: the rate of infection, reopening patterns and the pace of vaccination. It then tackles the latest economic trends, before digging into three special topics:

  1. The trajectory ahead for e-commerce activity.
  2. A grab-bag of recent inflation developments.
  3. A look at newly proposed global corporate tax rules.

The positives and negatives remain mostly familiar.

On the positive side,

  • The latest COVID-19 wave continues to retreat in most countries.
  • The rate of vaccination remains rapid.
  • Countries are enthusiastically reopening their economies.
  • Economic data appears to be strengthening into June.
  • The infection rate in Vietnam has begun to decline despite worries about a new variant there.

However, the negatives remain serious:

  • The Delta variant, which first appeared in India, continues to spread rapidly.
  • Higher corporate taxes may be on the way (a negative for investors, if not for fiscal coffers).
  • Canadian economic data was quite weak in April and still soft in May.

Virus developments

At the highest level, the story remains the same: global infections and deaths from COVID-19 are happily in decline (see next chart).

Global COVID-19 cases and deaths

Global COVID-19 cases and deaths

As of 06/06/2021. 7-day moving average of daily new cases and new deaths. Daily deaths skewed higher as countries restate historical figures. Source: WHO, Macrobond, RBC GAM

In fact, the global transmission rate is now at its lowest level since the onset of the pandemic, meaning the virus is retreating at the fastest rate (see next chart).

Global transmission rate hovering around key threshold of one

Global transmission rate hovering around key threshold of one

As of 06/06/2021. Transmission rate calculated as a 7-day change of underlying 7-day moving average smoothened by a 14-day moving average of new daily cases. Source: WHO, Macrobond, RBC GAM

Both emerging market and developed countries are participating, though not universally. For instance, Indian infections are now sharply lower (see next chart) and the overall emerging market infection rate is in retreat. However, those in Columbia, Chile, Brazil, South Africa and Russia are all rising (see subsequent chart of South Africa). We presume some of the more virulent variants are only now taking hold in those markets.

COVID-19 cases and deaths in India

COVID-19 cases and deaths in India

As of 06/03/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

COVID-19 cases and deaths in South Africa

COVID-19 cases and deaths in South Africa

As of 06/06/2021. 7-day moving average of daily new cases and new deaths. Daily deaths skewed higher as countries restate historical figures. Source: WHO, Macrobond, RBC GAM

In the developed world, the infection rate in most European Union (E.U.) countries continues to decline, as does the U.S. infection rate. Canada’s further improvement means that its infection rate is now significantly lower than during the trough between the second and third wave (see next chart). Further, the success of the targeted first-dose vaccination campaign has meant that fatalities in the third wave were far lower than during the first two waves.

COVID-19 cases and deaths in Canada

COVID-19 cases and deaths in Canada

As of 06/06/2021. 7-day moving average of daily new cases and new deaths. Daily deaths skewed higher as countries restate historical figures. Source: WHO, Macrobond, RBC GAM

Delta variant

For all of this good news, the Delta variant remains quite concerning. This is the new name given to the variant that first appeared in India – the variant thought to be 50% more contagious than the variant from the U.K. (now Alpha), and 125% more contagious than the original version of the virus. It may also be more deadly than earlier forms of the virus. One prominent research report also finds that the Delta variant is significantly better at infecting people who have only been vaccinated once.

While the infection count in India itself is falling, there is evidence that the virus is gaining momentum elsewhere. Most prominently, the U.K. now reports that the Delta variant has taken over from the Alpha variant as the main variant in the country (see next chart). The Delta variant now represents a startling 56% of all new cases, up from virtually none at the beginning of April. It is clearly outcompeting the Alpha variant.

COVID-19 variant share of cases in U.K.

COVID-19 variant share of cases in U.K.

As of 06/06/2021. Share of cases by variant. Source: GISAID, RBC GAM

The U.K. infection rate is now clearly rising overall (see next chart). In other words, even with 100 doses of vaccine administered per 100 people (out of a theoretically possible 200), a fairly high level of natural immunity and favourable summer weather, the Delta variant still possesses a transmission rate of greater than one. This is not good for the U.K., or for the world.

