Eurozone's unemployment rate was unchanged at 11.5% in September

Week in review

Canada – Real GDP contracted 0.1% in August, after a flat print in the prior month. Goods producing industries had a 1% drop in output due to declines in oil & gas (-2.5%), manufacturing (-1.2%), construction (-0.5%) and agriculture (- 2.4%), which more than offset gains in mining (+2%) and utilities (+1.7%). Industrial production fell 1% as a result. The services sector's output exp anded 0.2% driven by gains in wholesaling, education, a nd health care among others. Overall, August’s GDP report came in a bit softer than expected (consensus was looking for a flat print). Given the poor start to the quarter, it will now take growth of more than 0.5% in September to hit the Bank of Canada’s Q3 GDP growth estimate of 2.3% annualized. For now, the monthly reading are indicating Q3 growth just under 2% annualized, i.e. about half that of the U.S. ec onomy in the quarter. That being said, as was the case in the second quarter, there may be upward revisions to the monthly readings.

The Survey of Employment, Payrolls and Hours (SEPH) a survey of establishments (unlike the Labour Force Survey which surveys households), showed that Canada gained 11K jobs in August, contrasting sharply with a 98K loss of paid jobs according to the LFS. On a more reliable 12-month moving average basis, the SEPH sh ows the creation of 11K jobs/month, versus just 6K/month paid jobs in the LFS. The SEPH’s year-on-year earnings growth was unchanged at a two-year high of 3.5% in August. Annual wage growth topped the national average in sectors like mining/oil/gas, utilities, finance/insurance, management, ar ts/entertainment and real estate. Sectors including manufacturing, health care/social assistance, construction, tr ansportation/warehousing, accommodation/food services, and education had annual wage growth below the national average.

United States – The Bureau of Economic Analysis’ advance estimate of Q3 GDP growth came in at +3.5% annualized. Consensus was looking for just a +3.0% print. As expected, trade contributed significantly to growth. But domestic demand was also solid thanks to contributions from consumption spending, business investment, residential investment, and even government spending. Inventories were a drag on growth. So, final sales, i.e. GDP excluding inventories, grew a solid 4.1%. Nominal GDP grew at an annualized pace of 4.9% after a 6.8% advance in the prior quarter.

Overall, the U.S. GDP results wre much better than expected. The U.S. economy grew at an annua lized pace of 4.1% in the Q2-Q3 period, the best two-quar ter performance since 2003. The positive surprise about Q3 results was final sales which grew at the fastest pace since 2010 thanks to another good showing from domestic demand, with an added solid contribution from trade. The ici ng on the cake was the drag from inventories, which bodes well for future production.

Personal income rose 0.2% while personal spending fell 0.2% in September. With income rising and spending dropping, the savings rate jumped two ticks to 5.6% (from 5.4%). In real terms, disposable income was flat while spending fell 0.2%. The PCE deflator rose 0.1% in September, causing the year- on-year rate to remain unchanged at 1.4%. The core PCE deflator was also up 0.1%, leaving the annual core rate unchanged at 1.5%.

The durables goods report showed new orders declining 1.3% in September. A 16.1% decrease in orders for civilian aircrafts, coupled with a 0.1% drop in orders of autos/parts, caused overall transportation orders to fall 3.7%. Excluding transportation, however, orders fell just 0.2% after a 0.7% increase in the prior month. To tal shipments of durable goods rose 0.1%, but those of non-defense capital goods ex-aircraft fell 0.2%. Overall, while the decline in total orders was disappointing, the results have to be interpreted with caution given the moderation in the last two months came after outsized gains in June and July. Note that shipments of non- defense capital goods ex-air craft, a proxy for business investment spending, grew at an annualized pace of 11.1% in the third quarter (compared to 7.3% in Q2)

The 20-city Case-Shiller home price index fell 0.15% on a seasonally-adjusted basis, the fourth consecutive monthly decline. That took the annual hom e price inflation rate down to 5.6% the lowest since 2012. On a 3-month annualized basis, home prices are down 3.8% but with varying fortunes across the country. Las Vegas leads the 20-city list with a 3-month annualized print of 4.3%, followed Dallas at 3.9% and Denver at 1.7%. Fourteen of the twenty cities now have housing in deflation mode on a three-month annualized basis, with the worst hit being Detroit (-12.5%), Chicago (-14.3%) and Minneapolis (-15.6%)

The Conference Board’s consumer confidence index rose to 94.5 in October, the highest since October 2007. Consensus had expected a print of just 87. October’s increase in confidence was due to both perce ptions about the present situation (sub-index rising to 93.7) and economic prospects (sub-index soaring to a multi-year high of 95). Consumers were a bit more optimistic than in the prior month about prospects for employment, income and business conditions. However, they were a little less upbeat than in the prior month about buying autos and major appliances.

Jobless claims data for the week of October 25th showed initial claims rising to 287K (from an upwardly revised 284K 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 rose 29K to 2.38 million.

The Federal Reserve officially ended QE at its October meeting. The Fed also tweaked its forward guidance a bit by saying that while the fed funds rate should remain low for a “considerable time”, hikes could happen sooner or late depending on developments on the employment and inflation fronts. The FOMC also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage- backed securities and of rolling over maturing Treasury securities at auction. The Fed sa ys that this policy, by keeping the holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. The FOMC was encouraged by improving economic conditions. It stated that underutilizatio n of labour resources is gradually diminishing. The Fed’s outlook for inflation also improved. While energy prices and “inflation compensation” have declined somewhat, the Fed says that the likelihood of inflation running persistently below 2% has diminished. There was one dovish dissenter this time around. Narayana Kocherlakota wanted QE to continue at the same level and he also thought the Fed should commit to keeping the fed funds rate in the current range at least until the one-to-two-year ahead inflation outlook has returned to 2%.

World – In the Eurozone , the first estimate of October CPI put the annual inflation rate at 0.4%, up one tick from the prior month. The annual core inflation, however, was down one tick to 0.7% (from 0.8%), the 14 th straight month at or below 1%. The Eurozone’s unemployment rate was unchanged at 11.5% in September, as increases in Italy, Finland and Austria were offset by declines in S pain, Portugal and Ireland. The jobless rate was unchanged in Germany and France at 5.0% and 10.5% respectively. In Japan, September data showed both retail sales and industrial production jumping 2.7%, while the unemployment rate rose one tick to 3.6%. The annual inflation rate was 3.2% in September, although last April’s sales tax increase continues to amplify year-on-year comparisons. In truth, the battle against deflation is far from won. Abenomics moved up a gear on Friday with the announcement of two important measures. The Bank of Japan decided to increase its asset purchases to the amount of 80 trillion yen per year, i.e. up by 10 trillion/year. Japan’s public pension reserve fund also announced that it will double its allocation of stocks to 50% (25% each for domestic and foreign stocks), and increase its allocation of foreign debt to 15%, at the expense of domestic bonds whose allocation was cut to just 35%. Those measures should maintain pressure on the yen to depreciate.