Week in review

Canada – The consumer price index fell 0.2% in July, allowing the year-on-year inflation rate to drop three ticks to 2.1% (from 2.4%). In seasonally adjusted terms, CPI fell 0.1%, as three of the eight broad categories saw price declines, including a 0.6% drop for transportation (i.e. thanks to the 1.9% drop for gasoline). The core CPI, which excludes eight of the most volatile items, fell 0.1%, causing the year-on-year core inflation rate to drop one tick 1.7%. In seasonally-adjusted terms, however, core CPI rose 0.1%. Assuming seasonal patterns hold in August and September, Q3 year-on-year inflation is now tracking 2.1% for the headline and 1.8% for the core, a touch above the Bank of Canada’s estimates from last July’s Monetary Policy Report which estimated Q3 year-onyear inflation at 2.0% for the headline and 1.7% for the core.

Retail sales were up 1.1% in June, much better than consensus which was expecting only a 0.3% gain. Adding to the good news was the upward revision to the prior month. Sales rose in 8 of the 11 subsectors, and fell in three, including a 0.3% drop for autos. Excluding autos, sales rose a solid 1.5%, also much better than expected by consensus. Retailers selling gasoline, building materials, and food all saw healthy gains, more than offsetting declines for furniture and electronics. In real terms overall retail sales rose 0.6% in June, or 7% annualized for Q2 as a whole.

Wholesale sales rose 0.6% in June, after an upward revision to +2.3% in the prior month. In June, there were gains in five of the seven sub-sectors (including a notable 2.2% increase for building materials) which more than offset declines in sales of motor vehicles/parts (-2.4%) and personal/household goods (- 0.7%). Inventories grew 1.0%. In real terms, wholesale sales rose 0.7%. For Q2 as a whole, real wholesale sales grew a sizable 15.5% annualized, the best since 2009Q3. Inventories also grew over 15% in the quarter.

International securities transactions data showed foreign investors reducing their holdings of Canadian securities by C$1.07 bn in June, with net selling of bonds (-C$3.9 bn) more than offsetting net buying in equities/investment funds (+C$2.6 bn) and money market instruments (+C$0.2 bn). Looking at Q2 as a whole, net portfolio inflows amounted to C$30.6 bn (the largest since 2012Q3), thanks to increased holdings of equities/investment funds (+C$8.8 bn), money market instruments (+C$7.2 bn), and bonds (+C$14.5 bn). The bond net inflows were in corporates (+C$16.5 bn, of which C$6.2 bn in government enterprises), provis (+C$4.2 bn), and munis (+C$0.2 bn), which more than offset the divestment from federal government bonds (-C$6.4 bn).

United States – The consumer price index rose just 0.1% in July, allowing the annual inflation rate to drop one tick to 2.0% (from 2.1%). The 0.3% drop in energy prices was offset by a 0.4% increase in food prices. Excluding food and energy, prices also rose just 0.1%, which allowed the year-onyear core inflation rate to remain unchanged at 1.9%. The core CPI was restrained by declines in prices of tobacco and personal computers which partly offset gains in other categories. Overall, the inflation data was much in line with expectations and the softness reflects a moderation in energy prices. The 3-month annualized rate of growth is now at 2.8% (from 3.5% in June) for the headline and 2.0% for the core.

Housing starts soared 15.7% to 1093K in July (highest since November last year) from an upwardly revised 945K in the prior month. The increase in starts was mostly due to multifamily homes (+28.9%), although singles also registered healthy gains (+8.3%). Building permit applications rose 8.1% in July to reach 1052K (from an upwardly revised 973K). The increase was mostly due to permits for multis which jumped 21.5%, while those for single family units rose 0.9%. All told, after facing some headwinds in the last quarter of 2013 and the first quarter of this year, residential construction is bouncing back as evidenced by a solid Q2 and the apparent extension of momentum into early Q3 based on July’s strong starts and permits. Little wonder that home builders’ confidence (NAHB index) is now at a 7-month high. With inventories of new home remaining relatively low, we expect the upswing in home construction to extend through the rest of the year.

