The consumer price index rose 0.6% in March

WEEK IN REVIEW

Canada – The consumer price index rose 0.6% in March, causing the year-on-year inflation rate to rise four ticks to 1.5% (from 1.1%), the highest since April 2012. In seasonally adjusted terms, CPI rose 0.2%, as four of the eight broad categories saw price increases. Price gains for food, shelter, household equipment, alcohol/tobacco more than offset price declines for transportation, recreation, clothing/footwear and health/personal care products. The core CPI, which excludes eight of the most volatile items, rose 0.3%, allowing the year-on-year core inflation rate to rise one tick to 1.3%. In seasonally-adjusted terms, core CPI rose 0.1%.

Manufacturing shipments rose a consensus-topping 1.4% in February, on top of the prior month’s 0.8% advance (the latter was revised down from +1.5%). In February, there were higher sales for autos/parts, aerospace, electrical equipment, petroleum and coal products, among others. Those dwarfed declines in just a handful of categories including food manufacturing. In real terms, factory sales rose 0.8% and inventories were up 0.6%. New orders were up a massive 18.8%, due to transportation equipment. The gains in factory volumes, coupled with increases in inventories, suggest production was strong, and bode well for February GDP due at the end of the month. But given the bad handoff from last year, real shipments are tracking a contraction in Q1 (- 2.9% annualized versus +3.8% in Q4 last year). That’s consistent with our view that Q1 GDP growth in Canada will slow to around 1.5% annualized.

The Teranet–National Bank National Composite House Price Index remained stable in March as price gains in Calgary, Vancouver, Edmonton, Victoria, Winnipeg, and Halifax offset declines in Montreal, Hamilton and Ottawa- Gatineau. Prices were stable in Toronto and Quebec City. On a year-on-year basis, Canadian resale house prices were up 4.6% in March, a deceleration from February. The annual house price inflation exceeded the national average in five regions: Calgary (+9.7%), Vancouver (+7.6%), Toronto (+5.8%), Hamilton (5.2%) and Edmonton (4.7%). It was below the national average in Winnipeg (+3.4%), Victoria (0.2%), Montreal (-0.7%), Ottawa-Gatineau (-1.2%), Quebec City (-2.4%), and Halifax (- 4.2%).

Securities transactions data for February showed foreign investors adding Canadian securities to their holdings to the amount of C$6.1 bn. The net buying in February was split between bonds (+C$2.2 bn), money market instruments (+C$2.3 bn) and equities (+C$1.6 bn). The net increase in foreign holdings of bonds was centered on corporate bonds (+C$4.2 bn, mostly government enterprise) and provis (+C$1.4 bn), which more than offset the net divestment from federal government bonds (-C$3.6 bn).

As expected, the Bank of Canada left the overnight rate unchanged at 1.00%. The BoC also kept its vague language: “The timing and direction of the next change to the policy rate will depend on how new information influences the balance of risks.” The central bank continues to be concerned about low inflation which it expects to stay under 2% this year despite what it views as “temporary upward pressure” provided by higher consumer energy prices and the lower Canadian dollar. While the BoC says that downside risks to inflation remain important, it also stated that household imbalances remain elevated and would pose a significant risk should economic conditions deteriorate. The decision to stand pat was supported by a downgrade to its Canadian growth forecasts. The projection for 2014 growth was lowered to 2.3% (previously 2.5%), while that for 2015 was left unchanged at 2.5%. The lower 2014 GDP growth forecast was due to a softer Q1 forecast (than in January), with a smaller contribution from domestic demand i.e government and business investment downgrades more than offsetting a small upgrade to consumption. The negative output gap at the end of 2014Q1 was gauged to be between 0.50-1.50%, a bit less than estimated back in January. Given the wide range for its output gap estimate, the BoC decided to refrain from explicitly giving a timeline for when the output gap will close. Inflation has been upgraded over the next few quarters but is expected to only return to target in 2015.