COVID-19 cases and deaths in the U.K.

COVID-19 cases and deaths in the U.K.

As of 06/06/2021. 7-day moving average of daily new cases and new deaths. Daily deaths skewed higher as countries restate historical figures. Source: WHO, Macrobond, RBC GAM

The beginning of a further wave can also be seen if one peers beneath the surface in Canada (see next table). Government statistics by variant show that the Alpha variant – currently the dominant variant by far in Canada – is in aggressive retreat. We’ve seen a 50.8% decline in new cases over the past two weeks alone. The Beta variant from South Africa is falling even more quickly, down 77.2%. Although the Gamma variant (Brazil) appears to be surging, this is mainly due to an anomalous reading from two weeks ago. On a trend basis it is also declining. For context, the Gamma variant has fallen by 62% over the past three weeks.

All of this contrasts to the Delta variant, which rose by a big 48% over the past two weeks and appears set to continue rising, potentially until it is the dominant strain, if the U.K. is any example. Some experts put the share of Canadian cases with the Delta variant even higher than 5.9% because not all tests are able to differentiate the variant from other forms.

Tracking variant cases in Canada

Tracking variant cases in Canada

As of 06/04/2021. Source: Government of Canada, RBC GAM

There is clearly the risk of another virus wave across much of the world over the next few months due to the spread of the Delta variant. One might characterize the current situation as a race between the Delta variant and efforts to get people vaccinated a second time. Those with a second shot appear to be as protected from the Delta variant as from other forms of the virus.

On a less sour note, it is promising that Vietnamese infections have begun to decline (see next chart). Vietnam had reported the existence of a potentially even-more contagious variant that was theoretically capable of greater airborne transmission. It is too early to say whether these predictions were exaggerated, but it is good that Vietnam is no longer spiraling out of control.

COVID-19 cases and deaths in Vietnam

COVID-19 cases and deaths in Vietnam

As of 06/06/2021. 7-day moving average of daily new cases and new deaths. Daily deaths skewed higher as countries restate historical figures. Source: WHO, Macrobond, RBC GAM


Most countries are now enthusiastically reopening their economies (see next chart). The U.S. is among the most open. Canada has been more cautious than most, with only a tentative reopening that began quite recently. As a result, it is now the most locked down of the 11 countries examined in the chart. This helps to explain its poor economic performance in April and May, discussed later.

Severity of lockdown by developed nation

Severity of lockdown by developed nation

Based on latest data available as of 06/03/2021. Deviation from baseline, normalized to U.S. and smoothed with a 7-day moving average. Source: Google, University of Oxford, Macrobond, RBC GAM

Digging into the Canadian data (and pivoting from Oxford/Google data to Bank of Canada data), several provinces have begun easing their restrictions (see next chart, and note that ‘down’ means fewer restrictions, in contrast to the prior chart). British Columbia has moved significantly toward reopening, as have Quebec and the Prairies region. Ontario remains the strictest and had not significantly eased its rules as of May 26 – the date of the latest estimate.

Tightening of COVID restrictions appears to have plateaued

Tightening of COVID restrictions appears to have plateaued

As of 05/26/2021. Atlantic region include New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island, Prairies region includes Alberta, Manitoba and Saskatchewan. Source: Bank of Canada, RBC GAM

Elsewhere, India is now easing its own severe lockdown, so a key test will be whether its infection figures continue to improve from there. Conversely, South Africa just locked down again in response to its own rising case count.

International borders – particularly those beyond the realm of super-national entities like the E. U. – are only haltingly reopening, at least without long quarantines. The U.S. and Canada are now apparently negotiating on this matter, with professional hockey teams recently receiving a limited exemption. Conversely, Australia has indicated it won’t open its international border until mid-2022.

