Housing starts slumped 17.7% in March to just 156K

WEEK IN REVIEW

Canada – The Spring edition of the Bank of Canada's Business Outlook Survey (conducted between February 18th and March 13th) showed that businesses were a bit more enthusiastic than in the winter. Intentions to invest in machinery and equipment improved, with the related balance of opinion rising two points to 21, the highest since 2012Q2. Hiring intentions were also better with the index rising four points to 46, also the highest since 2012Q2. While the proportion of respondents facing labour shortages dropped a bit to 23% (from 26% in the winter), firms felt that capacity pressures rose a bit, with 45% of respondents, versus 39% in the Winter survey, stating either some or significant difficulty in meeting an unexpected increase in demand. Optimism about future sales was little changed from the Winter survey.

Expectations of input price inflation rose quite a bit, with the corresponding index soaring 18 points to reach 37. That’s the biggest one quarter increase since 2009. The reason given was the much depreciated Canadian dollar. However, firms did not see that translating into too much output price inflation with the corresponding index rising only 5 points to reach 14 (highest since 2011, nonetheless). Firms thought that the pass-through of the cheaper loonie to output prices would be limited by strong competition in the marketplace. That’s consistent with inflation expectations which were little changed from the Winter survey, with a large majority of respondents (93%) expecting annual inflation to remain in the BoC’s 1-3% target range.

The balance of opinion on credit conditions improved as it moved from positive in the winter to a negative in the Spring survey ― a negative print refers to an improvement in conditions because it suggests less firms reporting credit tightening relative to credit easing. The separatelyreleased BoC Senior Loan Officer's survey for Q1 (conducted between the 10th and 17th of March) similarly showed a still-favourable picture with regards to lending conditions. Lenders thought that there was an easing in overall credit conditions, with the overall index moving from -10.8 to -10.9 in Q1. The improvement was due to both price and non-price aspects. All told, the survey results are very encouraging given the increased willingness of firms to hire and invest.

Housing starts slumped 17.7% in March to just 156K, the lowest since January 2013. The decrease in starts was due to a decline in rural areas (-4.9%), but mostly due to the slump in urban areas (-18.8%). Urban starts were down for both multiple units (-25.5%) and singles (-5.4%). On a regional basis in urban areas, gains in the Prairies and BC were dwarfed by massive declines in the East, including the over-35% decline in both Ontario and Quebec, and a 51.5% drop in Atlantic Canada.

The value of building permits contracted 11.6% in dollar terms in February. The decline was driven by the residential sector (-21%) which dwarfed the 6.6% increase in the non-residential sector. In the residential sector, there were declines in the value of multiple permits (- 31.5%) and single permits (-12%). In real terms, residential permits fell 23.8% with a 29.3% drop for multis and a 14.3% decrease for singles.

United States – The Fed minutes presented a much more dovish picture than the one provided by last March’s statement and subsequent press conference (when Janet Yellen said that rate hikes could come about six months after the end of QE). The minutes downplayed the Summary of Economic Projections’ more aggressive fed funds rate forecasts, with several participants saying that the increase shown “overstated the shift in the projections” and “could be misconstrued as indicating ... a less accommodative reaction function”. Moreover, “several” members thought that there was still a lot of slack in the labour market, while only “a couple” thought otherwise. So, the doves seem to still have the upper hand at the Fed.

The preliminary read for April’s Michigan sentiment index rose from 80 to a nine-month high of 82.6. Consensus was expecting an increase to just 81.0. Consumers felt more confident about current conditions (sub-index rising to 97.1, a four-month high), and were also more upbeat about the economic outlook (sub-index rising to 73.3, an eight-month high).

The producer price index rose 0.5% in March, causing the year-on-year rate to move up five ticks to a sevenmonth high of 1.4% (from 0.9% in the prior month). Food prices soared 1.1% while energy prices were down 1.2%. Excluding food and energy, producer prices rose 0.6% buoyed by services (+0.7%), causing the year-on-year core PPI to rise three ticks to 1.4%, the highest in five months.

Weekly jobless claims data for the week of April 5th showed initial claims falling 32K to 300K, the lowest in seven years. That was much better than consensus which was looking for a reading of 320K. The more reliable 4- week moving average dropped to 316K. Continuing claims for the prior week dropped 62K to 2.78 million.

World – Both the Bank of England and the Bank of Japan left monetary policy unchanged. BoJ Governor Kuroda expressed his confidence that Japan could handle the impact of the sales tax hike and hence, didn’t need additional stimulus. February data showed Japan’s current account in deficit for the third time in last four months. In China, trade data for March was quite disappointing, with both exports (-6.6%) and imports (-11%) contracting on a year-on-year basis. Also, the annual inflation rate rose to 2.4% in March, but excluding food, it fell one tick to 1.5%, a seven-month low.