Ex-auto sales actually fell 0.6% restrained by declines in food/beverage

Week in review

Canada – Retail sales fell for the first time this year, dropping 0.1% in July after an upwardly revised 1.2% gain in the prior month. In July, there was the expected jump in auto sales (+1.6%), but that was offset by declining sales in 5 of the 11 subsectors. Ex-auto sales actually fell 0.6% restrained by declines in food/beverage, gasoline, clothing/accessories, general merchandise and miscellaneous stores, which dwarfed gains for furniture, building materials, health/personal care products, sporting goods, and electronics. In real terms overall retail sales were flat. Four of the 10 provinces experienced a decline in nominal sales, including a 1.3% drop in Quebec. On a year-on-year basis, Alberta continues to lead the nation with sales up 8.9%, followed by BC at 6.2%, while Quebec is last at just 2.1%.

The Survey of Employment, Payrolls and Hours (SEPH), a survey of establishments (unlike the Labour Force Survey which surveys households), showed that Canada gained 42K jobs in July. The SEPH’s year-on-year earnings growth jumped to 3.3%, the highest since September 2012. Annual wage growth topped the national average in sectors like mining/oil/gas, utilities, construction, finance/insurance, real estate, management, transportation/warehousing, wholesaling, and forestry. Sectors including arts/entertainment, accommodation/food services, public admin and education had annual wage growth below the national average in July. Overall, the SEPH (+17K paid jobs/month on average in the first seven months of 2014) shows a stronger Canadian labour market than what is depicted by the LFS (+14K paid jobs/month over the same period). It’s unclear if the SEPH took a dive in August similar to that of the LFS (-98K paid jobs). But for now, the SEPH is showing a decent performance by the Canadian labour market this year, more importantly with support from the private sector.

In a speech this week, Bank of Canada Senior Deputy Governor Carolyn Wilkins explained that cyclical and structural factors have contributed to bring down the neutral rate of interest, i.e. the real risk-free rate of interest that enables the economy to operate at full capacity with stable inflation after cyclical forces have dissipated. The BoC estimates the real neutral policy rate in the range of 1 to 2%, i.e. a nominal neutral policy rate of 3 to 4%. Based on this, she reiterated that the current overnight rate is quite accommodative. That being said, she still thinks stimulus is needed “to close the output gap and maintain inflation sustainably at target”. More importantly, she suggested that rates will remain low even after that: “But even with a closed output gap and inflation at target, the policy rate may not be at neutral”....“As long as the factors leaning on growth persist, a policy rate below neutral would be required to maintain inflation sustainably at target.”

United States – The manufacturing purchasing managers index was unchanged at a 52-month high of 57.9 according to Markit’s flash/preliminary estimate for September. A reading above 50 implies expansion in manufacturing activity. Markit says that September saw the strongest increase in new work since the survey began in 2007, boosted by export sales. Adding to the good news, the employment sub-index rose to the highest level since March 2012. Markit’s flash/preliminary estimate of the services purchasing managers index dropped to a 58.5 in September (from 59.5 in the prior month). That was below consensus (print of 59.2 was expected) but is still consistent with growth because a reading above 50 implies expansion in the services sector. Markit says that new business expanded at the fastest pace since June, while payrolls rose “at a solid pace”.

Weekly jobless claims data for the week of September 20th showed initial claims rising to 293K (from an upwardly revised 281K in the prior week). That was better than consensus which was looking for a print of 296K. The more reliable 4-week moving average fell to 298.5K. Continuing claims for the prior week rose 7K to 2.44 million.

The durables goods report showed new orders slumping 18.2% in August, albeit after a 22.5% jump in the prior month. Not surprisingly, there was a big drop for civilian aircrafts (- 74.3%) as Boeing orders returned to normal. That, coupled with a 6.4% decrease in orders of autos/parts, caused overall transportation orders to drop 42% (after a 73% gain in the prior month). But excluding transportation, orders rose 0.7% after a revised 0.5% decrease in the prior month (previously reported as a 0.8% decline). There were increases for orders of computers, electrical equipment, and machinery among others. Total shipments of durable goods fell 1.5%, but those of nondefense capital goods ex-aircraft, a proxy for business investment spending, were up 0.1%. Assuming no change in September, shipments of non-defense capital goods ex-aircraft are set to grow at an annualized pace of over 11% in the third quarter (compared to 7.3% in Q2). The better economic outlook and cheap credit is likely helping boost investment spending. The solid investment data is consistent with our view that the US is on track to grow around 3% annualized in the current quarter after a scorching hot Q2.

Existing home sales fell 1.8% to just 5.05 million units in August. Consensus was looking for an increase to 5.2 million units. August sales were hurt by both single family units (- 1.8%) and multis (-1.7%). The months supply of homes at current sales rate was unchanged at 5.5. The median resale price fell to $219,800 but is still 4.8% higher than year-ago levels. Only about 23% of August sales were made to cash buyers, while the share of distressed sales in total sales fell to just 8%, both measures falling to the lowest in months.

New home sales soared 18% to 504K in August, from an upwardly revised 427K in the prior month. Those were the highest sales since May 2008. The months supply of homes at current sales rate shrank to just 4.8, the lowest since June last year. The median sale price fell to $275,600, but remain 8% above year-ago levels. Despite the massive jump in September, new home sales remain at about half the levels prevailing in 2005. So, the housing market remains in recovery mode.

The third estimate by the Bureau of Economic Analysis of Q2 US GDP, showed growth of 4.6% (revised from the second estimate of 4.2%). There was an upward revision to trade, consumption and residential investment.

World – Flash manufacturing purchasing managers indices for the month of September were released by Markit for a range of countries. In China, the PMI climbed to 50.5 (from 50.2 in the prior month), buoyed by new orders which were helped in part by exports. Japan’s PMI fell to 51.7 (from 52.2 in the prior month) as employment dropped and new orders increased at a slower rate. However, factory output expanded at a faster pace than in the prior month. The eurozone PMI fell to a 14-month low of 50.5 (from 50.7 in the prior month) as new orders declined for the first time since June last year. The overall decrease was driven by Germany whose PMI fell to a 15-month low of 50.3, while France’s remained in contraction territory with a print of 48.8. The eurozone’s services PMI fell to 52.8 in September as France fell back in contraction territory with a print of 49.4 (3-month low), offsetting the increase in Germany to 55.4 (from 54.9 in the prior month). In Japan, the annual inflation rate dropped to 3.3% in August, with last April’s sales tax increase still amplifying year-on-year comparisons.