Reopening theory

As a more general comment on reopening plans, the number of infections per day is undoubtedly a relevant criterion for loosening restrictions. After all, hospitals have a limited capacity and no one wants a high level of mortality. Yet the main criteria should nevertheless be whether the infection rate is falling or rising, and how rapidly. A low number of infections per day will eventually become quite high if rising, and a high number of infections per day will eventually become low if falling.

A daily infection count that is falling quickly should permit a significant reopening, even if off a fairly high level. Conversely, an infection rate that is only falling slightly justifies only a minor reopening, or none at all. A mistake made last summer and into the early fall was to continue reopening just because case counts were low. But they weren’t falling any more. They had actually started to rise off of low levels. That should have been a time to tighten rules, not ease them.

In the present context, rapidly falling infection rates would seemingly argue that economies can be significantly reopened.

But the Delta variant presents an additional twist: the pandemic is not one homogenous entity. The transmission rate for one component of the pandemic – the Delta variant-driven portion – is clearly above one, unfortunately meaning that existing rules are therefore actually too loose in places where that variant is consolidating its presence. It is a frustrating situation.

Vaccination efforts continue

Over 2.1 billion COVID-19 vaccines have now been administered globally, with the daily rate increasing to nearly 39 million doses per day. The rankings remain familiar (see next table).

COVID-19 global vaccine ranking

COVID-19 global vaccine ranking

As of 06/06/2021. Cumulative total doses administered by country per 100 people. Source: Our World in Data, Macrobond, RBC GAM

The U.K. has now attained the milestone of 100 doses per 100 people. This doesn’t mean the country is done vaccinating since two doses are needed per person. Nor does it mean that every individual has received a dose since some are not eligible and others have already received a second dose.

The U.S. is now at 90 doses per 100 people, Canada has increased to 69 and Europe hovers in the range of 55 to 65. China has made particular progress recently, with a remarkable 18.6 doses per 100 people over the past two weeks alone. That means almost one in five of China’s 1.4 billion people received a dose in just the last two weeks.

As a surplus of vaccines builds, the U.S. is beginning to lay out its vaccine-sharing plans. It will share 25 million doses initially, scattering them liberally around the world. It later plans to share an additional 55 million doses by the end of June. It will presumably be in a position to share even more over subsequent quarters.

Economic data

Traditional U.S. data

Traditional economic data remains consistent with a robust economic recovery in the U.S.

The twin U.S. ISM reports for May were unimpeachably strong. The ISM (Institute for Supply Management) Manufacturing Index rose from 60.7 to 61.2, a very strong reading. Sixteen of 18 industries reported growth and new orders rose to a spectacular 67.

Meanwhile, the ISM Services Index also rose, from 62.7 to 64.0. It is notable that the services side is apparently outgrowing the goods side, as that is a key signal that the previously beleaguered parts of the economy are now leading the charge higher.

The latest payrolls report, for May, technically missed expectations with 559,000 new jobs versus a consensus expectation of 675,000. But the absolute rate of job creation remained excellent, and the unemployment rate has now fallen from 6.1% to just 5.8%. This is still some distance from the sub-4% readings from before the pandemic, but would have been considered a half-decent unemployment rate for most of the past several decades.

If anything, employers would like to hire more but simply can’t find enough new workers – a subject addressed in the inflation section, later. We fully expect job creation to remain robust over the coming months, particularly given a 30% decline in weekly initial jobless claims over the past month alone (see next chart).

U.S. jobless claims reached pandemic low

U.S. jobless claims reached pandemic low

As of the week ending May 29, 2021. Shaded area represents recession. Source: Department of Labor, Haver Analytics, RBC GAM

Fascinatingly, the fact that job creation missed expectations seemed to elicit a positive reaction from the stock market. The view is presumably that this report simultaneously confirms that the recovery remains intact (a good thing), but without further sounding the overheating economy alarm. This alarm might have prompted the Fed to tighten monetary policy earlier than otherwise (an undesirable thing for risk assets). We could be entering a weird period for the economy where good is bad, bad is bad, and ok is good. More evidence is needed before we can say this with conviction.

