Canada – Retail sales fell 0.1% in Augus

Week in review

Canada – Retail sales fell 0.1% in August, disappointing consensus which was looking for an increase of 0.3%. The prior month was revised down to -0.2% (from -0.1%). In August, sales declined in 7 of the 11 subsectors, including autos. Excluding autos, sales were flat also disappointing consensus which had expected an increase of 0.3%. There were lower revenues for sellers of clothing, electronics, building materials, sporting goods, general merchandise and miscellaneous items. Those more than offset gains for sellers of furniture/home furnishings, food/beverage, health care products and gasoline. The latter's gains happened despite falling pump prices during the month. In real terms, Canada's retail sales fell 0.3% in August. Assuming no change in September, real retail sales fell 1.1% annualized in Q3, which suggests consumption spending remained soft in the third quarter.

The consumer price index rose 0.1% in September, allowing the year on year inflation rate to increase two ticks to 1.3%. This was lower than consensus expectations calling for a 0.2% rise. In seasonally adjusted terms, CPI was up 0.2% as higher prices for recreation, alcohol/tobacco, clothing and transportation have more than offset declines in food, household operations and healthcare. The core CPI, which excludes eight of the most volatile items, rose 0.2% (in line with consensus expectations), which allowed the year-on-year core inflation rate to remain unchanged at 1.8%.

In August, manufacturing shipments rose 0.9%, well above the 0.3% increase expected by consensus. The July figure was revised downwardly from a 0.1% gain to a flat print. Shipments were up in 15 of the 21 broad industries. Among the six industries that registered a decline, transportation was hurt by lower sales of autos (-2.2%) and aerospace products. Inventories shrank 0.5% after growing 0.8% the previous month. The inventory-to-sales ratio slid from 1.41 to 1.39. In real terms, sales advanced a solid 1.2%. The Canadian factory data surpassed expectations. The volume gains bode well for August GDP, although the inventory drawdown will take some shine off the contribution of factories in the month. Things are looking good for the quarter as well because, even if sales proved flat in September, real factory shipments were on track to expand a hefty 3.6% annualized in Q3 after contracting the prior quarter. The factory revival has much to do with the export rebound observed during the quarter. All in all, results support the notion that Canada's Q3 GDP growth will peg in above 3% annualized.

On October 19, the Bank of Canada announced it was keeping its overnight rate target unchanged at 0.5%. However, the message was very dovish. While the central bank expected Canadian growth to be above potential in the second half of the year thanks in part to federal fiscal stimulus, it still lowered its growth forecasts for both this year (1.1%) and next (2.0%). This means that the profile for growth is now lower than was projected last July and, in turn, the output gap should remain open until mid-2018. In that context, the Governing Council "actively discussed" the possibility of adding monetary stimulus. However, it decided to stand pat, preferring to wait for more data given the heightened uncertainty surrounding its economic forecasts. The central bank welcomed the new measures announced to promote stability in the housing market, saying that these were "likely to restrain residential investment while dampening household vulnerabilities". We still believe the next move by the BoC will be a rate increase, though this will be pushed back to 2018 in light of the central bank's view on the output gap. This said, if incoming data prove weaker than expected by the central bank, further monetary stimulus will likely be injected.

According to the latest data published on international securities transactions, foreign investors acquired a net C$12.7 billion in Canadian securities in August, padding their holdings with C$9 billion in bonds, C$2.6 billion in equities/investment funds and C$1.2 billion in money market instruments. Where bonds are concerned, the net inflow was due primarily to corporates (+C$6.9 billon, of which C$3.9 billion in government enterprises) and provis (+C$1.7 billion), and to a lesser extent to federal government bonds (+C$0.3 billion) and munis (+C$0.1 billion).

United States – In September, the consumer price index rose 0.3% month on month. Year on year it climbed four ticks to 1.5%. The monthly increase was largely due to energy prices, which surged 2.9%. Meanwhile, food prices were flat. Excluding food and energy, prices rose 0.1% on further gains in owners' equivalent rent (OER), which boosted ex-energy services CPI (0.2%). Core CPI was restrained by lower prices for apparel and autos. Year on year, the core inflation rate dipped one tick to 2.2%. Driving core inflation was services. Excluding OER, however, core inflation remained mild at 1.7%. It should be noted that the Fed's preferred measure of inflation, the PCE deflator, set annual core inflation at 1.7% as well. This is below the FOMC's 2% target but pretty close to the mark in the eyes of Fed Vice-Chair Stanley Fisher.

