The consumer price index was up 0.2% in September

WEEK IN REVIEW

Canada – The consumer price index was up 0.2% in September (consensus was expecting +0.1%), causing the year-on-year inflation rate to remain unchanged at 1.1%. In seasonally adjusted terms, CPI rose 0.2% with five of the eight broad categories seeing price increases. There were price gains for alcohol/tobacco (+0.4%), transportation (+0.3%), health/personal care (+0.2%), shelter (+0.2%) and food (+0.1%) while declines were observed for clothing/footwear (-1.2%) and recreation/reading (-0.3%). The CPI for household operations was flat. The core CPI, which excludes eight of the most volatile items, rose 0.2% causing the year-onyear inflation rate to remain unchanged at 1.3%. In seasonally-adjusted terms, core CPI was up 0.1% in September, after being flat in August. On a 3-month annualized basis, core inflation is running at a soft 0.7%, while the headline is at 1.3%. Excluding food and energy, prices were also up 0.1% in seasonally-adjusted terms, with the 12-month rate remaining very mild at just 1.0%. The annual services inflation rate remained unchanged at just 1.5%. The goods annual inflation rate dropped to 0.5% from 0.6%. Despite this month’s increase, total CPI is running at 1.3% on a 3-month annualized basis and 1.1% on a year-on-year basis, well within the bottom half of the Bank of Canada's 1%-to-3% inflation target range. Given the softness observed in commodity prices (except for oil), the remaining slack in the labor market, and the strength of the loonie, a significant rebound in the CPI seems very unlikely. All told, the soft inflation picture is unlikely to change the BoC’s stance for now.

Manufacturing shipments registered a 0.2% drop in August, flying in the face of the 0.2% increase expected by consensus. Factory sales were down in 11 of 21 industries. Sectors that saw higher sales included transportation, petroleum and coal products, electrical equipment, and metals. Manufacturers posting lower sales included those producing machinery and food. In real terms, sales retreated 0.3%. Real orders rose 0.6% after falling sharply the month before. Real inventories dipped 0.1%, less so than shipments, thus lifting the real inventory-to-sales ratio one tick to 1.44.

On a y/y basis, the Teranet–National Bank National Composite House Price Index™ climbed 2.7% in September. Of the 11 metropolitan areas covered, only four exceeded the national average. On a monthly basis, the index was flat. Price behaviour appears to be at odds with the recent pick-up in resale activity. It looks as though households are willing to buy, but they are now bargaining harder on price to compensate for higher mortgage rates.

The Canadian Real Estate Association reported that residential sales reached 40,793 units in September, up 0.8% from the previous month.

United States – The Philadelphia Fed index of manufacturing activity slipped a couple of points in October to 19.8 from the prior month’s reading of 22.3. This was nonetheless better than expected by consensus, which had pegged the index at 15. The decrease was driven by shipments, whose sub-index fell almost one point to 20.4. However, the new-orders sub-index soared to 27.5, its highest mark since March 2011, while the employment sub-index sprang to 15.4, its top notch since May 2011. The headline figure has now held in positive territory for five months running. Such a winning streak had not been witnessed since the turn of 2011-2012 when the positive Philly coincided with mounting U.S. industrial output.

In October, the New York Fed’s Empire index of manufacturing activity fell to a five-month low of 1.52 from 6.29 in September. Consensus expected the index to climb to 7. Moreover, the shipments, employment and delivery-time sub-indices were all down. However, the new-orders sub-index edged higher to 7.75, its top mark since May of last year. Though the manufacturing report ran counter to expectations at the headline level and disappointed in specific areas, the uptick in the neworders sub-index to its highest point in over a year bodes well for a rebound in shipments and production once the uncertainty surrounding fiscal policy subsides.

The Fed's Beige Book provided the latest information on the U.S. economy, covering the period to October 7th. As in its previous issue, the Beige Book suggested that economic activity continued to increase at “a modest to moderate pace”. Eight of the districts saw similar growth in economic activity as in the previous reporting period, while four districts experienced a deceleration. Manufacturing expanded “modestly” once again. Residential and commercial real estate continued to improve in most districts. Lending activity, too, remained “modest” in most districts, though several reported a drop in mortgage lending due to lower refinancing activity and higher rates. However, a few others reported higher mortgage originations and higher home-equity lending as a result of higher home prices. Business loans were up with several districts reporting a pick-up in both commercial and industrial lending. Employment growth remained modest in September, with the Fed’s contacts attributing their reluctance to expand payrolls to the implementation of the Affordable Care Act and, more generally, to fiscal policy. Price and wage pressures were perceived as “limited”.

Initial jobless claims for the week of October 12th sank to 358K from the prior week’s downwardly revised 373K. This undershot consensus expectations for a sharp decline to 335K. The four-week moving average rose to 336.5K. Continuing claims for the prior week fell 43K to 2.86 million Initial claims likely remained elevated on account of the impact of the government shutdown on federal contractors. The end of the government shutdown should cause claims to drop further in the coming weeks, though perhaps not all the way back to the near-300K levels that prevailed just before the stand-off. Those low numbers might not have been real after all, given that they failed to include data from California, which continued to work through a backlog of applications. In any event, the U.S. labour market seems to be struggling a bit as evidenced by the weak ADP report for September, the higher-than-anticipated initial claims above, and the message from the Fed’s Beige book that employers were holding back on hiring owing to uncertainty surrounding fiscal policy.

China – In Q3, GDP grew of 9.1% on a seasonallyadjusted annualized basis, or 7.8% year-on-year. The main contributor to growth in Q3 was yet again investment spending, maintaining the share of that component at roughly 47% of the total contribution to GDP. However, the share of consumption in growth continued to fall, dropping under 50% (on a 4-quarter moving average basis) for the first time in three years. So, rebalancing the economy away from investment and exports and towards consumption is proving to be very challenging for the central government. Even assuming a deceleration to around 6% annualized in the final quarter, China should be able to meet the government’s objective of 7.5% GDP growth this year. While the latter is below the average of the last three decades, it’s still a good performance considering the trade-weighted yuan has, according to the Bank of International Settlements, appreciated over 7% in real terms in the first nine months of the year (contrasting with the trade-weighted USD which appreciated just 3% in real terms over that period). Given that annual inflation remains relatively tame (3% for headline CPI in September but only 1.6% for the non-food component), authorities have room to provide more stimulus to kickstart rebalancing, helping China perhaps to repeat a 7.5% growth print next year.