Real-time indicators

A slew of real-time indicators provide a mostly positive impression of the economy as well.

While the hours worked of American hourly workers fell recently, that was due to a Memorial Day distortion. The trend otherwise continues to rise robustly, and at a rate not experienced since last spring (see next chart). The level is now easily the highest since the pandemic began.

Percentage change of hours worked by hourly workers in the U.S.

Percentage change of hours worked by hourly workers in the U.S.

As of 06/01/2021. Impact compares hours worked in a day vs. median for the same day of the week in January, 2020. 7-day moving average used. Source: Homebase, RBC GAM

After a fiscal stimulus-induced March spending boom was followed by a mild April hangover, U.S. card-based spending is back to strength in May. Activity was roughly 20% higher than two years ago (see next chart). There is no evidence of consumers rolling over.

U.S. aggregated daily card spending

U.S. aggregated daily card spending

As of 05/29/2021. Total card spending (7-day moving average) includes total BAC card activity which captures retail sales and services paid with cards. Does not include ACH payments. Source: Bank of America COVID-19 and the consumer weekly publication, RBC GAM

A further confirmation of the reopening U.S. economy is that TSA (Transportation Security Administration) travel checkpoints are being visited to a significantly greater extent than at any other point during the pandemic (see next chart).

TSA checkpoint travel numbers recent rebound has accelerated

TSA checkpoint travel numbers recent rebound has accelerated

As of 06/02/2021. 7-day moving average change compared to same weekday of prior years. Source: TSA, Macrobond, RBC GAM

Combining the many different real-time indicators we examine, our U.S. economic activity index continues to revive. It is now at its highest level during the pandemic (see next chart). We actually think that the overall U.S. economy – as properly defined, rather than via proxies such as this – is already slightly bigger than it was before the pandemic struck.

U.S. economic activity accelerates as states reopen

U.S. economic activity accelerates as states reopen

As of 05/29/2021. Economic Activity Index is the average of nine high-frequency economic data series measuring the percentage change versus the same period of 2019. Source: Bank of America, Goldman Sachs, OpenTable, Macrobond, RBC GAM

Restaurant reservation data continues to reveal the pace of economic reopening across the globe (see next chart). The U.S. has now caught up to a normal level of restaurant reservations. The U.K. has leapt at the newfound opportunity to dine out. Reservations soared from zero to nearly twice the normal clip. Continental Europe is now also reviving on this front, as per Germany’s tentative increase. Canada is now beginning to inch higher, but remains quite depressed compared to the others.

Restaurants reopen for dine-in service in some countries

Restaurants reopen for dine-in service in some countries

As of 06/02/2021. 7-day moving average of year-over-year (YoY) % change. Seated diners from online and phone reservations and walk-ins, based on a sample of restaurants on OpenTable. Source: OpenTable, RBC GAM

Canadian weakness in context

Canada’s recent economic data has been weak, but much of the reason for this revolves around the temporary damage done by third-wave lockdowns.

Canadian employment fell for a second straight month with the loss of 68,000 jobs in May. This was somewhat worse than the consensus. Technically it means that Canada has now lost slightly more jobs during the third wave than during the second wave. The unemployment rate edged higher, from 8.1% to 8.2%.

Canadian first quarter GDP was also released, revealing a 5.6% annualized increase that fell somewhat short of the 6.8% gain expected. Of course, the absolute rate of growth was nevertheless spectacular, especially since the economy remained locked down for the first month of that quarter. While most areas of the economy grew, it is notable – and a bit ominous – that residential investment contributed so disproportionately to the economy’s increase – rising by a startling 43% annualized.

Alongside the quarterly GDP report was a flash estimate for the month of April. Whereas the first quarter ended with a 1.1% increase to output in March, Statistics Canada estimates that the economy then shrank by 0.8% in April. A decline isn’t shocking, since it was evident that economic damage would occur during the third wave lockdown. However, it is nevertheless a contrast to the second wave, which failed to record a single month of economic decline.

