The consumer price index rose 0.6% in March

Week in review

Canada – Retail sales rose a consensus-topping 0.4% in February. Consensus was expecting a decline after the prior month’s outsized gains (unrevised at +2.1%). In February, sales rose in 9 of the 11 subsectors, including a 1% gain for autos/parts dealers. Excluding autos, sales rose 0.2% as gains in home furnishings, electronics, sporting goods, building materials, health/personal care products, clothing, and general merchandise more than offset declines for sellers of gasoline and miscellaneous items. In real terms overall retail sales rose 1.5%. Looking at provinces, on a year-on-year basis, New Brunswick still leads the way (+10.2%) followed by Ontario (+9.2%), while Alberta (-1.8%) remains last. February’s increase in retail spending surprised consensus, coming after massive gains the prior month (unrevised at +2.1% for nominal sales). With such a flying start, the quarter is looking great with regards to consumption spending because even if we assume no change in March, real retail sales will grow a stunning 8.4% annualized in Q1, the best performance in six years. That’s in large part due to autos, although sales were also good excluding that category in Q1. The strength in spending is likely due to the observed uptick in the labour market. According to the Labour Force Survey 76K private sector jobs were created in Q1, the best quarterly performance since 2013. Also encouraging is consumer credit growth which remains healthy above 2%. All told, Canada is on track to register a strong first quarter (our estimate for GDP growth is 3% annualized), driven by consumption and exports.

year-on-year inflation rate to drop to 1.3% from 1.4%. In seasonally adjusted terms, CPI rose 0.2% as all subcomponents experienced gains. Alcohol/tobacco (+0.6%), clothing (+0.5%) and recreation (+0.5) experienced the strongest gains while rises were modest in food (+0.1%), shelter (+0.1%) and household ops (+0.1%). The core CPI, which excludes eight of the most volatile items, was up 0.7%, which allowed the year-on-year core inflation rate to rise to 2.1% from 1.9%. In seasonally-adjusted terms, core CPI was up 0.3%.

Excluding food and energy, prices rose 0.2% in seasonally adjusted terms for March. The Canadian CPI data for March was stronger than expected. The main surprise came from core CPI rising 0.3% in March after a 0.2% increase in February with gains coming from multiple sources. Keep in mind that there is a significant lag for the effect of a weaker currency (via import prices) on the CPI. This could be the explanation for this month’s performance as goods ex. food and energy rose 1.4% in March, twice the usual pace for that month. This being said, we continue to think that significant rebound of the Canadian dollar over the past few weeks should limit the rise of import goods prices in the coming months. Since we expect subpar growth again this year, we see core inflation decelerating slightly to 1.8% in 2016 from 2.2% last year.

In February, wholesale trade fell 2.2% m/m. Sales were down in five of seven subsectors, accounting for 60% of total trade. In volume terms, sales declined 1.9%. Inventories rose 0.2%, lifting the inventory-to-sales ratio up two ticks to 1.31.

United States – In March, housing starts dropped to a seasonally adjusted annual rate of 1089K, well short of the 1166K expected by consensus. Construction of single- and multi-family homes declined 9.2% and 7.9%, respectively, from the month before. As a result, the corresponding 3-month moving averages sank 2.0%, 0.3% and 5.9%. Building permit applications pulled back to 1086K, plunging in the multi-family segment (-18.6% m/m) and sagging slightly in the single-family segment (-1.2% m/m). For Q1 as a whole, starts averaged 1133K, which did not differ much from the prior quarter’s tally. This means that new-home construction is not contributing to economic growth in the United States. Despite this weakness early in 2016, we still believe that residential construction this year will again benefit from the strength of consumers and low mortgage rates. However, the level of starts is still low compared with our estimated trend rate of household formation in the United States, which we have pegged at about 1400K annually.

Again in March, existing-home sales rose 5.1% m/m to an annual rate of 5.33 million after slumping 7.3% the previous month. Sales jumped 11.1% in the Northeast and 9.8% in the Midwest. Year over year, sales advanced 1.5% and the median price of an existing home increased 5.7% to US$222,700. The inventory of existing homes for sales stood at 1.98 million units, which translated into a 4.5-month supply at the current sales pace. As a rule of thumb, supply is considered tight when it slips below five months.

In April, the National Association of Home Builders Housing Market Index notched in at 58 for a third consecutive month. While the index of current sales edged down from 65 to 63, prospective buyer traffic climbed one point to 44 and the sixmonth sales outlook measure gained one point to 62.

Still in April, the Philly Fed Manufacturing Survey Index slid into shallow negative territory (-1.6), reversing most of the sharp increase registered the month before. The current new orders index dove from 15.7 to 0, the employment index tumbled 17 points to -18.5 for a fourth consecutive negative reading, and firms reported a substantial decline in average work hours, with the index losing 21.9 points to -16.2. While the survey showed significant weakness early in the quarter, its forward-looking components were more encouraging. The diffusion index for future activity sprang 13.4 points to 42.2, its highest mark in 15 months. Also, only 9% of respondents expected activity to be lower in six months, whereas 51% thought it would increase.

The index of leading economic indicators rebounded 0.2% in March after eking down 0.1% the previous month. Yield spreads and a stronger stock market accounted for most of the improvement, while building permits acted as a drag.

The weekly jobless claims report showed initial claims fell 6K to 247K in the week of April 16. The 4-week moving average dipped to 261K.

World – At their April meeting, the members of the ECB Governing Council decided to keep the key ECB interest rate unchanged. As announced in March, the ECB began expanding its monthly purchases program to €80 billion. Also as previously announced, the central bank will conduct the first of a series of targeted longer-term refinancing operations (TLTRO II) in June and will begin making purchases under the corporate sector purchase program (CSPP). In response to criticism of the ECB’s low interest rate policy from politicians, ECB President Mario Draghi argued that, except on a few rare occasions, monetary policy has been the only factor in the past four years to support growth. According to staff estimates, had it not been for the ECB’s actions, growth would have been 1.6% lower over the 2015-2017 period.

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