Canadian retail sales slumped 1.2% in April

Week in review

CANADA: Canada's consumer price index rose 0.1% (m/m) in May in seasonally adjusted terms causing the year-on-year inflation rate to remain unchanged at 2.2%. On a month-tomonth basis, among the eight major categories only three categories were rising: Recreation (+1.7%), transportation (+0.1%) and shelter (+0.1%). Household operations (-1.0%), food (-0.1%), and clothing (-0.2%) posted declines. Healthcare and alcohol/tobacco were flat. CPI excluding food and energy was down 0.1% in seasonally adjusted terms and the year-onyear inflation rate declined one tick to 1.7%. On an annual basis, the CPI-trim stood at 1.9% (down two ticks from 2.1%), CPI-Median at 1.9% (unchanged from a two tenths downwardly revised print) and CPI-Common at 1.9% (unchanged). On a regional basis, total annual CPI was well above the national average in Saskatchewan (+3.0%), British Columbia (2.7%), Manitoba (+2.7%) and Alberta (+2.6%) but trailed in Newfoundland/Labrador (+1.8%) and Quebec (+1.7%). Price hikes in Ontario (+2.3%) were close to the average.

Headline inflation was softer than expected as the rise in gasoline prices was offset by weaknesses elsewhere leaving the CPI excluding food and energy being down in the month, a first since 2012. Not surprisingly, the Bank of Canada's preferred gauges which filter extreme price movements did not exhibit strength in the month as shown by our in-house replication of CPI-Trim and CPI-median respectively registering a flat and a 0.1% rise. Looking at 3-month annualized changes, we observe inflation running at 0.8% for CPI-trim and 1.4% for CPI-median a deceleration compared to the pace registered earlier this year. All in all, we expect trend inflation to get back to the Bank of Canada target sooner rather than later.

Canadian retail sales slumped 1.2% in April. There were upward revisions to the prior month from +0.6% to +0.8%, although that's scant consolation. Sales were down in 8 of the 11 broad categories in April. Autos were largely responsible for the overall sales decline, falling 4.3% during the month. Excluding autos, sales were down just 0.1% as declines for building materials (-3.3%), furniture/home furnishings (-0.9%), health/personal care products (-0.9%), clothing/accessories (-1.3%), sporting goods (-1.1%), general merchandise (-2.2%) and miscellaneous items (-1.6%) more than offset higher sales of gasoline, food/beverage, and electronics. Seven of the 10 provinces saw declining sales in April, with Ontario and Quebec being hit particularly hard. In real terms overall Canadian retail sales sank 1.4%.

Discretionary sales (i.e. sales excluding gasoline, groceries and health products) sunk at the fastest pace in three years. A colder than normal April also weighed on the results as evidenced by the sharp drop in sales of items such as clothing, sporting goods, and building materials. Central Canada was hit particularly hard by inclement weather in April, and hence the sharp drop in sales in Ontario and Quebec should not be surprising. In fact, excluding those two provinces, Canada's retail spending was actually up in April. While the outlook for Q2 Canadian consumption may not look good right now, we expect the picture to improve in the coming months starting with a sharp sales rebound in May.

In April, nominal wholesale sales rose 0.1% m/m to an all-time high C$63.1 billion. Sales were up in three of the seven subsectors, led by machinery, equipment and supplies (+2.3%) and food, beverage and tobacco (+1.9%). Alternatively, sales were down in the motor vehicles and parts subsector (-4.0%). In volume terms, total wholesale trade was flat in the month.

UNITED STATES: Housing starts jumped 5.0% m/m in May to a new cyclical high of 1,350K in seasonally adjusted and annualized terms. Starts rose 3.9% to 936K in the single-family segment and 7.5% to 414K in the multi-family segment. The gains were concentrated in the Midwest, where groundbreaking soared 62.2% to 266K units. All the other regions registered declines, most notably the Northeast, where groundbreaking fell 15% to 102K units. With one month of data still to come, starts are currently on pace to post a marginal increase in Q2. However, as single-family starts, which contribute more to GDP per unit, are up 13.8% so far, the odds are good that residential construction will make a positive contribution to growth in the quarter.

