Wholesale sales rose 0.2% in August

Week in review

Canada – Retail sales fell 0.3% in August, worse than consensus which was expecting no change. Sales were down in 7 of the 11 subsectors, including a 0.4% drop for autos/parts. Excluding autos, sales were also down 0.3%, restrained by declines for sellers of furniture, building materials, health/personal care, food/beverage, sporting goods and gasoline. Sales were down or failed to grow in seven of the 10 provinces. Alberta continues to lead the nation with sales up 8% on a year on year basis. In real terms, retail sales fell 0.1%. Overall, the retail results were softer than expected. But the decline in sales was largely due to slumping pump prices, which hurt gasoline station receipts. Excluding gasoline, retail spending was actually flat in both July and August. While not spectacular, note that this comes after a massive jump in June. Regardless, the quarterly picture is showing a moderation in growth after a scorching hot Q2. Assuming no change in September, real retail sales are tracking growth of 2.3% annualized in Q3, after the prior quarter’s +7% print. That’s much in line with our view that, Canada’s GDP growth softened in Q3 to around 2-2.5% annualized after an above 3% print in Q2.

Wholesale sales rose 0.2% in August, surprising consensus which was looking for a decline. Adding to the good news was the upward revision to the prior month from -0.3% to -0.2%. In August, three of the 7 subsectors saw gains, including machinery/equipment (+3.6%), and food/beverage which offset declines in other categories including autos/parts (-3.7%). Inventories grew 0.2%. In real terms, wholesale sales rose 0.1%. Assuming no change in September, real wholesale sales grew at an annualized pace of 3.9% in Q3, a decent pace considering this comes after an unsustainably hot 14% jump in the prior quarter.

As expected, the Bank of Canada left the overnight rate unchanged at 1.00%. While the BoC removed the paragraph stating that it remains neutral with respect to the next change to the policy rate, it effectively still remains neutral given that it says the risks to its inflation projections are “roughly balanced”. Still, the overall tone of the MPR remained dovish with the central bank highlighting the downside risks to growth. The BoC thought that the global economy was in a worse shape than it was back in July, and that growth remains dependant on “exceptional policy stimulus”. That’s reflected in the downgrade of next year’s growth forecast, notably for Europe and Japan. The BoC’s global growth forecast for 2015 is now just 3.4% (down from 3.7%). The central bank remains positive about U.S. prospects saying the latter is “gaining traction”. Still, U.S. growth next year was cut two ticks to 2.9% (from 3.1%).

With regards to Canada, the central bank says that exports have “begun to respond” (to the U.S. rebound and the cheaper C$) but business investment remains weak. The BoC is concerned about the lower terms of trade (in light of slumping commodity prices) and expects that to affect income. That’s reflected in its forecast for real gross domestic income growth which was chopped to just 1.8% this year (from 2.5%), and to 1.7% next year (from 2.8%). However, the real GDP growth forecasts were left relatively unchanged, i.e. just a one-tick upward revision for this year to 2.3% thanks to upgrades to exports and consumption, and no change to next year’s 2.4% forecast. The projections for potential GDP were unchanged at 1.9% for 2014, but lowered one tick to 1.9% for 2015. The central bank still remains vague about the output gap saying that “there is considerable uncertainty around estimates of economic slack” as evidenced by the wide estimated range of 0.5-1.5%. But given the hotter than expected inflation, the BoC yet again revised up its core inflation projections, although they remain close to 2% through the forecast horizon. The headline inflation 2015 forecasts however, were revised down in light of lower oil prices.

United States – The manufacturing purchasing managers index fell to 56.2 according to Markit’s flash/preliminary estimate for October (from 57.5 in the prior month). A reading above 50 implies expansion in manufacturing activity. Markit says that softer new business growth was the driver of the decline. The survey’s respondents were more cautious about export sales. Output growth also slowed although employment remained resilient.

Jobless claims data for the week of October 18th showed initial claims rising to 283K (from an upwardly revised 266K in the prior week). That was in line with consensus. The more reliable 4-week moving average fell to 281K, the lowest in over 8 years. Continuing claims for the prior week fell 38K to 2.35 million, the lowest since 2006.

Existing home sales rose 2.4% to a 12-month high of 5.17 million units in September. Consensus was looking for a smaller increase to just 5.10 million units. September sales were boosted by both single family units (+2%) and multis (5.2%). The months supply of homes at current sales rate fell to 5.3. The median resale price fell to $209,700 but is still 5.6% higher than year-ago levels. About 24% of September sales were made to cash buyers, while the share of distressed sales in total sales rose slightly to 10%.

New home sales rose 0.2% to 467K in September, from a downwardly revised 466K in the prior month. The months supply of homes at current sales rate was unchanged at 5.3. The median sale price fell to $259,000, and is now 4% below year-ago levels.

World – In China, GDP growth came in slightly better than expected in the third quarter, with an annualized print of 7.8% (or 7.3% year-on-year). The handoff to Q4 was also good with industrial production and retail sales registering year-on-year growth rates of 8% and 11.6% respectively in September. In the U.K, GDP grew 2.8% annualized in the third quarter (or 0.7% unannualized).

Flash manufacturing purchasing managers indices for the month of October were released by Markit for a range of countries. In China, the PMI climbed to a 3-month high of 50.4 (from 50.2 in the prior month), buoyed by output and new orders. Japan’s PMI rose to 52.8 (from 51.7 in the prior month) with all of the major sub-indices remaining above 50, including employment which returned to expansion mode. The eurozone’s PMI rose to 50.7 (from 50.3 in the prior month) as the output sub-index rose further into expansion territory to a 3- month high. The increase was driven by Germany whose PMI returned to expansion mode. That helped offset the decline of the PMI in France to 47.2, i.e. further into contraction territory.

The eurozone’s services PMI was unchanged at 52.4 despite declines in both Germany (from 55.7 to 54.8, i.e. still in expansion mode) and France (from 48.4 to an 8-month low of 48.1, i.e. still in contraction). More concerning for the eurozone is the threat of deflation, as evidenced by output prices declining for the 35th consecutive month in the services sector.