Canada – Manufacturing sales dropped 1% in May

Week in review

Canada – Manufacturing sales dropped 1% in May, after an unrevised 1.0% rise the prior month. In May, sales were down in 15 of the 21 broad industries (representing 70% of total Canadian manufacturing) including a 2.2% decline for the transportation sector. In real terms, factory sales declined 2.1% in May while inventories were down 1.2%. New orders were down 4.6% in real terms. The factory data was softer than expected. The pullback in volumes suggest factories hurt economic growth in May and the drop in inventories is adding to the bad news. Moreover, the previous month’s surge in new orders was almost all erased in May indicating that a substantial rebound in the coming months is now less likely. Due to the pullback in May, factory volumes are at their lowest level in seven months. After two months in the quarter, real factory shipments are down roughly 2% in Q2 after a sizable expansion of nearly 5% the prior quarter. Our view remains that Canada’s economy, after registering above potential growth in Q1, contracted in the second quarter furthermore dragged down by Alberta’s wildfires.

The Teranet–National Bank National Composite House Price IndexTM rose 2.3% in June, with monthly gains in 10 of the 11 markets surveyed. Vancouver led the pack with a monthly rise exceeding 2% for a fifth month in a row. The 12-month rise of the composite index was 10.0%, the largest since July 2010. It was led by 12-month gains well above the national average in Vancouver (23.4% − the largest on record), Hamilton (+13.8%), Victoria (+12.5%) and Toronto (+12.4%). Those four markets contrast sharply with the other seven. Prices were barely higher than a year earlier in Winnipeg (1.7%), Ottawa-Gatineau (1.4%), and Montreal (0.5%) and down from a year earlier in Calgary (−2.4%), Edmonton (−1.9%), Quebec City (−1.4%) and Halifax (−0.7%).

Housing starts surged 16.9% to 218K in June from a downgraded 187K in May. That was significantly above the consensus expectation. The rise came mainly from urban areas (18.1%), with rural starts also up (3.8%). The increase in urban starts came from multis (+26.7%) and to a lesser extent from single-family homes (+1.7%). Among regions, there were sharp increases in the urban areas of B.C. (38%), Ontario (27%) and the Prairies (9%), more than offsetting losses elsewhere. The sharp June rebound in starts after three consecutive monthly declines was consistent with strong building-permits data. In B.C. and Ontario, where the increase was especially impressive, resale markets are particularly tight. The June surge left starts up 2.1% annualized in Q2 after a 7.6% rise in Q1. However, the June tilt toward multis meant a lesser contribution to GDP growth per unit built. We continue to expect starts to return sooner rather than later to a pace of 180-185K, closer to the rate of Canadian household formation.

In June, existing-home sales fell 0.9% m/m, following a 2.8% decline in the previous month. The number of newly listed homes rose 2.2%. Falling sales combined with rising new listing pushed the ratio of sales to new listings down from 65.3% to 63.3%. There were 4.6 months of inventory at the end of June. According to the CREA, the national average price for homes sold in June was $503,301. Excluding Greater Vancouver and Greater Toronto, the figure dropped to $374,760.

As widely expected, the Bank of Canada left its overnight rate unchanged at 0.50% on July 13. The Bank also updated its economic projections. It now expects 2016 Canadian economic growth of 1.3%, a 4-tick downward revision of its April outlook. The quarterly pattern has also been revised. The Bank now sees a contraction of 1.0% annualized in Q2 and, with cleanup and rebuilding under way in Alberta and oil production recovering, growth rates of 3.5% in Q3 and 2.8% in Q4. That leaves its projection for 2016 at 1.9% Q4/Q4. For 2017 the Bank sees Q4/Q4 growth of 2.1% and for 2018, 2.2%. In this scenario the output gap will close toward the end of 2017, with softer business investment crimping both GDP and potential output. The Bank projects inflation averaging close to 2.0% in 2017. Though it considers financial vulnerabilities to be elevated and rising (housing in Vancouver and Toronto), it judges that “the overall balance of risks remains in the zone for which the current policy stance is appropriate.” It acknowledges that “the implications of the Brexit vote are highly uncertain and difficult to forecast.” In our view, another risk factor in its outlook is the contribution of trade to GDP. With U.S. industrial production down in 14 of the last 18 months, one may want to temper one’s expectations. In this regard, we note that the Bank has revised down its view of the contribution of net exports to GDP growth in 2016 to 0.8 percentage points from 1.3. Our own expectation for Canadian GDP growth is 1.2% this year and 1.7% in 2017. The latter forecast being much weaker than the BoC`s 2.2%, we do not see the Bank of Canada tightening any time soon, especially with inflation expected to soften in step with import prices.

United States – Retail sales grew 0.6% in June, well above consensus expectations calling for a 0.1% rise. However, May data were revised down to 0.2% from an earlier estimate of 0.5%. Excluding auto and gasoline, spending was up a robust 0.7% in June. Sales at building-supply stores registered their largest m/m increase (3.9%) since April 2010. Lagging in the month were clothing sales, down 1.0%. Retail sales expanded 5.9% during the quarter after declining 0.2% in Q1. Decent job creation is helping support discretionary spending which showed annualized growth of 4.1% in Q2. All and all, we remain comfortable with our estimate calling for U.S. real GDP to expand at an above-potential rate of 2.5% during the quarter. This is strong enough for Fed hawks to keep their rhetoric calling for rate hikes in 2016.

