Federal Reserve left the fed funds rate unchanged at 1.50-1.75%

CANADA: Canada's real GDP rose a consensus-topping 0.4% in February, more than making up for January's contraction. That was the biggest monthly advance since May last year. Of the 20 industrial sectors, 15 registered increases in output. Services-producing industries saw a 0.1% increase in output courtesy of solid contributions from arts/recreation, professional services, retail, and finance/insurance, among others, which offset declines in wholesale and real estate. Production in the goods-producing sector surged 1.2% thanks to gains in manufacturing, oil and gas, construction, mining, and agriculture, which dwarfed declines in utilities. As a result, industrial production jumped 1.4%, its biggest increase since May last year. The Canadian economy bounced back nicely after a difficult January. The breadth of increases is encouraging, particularly the observed rebounds in agriculture, mining, oil and gas, retail, arts/recreation, professional services, and information. Weakness in real estate persisted, though this came as no surprise in light of the lower home sales in the month. With home sales reportedly up in March, real estate can be expected to turn around. The goods-producing sector's rebound in February took industrial production to an all-time high. This extended Canada's decade-long outperformance of the United States in terms of industrial output. However, it must be noted that this has not been due to manufacturing or mining but rather to utilities. While the overall results are positive, it is worth pointing out that even with February's consensus-topping results, real GDP growth remained on track for another sub- 2% annualized print in Q1 and that this was largely due to the poor results in January. That said, Q1 growth might nevertheless end up topping the Bank of Canada's estimate of 1.3%.

In April, Markit's Manufacturing PMI edged down 0.2 point to 55.5, which was still well above the neutral level of 50.0 but nevertheless the lowest level for the current year. The latest survey showed a lacklustre increase in production volumes. Order books, for their part, lengthened once more as new orders expanded for the 19th consecutive month. The report also evidenced mounting capacity pressures, with suppliers' delivery times lengthening noticeably, input prices rising, and output prices soaring at their fastest rate in almost seven years.

The merchandise trade deficit worsened from C$2.9 billion in February to an all-time high of C$4.1 billion in March (data goes back to 1988). The increase was due to a 6.0% surge in nominal imports (to a record high C$51.7 billion), which dwarfed a 3.7% jump in exports. Most of the increase in imports was due to two categories: motor vehicles and parts (+8.3% despite lower prices) and consumer goods (+7.7%). The surges in these two segments suggest that consumer demand in Canada was strong in March. Imports of industrial machinery and electronic equipment were up as well (3.3% and 4.4%, respectively), which was a good sign for business investment. On the exports side, the farm products sector bounced back (+14.7%) and recouped the prior month's losses (-14.0%), which had been caused by rail transport disruptions. The aircraft/transportation equipment category had a good month, too, with exports climbing no less than 24.3%. In real terms, imports leaped 5.3% while exports grew 3.0%. On a quarterly basis, international commerce was set to detract from GDP for a fifth consecutive quarter in Q1, something that had not been seen since 1997.

UNITED STATES: In the U.S., the establishment survey for April showed non-farm payrolls rising 164K. While that was below the 193K expected by consensus, upward revisions to prior months (which added a net 32K to payrolls) offset the disappointment. The private sector added 168K jobs in April buoyed by cyclical sectors like construction (+17K) and manufacturing (+24K) which lifted goods sector payrolls by 49K. Services-producing industries in the private sector added 119K net new jobs thanks to strength in business services, education/health and leisure/hospitality. Government lost 4K jobs due to cuts at the state and local levels. Average hourly earnings rose 0.2% in the month, leaving the year-on-year print unchanged at 2.6%. The private sector diffusion index sank to 57.6, a three-month low.

The household survey (similar in methodology to Canada's LFS) suggested just 3K new jobs were created in April as solid gains for full time employment was offset by job losses for parttimers. Despite the almost unchanged employment levels, the jobless rate fell two ticks from 4.1% to 3.9%, the lowest since April 2000. That's because of the one-tick drop in the participation rate to 62.8%. Those seeking positive stories will find encouragement from gains in temporary employment and cyclical sectors (manufacturing/construction), both of which are consistent with continued economic expansion. The widest measure of unemployment (U-6) fell to 7.8, one tick below the pre-recession low and a level not seen since 2000. The fact that full-time employment surged to a new record is also positive. Atypically bad weather may have restricted activity and hence hiring during the month. But the difficulty to recruit (amidst a tight labour market) was probably also a factor. In other words, non-farm payrolls gains of around 100- 150K should become the norm rather than the exception going forward.

In March, the trade deficit improved for the first time in six months, contracting from $57.7 billion to $49.0 billion. Exports (+$4.1 billion) rose to an all-time high while imports stumbled (-$4.6 billion). The goods deficit improved 10% to $69.4 billion while the services surplus grew 6.9%. In real terms, exports rose 2.9% while imports were down 1.6%. The trade balance improved in real terms at its strongest pace in two years (-10%). This might in the short term put a bit of a damper on the protectionist rhetoric emanating from the White House, but President Trump's stimulus (tax reform and lifting of spending cap come to mind) promises to boost domestic demand even more. In this context, we do not expect the trade deficit to shrink again anytime soon and the 12-month cumulative for the trade balance paints an even more sombre picture (chart below).

In March, personal income rose 0.3% while personal spending increased 0.4%. As a result, the savings rate fell two ticks to 3.1%. In real terms, disposable income was up 0.2% while spending jumped 0.4%. The U.S. data was largely in line with consensus expectations. In Q1, real spending edged up 1.1% annualized, a deceleration relative to the prior quarter (+4%). The fact that American consumers took a breather in Q1 came as no surprise after the savings rate slumped in 2017Q4 to a 12-year low. Furthermore, personal savings as a percentage of income rose five ticks from the prior quarter (their largest upswing in four years), which could set the stage for a stronger showing in Q2.

