Canada's business outlook dampens significantly

Week in review

Canada – The Teranet–National Bank House Price Index fell 0.2% in December due to declines in 4 of the 11 metropolitan regions covered. On a year-on-year basis, home prices were up 4.9% nationally in December, with above average increases in Calgary (+8.3%), Hamilton (+7.8%), Toronto (+7.2%), Edmonton (+5.8%) and Vancouver (+5.0%), and below average increases in Victoria (+3.2%), Winnipeg (+1.5%), Montreal (+0.3%) and Ottawa-Gatineau (+0.1%). Two cities, namely Quebec City (-0.8%) and Halifax (-2.5%), were in deflation mode on a year-on-year basis. For 2014 as a whole, resale home prices grew 4.9% on average, the largest annual gain in three years.

The number of homes sold through the MLS system dropped 25% on a seasonally adjusted basis from November to December in Calgary (the biggest decline since October 2008) and 26% in Edmonton (the worst monthly decline ever). Sales fell 3.1% in the rest of Canada, i.e. outside of Alberta.

The Winter edition of the Bank of Canada's Business Outlook Survey (conducted between November 17th and December 11th) showed that the business outlook dampened significantly from last Fall. While firms reported an improvement in sales growth over the past 12 months, they were less optimistic about sales over the next year, the corresponding balance of opinion sinking from 35 to just 8, the lowest since 2012. Intentions to invest in machinery and equipment remained positive, but the related balance of opinion dropped from 20 to 8, the lowest in over a year. However, the BoC said that “a majority” of manufacturers aim to invest to increase production, i.e. not just for replacing existing capital as was the case in the prior survey. Capacity pressures were little changed from the Fall survey, with 40% of respondents stating either some or significant difficulty in meeting an unexpected increase in demand. The proportion of respondents facing labour shortages rose a bit to 22% (from 18% in the last survey), but hiring intentions were weaker than in the Fall, with the balance of opinion falling from 44 to 31.

Expectations of input price inflation fell sharply, with the corresponding balance of opinion reaching -3, i.e. more respondents think input inflation will increase at a lesser rate than in the past year. The balance of opinion for firms’ expectations of output price inflation fell to -5, the first negative since early 2013. That was also reflected in inflation expectations which were down compared to the Fall survey. Most firms expect inflation to be in the bottom half of the BoC’s 1-3% target range. Indeed, 70% of respondents now see the annual inflation rate over the next two years to be at or below 2%, the highest proportion since 2013. Firms reported little change in credit conditions compared to the previous three months. The separately-released BoC Senior Loan Officer's survey for Q4 (conducted between December 8th and 12th) showed lending conditions were nearly unchanged from the prior quarter, although the corresponding index remain in negative territory (i.e. easing) at -2.7. There was little change in both the pricing and non pricing aspects.

United States – Retail sales fell 0.9% in December, after a downwardly revised 0.4% advance in the prior month. December sales were restrained in part by motor vehicles/parts which were down 0.7%. Excluding autos, sales were also weak, falling 1% in the month. Ex-auto sales were restricted by gasoline which sank 6.5%, a fifth consecutive drop in light of slumping pump prices. There were also declines in sales of electronics, clothing, sporting goods, general merchandise and building materials which offset gains for furniture, food/beverage and health care products. Despite a weak December, retail volumes grew roughly 7.8% annualized in Q4 (thanks to solid gains in October and November), about double the pace seen in the prior quarter.

Industrial production fell 0.1% in December, matching consensus expectations. Driving the decrease in December output was utilities (-7.3%), which offset increases in mining (+2.2%) and manufacturing (+0.3% despite declines in the auto sector). Capacity utilization fell three ticks to 79.7% from a downwardly revised 80.0%. Despite the soft December results, industrial output managed to grow 5.5% annualized in Q4 courtesy of a good November. That is consistent with U.S. GDP growth of over 2.5% annualized in Q4.

The consumer price index (CPI) fell 0.4% in December, allowing the annual inflation rate to drop to just 0.8%, the lowest since 2009. The 4.7% slump in energy prices (sixth decline in a row) restrained the CPI, while food prices rose 0.3% (nineteenth increase in a row). Excluding food andenergy, prices were flat, which allowed the year-on-year core inflation rate to fall one tick to 1.6%, the lowest since February. The core CPI was supported by increases in the price of medical care, tobacco and services, which just offset price declines elsewhere including personal computers and apparel. The headline CPI is, not surprisingly, being hammered by slumping oil prices, but even core inflation remains under wraps despite strong economic growth, probably due to the strengthening U.S. dollar which tends to cap import prices. The Fed’s preferred measure, the PCE deflator, is also very mild. The results will support the Fed’s stance of staying “patient” and delay rate hikes for at least a couple of meetings despite strong economic growth.

The producer price index fell 0.3% in December, causing the year-on-year rate to drop three ticks to 1.1% (from 1.4% in the prior month). Food prices fell 0.4%, while energy prices slumped 6.6% (sixth decline in a row). However, excluding food and energy, producer prices rose 0.3% buoyed by increases in both core goods and services. That allowed the year-on-year core PPI to rise three ticks to 2.1%.

The NFIB small business optimism index rose 2.3 points in December to reach 100.4, the highest level since October 2006. The gain was widespread with eight of the ten components of the index up on the month. The improving economic backdrop is benefitting workers, as evidenced by the percentage of businesses planning to raise worker compensation which stood at 17% in December, a postrecession high.

The Philadelphia Fed index of manufacturing activity fell to 6.3 in January (from 24.3 in the prior month). That’s the lowest Philly since February last year. While new orders managed to remain in expansion mode, the shipments and employment sub-indices dipped into negative territory for the first time in months. The New York Fed’s Empire index of manufacturing activity rose to 9.95 in January (from -1.2 in the prior month). New orders, shipments and employment sub-indices all rose further into expansion territory.

The preliminary estimate for January’s Michigan consumer sentiment index came in at 98.2, the highest in 11 years. Consumers felt more confident about the economic outlook (sub-index jumping to 91.6), while the index relating to current conditions rose to 108.3, both at multi-year highs.

Weekly jobless claims data for the week of January 10th showed initial claims rising to 316K from an upwardly revised 297K in the prior week. That was higher than consensus expectations. The more reliable 4-week moving average rose to 298K. Continuing claims for the prior week fell 51K to 2.4 million.

World – December data in China showed export growth accelerating to 9.9% on a year-on-year basis, while imports contracted 2.3%. Social financing, an aggregate measure of credit in China, rose by 1.7 trillion yuan in December, although just 696 bn of that amount (or 41%) was bank loans. In the Eurozone, industrial production was up 0.2% in November despite a flat print in Germany and declining output in France for the fourth consecutive month.