The consumer price index increased 0.2% m/m in June, slightly below expectations calling for a 0.3% increase. Excluding food and energy, the CPI was also up 0.2% on the month. Commodities ex food & energy prices were down 0.2% during the month while prices for services ex energy roe 0.3% due mainly to higher prices for shelter. On a year/year basis, headline CPI stood at 1.1% in June vs. 2.2% for the core measure.

The headline producer price index rose 0.5% in June, topping the consensus expectation of 0.3%. This third consecutive increase left the PPI up 0.3% from a year earlier. The June monthly rise came from energy (prices up 4.1%), food (0.9%) and services (0.4%). The 12-month rise in prices for core goods, 1.3%, topped the consensus expectation of 1.0%. Producer prices excluding food, energy and trade services were up 0.3% on the month and 0.9% from a year earlier.

Import prices rose 0.2% in June after a 1.4% jump in May. But ex petroleum, import prices were down 0.3% − petroleum prices rose 6.4%. Export prices rose 0.8% in June after a 1.2% surge in May.

Wholesale inventories edged up 0.1% in May to $589.2 billion. The April rise was revised up 1 tick to 0.7%. Wholesale sales rose 0.5% on the month after gains in the previous two months, but remained down from a year earlier (−2.5%). The inventoryto- sales ratio was 1.35, compared to 1.31 a-year earlier.

The Index of Small Business Optimism rose 7 ticks to 94.5 in June, a year-to-date high. The index is still below its average of 100.1 in the years of the Great Moderation (1987-2007). Three of the 10 Index components declined in June, three were unchanged and four improved. Twenty-nine percent of the small businesses that participated in the survey reported job openings they could not fill. For 15% of small businesses, difficulty in finding qualified workers was their Single Most Important Business Problem. Again in June, the number of owners expecting general conditions to be worse six months from now was larger than those expecting conditions to be better. However, the balance of opinion on that point has been improving over the year to date, from −21 in January to −9 in June.

The number of job openings fell 345K to 5.5 million in May. Hiring edged down 5K to 5.04 million. The number of total separations, which includes layoffs and discharges (1.7 million), quits (2.9 million) and other separations (400K), was little changed at 5.0 million. The quit rate in May was unchanged at 2%. The three-month moving average of the ratio of job openings to hires is at an all-time high, indicating an increase in the time it takes to fill a job. Thus it is hardly surprising that business surveys show employers having more difficulty hiring.

Industrial production rose 0.6% in June, following a 0.3% decline in the previous month. Mining registered a 0.2% gain adding to last month gain of 0.3%. Manufacturing output grew 0.4%, on the back of a 5.9% increase in motor vehicles and parts production. Utilities output rose 2.4% in the month. From a year earlier, industrial production was down 0.7%, while manufacturing activity is 0.4% above its year-ago level. Capacity utilization rose 0.5%, to 75.4% in June

In July, 31% of respondents to the Empire State Manufacturing Survey indicated that conditions had improved from the previous month, while 30% felt they had worsened. As a result, the diffusion index fell 5 points to 0.6. It suggests that in New York business activity was flat in the month. The neworders sub-index fell to minus1.82, down more than 12 points from 10.9 in June. The employment sub-index stood at minus 4.4, signaling a small decline in employment. The index for future business conditions, at 29.2, still indicates that respondents remain optimistic but somewhat less so than a month ago when it stood at 34.84.

World – China’s GDP growth stabilized in Q2 rising 6.7% from a year earlier, matching previous quarter performance. Separately, the National Bureau of Statistics said that industrial production grew 6.2% y/y in June, compared to 6.0% in the previous month. Retail sales over the same period rose 10.6%, topping the consensus expectations of 9.9%.

Eurozone industrial production in May was down 1.2% from April and 0.5% lower than a year earlier. Among the contributors to the decrease were energy production (−4.3%), capital goods (−2.3%), durable goods (−1.4%), intermediate goods (−0.4%) and non-durable consumer goods (−0.1%). Year to date, industrial production has declined in February, March and May.

The Bank of England surprised market participants by holding its Bank Rate at 0.5%. On the eve of the July 14 announcement the market was giving 80% odds of a rate cut. Although the Bank decided to keep its powder dry, it said “most members of the [Monetary Policy] Committee expect monetary policy to be loosened in August," with the precise size and nature of any action to be decided when the Bank updates its economic forecast next month. At that time the Bank will also publish its Inflation Report. Members of the Committee probably thought they could postpone new initiatives for three weeks (to August 4) because financial markets are functioning well, in their view softening rather than amplifying the impact of the Brexit vote. Also entering into the decision was an improvement in financial conditions from a month earlier despite the June 23 vote. On the eve of the MPC meeting of July, the FTS 100 was up 10.4% from 31 days earlier, 10-year U.K. government bonds were trading at about 0.75%, down 46 basis points, and the USD/GDP spot rate was down about 8% from June 13.

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