Weekly Recap: Canadian retail sales disappoints, Fed opens door for hike

Week in review

Canada – The consumer price index rose 0.9% in February, allowing the year-on-year inflation rate to remain unchanged at 1.0%. In seasonally adjusted terms, CPI rose 0.2%, thanks to increases in four broad categories, including transportation, household ops, recreation and alcohol/tobacco, which more than offset declines or flat prints in other categories. The core CPI, which excludes eight of the most volatile items, was up 0.6%, but that couldn’t prevent a one-tick drop in the year-on-year core inflation rate to 2.1%. In seasonally-adjusted terms, core CPI was up 0.1%. Assuming seasonal patterns hold in March, CPI is on track to grow in Q1 by 1% annualized for the headline and 2.1% annualized for the core. While the latter is not far from the Bank of Canada’s estimates (from January’s Monetary Policy Report), the headline is a bit hotter than the 0.5% expected by the central bank.

Retail sales fell 1.7% in January, much worse than consensus expectations. Sales fell in 7 of the 11 subsectors, including a 1.4% decrease for autos/parts dealers. Excluding autos, sales fell 1.8%. There were declines observed for sellers of gasoline, furniture, sporting goods, general merchandise, health/personal care products, and food/beverages, which dwarfed increases for sellers of electronics, clothing, building materials, and miscellaneous items. In real terms overall retail sales fell 1.2%. In Alberta, retail spending fell for the fourth consecutive month, the worst streak in over 15 years, outside of a recession. All told, the retail results were much weaker than expected considering the slump in volumes. That adds to disappointing prints reported earlier from factories and the wholesale sector. Those ugly results suggest Canada’s GDP may have contracted as much as 0.4% in January. Bad weather may have been a factor in restraining sales, and we’ll be looking for a rebound for all those sectors in subsequent months. But the poor start to the year suggests Q1 GDP growth could be under 1% annualized.

Manufacturing shipments fell 1.7% in January as sales were down in 14 of the 21 broad industries, including the 11.9% slump for petroleum/coal products which offset gains in other categories including transportation equipment. In real terms, factory sales fell 1%, erasing part of the massive gains registered in the prior month. Real inventories soared 2.8%, the biggest monthly increase on records.

Wholesale sales slumped 3.1% in January, more than wiping out the prior month’s 2.8% gain. There were decreases in four of the 7 subsectors, including a massive 11.3% drop for autos/parts, and a 5.3% decline for building materials. Inventories were up 1.3%. In real terms, wholesale sales fell 3.3%, the biggest drop since January 2009. The outlook for the rest of Q1 isn’t rosy considering the inventory build in both the wholesale and manufacturing sectors.

Statistics Canada’s latest report on job vacancies showed vacancy rates soaring last December to 2.7% for health care and 1.7% for finance/insurance, both at their highest since 2012. However, the good news ends there. Most of the other sectors, including resources, information/culture, professional services, retail, wholesale, and transportation/warehousing, saw vacancy rates plunge to multi-month lows, causing the overall vacancy rate to drop to just 1.5%.

International securities transactions data showed foreign investors increasing their holdings of Canadian securities by C$5.7 bn in January, as net buying of bonds (+C$10.5 bn) and equities/investment funds (+C$1 bn), more than offset the net divestment from money market instruments (-C$5.8 bn). The net inflows into bonds were largely in provis (+9.2 bn), although there were also net increases for federal government bonds (+C$0.4 bn), munis (+$59 million), and corporates (+C$0.8 bn, despite the net C$1.6 bn divestment from bonds of government enterprises).

United States – Industrial production rose just 0.1% in February. Adding to the disappointment was a sharp downward revision to the prior month to -0.3% (from +0.2%). The only reason industrial output was up in February was utilities (+7.3%, probably due to the cold snap) which more than offset output declines in manufacturing (-0.2%, driven by a 3% drop for autos/parts) and mining (-2.5%). Capacity utilization fell from a downwardly revised 79.1% to 78.9%. Assuming no change in March, industrial output is on track to contract slightly in Q1, the first negative print since the 2009 recession.

Housing starts fell 17% to just 897K in February, from an upwardly revised 1081K in the prior month. The decrease, probably due to bad weather, was split between single-family homes (-14.9%) and multis (-20.8%). In contrast, building permit applications rose 3% from an upwardly revised 1060K in the prior month to reach 1092K in February. The increase was entirely due to permits for multis (+18.3%), which dwarfed the 6.2% decrease for single family units.

The New York Fed’s Empire index of manufacturing activity fell to 6.9 in March (from 7.8 in the prior month). The new orders sub-index fell into negative territory for the first time in five months, and shipments fell to a three-month low, albeit remaining in expansion mode. The employment sub-index, however, jumped to 18.56, the highest in months. The Philadelphia Fed index of manufacturing activity fell to 5.0 in March (from 5.2 in the prior month). That’s the lowest Philly since February last year. The new orders and employment sub-indices fell a bit, but remained well in expansion territory. The shipments sub-index, however, moved into negative territory for the second time in three months. The declining Philly and Empire indices are consistent with a moderation in output growth from factories in the first quarter.

Weekly jobless claims data for the week of March 14th showed initial claims remaining roughly unchanged at 291K. The more reliable 4-week moving average rose slightly to 305K. Continuing claims for the prior week fell 11K to 2.42 million.

The Fed opened the door to rate hikes by removing the word “patient” from its forward guidance. Instead the Fed now says that it “judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting” and it “anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term”. In other words, the decision to hike rates is now entirely data dependent. The Fed further added that this change in the forward guidance does not indicate that it has decided on the timing of the initial increase in the target range. There were no dissenters with regards to this decision. The FOMC downgraded its GDP growth and inflation forecasts for both 2015 and 2016. That explains why only four participants (compared to 9 in December) see rates above 1% in 2015. Also, there are now eleven members that see rates remaining below 2% by the end of 2016 (versus 4 members last December). The majority of participants still see the fed funds rate above 3% in 2017, and in the 3.00-4.25% range over the longer term.

All told, while the Fed opened the door to rate hikes, that’s not to say the latter are imminent ― an April hike has already been ruled out by the Fed. There’s an outside chance of a June hike, but a September move is more likely in our view. Even then, don’t expect the Fed to get aggressive. While the USD surge hasn’t been explicitly mentioned, its impact is apparent in the Fed’s downgrades to both growth and inflation. There are also fewer FOMC participants now expecting rates to be above 1% at the end of the year.

World – The Bank of Japan left its QE program unchanged. While the central bank expected the annual inflation rate to be about zero due to declining energy prices, it felt confident that longer term inflation expectations were rising. Still in Japan, February trade figures showed exports rising 2.4% and imports falling 3.6%, both on a year-on-year basis.