Week in review: Retail sales rose a consensus-topping 1%

Week in review

Canada – Retail sales rose a consensus-topping 1% in May. Sales were up in 9 of the 11 subsectors including a 1.3% increase for autos/parts dealers. Excluding autos, sales rose 0.9% thanks to gains for sellers of gasoline, furniture, building materials, food/beverage, health/personal care products, electronics, general merchandise and miscellaneous items which dwarfed decreases for sellers of clothing accessories and sporting goods. In real terms, retail sales rose 0.4% in May, more than erasing the prior month’s decline. Nominal sales were up in nine of the 10 provinces. On a year-on-year basis, BC remains in the lead with sales up 8.3% followed by Ontario at 5%, while Alberta (-1.7%) and Saskatchewan (- 2.6%) are the worst performers.

Overall, the retail report was better than expected not just because of the consensus-topping results but also considering the breadth of gains, i.e. the majority of broad categories and almost all provinces saw gains in May. Discretionary spending i.e. retail sales excluding gasoline, groceries and personal care products is at an all-time high. Despite the oil shock, employment has been resilient and that is helping support consumption which seems to have accelerated in the second quarter.

Wholesale sales fell 1% in May, disappointing consensus which was looking for a flat print. There were decreases in four of the 7 broad subsectors (representing 65% of total sales), including a 3.1% slump for autos/parts, and a 1.8% drop for machinery and equipment. The three energy-rich provinces saw the largest monthly declines: NL (-7.4%), SK (-3%) and AB (-2.2%). In real terms, wholesale sales fell 1%.

United States – After jumping 4.5% in the prior month existing home sales rose another 3.2% in June to 5.49 million units. That’s the highest level of resales since February 2007. The increase in June was due to both single family units (+2.8%), and multis (+6.6%). The months supply of homes at current sales rate fell to 5.0, the lowest in three months. The median resale price rose to $236,400 and is now 6.5% higher than year-ago levels (+6.6% for singles and +5.5% for multis). Only 22% of June sales were made to cash buyers, while the share of distressed sales in total sales fell to 8%, both at their lowest in several months.

New home sales fell unexpectedly to 482K in June from a downwardly revised 517K in the prior month. The months supply of homes at current sales rate rose to 5.4, the highest in months. The median sale price rose to $281,800, but remains 1.8% below year-ago levels.

Markit’s flash/preliminary estimate of the manufacturing purchasing managers index ended up at 53.8 in July, up slightly from 53.6 in the prior month. A reading above 50 implies expansion in manufacturing activity. The production and new orders sub-indices expanded at a faster rate than the prior month, while the pace of employment creation eased somewhat. Factories continue to struggle with the strong dollar (which is hurting exports) and the downturn in the energy which has hurt sales to that sector. However, respondents said those challenges had encouraged them to focus sales on fastgrowing domestic markets.

Weekly jobless claims showed initial claims falling 26K to 255K in the week of July 18th. The more reliable 4-week moving average fell to 278.5K. Continuing claims for the prior week fell 9K to 2.207 million. The low US claims are good news, more so considering those were in the reference week. One can expect another 200K+ print for July’s non-farm payrolls.

World – Flash manufacturing purchasing managers indices for the month of July were released by Markit for a range of countries. In China, the PMI fell to a 15-month low of 48.2 (from 49.4 in the prior month) as new orders, output, and employment all fell. Japan’s PMI rose to 51.4 (from 50.1 in the prior month) as both output and employment increased at a faster rate. New orders which had been declining, bounced back in the month. The eurozone’s PMI fell to 52.2 (from 52.5 in the prior month) although all of the major sub-indices remained in expansion territory, i.e. output, new orders and employment, the latter increasing at the fastest pace since April. The eurozone’s services PMI fell to 53.8 in July (from 54.4 in the prior month). The rate of job creation eased to a 6- month low.

Latest CPB data showed a significant drop in trade volumes in May, but also a sharp downward revision to the prior month. So much so that it will now take a miraculous recovery in June, highly unlikely in our view, to prevent the first back-to-back quarterly contraction of trade volumes since 2009. Industrial output was soft again in May, but wasn’t as bad as trade. That caused the ratio of output to trade, a proxy for global inventories, to surge to a five-year high, not an encouraging development for growth in the second half of 2015. All told, while a rebound in growth is expected after a tepid first half, we’re not anticipating a stellar second half.