This runs somewhat contrary to our thesis in last week’s note that the third wave should be no worse than the second wave from an economic standpoint. We tend to reconcile this with the view that it was arguably anomalous that Canadian GDP didn’t fall last November, December or January, given evidence of softness in other metrics at that time.

It is clear that the Canadian economy now lags behind the U.S. given the very different economic performances between the two over the past few months. But the month of June is almost certain to be better for Canada, and for that matter, Canada now possesses more room to catch up going forward, potentially permitting an economic outperformance over the second half of the year.

Online shopping and the pandemic

Naturally, online shopping increased massively during the pandemic. The Bank of America’s real-time card transaction data for the U.S. (a mix of credit card and debit card activity) shows that online transactions rose from just 13% of the retail share to as much as 28% during the pandemic (see next chart). This has since retreated back to 19% of retail spending.

Bank of America aggregate card transactions – online retail share

Bank of America aggregate card transactions – online retail share

As of 05/01/2021. Total card spending includes total BAC card activity which captures retail sales and services which are paid with cards. Does not include ACH payments. Online sales defined as purchases made where card is "not present" and hence may include purchases made over the phone. Source: BAC aggregated card transaction data, RBC GAM

The online shopping share of spending appears to be continuing to decline. This arguably makes sense: physical stores are reopening, capacity limits are going away and people are becoming less fearful. These brick and mortar stores are capturing some fraction of spending that was previously happening online. There is presumably also a reallocation within brick and mortar spending, away from the big box stores that thrived during the pandemic, and back toward physically smaller retailers and small businesses more generally.

It seems reasonable to expect online retail spending to remain higher after the pandemic than it was before, but not as high as today.

Arguments in favour of a robust online presence going forward include:

  • Online retailers can offer an enormous selection.
  • Online shoppers can frequently secure a lower price on a product due to superior price discovery online, plus lower rent and staffing costs for an online retailer (partially offset by shipping costs).
  • Online shoppers don’t have to leave the comfort of their home.
  • The pandemic may have knocked some people out of the rut of going to a physical store when, in some cases, an online retailer might have been more logical.
  • Online spending was rising as a share of total spending before the pandemic.

However, there is also reason to think that physical stores can recover some lost ground:

  • Online shoppers have to wait hours, days or even weeks to receive the product they have purchased – there is no instantaneous gratification.
  • Some products don’t lend themselves to online buying – the fit, quality and details of a product are not always fully apparent online.
  • Online shoppers do not receive the expert, personalized advice that they might at a physical retailer (though online reviews can serve as a reasonable proxy in some cases).
  • Some shoppers may wish to actively support the local community.
  • Shopping can be as much an experiential and social activity as it is about procuring goods – these additional elements are really only possible in a physical store.

E-commerce may decline to 17% of retail spending in the U.S. That number is based on the presumption that the online spending share continues to retreat at its recent pace through the autumn, at which point the U.S. economy should be fully reopened and back to its potential. The 17% estimate is 11 percentage points below the peak and two percentage points below today’s level, but still four percentage points above the pre-pandemic norm.

Some retail sector pundits don’t expect a significant pullback, instead looking for e-commerce to jump from success to success going forward. However, it seems unlikely to us that the online spending share in 2021—2022 will be higher than it was in 2020—2021. The trend is clearly in decline, and logically so as physical stores reopen.

We do concur about the longer-term story: after a near-term consolidation, e-commerce should then return to growing its slice of total spending from year to year. Over the long run, retail e-commerce could increase at something like 8% per year, versus just 4% for overall retail sales.

Without prophesying doom for physical retailers, it isn’t obvious that there is a hard limit to how far online shopping can go over the long run. Case in point: e-commerce already captures a much larger 34% of Chinese retail sales. eMarketer predicts that this share could rise to an unfathomable 58% in China by 2024.

Inflation musings

We continue to view inflation as constituting three separate stories.

