Week in Review: US retail sales bounce higher, BoC still uncertain

Week in review

Canada – The Teranet–National Bank House Price Index rose 0.9% in May thanks to gains in 10 of the 11 metropolitan regions covered (only Calgary was down in the month). On a year-on-year basis, home prices were up 4.6% nationally with above average increases in Toronto (+7.6%), Hamilton (+6.2%), Vancouver (+6.2%), Victoria (+4.8%), Edmonton (+4.8%), and below average increases in Quebec City (+2.9%), Montreal (+1.5%), Winnipeg (+1.0%), and Halifax (+0.4%). Two regions were in deflation mode on a year-onyear basis, namely Ottawa-Gatineau (-0.9%) and Calgary (- 1.4%).

Housing starts jumped 10% from 183K in the prior month to 202K in May, much better than consensus expectations. The increase in starts was driven by urban areas (+10.8%) although there was also a 1.5% increase in rural areas. The jump in urban starts was entirely due to multis (+16.9%) which dwarfed the 0.3% drop for single family homes. On a regional basis in urban areas, there were solid gains in Ontario (+32.2%), Quebec (+25%) and Atlantic Canada (+151.8%, as starts soared from 3.8K to 9.6K), which more than offset declines in the Prairies (-3.3%) and BC (-32.5%).

Building permits jumped a consensus-topping 11.6% in dollar terms in April. There was a 30.2% increase in the value of nonresidential permits (driven by institutional buildings), and a 1.2% increase for the residential sector. In real terms, however, residential permits fell 4.5% due to an 8.1% drop for multis which more than offset the 4.1% increase for singles.

The capacity utilization rate sank to 82.7% in the first quarter of 2015 (from 83.5% in Q4). That was the largest one-quarter decline since the 2009 recession. Most sectors saw a drop in utilization rates including the manufacturing sector (down to 82.9%) whose decline was largely due to transportation equipment. In the construction industry, the capacity utilization rate fell to 83.6%. However, utilization rates rose in sectors including oil and gas, forestry/logging, and electricity. All told, with the Canadian economy contracting in Q1, a lower capacity utilization rate shouldn't come as a surprise. The utilization rate for transportation equipment is expected to bounce back in Q2 not only due to strong demand for vehicles on both sides of the border, but also because Q1 utilization was temporarily restrained by retooling at some auto plants in Ontario. Capacity is close to decade highs in the oil and gas industry. That’s not to say investment will pick up in that sector anytime soon given the industry is still adjusting after the oil price collapse.

In the June update of the Financial System Review, the Bank of Canada sounded somewhat more cautious than in December. The bank now sees risks to financial stability as being slightly higher than in December. But the BoC thinks there is a low probability that the risks identified in the FSR will materialize. It says policies and regulations are in place to promote the strength and soundness of the Canadian financial system. The oil shock is seen as increasing the risk to financial stability by delaying improvements to incomes and economic growth and impacting housing markets of oil-producing regions. However, the decline in oil prices alone is unlikely to trigger a material risk to the system as a whole. The Bank continues to expect the imbalances in the household sector and housing market to ease as the economy improves.

In the press conference, Governor Poloz acknowledged that Q1 ended on a weaker note than expected. Trade data were disappointing, but on the other hand, labor market data have been impressive. The Governor pointed out that the impacts of the oil shock on the economy are happening via a number of channels. It is therefore complex to assess what will be the net impact. That is why the Bank has to take a risk management approach to the situation, trying to balance risks to the inflation outlook as well as to financial stability. The central thinks the negative impacts of the oil shock on the economy seem to be relatively localized. Regarding the recent increase in bond markets yields and volatility, the Bank`s view is that market volatility is part of monetary policy normalization. Still regulatory and structural changes are adding to volatility due to less liquidity. As a consequence the normalization process is more uncertain and hence the BoC will need to monitor the impact of market movements.

United States – Retail sales jumped 1.2% in May thanks in part to motor vehicles/parts +2%. Excluding autos, sales rose 1%, a bit better than consensus. Gains were broadbased. Assuming CPI grew 0.5% in May (consensus call for next week’s release), then retail volumes grew a decent 0.7% in May, i.e. Q2 is on track to match last quarter’s 4% annualized increase. The resilience in consumption spending shouldn’t be surprising considering the solid labour market as evidenced by non-farm payrolls and low initial jobless claims.

The producer price index was up 0.5% in May on the headline, taking the year-on-year rate from -1.3% to -1.1%. Energy prices soared 5.9% (in synch with pricier gasoline), while food prices jumped 0.8%, the first increase in 6 months. Excluding food and energy, producer prices rose 0.1% as gains for core goods more than made up for flat prices in core services. The year-on-year core PPI fell to 0.6%. Overall, the PPI data was in line with consensus expectations, the jump largely anticipated due to observed increases in pump prices. Excluding volatile items, however, prices remain mild as evidenced by the annual core PPI inflation rate which is now the lowest on records going back to 2011. The Fed will be interested to see if such weakness in upstream prices is spilling over to the consumer level i.e. in the more closely watched core PCE deflator which is currently at just 1.2% on a year-on-year basis and well below the Fed’s 2% target.

Weekly jobless claims showed initial claims rising 2K to 279K in the week of June 6th. The more reliable 4-week moving average rose slightly to 279K. Continuing claims for the prior week rose 61K to 2.265 million.

The preliminary estimate for June’s Michigan consumer sentiment index came in at 94.6, up from 90.7 in the prior month. Consumers felt more confident about both the economic outlook (sub-index rising to 86.8) and current conditions (sub-index up to 106.8).

World – In Japan, Q1 GDP growth was revised up sharply from 2.4% to 3.9% annualized. April data showed the producer price index rising 0.3% and machine orders jumping 3.8%. In China, industrial production and retail sales rose in May by 6.1% and 10.1% respectively on a year-on-year basis. Still in May, the year-on-year CPI inflation rate fell three ticks to just 1.2%, while the PPI remained in deflation mode at -4.6%. New loans bounced back to 901 bn yuans in May. Germany’s industrial production and exports topped consensus by growing 0.9% and 1.9% respectively in April.