Still in September, industrial production was up 0.1%, matching consensus expectations. However, the prior month's growth was revised down from -0.4% to -0.5%. In September, output gains in manufacturing (+0.2%) and mining (+0.4%) more than offset declines in utilities (-1%). Motor vehicle and parts made a slim contribution, as output grew only 0.1%, down from 0.9% in August. The output gains pushed the capacity utilization rate up one tick to 75.4% from a downwardly revised 75.3% the month before. Industrial output rose 1.8% annualized in Q3, the first quarterly increase in a year. This is consistent with an acceleration of U.S. GDP growth in the third quarter, which we estimated at just under 3% annualized.

The regional Fed manufacturing business outlook surveys released this week contained mixed results. The Empire State Manufacturing Survey slipped five points to -6.8 in October, indicating a modest decline in business activity in the New York area for a third month in a row. The new orders index gained 1.9 points but remained in negative territory at -5.6. The employment index climbed 9.6 points but it, too, remained in negative territory at -4.7. The average workweek index inched up one point to -10.4. The index for future business conditions reached its highest level this year, rising 1.5 points to 36. Although, the Philadelphia Fed Business Outlook index edged down in the month, it still suggested that regional manufacturing conditions continued to improve. The index of current manufacturing activity lost 3.1 points to 9.7 but remained in positive territory for a third consecutive month. The indexes for new orders and shipments improved significantly, rising almost 15 points to 16.3 and 24 points to 15.3, respectively. The indexes for employment (-4.0) and average workweek (-2.2) remained soft. Firms were optimistic about business conditions over the next six months (32.6) but somewhat less so than a month earlier (37.5).

Again in September, housing starts dropped 9.0% to an 18- month low of 1,047K in seasonally adjusted annualized terms. Multi-family starts plunged 38% while single-family starts bounced back 8.1%. Building permits rose to 1,225K as multifamily permits soared 16.8% and single-family permits increased 0.4%. Consensus expected housing starts to rebound after the poor performance in August. Instead, they dropped to a multi-month low. It is worth noting that multi-family starts (September's weak point) can be volatile from one month to another. Though October's performance could be affected by hurricane Matthew, we still think that this pull-back is merely temporary and that starts should begin trending up again in the coming months. Supporting this is the fact that homebuilder confidence remains near its post-recession peak and building permits are at a 10-month high.

According to the NAHB Housing Market Index, home builder's confidence dipped two points to 63 in October. This followed a gain of six points the previous month, which had pushed the index to a post-recession high. Home builders' expectations for future single-family sales notched up one point to 72, its best reading so far this year. On a regional basis, builder's sentiment rose four points to 46 in the Northeast and two points to 59 in the Midwest. It dropped four points to 64 in the South and eight points to 74 in the West. Overall, the report still suggested things were looking up.

Existing home sales increased 3.2% m/m in September to a 5.47 million annual rate. All four Census region posted monthly gains, ranging from 0.9% in the South to 5.7% in the Northeast. Single-family home sales increased 4.1% to a seasonally adjusted annual rate of 4.86 million units in the month. Offsetting some of the gains were lower sales (610K units) of existing condominium and co-ops from a month ago (630K units).The overall increase in sales volume drove the number of month's supply down one tick in September to 4.5 in September. For the third quarter, the average level of existing home sales was 2.2% lower than in the second one.

The Beige Book, based on information collected on or before October 7, showed most districts reporting a modest or moderate pace of economic expansion. Labor market conditions remained tight with modest employment and wage growth according to the report. Yet, some District reported rising wage pressure for certain sectors.

World – In China, GDP grew 6.7% y/y in the third quarter. In September, retail sales and investment spending were up sharply, in line with market expectations. Industrial production growth (+6.1% y/y) was softer than anticipated.

In the Eurozone, the focus was on the European Central Bank. Unsurprisingly, the ECB announced it was maintaining its policy stance, including its forward guidance, unchanged. ECB President Mario Draghi stated that the bank's baseline scenario continued to be supported, as incoming information confirmed an ongoing moderate but steady recovery of the euro area economy and a gradual rise in inflation. During Draghi's press conference, numerous questions were asked regarding tapering of the ECB's asset purchase program. Draghi pointed out that the subject had not been discussed by members of the Governing Council. The decision whether or not to revise the program will only be taken in December after the ECB receives new economic forecasts, including for 2019, and full recommendations from the advisory committee. Finally, according to Draghi, bond scarcity was not a problem at the present time and the asset purchase program continues to run smoothly.

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