Canada – Retail sales fell 0.1% in June

Week in review

Canada – Retail sales fell 0.1% in June. Adding to the bad news were downward revisions to the prior month. In June, sales fell in 7 of the 11 subsectors. Gains for sellers of autos, gasoline, electronics and health stores were dwarfed by losses in other categories. Excluding autos, sales fell 0.8%, also disappointing consensus which had expected an increase. Looking at provinces, on a year-on-year basis, BC leads the way (+5.2%), while Quebec (+3.5%) and Ontario (+3.3%) are also well above the national average of 2.7%. Alberta (-2.5%) remains last. In real terms, Canada’s retail sales fell 0.3% in June. The soft retail volumes isn’t good news. Real retail sales fell 2.3 % annualized in Q2 the worst performance since early 2015. So, weak consumption coupled with a massive drag from trade, likely caused Canada’s real GDP to fall 1.5% annualized or so in Q2. Looking ahead to Q3, we remain of the view Canada’s consumption growth (thanks in part to the enhanced Canada Child Benefit), trade (thanks to US inventory rebuilding), and hence overall GDP growth will bounce back sharply.

Canada’s consumer price index dropped 0.2% in July, with gasoline prices experiencing a significant 5.6% m/m drop. The year-on-year inflation rate edged down one tick to 1.3%. In seasonally adjusted terms, CPI was flat m/m as higher prices for recreation/education (+0.4%), food (+0.3%), shelter (+0.3%), alcohol/tobacco (+0.3%) and household operations (+0.1%) offset declines for clothing (-0.6%) and transportation (-0.9%). Healthcare prices were flat. The core CPI, which excludes eight of the most volatile items, was flat (as expected by consensus), which allowed the year-on-year core inflation rate to remain unchanged at 2.1%.

In June, manufacturing shipments rose 0.8%, thus regaining most of the ground lost in May. The increase was rather generalized, as sales were up in 15 of 21 industries, which represented nearly 62% of Canadian manufacturing. However, motor vehicles and parts (+2.5%) and machinery (+5.8%) largely accounted for the rise. Unfilled orders jumped 1.6% for a third monthly gain. The increase was driven mostly by aerospace product and parts manufacturing (+3.5%), which represented more than half of total orders. Inventories fell 0.2% for a fifth decline in a row. Chemicals (-2.3%), primary metals (-1.8%) and aerospace products and parts (-1.6%) were the largest contributors to the drop. The inventory-to-sales ratio slid from 1.42 to 1.40. In real terms, shipments rose 0.5%, unfilled orders increased 1.5%, and inventories shrank 0.4%. However, the picture is not rosy for Q2. Real factory shipments fell 4.6% annualized and real inventories slumped 4.8%. This was the worst combination of factory sales and inventories since the 2009 recession.

All told, the factory data are consistent with an expected GDP contraction in Q2. However, given the recovery from the Fort McMurray wildfire, an expected rebound in U.S. economic growth in Q3 and the volume increase in Canadian manufacturing sales in June, the setback in manufacturing output in Q2 may well prove a temporary phenomenon.

In July, existing-home sales fell 1.3% m/m after declining 0.9% the previous month. The number of newly listed homes rose 1.2%. Lower sales combined with higher new listings pulled the ratio of sales to new listings down to 61.6% from 65.3% two months earlier. There were 4.6 months of inventory at the end of July. According to the CREA, the national average price for homes sold in the month was $480,743. Excluding Greater Vancouver and Greater Toronto, it was $365,033.

Canada’s international transactions in securities data for the month of June showed non-residents accumulated $9.0 billion of Canadian portfolio assets, which brought the total for the first half of the year to a very healthy $80 billion. But as is often the case, the headline numbers did not really tell the story. Nonresident holdings of Canadian stocks were $13.4 billion higher in June—the largest one-month increase in over a decade— driven primarily by cross-border M&A activity (alongside a bit of secondary market buying). Meanwhile, non-residents reduced their holdings of Canadian bonds and money-market paper by $3.4 billion and $1.0 billion, respectively. On the other side of the ledger, Canadian investors accumulated a net $4.1 billion of foreign portfolio assets.

United States – The consumer price index was flat in July. Energy prices dropped 1.6% while food prices remained unchanged. Excluding food and energy, prices rose 0.1%, one tick below consensus expectations. Commodity prices ex food and energy were down 0.1%, as lower prices for used cars and trucks, alcoholic beverages and tobacco more than offset higher prices for medical care and new vehicles. There were further gains for owners’ equivalent rent and medical care services while transportation posted a 0.2% decline. This allowed exenergy services CPI to climb 0.2%. As a result of the monthly increases and the base effects, both the headline and the core year-on-year inflation rates slipped one tick to 0.8% and 2.2%, respectively.

