Weekly Economic Letter

Week in review

Canada – Manufacturing shipments blew past consensus by soaring 2.9% in March, after a downwardly revised 2.2% drop in the prior month. In March, sales rose in 10 of the 21 broad industries, including a 13.5% jump for the transportation sector thanks to gains for both autos and aerospace. In real terms, factory sales rose 2.9%. The March results, however, have to be looked at in context, given the surge (biggest jump since 2011) occurred after two massive declines. In fact, despite March’s gains, real shipments are still roughly where they were back in November last year. The bad news from the report is that Q1 as a whole was awful, with real shipments contracting 8% annualized, the worst performance since 2011Q2. That’s consistent with our view that Q1 GDP growth (report due at the end of the month) was the worst in years. The good news from the factory report, however, is that the handoff to Q2 was very good.

International securities transactions data showed foreign investors increasing their holdings of Canadian securities by C$22.5 bn in March, with net buying of bonds (+C$21 bn) and equities/investment funds (+C$6.8 bn), more than offsetting the net decrease for money market instruments (-C$5.3 bn). For Q1 as a whole, net portfolio inflows amounted to C$37.6 bn as net inflows in bonds (+C$41.4 bn) and equities (+C$9.5 bn) dwarfed the net divestment from money market instruments (- C$13.3 bn). The bond net inflows in Q1 were in corporates (+C$22 bn, including a net C$3.3 bn investment in bonds of government enterprises), federal government bonds (+C$16 bn), provies (+C$3.2 bn), and munis (+$143 million). All told, after disappointing in the prior quarter, net foreign inflows into Canadian securities bounced back sharply in Q1, the C$37.6 bn net inflows being the largest since 2010Q2. Foreign net inflows got a lift from bonds (particularly corporates) and equities, while there were net outflows from money market instruments. Inflows into equities/TSX strengthened in synch with the stabilization of oil prices, while money market instruments remained unattractive in light of the Bank of Canada’s persistently dovish stance in the first quarter.

The Teranet–National Bank House Price Index rose 0.2% in April, a fourth increase in a row, due to gains in six of the 11 metropolitan regions covered. On a year-on-year basis, home prices were up 4.4% nationally with above average increases in Hamilton (+7.6%), Toronto (+7.3%), Vancouver (+4.8%) and Edmonton (+4.7%), and below average increases in Victoria (+4.2%), Quebec City (3.7%), Calgary (+3.0%), Halifax (+1.2%), Winnipeg (+0.5%) and Montreal (+0.4%). The only region in deflation mode on a year-on-year basis was Ottawa- Gatineau (-2.3%).

United States – Retail sales were flat in April, after an upwardly revised increase of +1.1% in the prior month (from +0.9%). April sales were restrained in part by motor vehicles/parts which were down 0.4%. Excluding autos, sales rose 0.1% after an upwardly revised gain of 0.7% in the prior month. April ex-auto sales were restricted by gasoline which fell 0.7% in line with soft pump prices. There were also declines in sales of furniture, electronics, food/beverage and general merchandise which offset increases for non-store retailers, building materials, clothing, health products, and sporting goods.

While the retail results were weaker than expected, those have to looked at in context. The flat print comes after strong gains in the prior month. Discretionary spending, i.e. spending excluding gasoline, groceries and health care items, managed to grow another 0.1% on top of the prior month’s 1.2% increase.

Industrial production fell 0.3% in April after an upwardly revised print of -0.3% in the prior month (initially reported as -0.6%). Gains in manufacturing (largely due to autos and parts) offset declines in mining (4th straight drop) and utilities (2nd drop in a row). The capacity utilization rate fell from an upwardly revised 78.6% to 78.2%.

The producer price index for April showed a 0.2% decrease for the headline PPI, taking the year-on-year rate to -1.3%. Food prices fell 0.9% (fifth straight decline), while energy prices slumped 2.9% erasing the prior month’s gains. Excluding food and energy, producer prices fell 0.2% with declines in both core goods and core services. The year-onyear core PPI fell one tick to 0.8%. The Fed will be interested to see if such weakness in upstream prices is spilling over to the consumer level i.e. in the more closely watched CPI and PCE deflator. If that’s the case, rate hikes are likely to be delayed further.

The preliminary estimate for May’s Michigan consumer sentiment index came in at 88.6, down from 95.9 in the prior month. Consumers felt less confident about both the economic outlook (sub-index dropping to 81.5) and current conditions (sub-index falling to 99.8).

The New York Fed’s Empire index of manufacturing activity rose to 3.09 in May (from -1.19 in the prior month). The new orders sub-index returned to positive territory for the first time in three months, while both shipments and employment fell but remained well in expansion mode.

Weekly jobless claims data for the week of May 9th showed initial claims remaining roughly unchanged at 264K, better than the 273K expected by consensus. The more reliable 4-week moving average initial claims fell to 272K, the lowest since April 2000. Continuing claims for the prior week were also roughly unchanged at 2.23 million.

World – The eurozone’s GDP grew 1.6% annualized in the first quarter of 2015, or +0.4% unannualized. Of the fifteen countries that reported quarterly growth rates (out of 19 eurozone members), 11 showed expanding output namely Germany (+0.3%), France (+0.6%), Italy (+0.3%), Spain (+0.9%), Portugal (+0.4%), the Netherlands (+0.4%), Belgium (+0.3%), Austria (+0.1%), Latvia (+0.4%), Cyprus (+1.6%) and Slovakia (+0.8%), all in unannualized terms. Four countries contracted namely Finland (-0.1%), Greece (-0.2%), Estonia (- 0.3%) and Lithuania (-0.6%). The eurozone’s GDP is still 1.5% below its pre-recession peak, or 3.7% below peak excluding Germany.

The eurozone’s industrial production fell 0.3% in March due to declines in Germany and France which more than offset gains in Spain and Italy among others. In China, April data showed retail sales rising 10% and industrial production increasing 5.9%, both on a year-on-year basis. The pace of social financing fell for the third straight month, reaching 1 trillion yuans in April. The People’s Bank of China lowered its target interest rate to 5.1% while the Bank of England left monetary policy unchanged this week.