CANADA: The consumer price index was flat in June

Week in review

CANADA: The consumer price index was flat in June in seasonally adjusted terms allowing the year-on-year inflation rate to drop three ticks to 1.0%, its lowest level in 20 months. The price increases in food (+0.4%), healthcare (+0.3%), alcohol/tobacco (+0.4%), household operations (+0.1%), recreation (+0.1%) and shelter (+0.1%) were offset by a decline in the price of transportation (-0.5%). Excluding food and energy, CPI rose 0.2% in seasonally adjusted terms but, due to base effects, the year-on-year rate remained unchanged at 1.4%. On an annual basis, the CPI-trim stood at 1.2% (unchanged), CPI-Median at 1.6% (up from 1.5%) and CPICommon at 1.4% (up from 1.3%). The average of the three measures edged up one tenth to 1.4% from a 17-year low in the prior month. Inflation in Canada was below expectations for a fifth month in a row. However, the fact that transportation was the only category showing a decline indicated that the weakness was far from widespread. Due to a positive base effect, we expect annual inflation to bounce back in July.

Retail sales rose 0.6% in May, with increases in 5 of the 11 major subsectors, including a 2.4% increase for autos. Excluding autos, sales were roughly flat as increases for sellers of electronics, furniture/home furnishings, food/beverage and miscellaneous items dwarfed declining sales of gasoline, health products, clothing, building materials, sporting goods, and general merchandise. Discretionary sales, i.e. sales excluding gasoline, groceries and health products, rose a solid 0.9% during the month. In real terms, Canadian retail spending was up a healthy 1.1% during May and, assuming no change in June, they should grow at an annualized pace of 6% in Q2. This would represent a slight deceleration from Q1's print and is thus consistent with an expected moderation of GDP growth in Q2. That said, the results still suggest Canadian consumption remained in good shape in the second quarter, backed by sound fundamentals such as income gains from a solid labour market, the housing wealth effect and low interest rates. 

Manufacturing shipments rose 1.1% month on month in May, taking nominal sales to an all-time high. Sales increased in 16 of the 21 industries surveyed, including electrical equipment (+4.5%), chemicals (+2.4%), machinery (+2.2%), and transportation equipment (+4.2%). These gains more than offset declines in food products (-1.2%), petroleum and coal (-3.4%) and non-metallic mineral products (-0.8%). In the 12 months to May, nominal sales were up 8.7%, the steepest year-on-year increase since July 2014, with strong gains not only in Ontario (+7.4%), Quebec (+8.1%) and British Columbia (+8.2%), but also in Alberta (+18.4%), Saskatchewan (+8.9%), and Newfoundland and Labrador (+29.0%), the three provinces hardest hit by the slump in oil prices. Overall, the solid increase in shipment volumes, which advanced 1.1% in May to reach a post-recession high, points to a strong month and a more than decent Q2.

International securities transactions data showed foreign investors increased their holdings of Canadian securities by C$29.5 billion in May thanks to net buying of bonds (+C$21 billion), equities/investment funds (+C$7.2 billion) and money market instruments (+C$1.4 billion). About half of the bond inflows went into provis (+C10.2 billion), but there was strong appetite for federal government bonds (+C$4.3 billion) and corporates (+C$6.4 billion, including C$1.8 billion in government enterprise bonds) as well. The vast majority of bonds purchased by foreigners was denominated in foreign currencies. So far this year, foreigners' intake of Canadian bonds has averaged about C$12 billion/month, topping last year's record C$9.1 billion/month. Indeed, in 2017, appetite for corporate bonds (C$7.7 billion/month on average) and provis (C$3.9 billion/month on average) has surpassed the already high levels recorded in 2016.

According to the Canadian Real Estate Association (CREA), in June, existing home sales fell the most in seven years, retracing 6.7% in seasonally adjusted terms to 39,979 units. Since peaking in March, unit sales dropped 14.1% in Canada as a whole. On a 12-month basis, sales retreated 11.4% in actual terms (not seasonally adjusted). With sales declining and new listings increasing only 1.5% in June, the new-listings-to-sales ratio jumped to 1.89 from 1.79 in May (a ratio of 1.60 to 2.10 is generally consistent with a balanced housing market). Back in January, this indicator stood at a 12-year low of 1.46, which clearly reflected a sellers' market. Most of the realignment seen in the Canadian housing market was driven by the Toronto area, where sales fell 15.1% month on month in June after retreating 25.9% in May. In fact, the cumulative drop in sales in Ontario's capital since the introduction in April of the Fair Housing Plan—a set of measures aimed at cooling the redhot housing market in the province—has totaled 41.7%, the largest decline for a similar time period since March 1990. Over the same time span, new listings spiked 12.7% in the city. As a result, the new-listings-to-sales ratio shot up from a trough of 1.06 in January to 2.54 in June.