In August, the Empire State Manufacturing Survey slid five points to -4.2. However, the details of situation were not as dire as the headline. Indeed, 44.7% (+5.7 percentage points) of respondents indicated that conditions were the same as the month before, 29.8% (+0.5 points) indicated conditions had worsened, and 25.5% (-5.2 points) indicated conditions had improved. The new-orders sub-index climbed 2.8 points from minus 1.8 to 1.0, suggesting orders were little changed from the previous month. The employment sub-index gained 3.37 points to -1.03. The index for future business conditions stood at 23.7, which indicated for the second month in a row that, while respondents remained optimistic, they were slightly less so than the previous month (29.2 in July and 34.8 in June).

The Philadelphia Fed’s Manufacturing Business Outlook rose 5 points to 2, which suggests that manufacturing activity remains soft in the region. The current new orders index fell 19 points to -7.2. This deterioration was mostly due to the percentage of firms that reported a decline, which increased 18 points, while the percentage of firms that reported an increase dropped one point. The employment index deteriorated considerably as well, plunging 18 points to -20. However, respondents were more optimistic about the future, with 53.9% expecting activity to improve versus 8.1% expecting activity to soften (index: 45.8).

In July, industrial production jumped 0.7%, which was much better than the 0.3% expected by consensus. However, the prior month’s figure was revised down from 0.6% to 0.4%. There were gains in manufacturing (+0.5%), utilities (+2.1%) and even mining (+0.7%). Thanks to a strong start to the quarter, manufacturing output growth is now tracking nearly 3% annualized in Q3, its strongest pace since 2014. This may reflect inventory rebuilding after the massive destocking observed in Q2. All told, the results are consistent with a sharp rebound in GDP growth after an awful first half of the year. Our estimate for Q3 US GDP growth remains 3.6% annualized. The capacity utilization rate, for its part, sprang to 75.9% in July.

In June, the sum of all net foreign acquisitions of long-term U.S. securities, short-term securities and banking flows was a net outflow of $202.8 billion. Bank’s own net dollar-denominated liabilities to foreign residents (down $174.4 billion) were the main contributor to the overall decline. Foreigners were net sellers of Treasury bonds and notes ($32.9 billion). However, Treasury holdings increased $14.5 billion and $13.8 billion, respectively, for Japan and UK residents. Overall, foreigners were also net sellers of $7.4 billion of T-bills but net buyers of $17.9 billion of other short-term assets. Foreign residents’ holdings of agency and corporate bonds increased $33.9 and $13.5 billion, respectively, while their equity holdings fell $6.8 billion.

In July, housing starts rose 2.1% to a 5-month high of 1211K in seasonally adjusted annualized terms. Multiple starts jumped 5.0% and single-family starts were up 0.5%. Building permits dropped slightly (-0.1%) to 1152K, as a 6.3% gains for multis was more than offset by a 3.7% decline for singles. However, home builder sentiment edged up 2 points to 60 in August and expectation for the next six months increased one point to 67. The index, which gauges builder perception of the single-family home market, suggests that better days are probably not far off the horizon for construction in the sector.

The minutes of the July 26-27 FOMC meeting showed participants still debating when it would be appropriate to proceed with further normalization of monetary policy. Two participants advocated for an increase at the meeting, while some felt a rate hike would soon be warranted. On the other hand, many suggested it was appropriate to wait for further information before proceeding. With no consensus reached, the FOMC remained in wait-and-see mode, leaving its policy options open and standing poised to adjust its policy stance based on incoming data.

World – Japan’s GDP grew 0.2% on an annualized basis in Q2, well below the 0.7% expected by consensus. Net exports and a drop in business investments were a drag on growth in the quarter. Private consumption grew 0.6%, down sharply from the 2.8% seasonally adjusted annualized gain recorded the previous quarter. However, the Japanese government recently unveiled a fiscal stimulus package worth 28 trillion yen and the Bank of Japan announced a modest expansion of its monetary easing programme on July 29. The two measures should provide some impetus to growth later this year.

In July, euro area inflation was -0.6% m/m. However, annual inflation was 0.2%, unchanged from the flash estimate. On a non-seasonally adjusted basis, exports of goods from the euro area totalled €178.8 billion in June, down 2% from 12 months earlier. Imports stood at €149.5 billion, down 5% from June of last year. As a result, the trade surplus in goods reached €29.2 billion, compared with €25.5 billion in June 2015.

Download The Full Weekly Economic Letter