Though the PCE deflator was unchanged in March from February, it was up three ticks to 2.0% from 12 months earlier. The core PCE deflator rose 0.2% m/m and climbed 1.9% y/y. The Fed will likely be buoyed by the rising price pressures apparent in its preferred inflation measures (i.e., the PCE deflators). While the year-on-year core rate remained below the Fed's 2% target, the three-month annualized rate was now 2.6%.

The ISM Manufacturing Index fell 2.0 points in April to a still elevated 57.3. This was below consensus expectations, which had anticipating a 58.5 print. A number of key indicators retreated in the month, including production (57.2 from 61.0 the prior month), new orders (61.2 from 61.9), and employment (54.2 from 57.3). Alternatively, both the supplier delivery time sub-index (61.1 from 60.6) and the prices paid sub-index (79.3 from 78.1) advanced from levels that were elevated to begin with. The U.S. manufacturing sector expanded for a 20th consecutive month in April, though it did slow down compared with the prior month. The retreat of several key sub-indices should not be overly concerning as most of these indicators remained at levels consistent with healthy rates of expansion. Moreover, the fact that factory order books lengthened (the order backlog tracker stood at a 14-year high in April) bodes well for future production. However, mounting capacity pressures may limit growth in factory activity looking forward. Prices are already rising at their fastest clip in more than a decade and suppliers are struggling to deliver on time. More business investment may be needed to address these issues.

Also in April, the ISM Non-Manufacturing Index deteriorated from 58.8 to 56.8 on lower readings for both business activity (59.1 from 60.6 the prior month) and payrolls (53.6 from 56.6). New orders, for their part, expanded at a slightly faster pace than in March. Overall, the ISM report for April continued to reflect very healthy expansion in the U.S. services sector, where all 18 industries surveyed reported growth (PMI>50).

Separately, U.S. construction spending dropped 1.7% in March, a figure well below Bloomberg's median forecast (+0.5%). Both the residential sector (-3.5%) and the nonresidential sector (-0.3%) recorded lower outlays. Public sector construction spending was flat. Though construction spending was much weaker than expected in March, it nevertheless expanded 13.7% in annualized terms in Q1, thanks to a strong handoff from 2017Q4 and very good monthly prints in both January (+1.7%) and February (+1.0%).

In March, ending sales of previously owned homes rose 0.4% m/m in seasonally adjusted terms after increasing a solid 2.8% in February. Year on year, contract signings were down 4.4% on an unadjusted basis.

In 2018Q1, nonfarm business productivily rose 0.7% in annualized terms as output (+2.8%) grew at a slightly faster pace than employee hours did (2.1%). Year on year, productivity was up 1.3%, compared with 1.2% in 2017Q4.

Compensation costs were rising at a faster pace (3.4% annualized) but small gains in productivity translated into a 2.7% annualized jump in unit labour costs in Q1. On a 12-month basis, labour costs were up 2.4% as gains in compensation per hour (+2.5%) significantly outpaced gains in output per hour (+1.3%).

Factory orders rose 1.6% m/m in March, matching the increase recorded the month before. Orders in the transportation segment surged 7.6% on a spike in the civilian aircraft category (+44.5%). Excluding transportation, orders advanced 0.3%, extending their positive streak to ten months. Meanwhile, total shipments rose 0.4% m/m for a 12th consecutive gain and their longest positive streak since early 2011. Year on year, shipments were up a healthy 6.8%.

As widely expected, the Federal Reserve left the fed funds rate unchanged at 1.50-1.75%. The Fed acknowledged that the economy had improved as stronger business investment offset a moderation in consumption growth in Q1, that the labour market had strengthened, and that inflation was on the rise. The FOMC tweaked its assessment of the risk outlook by dropping the words "near-term" and instead made a more general statement: "risks to the economic outlook appear roughly balanced". With regards to inflation, the Fed expected it "to run near the Committee's symmetric 2 percent objective over the medium term". The FOMC reiterated that the monetary policy stance remained accommodative and that, therefore, it anticipated "gradual increases in the federal funds rate". The market is priced for the next rate hike to be delivered by the FOMC at its June 12-13 meeting.

WORLD: In 2018Q1, the Eurozone's GDP expanded 1.7% annualized (chart below), its softest pace of growth since 2016Q3. Growth in France decelerated sharply to just 1% annualized, which was also its weakest rate since 2016Q3. The zone's other major economies will release Q1 growth data at a later date. The Eurozone is expected to have slowed down after a string of ugly monthly results for retail spending and industrial output. Given the poor start to the year, the zone's real GDP growth will have to average an above-potential 2.4% over the Q2-Q4 period for the IMF's 2018 growth forecast (2.4%) to come true. The deceleration in Q1 will make it harder for inflation to rise towards the ECB's 2% target, which explains ECB President Mario Draghi's dovish tone last week.

Again in the Eurozone, the Consumer price index flash estimate showed prices rose 1.2% y/y in April, two ticks lower than in March. In the 12 months to April, energy prices increased 2.5%. Excluding this category, prices in the singlecurrency area climbed just 1.1%. Core inflation, which excludes energy, food, alcohol and tobacco, slipped three ticks to 0.7% y/y.

Still in the Eurozone, the seasonally adjusted unemployment rate remained unchanged in March at 8.5%, holding at its lowest mark since December 2008. At the national level, the jobless rate fell to multi-year lows in Portugal (7.4% from 7.6% the prior month), France (8.8% from 8.9%), and Spain (16.1% from 16.2%). It also slid one tick to a post-unification low of 3.4% in Germany.

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