Canadian housing starts rises 6.5% in November

Week in review

Canada – Housing starts rose 6.5% to 195K in November (from an upwardly revised 183.7K in the prior month). November’s increase in starts was felt in both rural (+2.1%) and urban areas (+7%). The increase in urban starts was entirely due to multis (+13.6%), which dwarfed the 2.9% drop for single family homes. On a regional basis in urban areas, there were gains in Ontario (+10.9%), Quebec (+15.9%), BC (+26.7%), and Atlantic Canada (+9.8%), which more than offset an 11% decline in the Prairies.

Building permits rose 0.7% in dollar terms in October. There was a 2.4% increase in the value of non-residential permits, but the residential sector saw a 0.4% drop due to a 0.9% decline for multis. In real terms, residential permits fell 0.6% with declines for both singles (-0.2%) and multis (-0.9%).

The Teranet–National Bank House Price Index fell 0.3% in November as 8 of the 11 metropolitan regions covered saw lower prices. On a year-on-year basis, home prices were up 5.2% nationally, but with contrasting fortunes across cities. Calgary led the pack with a 9.2% year-on-year increase, followed by Toronto (+7.3%), Hamilton (+7.0%), Edmonton (+6.2%), Vancouver (+5.9%), Winnipeg (+1.5%), Victoria (+1.4%), and Montreal (+0.6%), while prices were down in Ottawa-Gatineau (-0.2%), Quebec City (-0.3%) and Halifax (- 1.8%).

In the third quarter of 2014, the overall capacity utilization rate rose to an 8-year high of 83.4%. The capacity utilization rate in the manufacturing sector rose again to reach 83.8%, a seven-year high, although some sub-sectors are even closer to capacity, e.g. transportation equipment where the utilization rate is now 95.6%, the highest on records. In industries such as construction and oil & gas, capacity utilization rates are near decade highs.

The Bank of Canada released its Financial System Review this week. The most important risk, according to the report, is the inability of stretched households to service their debt should they face a sharp decline in their incomes or a sharp rise in interest rates, which could trigger a correction in house prices. The BoC thought that the probability of this happening is low, but if it did, the effect on the economy would be severe.

The central bank said that there are significant uncertainties in estimating by how much house prices are overvalued, but its staff models suggest overvaluation in the 10-30% range.

United States – Retail sales rose a consensustopping 0.7% in November. Adding to the good news, the prior month was revised up from +0.3% to +0.5%. November sales were supported in part by motor vehicles/parts which were up 1.7%. Excluding autos, sales were up 0.5%, also easily beating consensus which was expecting just a 0.1% increase. Ex-auto sales got a lift from almost all broad categories with the exception, of course, of gasoline which saw a fourth consecutive drop in light of slumping prices. Discretionary spending, i.e. sales excluding groceries, health care products and gasoline, has now risen nine times in the last ten months. Assuming CPI fell 0.1% in the month, then real retail sales grew 0.8% in November, and tracking a healthy 5.1% annualized in Q4, i.e. better than in the prior quarter. The solid labour market, coupled with the gasoline slump, has clearly given a boost to household disposable incomes and hence spending.

Weekly jobless claims data for the week of December 6th showed initial claims falling to 294K (from an unrevised 297K in the prior week). That was roughly in line with consensus expectations. The more reliable 4-week moving average was little changed at 299K. Continuing claims for the prior week rose 142K to 2.5 million.

The producer price index fell 0.2% in November, allowing the year-on-year rate to drop one tick to 1.4% (from 1.5% in the prior month). Food prices fell 0.2%, while energy prices slumped 3.1% (fifth decline in a row). Excluding food and energy, producer prices were flat as weakness in core goods (- 0.1%) offset price increases for services (+0.1%). That allowed the year-on-year core PPI to remain unchanged at 1.8%.

The preliminary estimate for December’s Michigan consumer sentiment index came in at 93.8, the highest since January 2007. Consumers felt more confident about the economic outlook (sub-index jumping to 86.1), while the index relating to current conditions rose to 105.7, both at multi-year highs.

World – In China, November data showed exports growing 4.7%, industrial production rising 7.2%, and retail sales up 11.7%, all on a year-on-year basis. New bank loans picked up to 853 bn yuans in the same month. The annual inflation rate based on the consumer price index fell to just 1.4% in November, the lowest since 2009.