Existing home sales rose a consensus-topping 2.4% to 5.15 million units in July, the highest since September last year. Sales were driven by single family units (+2.7%) while sales of multis were flat. The months supply of homes at current sales rate was unchanged at 5.5. The median resale price rose to $222,900 and is now 4.9% higher than year-ago levels. Only about 29% of July sales were made to cash buyers, while the share of distressed sales in total sales fell to just 9%, both measures falling to the lowest in months.

The Philadelphia Fed index of manufacturing activity jumped to 28 in August (from the prior month’s reading of 23.9). That’s the highest Philly since March 2011. All of the major subindices, i.e. employment, new orders and shipments, remained well in expansion territory, but fell a bit in August. The manufacturing purchasing managers index rose to 58 according to Markit’s flash/preliminary estimate for August. That was the highest since April 2010. A reading above 50 implies expansion in manufacturing activity. Both the output and new orders sub-indices not only remained well in expansion territory but rose further. The employment sub-index also rose to the highest level in over a year. All told, factory momentum from the second quarter seems to have carried over to Q3 based on the multi-year highs for the Philly and Markit PMI.

Weekly jobless claims data for the week of August 16th showed initial claims falling to 298K, from an upwardly revised 312K. The more reliable 4-week moving average rose marginally to 301K. Continuing claims for the prior week fell 49K to 2.5 million, the lowest since 2007.

The Fed meeting minutes provided some additional information about the thinking of the FOMC. Recall that on July 30th, the Fed left its statement largely unchanged. There were, however, plenty of discussions about the eventual normalization of monetary policy. Almost all participants agreed that it would be appropriate to retain the federal funds rate as the key policy rate, and to use adjustments in the IOER rate (interest on excess reserves) as a primary tool to move the fed funds rate into its target range. Participants also discussed the normalization of the Fed’s balance sheet and generally agreed that its size should be reduced “gradually and predictably”. Most participants supported reducing or even ending reinvestment after the first increase in the fed funds rate.

With regards to the FOMC’s view on the economy, risks to growth were still viewed as being tilted a little to the downside, but less so than previously. Most participants judged that the downside risks to inflation had diminished. Participants acknowledged the recent improvement in labor market and thought that “progress over the past year had been greater than anticipated and that labor market conditions had moved noticeably closer to those viewed as normal in the longer run”. But they also observed that “labor compensation was still rising only modestly.” With regards to risks to the financial system, participants acknowledged “valuation pressures” in some asset markets, but weren’t too concerned.

Many participants noted that “if convergence toward the Committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.” Some participants already view the progress made to date as warranting “a prompt move toward reducing accommodation”. These participants were uncomfortable with the forward guidance and thought the latter should more clearly communicate how policy-setting would respond to the evolution of economic data. The discomfort with forward guidance is clearly not isolated to Mr Plosser, the only dissenter at July’s meeting.

World – Flash manufacturing purchasing managers indices for the month of August were released by Markit for a range of countries. In China, the PMI dropped to a 3-month low of 50.3. Output and new orders sub-indices fell a bit but both remained above 50, i.e. in expansion territory. Japan’s PMI rose to 52.4 as new orders and employment sub-indices rose further above 50, while the output sub-index returned to expansion. The eurozone PMI dropped to 50.8 (from 51.8 in the prior month) as the output sub-index dropped more than a point. The decrease was driven by Germany whose PMI edged down to 52, while France’s PMI fell further into contraction territory at 46.5, a 15-month low.

The eurozone’s services PMI, while remaining above 50, also fell in August as Germany’s declining index (while still above 50) more than offset France’s return to expansion. In Japan, trade data for July showed exports and imports increasing 3.9% and 2.3% respectively from year-ago levels.

This presentation may contain certain forward-looking statements about the 2009 Economic and Financial Outlook. Such statements are subject to risk and uncertainties. Actual results may differ materially due to a variety of factors, including legislative or regulatory developments, competition, technological change and economic conditions in Canada, North America or internationally. These and other factors should be considered carefully and readers should not rely unduly on National Bank of Canada’s forward-looking statements. This presentation may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express consent of National Bank.

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