Wholesale sales soared 1.8% in September

Week in review

Canada – The consumer price index rose 0.1% in October, causing the year-on-year inflation rate to rise four ticks to 2.4%, the highest since June. In seasonally adjusted terms, CPI rose 0.1%, as seven of the eight broad categories saw price increases: food (+0.1%), clothing (+0.3%), shelter (+0.2%), recreation/education (+0.2%), alcohol/tobacco (+0.5%), household ops/equipment (+0.3%), and transportation (+0.3%), which dwarfed the decline for health/personal care products (-0.1%). The core CPI, which excludes eight of the most volatile items, rose 0.3%, allowing the year-on-year core inflation rate to jump to 2.3%, the highest since February 2012. In seasonally-adjusted terms, core CPI rose 0.2%. Assuming seasonal patterns hold in the last two months of the year, Q4 year-on-year inflation will be 2.4% for the headline and 2.5% for the core, i.e. well above the Bank of Canada’s estimates from its latest Monetary Policy Report which were at 2.2% and 2.1% respectively. Perhaps the central bank is overestimating the amount of slack in the economy.

Wholesale sales soared 1.8% in September, as six of the 7 subsectors saw gains, including building materials (+5.5%), machinery/equipment, food/beverage among others which more than offset declines in autos/parts (-1.1%). Inventories grew 0.5%. In real terms, wholesale sales rose 1.8% in September, or 5.7% annualized for Q3 as a whole, after an unsustainably hot 14.1% jump in the prior quarter.

Home resales were up 0.7%, in October, exceeding 40,000 units for a sixth consecutive month - the best sequence in 4 ½ years. Resales remain particularly strong in Western Canada and the Toronto region where supply conditions are relatively tight. In Toronto, the number of active listings for single-unit homes fell to the lowest level since at least 1998. In Vancouver, the market is the tightest in three years. Elsewhere in western Canada, the ratio of new-listings-to-sales is very low except for Saskatchewan where over-building is resulting in “buyers’ market” conditions. Among the larger Canadian cities, Montreal has the most months of inventory of unsold homes on the market - a reflection of the tepid growth in job creation.

International securities transactions data showed foreign investors increasing their holdings of Canadian securities by C$4.4 bn in September, with net buying of bonds (+C$4.6 bn) and equities/investment funds (+C$4.7bn), more than offsetting the net divestment from money market instruments (-C$4.95 bn). For Q3 as a whole, net portfolio inflows amounted to C$19.9 bn (versus C$31.4 bn net inflows in the prior quarter), thanks to increased holdings of equities/investment funds (+C$11.6 bn) and bonds (+C$11.4 bn), dwarfing the divestment from money market instruments (-C$3.2 bn). The bond net inflows were in corporates (+C$8.1 bn, despite the net C$0.7 bn divestment from government enterprises), provis (+C$2 bn), and even federal government bonds (+C$1.4 bn, the first net increase in 6 quarters), while there was net divestment from munis (-C$66 million).

In a speech, Bank of Canada Deputy Governor Agathe Côté said that the BoC will be looking for ways to achieve its mandate of delivering low, stable and predictable inflation in an even more effective and reliable manner. The properties of various measures of core inflation will be re-examined to determine whether the BoC should continue the practice of identifying one pre-eminent measure of inflation as its operational guide and, if so, whether CPIX should continue to play that role. An aspect of monetary policy that will be studied is the implication of a 2% inflation target in a world where the neutral real rate is lower than in the past. According to the BoC, a lower neutral rate implies a greater probability of being constrained by the zero lower bound.

United States – Industrial production fell 0.1% in October, disappointing consensus which was expecting a 0.2% increase. Adding to the disappointment was a downward revision to the prior month to 0.8% (from the +1% print reported initially). Driving the decrease in October output was mining (-0.9%) and utilities (-0.7%), which offset the 0.2% increase in the manufacturing sector. The latter managed to score gains as increases outside the auto sector more than offset the drop in auto production (-1.2%), Capacity utilization fell three ticks to 78.9% from a downwardly revised 79.2%.

Housing starts fell 2.8% to 1009K in October, from an upwardly revised 1038K in the prior month. The decrease in starts was mostly due to multi-family homes (-15.4%), which dwarfed the 4.2% increase for singles. Building permit applications rose 4.8% in October to reach 1080K, the highest since June 2008 (from an upwardly revised 1031K in the prior month). The increase was mostly due to permits for multis (+10%), although there was also a small increase for single family units (1.4%). All told, the drop in housing starts seems to be temporary. The major weakness for starts was in the multi-category, which is poised for a rebound considering the solid building permits for that segment.

