Week in review

Canada – Retail sales fell 2% in December, much worse than consensus which was expecting a drop of only 0.4%. That was the largest monthly drop since April 2010. Sales were down in 9 of the 11 subsectors, including a 1% drop for autos/parts dealers. Excluding autos, sales fell 2.3%, the worst performance in six years. There were declines observed for sellers of gasoline, furniture, electronics, clothing, sporting goods, general merchandise, building materials and miscellaneous items, which dwarfed the small gains registered by sellers of health/personal care products, and food/beverages. In real terms overall retail sales fell 1.3%, the worst in a year. Still, retail volumes managed to grow 2.4% annualized in Q4. All told, the retail report was much weaker than expected given the broad-based declines. That said, the results have to be interpreted with caution. We’ve seen a similar slump in December 2013, which was then reversed in the following month.

Wholesale sales rose 2.5% in December, blowing past the 0.3% increase expected by consensus. There were increases in six of the 7 subsectors, namely building materials, farm products, autos, food/beverage, personal goods and miscellaneous items which more than offset declines for machinery/equipment. Inventories were up 1%. In real terms, wholesale sales rose 2.4%, the biggest increase since May. That allowed wholesale volumes to grow 6.3% annualized in Q4, matching the pace seen in the prior quarter. That will go some way towards offsetting the quarterly sales decline registered by factories in the last quarter of 2014.

International securities transactions data showed foreign investors decreasing their holdings of Canadian securities by C$13.6 bn in December, with net selling of bonds (-C$8.5 bn) and equities/investment funds (-C$7 bn), more than offsetting the net increase for money market instruments (+C$2 bn). For Q4 as a whole, net portfolio inflows amounted to just C$282 million, the worst since 2008, as net inflows in bonds (+C$5.3 bn) were offset by divestment from equities (-C$3.5 bn) and money market instruments (-C$1.6 bn). The bond net inflows in Q4 were in corporates (+C$4.1 bn, including a net C$1.6 bn investment in bonds of government enterprises), provis (+C$0.9 bn), federal government bonds (+C$0.3 bn) and munis (+$30 million).

In a speech this week, Deputy Governor, Agathe Côté reiterated the Bank of Canada’s view that lower oil prices will have an unambiguously negative impact on the Canadian economy. She pointed out that the average household disposable income would have been cut by 3% by the end of 2016 and the underlying inflation rate would have been knocked down by roughly half a point, had there been no monetary policy response to the shock. She argued in favor of the BoC’s January rate cut because there is a greater risk that inflation expectations can become unanchored when inflation is persistently low than when inflation lies above target. She said that, in order to better understand inflation dynamics, the Bank of Canada has created a new quarterly survey to measure both Canadian consumers’ inflation expectations and the uncertainty surrounding them. Results will be shared later this year.

United States – Industrial production rose 0.2% in January, weaker than the +0.3% print expected by consensus. Adding to the disappointment was a sharp downward revision to the prior month to -0.3% (from -0.1%). Driving the increase in January output was manufacturing (+0.2%, despite a 0.6% drop for autos/parts) and utilities (+2.3%), which offset a 1% decrease in mining output. Drilling for oil and gas wells was down 10%, the biggest drop since 2009. Capacity utilization was flat at 79.4% (the prior month was downwardly revised to 79.4% from 79.7%). Assuming no change in February and March, industrial output is on track to grow just 1.4% annualized in Q1, well below the 4.3% pace registered in the prior quarter.

Housing starts fell 2% to 1065K in January, from a downwardly revised 1087K in the prior month. The decrease in starts was entirely due to single-family homes (-6.7%), which more than offset the 7.5% increase for multis. Building permit applications fell 0.7% in January to reach 1053K, from an upwardly revised 1060K in the prior month. The decrease was entirely due to permits for singles (-3.1%), which dwarfed the 3.6% increase for multis.

The producer price index fell 0.8% in January, causing the year-on-year headline rate to drop to 0.0% (from 1.1% in December), the lowest on records going back to 2010. Food prices fell 1.1%, while energy prices slumped another 10.3%. Excluding food and energy, producer prices fell 0.1% as declines in the core goods sector more than offset increases in core services. That allowed the year-on-year core PPI to fall to just 1.6%, the lowest since September.

The New York Fed’s Empire index of manufacturing activity fell to 7.8 in February (from 9.95 in the prior month). New orders and employment sub-indices both fell a bit but remained in expansion mode. Shipments rose further into in expansion territory.

The Philadelphia Fed index of manufacturing activity fell to 5.2 in February (from 6.3 in the prior month). That’s the lowest Philly since February last year. The new orders sub-index fell a bit, but remained well in expansion territory. Shipments and employment returned to expansion mode after a temporary drop into contraction territory.

Markit’s flash/preliminary estimate of the manufacturing purchasing managers index ended up at 54.3 in February (from 53.9 in the prior month). A reading above 50 implies expansion in manufacturing activity. Markit says that production rose at the fastest pace in four months. That said, exporters were seeing stagnating sales.

Weekly jobless claims data for the week of February 14th showed initial claims dropping to 283K (from an unrevised 304K in the prior week). That was better than the 290K expected by consensus. The more reliable 4-week moving average fell to 283K, the lowest since October last year. Continuing claims for the prior week rose 58K to 2.43 million.

The Fed minutes were quite dovish. Many participants had indicated during the January meeting that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time. The January statement had given the impression that the FOMC was downplaying concerns about inflation and was putting somewhat more emphasis on international developments. As it turns out, the minutes show that the inflation outlook is the key variable driving participants’ discussion about the appropriate timing of the liftoff date. A number of participants suggested they would need to see further improvement in labor market conditions before beginning normalization. Continued growth would help bolster their confidence in the likelihood of inflation moving towards 2%. Several participants indicated that signs of improvements in labor compensation data would also be an important signal that the time has come for tightening the policy stance. Acceleration in the core PCE and in market-based measures of inflation compensation would also comfort them in that view.

World – Flash manufacturing purchasing managers indices for the month of February were released by Markit for a range of countries. Japan’s PMI fell to 51.5 (from 52.2 in the prior month), the lowest since July. More importantly, all of the major sub-indices remained above 50. The eurozone’s PMI rose to 51.1, a seven-month high (from 51 in the prior month) thanks to expanding output, new orders and employment. The eurozone’s services PMI also rose to a seven-month high of 53.9 in February (from 52.7 in the prior month) buoyed by gains in Germany and France, the latter’s related index hitting a 42-month high and moving into expansion territory.

Japan came out of recession in Q4 with GDP growing at an annualized pace of 2.2% in that quarter after two consecutive declines. For 2014 as a whole, real GDP growth was zero, the lowest in three years. The sales tax hike last April clearly had a negative impact on growth. However, the handoff to 2015 was good with December industrial production rising 0.8%.

This presentation may contain certain forward-looking statements about the 2009 Economic and Financial Outlook. Such statements are subject to risk and uncertainties. Actual results may differ materially due to a variety of factors, including legislative or regulatory developments, competition, technological change and economic conditions in Canada, North America or internationally. These and other factors should be considered carefully and readers should not rely unduly on National Bank of Canada’s forward-looking statements. This presentation may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express consent of National Bank.

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