Building permit applications retreated 4.6% m/m in May, coming in at 1,301K on an annualized basis. The pullback was due above all to an 8.8% drop to 457K in the multi-family segment. Permits for single-family construction recorded a less pronounced decline (-2.2% to 844K).

Again in May, sales of existing homes sagged 0.4% m/m to an annualized 5,430K. Contract closings sank 0.6% in the singlefamily segment, a drop offset in part by a 1.6% rise in the multi-family category. Relative to a year earlier, resale transactions were down 3.0%, hampered by a shrinking supply of homes on the market. Indeed, in the 12 months to May, the inventory of properties for sale receded 6.1% to 1,850K, its lowest level for a month of May since record-keeping began in 1982. Given the tightness of the market, prices continued to rise at a good clip. The median price for a previously owned home in the United States climbed 4.9% y/y to a record $264,800 despite the lower sales over the period.

Still in May, the leading economic index (LEI) gained 0.2 point to an all-time high of 109.5, thus extending its streak of nonnegative prints to 24 months. However, the index growth pace has been softer in recent months compared to the strong growth recorded coming into 2018 (+0.7 in January and +0.8 in December). Moreover, the diffusion index went from 100% in April to 75% in May. The ISM new orders index and the interest rate spread were the main drivers, adding 0.17 and 0.13 percentage point to the LEI, respectively. Alternatively, building permits (-0.14 pp) and the average workweek (-0.13 pp) acted as a drag on the headline index. Although the LEI indicates that economic growth will continue, its recent trend suggests that the pace is unlikely to accelerate.

In June, the flash composite PMI fell 0.6 point to 56.0. The monthly decline was driven primarily by the manufacturing index, which went from 56.4 to 54.6 on poor growth in new business and new work. The services tracker edged down as well but to a lesser degree, dipping 0.3 point to 56.5 (still a second highest reading since mid-2015). The output sub-index eased somewhat in the manufacturing sector but remained at levels consistent with a very strong pace of expansion. Conditions remain favourable as signs of capacity constraints were evident, with factory order backlogs accumulating from a lack of stock and supplier delivery times lengthening the most since the inception of the survey in 2007. Price pressures continued to build after 28 consecutive months of expansion for the U.S. private sector as a whole. Indeed, businesses reported input prices hovering around their four-year peak, attributing the latter to higher prices for metals, especially steel and related items.

WORLD: In the euro zone, the flash composite PMI rose in June, gaining 0.7 point to a 2-month high of 54.8. The manufacturing component (55.0 vs. 55.5 the prior month) dropped to a multi-month low on weaker expansion for output and orders. This was more than offset by the services component which rose to a 4-month high (55.0 vs. 53.8 the prior month) on the back of service sector employment which grew at the fastest clip since October 2017. Moreover, the pace of job creation in the private sector as a whole shot up as well, registering one of the steepest increases in over 15 years.

In Japan, the Nikkei flash manufacturing PMI came in at 53.1 in June, up from 52.8 in May. Both output and employment expanded at a faster pace than in the prior month. Alternatively, the rise in input prices for Japanese factories intensified. June marked the 22nd consecutive month of expansion (PMI >50) for Japan's manufacturing sector.

Also in Japan, the national headline consumer price index (CPI) rose 0.7% in May, up one tick from 0.6% in April. The slight upswing was in part caused by an increase in energy prices (+5.7% y/y vs. +5.3% y/y the prior month) while fresh food continued to detract (-0.8% vs. -1.5%). Excluding the price effects from those two categories, CPI rose just 0.3% in the twelve months to May. CPI excluding fresh food, the core measure preferred by the Bank of Japan, stayed flat at 0.7%, still far below the BoJ target of 2.0%.

 

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