Hello, and welcome to our latest video MacroMemo.

This week, we’ll talk about the mixed economic data that has lately been coming out. Not quite as universally strong as until recently. We’ll update you on our business cycle thinking and where we are in that cycle. U.S. fiscal plans will be discussed and some movement on that front. And also, just reviewing some of the structural changes that may and may not be occurring out there in the global economy of relevance to investors. And from there, we’ll then turn to the usual pandemic fare. We’ll talk about the latest infection numbers, and vaccinations, and so on.

Let’s start with the economic figures. And so economic date, quite mediocre recently. And so I think in a U.S. context, I would describe it as the end of the sugar high that was March. And so in March a lot of fiscal stimulus was delivered, $1,400 checks made their way to many mailboxes and a lot of that money got spent. And so, inevitably, as April rolls around, there’s a little bit less spending going on relative to that very high watermark. And so a little bit of softness in the U.S. context there.

We can see, for instance, that credit and debit card spending is a bit softer in April, particularly in later April, relative to where it was in March. The April payrolls number did not see the million jobs created that had been anticipated. It was only a little over 200,000 instead. Completely fine by the way, still eating through economic slack, but not as incredible as had been anticipated. And so little bit of softness there, but I think the key message is we do fully expect for a full revival as the May data begins to roll out.

One thing of interest I think within the U.S. economic figures is we’ve seen nearly a complete economic recovery now. The level of activity is very close to where it was before the pandemic, acknowledging some sectors are still very much depressed. Others though are going faster than they were before the pandemic.

But what hasn’t fully come along is employment. Employment is only 63% or so of the way back to normal. And so somehow the economy is nearly normal. The employment side isn’t. I must confess, I don’t think we fully understand this. We can see other countries like Canada where employment is 90% of the way back to normal and the economy isn’t even quite as far along and so it’s not quite as simple as to say the pandemic has drawn out incredible productivity gains. But somehow, in a U.S.-specific context, it has been particularly successful at doing that.

Some of that, we think, is likely to be temporary. Some of that might be permanent. And let the record show we do expect somewhat faster productivity growth structurally down the line, but I would say the main takeaway, not fully understanding why that’s happening, but nevertheless, the main takeaway is even as the U.S. economy gets back to its prior peak, and perhaps towards the end of the year even gets towards what would normally be considered its potential, chances are the labour market won’t be all the way back alongside it.

And so, of course, that’s bad for workers, and so let’s not forget about that angle. But equally, from an investor perspective, what that means is that the risk of inflation continuing to overheat is a little bit less because there’s still some labour markets slack. And similarly, the pressure on, for instance, the Federal Reserve to raise rates is a little bit less than you might otherwise think if you were just looking at the economy.

And so on that front, those are actually quite welcome things for investors and perhaps keep this bull market going a little bit longer.

In a non-U.S. context, in a Canadian and European context, we’ve also seen some weakness in April for pretty obvious reasons. There were quite harsh lockdowns imposed in late March and into April in some cases. And so, using Canada as an example, I can say Canada did shed several hundred thousand jobs in the month of April and so that was expected, and indeed reflects that weakness. It was very much in the regions and sectors you would imagine on the basis of how those lockdowns played out. And similarly, small businesses do report being a little bit less open. And so a bit of suffering there, but I would emphasize, again, we expect some improvement into May and beyond. We still think there’s a fair bit of economic runway left to go here. And we can certainly still see bright spots out there more generally as well. We can see that globally, in areas that are beginning to reopen now, restaurant reservations are very much surging.

In the U.S., there’s a News Sentiment Index, and that’s been rising steadily for many months, but it’s now actually more optimistic—the average newspaper headline I suppose—more optimistic than it was before the pandemic struck. So that’s very much recovered. And our own real-time Economic Activity Index is still showing some improvement. So we still think the recovery narrative is very much alive.

