Week in review: US core CPI climbs, helps keep September hike expectations alive

Week in review

Canada – The Consumer Price Index rose 0.7% in the month of March and the year-on-year inflation rate accelerated from 1.0% a month ago to 1.2%. In seasonally adjusted terms, the CPI rose 0.4, the largest monthly gain in two years. The rises in prices were particularly strong for car purchases and the recreation components. Canada’s CPI data were definitely hotter than expected in March with core inflation jumping to 2.4% on a year-over year basis, the highest since 2008. Price increases are coming from multiple sources. Indeed, five out of the eight broad components show prices increasing over the last 12 months at a faster pace than the Bank of Canada’s midpoint target. Weakness in the Canadian dollar is contributing to the inflation situation. Goods excluding food purchased from stores and energy are now rising well above 1% on a sustained basis for the first time in over a decade. While we still expect core food inflation to decelerate in line with the recent drop in global commodity food prices, the passthrough effects of the sinking Canadian dollar should continue to support core inflation close to 2%.

Retail sales surged 1.7% in February, much better than the 0.5% increase expected by consensus. The improvement was widespread with sales rising in all of the 11 subsectors. Excluding autos, sales were up a robust 2% after a 1.5% drop in January. Discretionary spending (less grocery stores, healthcare and gasoline) surged 2.3% in February. In real terms overall retail sales were up 1.3% on the month compared to a 0.3% decline in January. At the regional level, retail spending was up in seven of ten provinces. Alberta recorded a gain of 1.5% (the first in four months). The retail results were much better than expected, suggesting that the weakness in Q1 is likely to prove to be a temporary phenomenon. We were encouraged by the breadth of the improvement in February, both at the sector and provincial level. Volume retail spending remains down 2% after two months in Q1. Yet, there is scope for a rebound in Q2 with the recent rebound in oil prices and the resilience in job creation. The combination of strong retail sales in February and the highest annual core inflation since 2008 (2.4%) negates the need for additional rate cuts in Canada.

Housing starts jumped 25.4% to 189.7K in March. The increase was due to gains in urban areas (+28.1%), which dwarfed a 3.5% drop in rural areas. The increase in urban starts was driven by multis (+48.2%), which more than offset a decline in single-family homes (-3.4%). After a weather-related plunge the prior month, residential construction bounced back in March thanks to multis, whose share of total urban starts is now nearly 71%, its highest ever. Ontario accounted for over half of the increase in multiple starts in the month. Still, despite the solid gains in March, overall housing starts contracted in Q1 owing to the poor start to the quarter. Weakness came from single-family units, which carry more weight than multis do per unit in GDP calculations. It is unclear whether there will be much of an improvement in home starts over the rest of year given that residential building permit applications remain low, even outside Alberta and Saskatchewan. Developers could take an extended breather to assess the situation in light of the greater uncertainty brought about by the oil price collapse. We continue to expect average Canadian housing starts in 2015 to be much lower than last year’s 188K print.

The Teranet–National Bank National Composite House Price Index™ rose 0.3% in March for a third consecutive increase. March prices were up in 8 of the 11 metropolitan markets surveyed, the broadest diffusion in seven months. Prices fell in Victoria (-0.2%), Ottawa-Gatineau, and Hamilton (-0.3%). On a 12-month % change basis, the index was up 4.7%. Prices were down from a year earlier in Ottawa- Gatineau (−0.9%) and Winnipeg (−1.0%). Though the index struck a new record in March, it was not indicative of general strength in the Canadian real estate market. New highs were recorded in only 2 of the 11 metropolitan areas (Toronto and Vancouver).

Manufacturing shipments fell 1.7% in February, confounding consensus expectations for an increase. Adding to the bad news, the prior month’s sales were downgraded sharply to -3% (from -1.7%). In February, sales were down in 10 of the 21 broad industries, including the transportation sector where they dove 13.4%. Real factory shipments declined about 5% over January and February, their biggest two-month drop since the last recession. In February, the low sales volume of motor vehicles was in large part due to closures for retooling at assembly plants in Ontario. Other industries saw shipments disrupted by bad weather but they are expected to rebound given their persistently high level of unfilled orders in real terms. Meanwhile, the back-to-back 2.5% monthly drops in volume shipments constituted the worst two-month sequence since the recession. The poor start to the year for factories adds to evidence that Canadian GDP growth in Q1 could prove the weakest in years.

The Bank of Canada left its overnight rate unchanged at 0.75%. The BoC indicated that stalled growth in the first quarter was attributable not to a larger oil price shock than initially anticipated but merely to the fact that the shock had a more front-loaded impact early in the quarter. The central bank expects a rebound later in the year, with real GDP averaging 2.5% (above potential) until the middle of 2016. The output gap is still expected to close around the end of 2016. The central bank believes oil price risk is tilted to the upside, a factor that should limit further damage to oil-producing provinces. In sum, growth, inflation and employment would all have to disappoint immensely in the coming months to prompt the central bank to move away from its current stance and dispatch another rate cut. Like the BoC, we see growth picking up significantly in the second half of the year and, based on that outlook, we continue to expect the overnight rate to remain unchanged through 2015.

