Housing starts rose 0.8% in May to 198.3K

Week in review

Canada – Housing starts rose 0.8% in May to 198.3K (from an upwardly revised 196.7K in the prior month). The increase in starts was due to gains in urban areas (+1.3%) which more than offset declines in rural areas (-3.8%). Urban starts were supported by single family homes (+5.4%) which dwarfed the decline for multis (-0.8%). On a regional basis in urban areas, gains in Quebec (+15%), BC (+11.9%) and Atlantic provinces (+82.3%), dwarfed the drop in the Prairies (- 15.7%). Ontario starts were roughly flat.

The Teranet–National Bank House Price Index rose 0.8% in May thanks to gains in seven of the 11 metropolitan regions covered. On a year-on-year basis, home prices were up 4.6% nationally, but with contrasting fortunes across cities. Calgary led the pack with a 8.7% year-on-year increase, followed by Vancouver (+8.2%), Toronto (+6.0%), Hamilton (+5.9%), Edmonton (+2.6%), Winnipeg (+1.0%) and Victoria (0.0%), while the rest were in deflation mode: Halifax (-0.4%), Montreal (-1.2%), Ottawa-Gatineau (-1.4%), Quebec City (-1.6%).

Manufacturing shipments fell 0.1% in April, disappointing consensus which was looking for a 0.5% increase. The prior month was revised down one tick to +0.3% (from +0.4%). Interestingly, the drop in sales was concentrated in just a third of the 21 categories, led by a 5% slump in sales of petroleum and coal products. Excluding the latter category, factory sales were actually up in April. Fourteen of the 21 industries posted higher sales, including autos. In real terms, factory sales rose 0.4%. Overall, the factory report wasn’t as bad as suggested by the headline. There were more categories on the rise than on the decline, and the drop in nominal sales was entirely due to prices considering that sales were actually up in real terms. The volume gains should be supportive of April GDP. Thanks to April’s gains, and assuming no change in May and June, real manufacturing shipments are on track to expand 3.7% annualized in the second quarter, contrasting sharply with a 3.8% contraction in Q1. That’s much in line with our view that Canadian GDP growth is accelerating in the current quarter after a difficult start to 2014.

The capacity utilization rate rose to a 7-year high of 82.5% in the first quarter of 2014. There was a further ramp up in resources which took the utilization rate in that sector to 80.8% ― in the oil and gas sector the utilization rate is actually 88.7%, the highest in 11 years. Manufacturing capacity utilization was down a bit in Q1, but remains elevated in some sectors including transportation equipment. The overall utilization rate in Q1 was higher than the average for 2007, i.e. before the recession hit.

The Bank of Canada released the Financial System Review this week. While the Canadian financial system remains robust, the central bank highlighted three key vulnerabilities, namely imbalances in the housing market, elevated level of household indebtedness, and significant exposures to potential external shocks. Overall, the nature of the risks to the Canadian financial system is broadly the same as that discussed in the December FSR.

United States – Retail sales rose 0.3% in May, weaker than +0.6% print expected by consensus. However, the prior month was revised up sharply to +0.5% (from +0.1%). Sales of motor vehicles/parts rose 1.4% in May. Excluding autos, sales were up 0.1%, also softer than consensus which was at +0.4%. But here too, the prior month was revised up from flat to +0.4%. Ex-auto sales were supported by gains for sellers of furniture, building materials, miscellaneous items and gasoline, which more than offset declines in sales of food/beverage, health/personal care products, clothing, sporting goods, electronics and general merchandise. Considering the upward revisions to the prior month, May’s retail report was on consensus. Even assuming a flat June, real retail sales are on track to grow over 5% annualized in the current quarter, accelerating sharply from Q1’s flat print. The results suggest US GDP growth is bouncing back sharply in Q2.

Weekly jobless claims data for the week of June 7th showed initial claims rising to 317K, from an upwardly revised 313K. That was a bit weaker than consensus expectations which were at 310K. The more reliable 4-week moving average rose to 315K. Continuing claims for the prior week rose 11K to 2.6 million.

The preliminary estimate for June’s Michigan consumer sentiment index is 81.2, a decrease from the prior month’s print of 81.9. Consumers felt less confident about the economic outlook (sub-index falling to 72.2) but were more upbeat about current conditions (sub-index rising to 95.4).

The producer price index fell 0.2% in May, allowing the yearon- year rate to move down one tick to 2.0% (from 2.1% in the prior month). Both food and energy prices fell 0.2%. Excluding food and energy, producer prices fell 0.1%, driven by declines in services prices, restraining the year-on-year core PPI to just a one-tick increase to 2.0%.

World – In the eurozone, industrial production grew 0.8% in April. Gains in Germany, Spain, Italy, France more than offset a sharp decline in Malta. In China, the annual inflation rate rose to 2.5% in May. Non-food annual inflation, however, remains mild at 1.7%. China also saw consensus-topping yearon- year growth of 8.8% for industrial production and 12.5% for retail sales in May. Social financing, the aggregate measure of credit in China, rose 1400 bn yuans in May, with traditional bank loans accounting for more than 60% of that amount. In Japan, Q1 GDP growth was revised up sharply to 6.7% annualized, while the BoJ decided to leave monetary policy unchanged this week.