One other economic comment would be on the inflation front, which is just do be braced. Inflation, as the April readings come out, is spiking further. We’ve known this would happen for the better part of about six months and so U.S. CPI is going to be up in the mid threes. And so just recognize that’s probably pretty close to as high as it gets. Some debate over the May figure, but nevertheless, unlikely that inflation stays that high for very long thereafter. And so, again, probably doesn’t get a whole lot worse.

Let’s talk about the business cycle for a moment. We tend to look at the U.S. business cycle. It’s the one that tends to drive the global economy and so we update that every quarter. And I can as with the quarter before, we’re still getting an early cycle reading, which broadly is a good thing. But I will admit that we are seeing some subtle advancement in the cycle readings. And so, for instance, still early cycle, but a little bit less confidently early cycle, and some claims now being made to mid cycle. In fact, when we look at the amount of economic slack out there, that’s pretty clearly a mid-cycle claim. It’s eaten through a lot of that slack already. And so some mid-cycle readings. Even a hint or two of late cycle, though we don’t think there’s much of a compelling argument that the overall economy is there.

And so in terms of takeaways from that, well, we do think this is probably going to be a shorter cycle, all else equal. But I do want to emphasize, it’s not done yet. I don’t think it’s a one-year cycle. Maybe it’s a four- or five-year cycle instead of a ten-year cycle, but nevertheless, plenty of room left to go. But again, what we’re seeing is consistent with just a rapid recovery, the sort you don’t normally get after a recession. And it’s because artificial constraints are being lifted.

And then just to say as well, we’ve looked into how financial markets generally perform at different points in the cycle, and usually they do best at the very start of a cycle and then incrementally less good. And so early cycle is normally quite strong. Mid cycle is normally pretty good. Late cycle, normally not bad. And so I think the takeaway from this is that we should still, all else equal, expect risk assets to rise over the coming years, but maybe not quite as enthusiastically as over the last year.

We’ve been tracking U.S. fiscal affairs for quite some time, and several major rounds of stimulus have been unveiled. And then things have gotten a little bit sleepier recently as there have been new proposals, but not actually action for more.

And so just to update you on that front, there are plans now—at least aspirations—of a major infrastructure bill in the U.S. And another tax and spending bill as well. And it’s not quite clear whether these will happen, how they will play out, but there are three main options in terms of how it might get through Congress.

And so one would be entirely bipartisan, getting the Republicans to sign on with the Democrats. That would have to be a much smaller package. The Republicans wouldn’t go for everything the Democrats want. Another one would be the Democrats go alone, and it could be a much bigger plan, but it’s trickier to get through Congress.

And then considered the most likely is splitting, in fact, the plan into two and doing something infrastructure oriented on a bipartisan basis with Republican support. And then doing the other things like tax hikes on their own, perhaps in the fall.

In terms of the takeaways from this, well so no guarantees anything happens. It’s a tricky one right now and the Democrat majority is thin enough. There’s no carte blanche in terms of the Democrats getting what they want, even if they go alone. Recognize it is tricky to use the reconciliation process that you’d need to do to go without the Republicans. It does impose some restrictions on what can actually be achieved.

We think we’re going to learn a fair bit more by the end of May in terms of just what the contours in terms of who’s supporting this and who isn’t, these packages. And then implementation considered most likely to be something like a late summer proposition. So not to be implemented in the next few weeks or even the next few months at this point in time.

Let me just quickly nod my head towards structural changes in the world. We’re always looking for things that might be on the cusp of shifting in an enduring way with consequence for the economy and investors. And just to highlight three debates we’ve been having.