The consumer price index was flat in October, allowing the annual inflation rate to remain unchanged at 1.7%. The 1.9% slump in energy prices restrained the CPI, while food prices rose just 0.1% (the smallest increase in four months). Excluding food and energy, prices were up 0.2%, which allowed the year-on-year core inflation rate to rise one tick to 1.8%. The core CPI was supported by increases in the price of tobacco, medical care, recreation, which more than offset declines for personal computers and apparel. The producer price index rose 0.2% in October, allowing the year-on-year rate to fall just one tick to 1.5% (from 1.6% in the prior month). Food prices jumped 1%, while energy prices dropped 3% (fourth decline in a row). Excluding food and energy, producer prices rose 0.4% with gains registered in services offsetting price declines for core goods. That caused the year-on-year core PPI to rise two ticks to 1.8%. Both the headline and core annual PPI inflation were hotter than expected.

Existing home sales rose 1.5% to 5.26 million units in October, the highest in over a year. Sales were boosted by both single family units (+1.3%) and multis (+3.3%). The months supply of homes at current sales rate fell to 5.1, the lowest in months. The median resale price fell to $208,300 but is still 5.5% higher than year-ago levels. About 27% of October sales were made to cash buyers, while the share of distressed sales in total sales rose fell to 9%.

Weekly jobless claims data for the week of November 15h showed initial claims falling to 291K (from 293K in the prior week). That was a touch higher than the 284K expected by consensus. The more reliable 4-week moving average edged up slightly to 288K. Continuing claims for the prior week fell 73K to 2.33 million, the lowest since December 2000.

The New York Fed’s Empire index of manufacturing activity rose to 10.16 in November (from 6.17 in the prior month). Both new orders and shipments sub-indices rebounded sharply after the prior month’s dive. The employment sub-index, however, fell a bit. All of those three major sub-indices were comfortably in expansion territory. The Philadelphia Fed index of manufacturing activity soared to 40.8 in November, the highest since 1993. The shipments, employment and new orders subindices all soared to multi-year highs, further into expansion territory. In sharp contrast, Markit’s flash/preliminary estimate of manufacturing purchasing managers index for November ended up at a 10-month low of 54.7 (from 55.9 in the prior month).

The National Association of Home Builders' index (NAHB) bounced back to 58 in November. The traffic of prospective buyers rose a bit from the prior month, and builders felt slightly more confident about sales than in the prior month.

The Fed minutes showed the FOMC decided to keep the words “considerable time” in the forward guidance because it thought that its removal might be seen as signalling a significant shift in the policy stance, something that may have caused an unintended tightening of financial conditions. The FOMC was also very cautious about its communications by opting to not include in its statement some facts that it felt may be misinterpreted, e.g. a sentence on developments in financial markets ― but decided otherwise as it thought markets may view this as suggesting the Fed was overly concerned about the growing risks of financial instability ― and language about increased uncertainties from foreign economic developments because that would suggest greater pessimism about the outlook than was actually the case. Regarding the decline in breakeven inflation rates, participants thought this could be due to a drop in inflation risk premiums as opposed to falling inflation expectations.

World – Japan’s GDP contracted at an annualized pace of 1.6% in the third quarter, putting it in its fourth technical recession since 2008. Domestic demand was again soft due to the contraction in business investment and residential construction, while the lingering effects of the tax hike capped consumption growth. The only positive from the Q3 results was the second consecutive contribution to growth from trade. The People’s Bank of China lowered interest rates by 40 basis points to stimulate the economy.

Flash manufacturing purchasing managers indices for the month of November were released by Markit for a range of countries. In China, the PMI dropped to a 6-month low of 50.0. Output and employment sub-indices fell below 50, i.e. in contraction territory, while new orders rose further above 50. Japan’s PMI fell to 52.1, although all major sub-indices remained in expansion mode. The eurozone PMI dropped to 50.4 as declines for new orders offset the increase in the output sub-index. The overall decrease was driven by Germany, whose PMI edged down to 50.0, and France where the PMI fell further into contraction territory at 47.6.

The eurozone’s services PMI, while remaining above 50, fell to an 11-month low in November as Germany’s declining index (while still above 50) more than offset the increase in France, the latter however still remaining in contraction.