New home sales fell 3.3% to 440K in February

WEEK IN REVIEW

Canada – While there were no major data releases for Canada as a whole this week, we nonetheless got some information about the province of Quebec (representing roughly 19% of the Canadian economy) which published GDP results for Q4. Output expanded at an annualized pace of 3% in the quarter, allowing the province to register GDP growth of 1.1% for 2013 as a whole, i.e. well below Canada’s national average of 2%.

United States – The Conference Board’s US consumer confidence index rose four points to a consensus-topping 82.3 in March (from an upwardly revised 78.3 in the prior month). That’s the highest the index has been since January 2008. The increase in March was entirely due to perceptions about economic prospects (sub-index soaring to 83.5, the highest since September last year) which more than offset the negative impact of slightly lower optimism about the present situation (sub-index dropping marginally from 81.0 to 80.4). Consumers were more optimistic than in the prior month about future business conditions and employment, but slightly less optimistic about future income. They were more keen (than in recent months) to buy appliances, but less so about buying homes and autos. The increase in the Conference Board’s measure of consumer confidence shouldn’t be surprising, given the uptrend in the labour market and feel-good factor associated with the stock market rally and home price appreciation. Better confidence coupled with re-leveraging should help give a boost to consumption spending this year.

Markit’s flash/preliminary estimate of manufacturing purchasing managers index came in at 55.5 (from 57.1) in March. A reading above 50 implies expansion in manufacturing activity. The output sub-index fell marginally but remained well in expansion territory at 57.5 (from 57.8), while the new orders sub-index dropped to 58.0 (from 59.6). The employment sub-index fell slightly to 53.9 (from 54.1). The “supplier deliveries” sub-index soared to 47.5 (from 40.6) with Markit attributing that to “signs that supply chains started to recover from adverse weather disruptions and subsequent bottlenecks earlier in the year”. PMI’s can be choppy and one shouldn’t make much of the small drop in March. The important message from the report is that output, orders and employment all remain in expansion phase in the U.S. manufacturing sector. The services sector is also in expansion mode according to Markit’s flash estimate of services purchasing managers index which came in at a consensus-topping 55.5 in March (from 53.3 in the prior month). There were increases for sub-indices relating to prices charged and business optimism. The employment sub-index was flat at 51.9. The composite Markit PMI, which takes into account both the manufacturing and services sectors, bounced back to 55.8 in March (from 54.1 in the prior month). Overall, the good March readings represent a decent hand off to Q2. This is consistent with our view that after a weather-related slowdown in Q1, the US economy is gearing up for a rebound in the second quarter.

Weekly jobless claims data for the week of March 22nd showed initial claims falling 10K to 311K. That was much better than consensus which was looking for a reading of 323K. The more reliable 4-week moving average fell to 318K, the lowest since September last year. Continuing claims for the prior week fell 53K to 2.82 million. The relatively low initial claims bode well for March non-farm payrolls. Unless the last week of March produces a disastrous reading, that month’s initial claims are set to average the lowest since September 2007.

Personal income and personal spending both rose 0.3% in February, matching consensus expectations. In real terms, spending rose 0.2% while disposable income was up 0.3%. With income rising faster than spending, the savings rate rose one tick to 4.3%. The PCE deflator rose 0.1% in February on both the headline and the core. On a year-on-year basis the core PCE deflator was unchanged at 1.1%, while the headline measure fell three ticks to a soft 0.9%.

The durables goods report showed a consensus-topping 2.2% jump in orders in February after a downwardly revised 1.3% decline in the prior month (from -1%). In February, there was a 6.9% increase in new orders of transportation equipment driven by a 13.6% jump for nondefense aircrafts and a 3.6% advance for autos/parts. Ex-transportation, orders rose a near-consensus 0.2% as gains in computers/electronics, and fabricated metals offset weakness elsewhere. Total shipments of durable goods rose 0.9% and those of non-defense capital goods ex-aircraft (a proxy for business investment spending) were up 0.5%. With February’s gains, shipments of non defense capital goods ex-aircraft are tracking growth of 0.2% annualized in Q1, a sharp deceleration from the prior quarter’s +7.8% print. That points to a softening of growth in investment spending, and is consistent with a moderation of US GDP growth in Q1.

New home sales fell 3.3% to 440K in February (from a downwardly revised 455K). Those weren’t as bad as expected by consensus but nonetheless were still the lowest sales since September 2013. The supply of homes at current sales rate rose to 5.2 months. The median sale price, however, rose to $261,800 while the average price was up to $317,500.

Pending home sales, a good gauge of existing home sales over the next couple of months, fell 0.8% in February, disappointing consensus which was looking for a 0.2% increase. Adding to the bad news was the downward revision to the prior month from +0.1% to - 0.2%. So much so that pending home sales, in level terms, are now at their lowest since 2011. The declines were centered in the Northeastern (-1.9%) and Southern (- 4.4%) parts of the country (i.e. areas that were the worst hit by bad weather in February), which more than offset increases in sales in the West (+1.9%) and Midwest (+2.6%).

The Case-Shiller home price index rose a consensustopping 0.85% on a seasonally-adjusted basis in January. That’s the 24th increase in a row and it took the annual resale home price inflation to 13.2%. However, the recovery in the US housing market is far from complete considering that resale prices are still 19% below the 2006 peak.

Fourth quarter GDP growth, initially estimated by the Bureau of Economic Analysis at 3.2% annualized, then downgraded to 2.4% in the second estimate, was revised up to a near-consensus 2.6% in the BEA’s third estimate. That, however, didn’t change the picture for last year, with the US registering growth of 1.9% in 2013. In Q4, there were upward revisions to consumption (mostly for services) and government, which more than offset downgrades to non residential investment (mostly in structures and intellectual property sub-components), while trade was left relatively unchanged. All in all, final sales (GDP excluding inventories) was upgraded and ended up growing at 2.7% annualized in Q4, the fastest pace since 2012Q1. Inventories which were deemed to have contributed to growth in the BEA’s first two estimates, ended up as subtracting marginally from Q4 growth. Overall, the upward revisions to Q4 GDP were expected, but we’d argue that the details of the report are stronger than expected. Consumption, the bedrock of the US economy, was better than first thought, something that propelled final sales to its best showing since 2012Q1.

Also, inventories didn’t contribute to Q4 growth, a positive for production in subsequent quarters.

World – In the eurozone, Markit’s flash purchasing managers indices showed both manufacturing and services sectors in expansion mode in March. The manufacturing PMI dropped marginally to 53 (from 53.2 in the prior month). France’s composite PMI returned to expansion territory by hitting a 31-month high of 51.6 thanks to sharp gains for factories as well as the services sector. Germany’s composite PMI, however, fell slightly to 55 as both manufacturing and services slowed a bit, albeit remaining well in expansion mode. China’s flash PMI (also by Markit) remained in contraction territory in March with a reading of 48.1, an 8-month low, as output, new orders and employment contracted at an even faster pace than in the prior month. In Japan, the annual inflation rate rose to 1.5% in February. In the same month, retail sales were up 3.6% year-on-year, while the unemployment rate dropped to 3.6%, the lowest since 2007.