One question is, might we be shifting from a low inflation regime to a high inflation regime? And our general answer to that is we think not. Yes, inflation’s spiking right now. Yes, it might be a little bit higher than we’re used to over the next few years, but probably not a permanent shift to some sort of 1970s type of experience. And so we’re dubious about that. We still see a lot of deflationary pressures, in particular, out there over the long run. The next question is whether we’re shifting from a period of maximum stimulus delivery to stimulus removal. And I would say yes, but with many caveats. And so China’s doing it. The Bank of Canada’s hinted hikes are maybe out there late next year. There is a bit of a pivot happening, but again let’s recognize there are still big fiscal stimulus plans in a lot of countries. And so I would say we do need to be thinking about this. There is some history of markets being displeased when stimulus begins to be removed. And so we need to be alert to this and it may well happen before the stimulus starts to be removed. But realistically it’s more of a 2022 and beyond proposition as opposed to something that’s actually going to start impeding the economy in the short run.

And then maybe the third debate we’re having in terms of structural changes is whether we’re going from a low productivity era to a more medium productivity era. This is something we’ve written on before, but we think maybe that is happening.

We do believe that on a number of fronts the amount of scientific innovation, and some of the recent productivity data, and some of the innovations that have been unleashed by the pandemic and pent-up CapEx intentions, that all does suggest we could see something of an improvement in productivity growth, which is quite a nice thing for investors and society more generally.

Let me pivot now and just talk for a moment about the latest COVID numbers. And so the global infection figures are now actually improving at the aggregate level. That’s been the case for many developed countries for several weeks now, but it’s a fairly new phenomenon in the emerging market world.

It’s not every country, to be clear. The Indian numbers are still getting worse, albeit a little bit less aggressively than before. In the developed world, we can say the UK still doing great. The U.S. gradually improving without really any restrictions, which probably qualifies as great as well. And Canada now improving also. But not everywhere. And so we see Ontario, Quebec, British Columbia now improving quite notably on the back of lockdowns, and vaccinations, and so on. We do see Alberta continuing to deteriorate, though it’s locked down somewhat recently. We do see some challenges elsewhere, including Nova Scotia now experiencing its biggest outbreak since the onset of the pandemic. And so not fully solved, but on the aggregate the national numbers are getting a little bit better.

Let me acknowledge the third wave improvements we’re seeing, and be they in the U.S., or Canada, or elsewhere. They are coming fairly slowly. This is not a situation in which the infections are collapsing, much as they exploded higher a month or two ago. The improvement is happening again more slowly than the deterioration did.

Improvements happening more slowly than the improvement from the second wave did back in January, February, March. And so it does suggest this is unfortunately a more gradual affair and so we’re not in a position to see aggressive reopenings in the very near term. The numbers are still fairly high at this point in time.

And then let me finish just with a quick vaccination thought. And so we’re still seeing good vaccination news. The rate is accelerating if anything. Canada and Europe are now moving as quickly as the UK and the U.S. on a per capita inoculation basis, though of course they’re notably behind given a slower pace earlier.

Vaccine makers are promising more supply. Pfizer is now promising 3 billion doses this year, up from 2.5 billion. Moderna is promising no fewer than 800 million, up from a minimum of 700 million. And so, if anything, we’re getting good news, not bad news, on the vaccination front, even as we grapple with an Indian variant joining the other three variants as variants of concern.

And maybe I’ll finished just with this. Just this little thought, which is in general we celebrate Israel and a number of other countries that are way ahead in terms of inoculations per capita. It is worth acknowledging that of course being a smaller country is an advantage in this regard.

And so it’s worth just for a moment stepping back and saying who’s actually done the most vaccinating regardless of population? And so on that front, Israel’s vaccinated 10 million people, which is wonderful for them given their population. But compare that to India who has vaccinated 168 million people already. The U.S. has done 260 million, and actually China’s leading with 324 million.

And so again, the populations are so big that doesn’t mean that they’re necessarily leading the way in terms of recovering from the pandemic, but nevertheless just logistically challenging to have a big population. Actually countries like that are inoculating a lot of people, they just have even more enormous populations.

Okay. Well listen, I think you very much for your time and I hope you found this interesting. And please consider tuning in again next week.

Thank you.