Consumer price index fell 0.4% in November

Week in review

Canada – The consumer price index fell 0.4% in November, allowing the year-on-year inflation rate to drop four ticks to 2.0% (from 2.4%). In seasonally adjusted terms, CPI fell 0.2%, as two of the eight broad categories saw price declines, namely transportation (-1.2) and recreation/education (-0.7%). Shelter and clothing prices were flat, while there were increases for the remaining 4 broad categories. The core CPI, which excludes eight of the most volatile items, fell 0.2%, allowing the year-on-year core inflation rate to drop two ticks to 2.1%. In seasonally-adjusted terms, core CPI was flat. Both the headline and core CPI were softer than expected by consensus. While the drop in the transportation category was expected (due to slumping pump prices), the sharp decline for recreation/education was surprising. Assuming seasonal patterns hold in December, Q4 year-on-year inflation is now tracking 2.1% for the headline and 2.2% for the core, not far from the Bank of Canada’s estimates from last October’s Monetary Policy Report.

Wholesale sales rose 0.1% in October, thanks gains in five of the seven subsectors, including building materials, machinery/equipment, and autos. Inventories jumped 1.2%. In real terms, wholesale sales were down 0.1%.

Manufacturing shipments fell 0.6% in October, although the drop was not broad based. Only 5 of the 21 industries saw declines, including a 2.7% drop for transportation equipment largely due to aerospace. In real terms, factory sales fell 0.5%. Real inventories rose 0.7%, the first increase in three months.

Retail sales were flat in October despite increases in 6 of the 11 subsectors. Auto/parts sales were down 0.6%. Excluding autos, sales rose 0.2% thanks to healthy gains in electronics, sporting goods and building materials which offset declines for furniture and general merchandise. In real terms overall retail sales were flat. The weak retail volumes come after soft results in manufacturing and wholesaling, suggesting that October GDP may have been no better than flat. That’s consistent with our view that GDP growth softened in Q4 after two strong quarters.

International securities transactions data for October showed foreign investors increasing their holdings of Canadian securities by C$9.5 bn, with net buying of bonds (+C$9.1bn) and equities/investment funds (+C$4.2 bn), more than offsetting the net divestment from money market instruments (- C$3.8 bn). The net purchases on bonds were mostly in federal government bonds (+C$3.7 bn is the biggest increase in 5 months) followed by corporates (+C$3.6 bn), and provies (+C$1.9 bn is also the biggest increase in 5 months), while there was a small net divestment from munis.

United States – The consumer price index (CPI) fell 0.3% in November, causing a drop in the annual inflation rate to just 1.3%. The 3.8% slump in energy prices restrained the CPI, while food prices rose just 0.2%. Excluding food and energy, prices were up just 0.1%, which allowed the year-onyear core inflation rate to fall one tick to 1.7%. The core CPI was supported by increases in the price of medical care, and other services, which more than offset price declines elsewhere including recreation, personal computers and apparel.

Industrial production jumped a consensus-topping 1.3% in November. Adding to the good news, there was an upward revision to the prior month to +0.1% from the -0.1% print reported initially. Driving the increase in November output was manufacturing (+1.1%) and utilities (+5.1%), which dwarfed the small drop in mining (-0.1%). Capacity utilization rose eight ticks to 80.1% from an upwardly revised 79.3%.

Housing starts fell 1.6% to 1028K in November, from an upwardly revised 1045K in the prior month. The decrease in starts was entirely due to single-family homes (-5.4%), which more than offset the 6.7% increase for multis. Building permit applications slumped 5.2% in November to reach 1035K, from an upwardly revised 1092K in the prior month. The decrease was mostly due to permits for multis (-11%), although there was also a small drop for single family units (-1.2%).

The New York Fed’s Empire index of manufacturing activity fell to -3.6 in December (from 10.16 in the prior month). That’s the worst Empire reading since January 2013. Both new orders and shipments sub-indices fell sharply after the prior month’s surge, and even entered negative territory in December. The employment sub-index also fell, but only slightly, remaining in expansion mode at 8.33. In sharp contrast, the Philadelphia Fed index of manufacturing activity remained in expansion mode, even as the index fell to 24.5 in December. The shipments, employment and new orders sub-indices all fell, albeit remaining comfortably in expansion territory.

Markit’s flash/preliminary estimate of services purchasing managers index dropped to a 53.6 in December (from 56.2 in the prior month), the lowest since February. That, however, is still consistent with growth because a reading above 50 implies expansion in the services sector. Markit says that the rate of job creation was the weakest since April, while service cost inflation was the lowest since March 2013.

Weekly jobless claims data for the week of December 13th showed initial claims falling to 289K (from 295K in the prior week). The more reliable 4-week moving average was little changed at 299K. Continuing claims for the prior week fell 147K to 2.37 million.

The Fed decided to tweak slightly its forward guidance on the fed funds rate, stating that “it can be patient in beginning to normalize the stance of monetary policy” but quickly pointed out that in its view, this statement is consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time. The objective was to reassure markets and reinforce the idea that rake hikes are not imminent despite the stronger economic data. Indeed, while the Fed acknowledged the stronger data, especially the labour market, it also highlighted that inflation continues to run below the FOMC’s objectives. The Fed thinks the decline in energy prices only “partly” explains this, and it says market-based inflation expectations have declined further. While there was just one dissenter last time, i.e. a dovish Kocherlakota, this time there were three. Kocherlakota remained concerned about low inflation and falling inflation expectations which, in his view, created undue downside risk to the credibility of the Fed’s 2% inflation target. He was joined by two hawkish members, Fisher and Plosser who thought that the stronger data warranted stronger language.

The Fed also released new projections. The central tendency forecast for GDP growth (Q4/Q4) is now 2.3 to 2.4% for 2014 (versus 2.0 to 2.2% in last September’s update), 2.6 to 3.0% for 2015 (unchanged from last September), 2.5 to 3.0% for 2016 (versus 2.6 to 2.9% previously), 2.3 to 2.5% for 2017 (unchanged). The central tendency projections for the unemployment rate were lowered a touch: 5.2 to 5.3% for 2015 (5.4 to 5.6% previously), 5.0 to 5.2% for 2016 (5.1-5.4% previously), 4.9 to 5.3% for 2017 (unchanged). Inflation forecasts were lowered for 2014 and 2015.

The Fed presented information about how participants feel about the pace of policy firming going forward. Nine participants (compared to 11 in September) see rates above 1% in 2015. There are four members that see rates remaining below 2% by the end of 2016 (versus 3 members last September). The large majority of participants still see the fed funds rate above 3% in 2017, and in the 3.25-4.25% range over the longer term.

World – Flash manufacturing purchasing managers indices for the month of December were released by Markit for a range of countries. In China, the PMI fell to a 7-month low of 49.5 (from 50.0 in the prior month), with both production and new orders sub-indices in contraction territory. Japan’s PMI rose to 52.1 (from 52.0 in the prior month) as output and employment increased at a faster rate, while new orders increased at a slower rate. The eurozone PMI rose to a 5- month high of 50.8 thanks to increases in new orders and employment. The overall gains were driven by Germany whose PMI rose to 51.2, while France’s remained in contraction territory at 47.9, a 4-month low. The eurozone’s services PMI rose to 51.9 in December with increases in France (albeit still in contraction mode), offsetting a drop in Germany, the latter nonetheless remaining in expansion mode, i.e. above 50. The Bank of Japan left monetary policy unchanged at its meeting this week. It will continue to increase the monetary base at an annual pace of 80 trillion yen.