Canada – The consumer price index rose 0.2% in June

Week in review

Canada – The consumer price index rose 0.2% in June, allowing the year-on-year inflation rate to remain unchanged at 1.5%. In seasonally adjusted terms, CPI also rose 0.2% as higher prices for clothing/footwear, transportation, shelter, household operations and health care more than offset price declines for food and alcohol/tobacco, while prices for recreation were flat. The core CPI, which excludes eight of the most volatile items, was flat, which allowed the year-on-year core inflation rate to remain unchanged at 2.1%. In seasonally-adjusted terms, core CPI was up 0.2%. Excluding food and energy, the annual inflation rate is now 2.1%, the highest since 2007. Prices have been hot lately particularly for imported items such as clothing/footwear. In Q2, CPI grew 1.6% year-on-year for the headline and 2.1 % for the core measure, matching the Bank of Canada's latest Monetary Policy Report estimates. So, prices are evolving in line with the central bank's expectations, meaning there's no reason to expect a sudden change in the monetary policy stance.

Retail sales rose 0.2% in May with increases in 6 of the 11 subsectors. Sales of autos/parts dealers fell 2% but that was more than offset by a sharp 0.9% increase in ex-autos sales.

Boosting ex-auto sales were gasoline station receipts (+2.3 % due to higher pump prices), but there were also gains observed for sellers of electronics, health/personal care products, clothing, food/beverage and miscellaneous items which more than offset declines for furniture, sporting goods, building materials, general merchandise. In real terms overall retail sales was up just 0.1%. The small retail gains for May, while encouraging, do not change the picture for Q2, i.e. a sharp moderation in Canadian consumption spending after a strong first quarter. Indeed, assuming no change in June, retail volumes are tracking a contraction in Q2, and that for the first time since 2015Q1. That's consistent with a GDP contraction in the second quarter of the year.

Wholesale sales jumped a consensus-topping 1.8% in May, with gains in six of the 7 broad subsectors. Inventories were down 0.1%, however. In real terms, wholesale sales were up 1.5%.

International securities transactions data showed foreign investors accumulating a net $14.7 billion of Canadian securities in May. Net purchases of Canadian bonds, at $17.3 billion, were even stronger than the headline figure of overall foreign buying because non-residents were net sellers of Canadian money market paper (unwinding a net $3.4 billion of the prior month's sizeable $6.0 billion net inflow) and were relatively inactive in Canadian equities (net buying of just ~$800 million). In the first five months of 2016, net portfolio inflows totalled C$74.6 bn, the largest on records, with increases for bonds (+C$55.1 bn), equities (+C$13 bn), and money market instruments (+C$6.5 bn).

United States – Housing starts rose 4.8% to a 4-month high of 1189K in seasonally adjusted annualized terms in June. Multiple starts rose 5.4% while single family starts were up 4.4%. Building permits rose 1.5% to 1153K in June with gains for both multis (+2.5%) and single family homes (+1.0%). For Q2 as a whole, housing starts were up 2.9% annualized, as gains for multiple units (+47% is the first increase in four quarters) were offset by declines for singles (-13% is the first decline in five quarters). With such a heavy tilt towards multis (which carry lower value-added per unit compared to say singles), the contribution of residential construction to Q2 GDP is likely to be less important than the prior quarter.

Existing home sales jumped a consensus-topping 1.1% in June to 5.57 million units, the highest since early 2007. The increase was due to both single family units (+0.8%) and multis (+3.2%). The months supply of homes at current sales rate fell to 4.6. The median resale price rose to $247,700 and is now 4.8% higher than year-ago levels (+5% for singles and +3.2% for multis). Only 22% of June sales were made to cash buyers, while the share of distressed sales in total sales was just 6%, both at their lowest in months.

The weekly jobless claims report showed initial claims remaining roughly unchanged at 253K in the week of July 16th. The more reliable 4-week moving average edged down slightly to reach 258K. Continuing claims for the prior week fell 25K to 2.128 million.

The Philadelphia Fed index of manufacturing activity fell to -2.9 in July (from +4.7 the prior month). While employment remained in contraction mode, shipments and new orders were both in expansion.

Markit's flash/preliminary estimate of the manufacturing purchasing managers index ended up at an 8-month high of 52.9 in July. A reading above 50 implies expansion in manufacturing activity. The production, new orders, and employment sub-indices expanded at a faster rate than the prior month.

World – The European Central Bank left monetary policy unchanged at its meeting this week. The central bank said that over the coming months it will be in a better position to reassess the economic outlook and the risks to the growth and inflation projections. There was no discussion about the monetary policy instruments that may be considered or about changes to QE's eligibility rules of bond purchases if ever more action was needed. Still, ECB President Draghi pointed out that the central bank has proven its ability to adapt its policy in order to achieve the targets set for QE and stands ready to act if needed. Specifically referring to Brexit, Mr Draghi said the impacts on the Eurozone will depend on how long the negotiations with the UK will last and what will be the outcome. A fair portion of the press conference was devoted to the situation of Italian banks and non-performing loans. Mr Draghi said the situation will take time to be resolved, but indicated he is favorable to public support for banks in exceptional circumstances.

Flash manufacturing purchasing managers indices for the month of July were released by Markit for a range of countries. Japan's PMI rose to 49 (from 48.1 the prior month). Output and new orders continued to contract, while employment improved somewhat. The UK's PMI fell to a 41-month low of 49.1 with declines in both output and new orders, while the eurozone's PMI fell to 52.9. Markit also released services purchasing managers indices for July, with the eurozone's measure falling to an 18-month low of 52.7 and the UK's measure sinking to an 88-month low of 47.4, i.e. well in contraction territory.

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