  1. Over the next several months, inflation should be very high due to a variety of temporary conspiring factors. These include a commodity boom, temporarily altered demand preferences and the challenge of switching an economy back on overnight.
  1. Over the next few years, inflation should remain somewhat higher than normal – in the realm of 2.5% – as remnants of some of the temporary factors fade slowly and given other considerations such as extensive quantitative easing and strong corporate pricing power.
  1. Over the long run, we tend to think inflation should revert to normal, with the risk that it is even a little lower than usual due to the deflationary effects of an aging population, among other factors.

What follows are a series of interesting developments and charts that don’t ultimately alter the above interpretation of the inflation outlook, but help to colour the thinking somewhat.

More U.S. inflation than elsewhere

It makes sense that the U.S. is experiencing the most inflation in the developed world. Not only has its currency weakened more than most, but its economy is also hotter, the country lifted its economic restrictions sooner, and it has been more generous with fiscal stimulus in 2021.

It also makes sense that the U.S. is specifically experiencing more wage inflation. The U.S. allowed unneeded workers to detach from their employer and claim unemployment insurance. In contrast, the E.U. and the U.K. implemented fiscal policies that paid surplus workers to remain on company payrolls. Canada’s policies landed somewhere in the middle of the two approaches, though arguably tilted more toward the U.S. The implication is that U.S. companies must now work harder to find new employees as the economy revives, whereas many other developed markets are already well positioned to recommence. American companies are using higher wages as an inducement to get these workers back.

Too few jobs and too few workers

The U.S. and, to a lesser extent, Canada, are in the curious position of having too few jobs (as evidenced by still-elevated unemployment rates) and yet too few workers (as evidenced by high job vacancies – refer to next chart). This is why wage pressures are being reported even though the unemployment rate remains elevated.

U.S. job openings rate at record high

U.S. job openings rate at record high

As of Mar 2021. Shaded areas represent recessions. Source: Bureau of Labor Statistics, Haver Analytics, RBC GAM

Most of this mismatch should ultimately be resolved:

  • Some of the mismatch is rooted in frictions associated with matching prospective workers with prospective employers: it can take a few months to make the right match.
  • Some of the mismatch reflects the fact that certain sectors are now significantly overheated, like residential construction – while others remain well below normal, like arts, entertainment & recreation. These imbalances, too, should fade as the economy normalizes.
  • Finally, some prospective workers have been reluctant to return to the office due to fears of getting sick, a lack of childcare and/or the generosity of temporary government benefits. Each of these restraints is set to fade in the coming months.

Narrow wage pressures

Much has been made of the substantial wage hikes and signing bonuses that some large U.S. retail and fast food chains are offering to their low-level employees. These are welcome from the perspective of reducing inequality and poverty. But they have also created anxiety that a wage-price spiral could form.

In actual fact, genuine wage pressures do not appear to extend much beyond a handful of sectors (see next chart). So-called limited-service restaurants (fast food restaurants) are indeed experiencing a spike in wages. However, overall, private non-farm average hourly earnings are merely rising at 2% per year. This probably understates the true wage growth somewhat since comparisons to a year ago are skewed by the temporary bonuses paid to front-line workers last spring. But the fact remains that most wages are not soaring right now.

Wage growth of U.S. low-skilled workers rebounds from pandemic low

Wage growth of U.S. low-skilled workers rebounds from pandemic low

Limited-service restaurants as of Apr 2021, total private non-farm as of May 2021. Source: Bureau of Labor Statistics, Macrobond, RBC GAM

Business pricing power

However, and as we have highlighted in the past, businesses have been raising prices significantly, and plan to continue doing so (see next chart). Conservatively, these metrics are at their highest readings since 2008. One of them is at its highest since 1982.