United States – The consumer price index rose 0.2% in March, causing the annual inflation rate to rise four ticks to 1.5% (from 1.1%). CPI gains in March were limited by energy (-0.1%), while food prices rose 0.4% for the second successive month. Excluding food and energy, prices were up 0.2%, allowing the year-on-year core inflation rate to rise one tick to 1.7%. Core CPI was supported by increases in medical care, apparel, tobacco, education which more than offset price declines for recreation and computers.

Retail sales rose a consensus-topping 1.1% in March. Adding to the good news was the four-tick upward revision to the prior month to +0.7% (from +0.3%). As expected, motor vehicles/parts sales were strong in March, with a 3.1% increase, on top of the prior month’s 2.5% advance. Excluding autos, sales rose 0.7%, also topping consensus. Ex-auto sales were supported by gains for sellers of food/beverage, building materials, clothing, health/personal care products, furniture, sporting goods, and general merchandise which easily offset declines in sales of gasoline and electronics. With CPI rising 0.2% in March, real retail sales grew a solid 0.9% in the month. But that was not enough to save Q1, which saw retail volumes contract in Q1 (-1.3% annualized, versus +3.4% in Q4 last year) due to the weather-related hit at the start of 2014. The positive news, however, is the excellent handoff to Q2, and more importantly the fact that US consumers are now showing resilience, something that bodes well for the rest of the year.

Housing starts rose 2.8% to 946K in March from an upwardly revised 920K in the prior month. The increase in starts was entirely due to single family homes (+6%) which more than offset the 3.1% decline for the “multifamily” category. Building permit applications dropped 2.4% in March to reach 990K (from a downwardly revised 1014K). The decline was entirely due to permits for multis which fell 6.4%, while those for single family units rose 0.5%.

Industrial production rose 0.7% in March, easily topping consensus which was looking for just a 0.5% increase. Adding to the good news was the six-tick upward revision to the prior month to +1.2% (from +0.6%). Driving the increase in March output were the manufacturing sector (+0.5%), mining (+1.5%), and utilities (+1.0%). Capacity utilization rose from 78.4% to 79.2%, the highest since 2008.

Weekly jobless claims data for the week of April 12th showed initial claims roughly flat at 304K. The more reliable 4-week moving average dropped to 312K, the lowest since 2007. Continuing claims for the prior week dropped 11K to 2.74 million.

The Fed’s Beige book brought further evidence that the U.S. economy is recovering well from the weather-related hit at the start of the year. Economic activity increased in most regions in March and early April. Consumer spending and manufacturing activity increased in most districts, while reports on housing were mixed. Loan demand strengthened and credit quality improved further.

Labour market conditions were generally positive. But wage pressures were deemed as contained.

The New York Fed’s Empire index of manufacturing activity fell to 1.29 in April (from 5.61 in the prior month). The decrease was driven by declines in the shipments and new orders sub-indices (the latter turning negative), while the employment sub-index rose a bit.

The Philadelphia Fed index of manufacturing activity rose to a 16.6 in April (from the prior month’s reading of 9.0). The increase was driven by shipments whose subindex soared to 22.7 (from 5.7 in the prior month) and the new orders sub-index which moved up to 14.8 (from 5.7 in the prior month), the highest since October. The sub-index for employment rose from 1.7 to 6.9, a three-month high.

World – In the first quarter this year, China’s GDP grew 5.7% annualized in seasonally adjusted terms. On a yearon- year basis, China’s GDP growth was 7.4% in Q1. In March, retail sales grew 12.2% while industrial production expanded 8.8%, both in year-on-year terms. Also in March, China’s credit growth softened further as evidenced by the aggregate measure of “social financing” which, on a 12-month cumulative basis, fell 7.3% from year-ago levels. In the eurozone, the headline annual inflation rate was just 0.5% in March, while February industrial output grew 0.2%.