United States – Retail sales rose 0.9% in March, a bit softer than the 1.1% increase expected by consensus. However, the prior month was revised up to -0.5% from -0.6%. March sales got a boost from motor vehicles/parts, which jumped 2.7%, more than reversing the 2.1% drop in February. Excluding autos, sales were up 0.4%, which was also softer than the 0.7% increase expected by consensus. Ex-auto sales were driven by furniture, clothing, and sporting goods in particular, which more than offset declines in gasoline, food/beverages and electronics. Though the March rebound in consumption was encouraging, it will not be enough to compensate for the poor start of the year. However, we continue to expect a sharp turnaround in Q2 for consumption spending (and hence GDP growth) as consumer fundamentals remain strong (e.g., high consumer confidence, healthy labour market, and relatively high personal savings rate).

Both headline and core CPI were up 0.2% in March, a touch below expectations calling for a 0.3% monthly gain. Energy, food and transportation costs held inflation down while most of the other main components showed monthly gains of at least 0.3%. The y/y inflation rate for core inflation was 1.9% in March but the 3-month annualized change stood at a more robust 2.3%. Though the March outcome was a bit softer than expected, the all-important components of core CPI such as owners’ equivalent rent and medical care (up 0.3% and 0.4% respectively) are helping keep core inflation at a run rate of just above 2%. The stronger USD is depressing important prices, but not by enough to offset higher service inflation. We still expect the Fed to launch its tightening campaign later this fall (September).

The Producer Price Index for March showed a 0.2% increase in the headline number, though this did not prevent the yearon- year rate from sliding to -0.8%. Food prices sank 0.8%, while energy prices sprang 1.5%. Excluding food and energy, producer prices rose 0.2% on gains in core goods and services. Still, the year-on-year core PPI slipped one tick to 0.9%. The PPI increase was in the ballpark of consensus expectations and put an end to a four-month string of declines.

The Small Business Optimism Index fell 2.8 points to 95.2 in March. This followed a flat reading in February and a 2.5-point drop in January. Since last November, the proportion of business owners expecting conditions to improve over the next six months has tumbled 20 points to -7, slumping 6 points in March alone. Under the circumstances, it was not surprising to see both the hiring plan and expansion indexes notch down 2 and 3 points, respectively.

Business inventories grew 0.3% in February. Build-up was widespread (0.3% for wholesalers, 0.4% for retailers, and 0.1% for manufacturers) while total sales were flat on the month as declines for wholesalers (-0.2%) and retailers (-0.5%) offset gains (+0.7%) for manufacturers. The overall inventory-to-sales ratio was unchanged at 1.36.

Industrial production fell 0.6% in March, exceeding the 0.3% drop expected by consensus. Declines in mining and utilities output dwarfed gains in the manufacturing sector, which came largely from autos and parts. IP results were weak outside of the auto sector. The utilities slump was expected after weather-related outsized gains the month before and the extended weakness in mining was not surprising in light of the oil price collapse. What is of concern, however, is the weakness in manufacturing outside of autos. Excluding motor vehicles and parts, manufacturing production receded 0.1% in the month. What’s more, January output growth was revised down to -0.6%. Auto production is being supported by domestic demand but the strong dollar is likely hurting exporters in some areas of manufacturing. For Q1 as a whole, industrial production contracted 0.9% annualized, its first negative print and its worst performance since the recession. We expect U.S. GDP growth of about 1% annualized in the first quarter.

In April, the Empire State Manufacturing Index fell 8 points to -1.2, which suggests activity was flat for New York manufacturers. Of the respondents surveyed, 25% reported that conditions had improved, 26% that they had worsened, and 49% that they had stayed the same. The new-orders index recorded a third consecutive drop, pegging down 4 points to -6. The employment index fell to 9.6 but remained in growth territory. In the Philadelphia region, instead, activity registered a modest increase to 7.5 according to the Manufacturing Business Outlook Survey. However, the new-orders diffusion index recorded a low positive reading of only 0.7.

Housing starts advanced 2% to 926K in March from an upwardly revised 908K the prior month. An increase in singlefamily homes (+4.4%) more than offset a decrease in the multis category (-2.5%). Building permit applications declined 5.7% to 1039K in March from an upwardly revised 1102K the month before. The drop derived entirely from multis (-15.9%), as permits for single-family units were actually up 2.1%. However, home builder sentiment rose 4 points to 56 in April, a first increase in five months. Also, the expected future sales component jumped 5 points to 64, no doubt lifted by the prospects of warmer weather and the spring selling season.

The index of U.S. leading indicator rose 0.2% in March.

World – The ECB left its key policy rate unchanged but reiterated its commitment to pursue its asset-purchase program. ECB President Mario Draghi pointed out that stimulus needed to be fully implemented for the program to work. He added that speculation regarding QE tapering was clearly premature given that sovereign bonds had begun to be purchased only a month earlier. Euro-area industrial production grew 1.1% in February after shrinking a revised 0.3% in January. China GDP rose 7% in Q1 from a year earlier. This was in line with market expectations.