U.S. businesses are raising prices – highest readings in decades

U.S. businesses are raising prices – highest readings in decades

As of Apr 2021. Shaded area represents recession. Source: National Federation of Independent Business (NFIB) Small Business Economic Survey, Haver Analytics, RBC GAM

But let the record show that this measure doesn’t mean that inflation is set to rise by as much as it did in 1982. Instead, it means that a similar fraction of businesses plan to increase their prices, but presumably to a less extreme extent. This last assertion receives at least tentative support from a different question in the same survey (see next chart). While the fraction is rising, few businesses report that inflation is their biggest problem. Critically, this looks nothing like the 1970s or early 1980s.

Inflation is not too big of a problem yet

Inflation is not too big of a problem yet

As of Apr 2021. Shaded area represents recession. Source: NFIB Small Business Economic Survey, Haver Analytics, RBC GAM

Cynically, one might argue that higher inflation isn’t a problem for businesses because they are passing so much of their cost pressures along, making it someone else’s problem. But we are skeptical that’s what the respondents were thinking.

Reversing early-pandemic distortions

It is worth remembering that some price movements today can only be evaluated in the context of their prior behavior. For instance, during the early phase of the pandemic, transportation costs plummeted while food costs surged (see next chart). People suddenly didn’t need to go anywhere while they were locked down, and simultaneously households were stocking up on food in case the food supply chain buckled during the pandemic.

Impact of COVID-19 on prices: food vs. transportation

Impact of COVID-19 on prices: food vs. transportation

As of Apr 2021. Source: Macrobond, RBC GAM

Today, the opposite trends are underway as the pandemic fades. Transportation costs are soaring as the prior price weakness is unwound (compounded by a shortage of car chips, an aversion to public transit and large government stimulus cheques being ploughed into the purchase of motor vehicles). At the same time, food inflation has retreated from 4% per year back to 2% per year (though, in fairness, it has not yet undershot its pre-pandemic inflation rate). In other words, some of the recent strength is explicitly a reversal of earlier weakness.

Commodity prices in context

Higher commodity prices have been a big part of the inflation story. However, this commodity surge is not quite as extraordinary as it seems (see next chart). The surge in 2008 was far greater, and reached a much higher peak. There was also a considerable boom in 2009 and 2011, with commodity prices significantly higher than today for several years. In other words, inflation has grappled with similar and even more powerful commodity trends in the fairly recent past without spiraling off into a higher inflation regime.

Latest commodity rally has been broad-based

Latest commodity rally has been broad-based

As of 05/25/2021. Shaded area represents recession. Source: S&P, Haver Analytics, RBC GAM

Today, some commodities are even cooling off a little. This can be seen in the recent stagnation in the chart, above, and also in that fact that U.S. lumber futures for July recently fell by a significant 25%.

Furthermore, there appears to be some spare capacity in the mining space, and also in U.S. steel production, which continues to come back online (see next chart).

U.S. raw steel production (net tons)

U.S. raw steel production (net tons)

As of 05/29/2021. Source: American Iron and Steel Institute, Haver Analytics, RBC GAM

As oil prices have moved beyond pre-pandemic levels, it would seem only a matter of time before U.S. crude oil production begins to revive (see next chart). Rig counts have been trending higher for some time.

U.S. crude oil field production (barrels/day)

U.S. crude oil field production (barrels/day)

As of 05/28/2021. Source: Energy Information Administration, Haver Analytics, RBC GAM

Real-time inflation peaking?

Finally, it is surely relevant that some proprietary web-based inflation signals have peaked and begun to edge back downward for both the U.S. and Canada. This argues that the soon-to-be-released May CPI (Consumer Price Index) readings may indeed be the peak of the inflation cycle, as we had previously speculated.

Inflation summary

To be clear, high inflation is still a real concern and not fully resolved. We do see considerable wage increases in certain sectors, and corporations appear to possess significant pricing power. But the wage heat may diminish with time, given that.

  • Businesses aren’t overly worried about inflation.
  • Certain pandemic-based price distortions are now fading.
  • Commodity price increases are not unprecedented and may already be peaking.
  • A key real-time indicator argues that overall inflation pressures may also have peaked. These are more reassuring than not.

