Retail sales fell 0.5% in September

Week in review

Canada – The consumer price index rose 0.1% in October, allowing the year-on-year inflation rate to remain unchanged at 1%. In seasonally adjusted terms, CPI rose 0.2% as gains for transportation, food, shelter and health care more than offset declines in the recreation/education category. The other three broad categories were flat. The core CPI, which excludes eight of the most volatile items, was up 0.3%, which left the year-on-year core inflation rate at 2.1%. In seasonally-adjusted terms, core CPI was up 0.2%. Assuming seasonal patterns hold in November and December, CPI is on track to grow in Q4 by 1.5% annualized for the headline and 2.4% annualized for the core, a bit higher than the Bank of Canada’s Monetary Policy Report estimates of 1.4% for the headline and 2.1% for the core. The weak loonie is likely behind the resilient core prices.

Retail sales fell 0.5% in September. Sales fell in 8 of the 11 subsectors, including a 0.5% drop for autos/parts dealers. Excluding autos, sales fell 0.5%. The big drag on ex-auto sales was gasoline station receipts which sank 3.7% due to lower pump prices, but there were also decreases observed for sellers of furniture, electronics, health/personal care products, clothing, sporting goods and miscellaneous items which dwarfed gains in sales of building materials, food/beverage and general merchandise. The decline in sales were largely due to lower prices. In fact, in real terms overall retail sales rose 0.1%. That’s enough, in our view, to offset the earlier-reported sales weakness for factories and the wholesale sector, and allow Canada’s GDP to expand slightly in September. The Q3 picture is also good given the strong performance from consumers. Note that real retail spending grew 2.8% annualized in the quarter, i.e. faster than the pace seen in the prior quarter. A resilient labour market, savings from low pump prices and the checks sent out to household by Ottawa starting July (expanded Universal child care benefit) seem to have supported spending.

Manufacturing shipments fell 1.5% in September after the prior month’s downwardly revised print of -0.6% (from -0.2%). Sales fell in 13 of the 21 broad industries, including a nearly 6% drop for the transportation sector with declines for both autos and aerospace. In real terms, factory sales fell 1.6%. That said, the soft sales have to be interpreted with caution because they come after solid gains earlier. Thanks to the good start to the quarter, real factory sales managed to grow 4% annualized in Q3, the best performance in a year. So, the factory data is still consistent with a return to growth in the third quarter.

Wholesale sales fell 0.1% in September, disappointing consensus which was looking for a small increase. There were declines in three of the 7 broad subsectors, including autos/parts. Excluding autos, overall sales actually rose 0.5%. In real terms, wholesale sales fell 0.4%.

International securities transactions data showed foreign investors increasing their holdings of Canadian securities by C$3.4 bn in September, with net buying of equities/investment funds and bonds more than offsetting the net decrease for money market instruments. For Q3 as a whole, there were net portfolio outflows of C$0.8 bn as net outflows from money market instruments (-C$4.4 bn) and equities (-C$9.2 bn) dwarfed the net inflows into bonds (+C$12.8 bn). The bond net inflows in Q3, mostly denominated in foreign currency, were due to increases for corporates, federal government bonds and munis which more than made up for net divestment from provincial bonds.

United States – The consumer price index was up 0.2% in October, allowing the annual inflation rate to rise two ticks to 0.2% (from 0%). The increase was partly due to energy prices which rose 0.3% and food prices which were up 0.1%. Excluding food and energy, prices rose 0.2%. Medical care services prices were up while there were further gains for the owners’ equivalent rent which allowed ex-energy services CPI to rise 0.3%. Core goods prices were restrained by declines for apparel and personal computers which offset gains for tobacco. The year-on-year core inflation rate was unchanged at 1.9%.

Industrial production fell 0.2% in October, disappointing consensus which was looking for an increase. The downside surprise came courtesy of utilities whose output sank 2.5%, while mining continued its declining trend with a 1.5% drop. Those more than offset gains in the manufacturing sector (+0.4% boosted by autos). The capacity utilization rate fell from 77.7% to 77.5%.

Housing starts fell to 1060K in seasonally adjusted annualized terms in October. That’s down 11% from prior month’s downwardly revised print of 1191K. Multiple starts sank 25% while single family starts were down 2.4%. But odds are we’ll see a rebound of housing starts sooner rather than later based on building permit applications which rose 4% to 1150K in October thanks to gains for both multis (+6.8%) and single family homes (+2.4%).

The Philadelphia Fed index of manufacturing activity turned positive for the first time in three months. That said, November’s print of just 1.9 suggested factory growth was soft. While employment returned to expansion mode, the subindices for shipments and new orders remained negative.

The weekly jobless claims report showed initial claims falling to 271K in the week of November 14th. The more reliable 4- week moving average edged up slightly to reach 271K. Continuing claims for the prior week fell 2K to 2.175 million.

The Fed minutes suggested that most FOMC participants thought the conditions needed for a rate hike would be met by December. In other words, barring unanticipated shocks to the economy in the next few weeks, a December rate hike is in the cards. The minutes also provided information about Fed staff estimates for the equilibrium real interest rate. The short run equilibrium rate is believed to be close to 0% and is likely to remain low even over the longer run, i.e. lower than was the case in the past. So, the Fed may have to use additional policy tools to achieve its objectives.

World – Japan’s GDP contracted 0.8% annualized in the third quarter. Weak investment spending more than offset contributions from consumption, causing domestic demand to subtract from growth. That more than offset contributions from trade.

Japan’s October data showed imports falling faster than exports (-13.4% versus -2.1% year-on-year) which allowed the merchandise trade balance to improve somewhat. The Bank of Japan left monetary policy unchanged at this week’s meeting.

•  Download Full Weekly Economic Letter