UNITED STATES: In June, housing starts surged 8.3% month on month to 1215K in annualized terms. The increase followed three consecutive negative monthly prints that translated in a cumulative 12.9% retreat from February to May. In June, single-family starts increased 6.3% to 849K, while multi-unit starts spiked 13.3% to 366K (albeit after a 29.8% cumulative drop over the previous five months). Despite the sharp rebound in June, housing starts data suggest residential construction softened in Q2. To be sure, starts averaged an annualized 1164K in Q2, compared with 1238K in Q1. This notwithstanding, the quarterly decline was concentrated in the multi-unit segment, which has a lesser impact on GDP.

Separately, building permits climbed 7.4% to 1,254K in June with applications augmenting in both the single-family (+4.1% m/m) and multi-unit (+13.9%) segments. For Q2 as a whole, permit applications fell 3.4% quarter on quarter.

The Empire State Manufacturing Survey's index of general business conditions slid 10.0 points to 9.8 in July after spiking 20.8 points to 19.8 in June. It now stands just below its 6- month moving average (11.5) but nonetheless continues to indicate expansion in manufacturing activity. Several important sub-indices of the survey fell in the month,including new orders (13.3 vs. 18.1 prior) and shipments (an 8-month low of 10.5 vs. 22.3). Moreover, both the current number of employees (3.9 vs. 7.7) and the average workweek (0.0 vs. 8.5) indices registered declines. Interestingly, the index tracking firms' expectations of general business conditions for the next 6 months fell 6.8 points to an 8-month low of 34.9, an indication that the enthusiasm generated by Donald Trump's election is waning.

The Philly Fed Manufacturing Business Outlook Index, too, reported a weaker expansion in the manufacturing sector as its General Business Activity diffusion index dropped 8.1 points to 19.5 in July, its lowest level since the U.S. presidential election. The new-orders index plunged from 25.9 the prior month to 2.1, its steepest monthly decline since October 2008. Similarly, shipments slid 16.3 points to 12.2. The employment trackers fared no better: the number of employees index went from 16.1 to 10.9 while the average workweek diffusion index erased all of its post-election gains, sinking 16.7 points to 3.8. Looking ahead, the businesses polled seemed to remain upbeat, as evidenced by a 5.6-point increase in the 6-month forward-looking general business activity index to 36.9.

In June, the Import Price Index fell 0.2% month on month after edging down 0.1% in May. Most of the decline was attributable to a 2.2% drop in the price of petroleum imports. Excluding these, import prices actually nudged up 0.1% in the month. On a 12-month basis, the headline IPI was up only 1.5%, down from 2.3% in May and 4.7% in February. Expetroleum import prices, which are less volatile, have showed a more positive trend recently. In June, they were up 1.4% year on year, their best showing since March 2012. The IPI continued to be depressed by Chinese imports, which decreased 1.0% in price on a 12-month basis in June. By comparison, the price of Canadian and Japanese imports increased 3.4% and 1.0%, respectively, over the same period.

The leading economic indicators index (LEI) rose for the tenth consecutive month in June, surging 0.6% month on month to 127.8. Compared with its level a year earlier, the index gained 4.0%, its steepest increase in two years. What's more, the diffusion index came in at a lofty 85.0 (up from 75.0 in April), which suggests that most of the underlying economic indicators contributed to hoist the leading index upward in June. Building permits (+0.21 percentage point) provided the biggest contribution to the index's overall gain, followed by ISM new orders (+0.17) and the interest rate spread (+0.13). Jobless claims (-0.05) was the only indicator acting as a drag.

WORLD: The European Central Bank kept interest rates unchanged as follows: 0.0% for the refinancing rate, -0.4% for the deposit rate, and 0.25% for the marginal lending rate. The portion of its statement addressing the asset purchase program was also left intact. Accordingly, the ECB maintained its commitment to increase the pace of bond buying if the European recovery was to falter. ECB President Mario Draghi reiterated the bank's confidence about the economic outlook but pointed out that a substantial degree of monetary accommodation was still needed as the economic expansion had yet to feed through to inflation. He added that the last thing the ECB wanted under the circumstances was tighter financing conditions. Yet, recognizing the economic momentum, the ECB indicated that a decision regarding the time table for implementing changes to the policy stance would be discussed this fall. In our view, the October 26 meeting seems a likely moment for an announcement to be made.

As anticipated, the Bank of Japan kept monetary policy on hold, maintaining its overnight interest rate at -0.1% and reiterating its intention to continue capping 10-year bond yields at 0% and to extend its ¥80tn-a-year government bond purchase program. There were no signs that the BoJ might be contemplating an eventual tapering of its bond-buying program. If anything, the Central Bank sounded even more dovish than before as it revised its inflation forecasts downward for fiscal year 2017 (1.1% from 1.4%), 2018 (1.5% from 1.7%) and 2019 (1.8% from 1.9%). These changes in the BoJ's forecast mean that the projected timing for reaching the 2% target is now being pushed back to fiscal year 2019.\

In China, gross domestic product (GDP) expanded at an annualized quarterly pace of 7.0% in Q2, accelerating from 5.3% in Q1. Expressed on a 12-month basis, growth clocked in at 6.9%, matching the pace set in the first quarter. With half of the year already in the books, China is on track to surpass the 6.5% annual growth target set by the government. In fact, this year's output growth is on pace to equal last year's figure of 6.9%.

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