Global corporate tax plan

The existing global corporate tax system has long been criticized for allowing companies to shift profits between jurisdictions – to their benefit from a taxation perspective – by manipulating what internal departments under a single corporate umbrella charge one another for various services and products.

Over the past weekend, G7 leaders announced an agreement that would reduce the extent of this tax arbitrage.

The details

The product of negotiations that began back in 2013, G7 nations have agreed upon a 15% minimum corporate income tax. In practice, none of the countries actually has a corporate rate below 15%. Instead, the idea is that a company headquartered within a G7 nation will have to pay worldwide corporate taxes of no less than 15% on its global corporate earnings. If a large fraction of the company’s profits are reported in a tax haven with a low corporate tax rate, the company might fall short of the overall 15% rate. This is remedied by having the company top up its tax payments to its home country until the 15% rate is reached.

Additionally, “the largest global companies” will have to pay a minimum tax of no less than 20% on any profits generated above a 10% profit margin. This extra taxation is shared by governments based on where a multinational’s sales occur. Presently, some companies pay very little tax in a major market if they don’t have corporate operations in that jurisdiction.

Not yet implemented

This plan is, at best, a few years away from implementation. So far, only G7 leaders have agreed to it. G7 nations still need to pass any associated laws, including in the U.S. Congress. Furthermore, changing a tax treaty in the U.S. requires a two-thirds majority in the Senate, meaning bipartisan support will be required. This is possible, but hardly certain. The U.S. may also be reluctant to move first given that it actually introduced a similar (though lower) 10.5% minimum corporate tax in 2017 and then no other countries followed. At the same time, other countries may be reluctant to implement laws until they see whether the U.S. can actually get its own laws through Congress.

The plan would also be quite limited unless it expands to include other nations. The matter will be proposed to the G20 next month in Venice, but even this is well short of the 135 or so countries that would ideally acquiesce to the plan. After all, without participation from the likes of Ireland and other low-tax countries – whose prosperity is arguably threatened by the plan – companies could conceivably choose to put their headquarters in non-compliant countries and avoid the minimum tax altogether.

Not a lot of clarity

There appear to be many details left to be worked out regarding the plan. For instance, the French minister suggested that the minimum tax could yet be negotiated up from 15%, while others spoke of the 15% rate as a fait accompli. It also isn’t clear what constitutes a “largest” global company for the purposes of the profit margin rule.

Impact on taxes and profits

The intent is that the effective corporate tax rate will rise, such that after-tax corporate earnings decline and corporate tax revenue increases – U.S. Treasury Secretary Yellen explicitly acknowledged this.

However, the magnitude of the change matters. A 15% corporate tax rate is not an especially high bar: as mentioned, that is a lower rate than any G7 country presently charges. Fascinatingly, Apple, Alphabet and Facebook already report effective tax rates close to the 15% minimum rate. These are the tech giants the taxes are largely directed toward. Apple’s effective tax rate is 14.4%, for context, meaning that the extra taxation might reduce its after-tax earnings by just 0.7%. Of course, there is also the profit margin component of the proposal. Using Apple as an example, Apple’s net profit margin is 23.4% – well above the 10% margin threshold. At a 20% tax rate on the surplus amount, that would reduce Apple’s after-tax earnings by a further (and quite large) 11.5%. It should be warned that all of these are back-of-the-envelope calculations performed by an economist rather than a proper analyst!

The Eurasia Group estimates that the deal might ultimately yield an additional U.S.$100 billion to $200 billion per year for participating governments out of a global pool of corporate earnings that we figure is worth (extremely approximately) $7 trillion per year. If correct, that would amount to perhaps a 1.5% to 3% decline in global after-tax earnings, pitted against an annual earnings growth rate in the realm of 7% per year. One might thus think of this change as setting back earnings by a quarter to half a year, but no more.

For their part, the largest American tech firms have said they welcome the proposed change. Let us see if it actually happens.

-With contributions from Vivien Lee and Sean Swift

Interested in more insights from Eric Lascelles and other RBC GAM thought leaders? Read more insights now.


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