Bank of Canada left its overnight rate unchanged at 0.50%

Week in review

CANADA: In March, wholesale trade rose 0.9% month on month (+10.2% y/y) to an all-time high of C$60.2 billion. Gains were recorded in four of the seven subsectors, including building materials and supplies (+3.9%) and the miscellaneous category (+2.2%), which includes recyclable material and paper products. On the other hand, sales of farm products retreated 1.6%. Nationally, 9 of the 10 provinces registered monthly advances, led by British Columbia (+1.9%) and Alberta (+1.5%). In volume terms, total sales were up 0.6%. For Q1 as a whole, nominal wholesale trade grew 3.6% from 2016Q4, making it the largest quarterly gain since 2008Q2.

The Survey of Employment, Payrolls and Hours (SEPH) indicated that average weekly hours worked were flat month over month in March, which translated into a 1.6% drop on a 12 month basis. Average weekly earnings grew 0.2% on a monthly basis but a disappointing 0.9% year over year. More recently, however, wages have been growing at a brisker pace. They jumped 1.4% from 2016Q4 to 2017Q1. This was slightly lower than in the previous quarter (+1.5%) but a healthy print nonetheless.

As widely expected, the Bank of Canada left its overnight rate unchanged at 0.50%. While the central bank acknowledged “robust” consumer spending and a booming housing sector, it bemoaned “subdued” export growth resulting from “ongoing competitiveness challenges”. According to the BoC, the fact that core inflation was still below 2% and that wage growth remained lacklustre was “consistent with ongoing excess capacity in the economy”, though this excess was no longer qualified as “material”. Still, the central bank considered that intense competition in the retail sector was temporarily pushing prices down. Interestingly, the BoC also stated that macro-prudential and other policy measures had yet to have a substantial cooling effect on housing markets. The emphasis on this point suggests that, if the resale market does not slow down, the bank may have to take further action in the form of a rate hike.

Overall, the tone of the statement was much less dovish than anticipated. Indeed the Bank chose to stress the improving global economy and the fact that Canada’s adjustment to the oil shock was largely completed. This change in tone sets the stage for a shift from a neutral stance to a tightening bias before year end. In our opinion, the probability of a rate hike before the end of 2017 is now above 40%.

UNITED STATES: The durables goods report showed new orders falling 0.7% month on month in April. There were also upward revisions to the prior month with orders rising 2.3% (revised from +0.9%). In April, orders were down 1.2% in the transportation category (albeit after a 5.3% surge the prior month) as gains for autos were offset by falling orders of civilian aircrafts. Ex-transportation orders were down 0.4% after an upwardly revised +0.8% print the prior month. Total shipments of non-defense capital goods ex-aircraft, a proxy for business investment spending fell only 0.1% after solid gains over the February-March period.

Q1 GDP growth was revised up by the Bureau of Economic Analysis to 1.2% annualized (from the advance estimate of +0.7%). There were upgrades to personal consumption, government spending, and business investment, although these were partially offset by inventories, which proved to be a larger drag than initially estimated. Real final sales grew 2.2% annualized, much better than the 1.6% increase estimated earlier. The GDP report not only suggests Q1 growth was better than first thought, but also points to a potentially stronger rebound. Based on monthly reports to date on manufacturing and the labour market, U.S. economic growth seems to have accelerated sharply in Q2 to above 3.0% annualized.

Sales of newly built homes, which account for approximately 10% of the housing market as a whole, plummeted 11.4% month on month in April to an annualized 569K in seasonally adjusted terms. Though this was the sharpest monthly decline since March 2015, it did come on the heels of a 5.8% jump in March that had taken annualized sales to their highest level in almost a decade (642K). Also reassuring is the fact that the numbers for the previous three months were revised up a combined 55K annualized. Moreover, despite the monthly decrease, sales have averaged 604K in the first four months of 2017, as compared with 536K for the same period in 2016. As a result of the drop in sales, the supply of new homes on the market climbed from 4.9 months of sales in March to 5.7 in April. Finally, the median selling price fell to $309,200, down 3.8% from 12 months earlier.

Existing-home sales retraced 2.3% on a monthly basis in April to an annualized 5.57 million in seasonally adjusted terms. The prior month, sales had swelled 4.2% to a 10-year peak of 5.70 million. The latest report showed sales sagged in both the single-family (-2.4%) and the multi-unit (-1.6%) segments. Still, the median selling price rose 6.0% year over year to $244,800, the second highest print ever. The price hike was spurred by tight supply. Indeed, the inventory of available properties fell 9.0% year over year to 1.93 million, the equivalent of only 4.2 months of sales. The lack of dwellings on the market explains why it took 29 days on average to sell an existing home in April, the shortest period recorded since the National Association of Realtors (NAR) began tracking the metric in May 2011.

Freddie Mac, a mortgage agency, announced that mortgage rates in the U.S. had fallen to their lowest level in 2017. The average 30-year fixed rate mortgage for the week ending May 25th fell to 3.95%, down from 4.02% the week before. This is still 0.31% above the levels seen at the same period last year, but it should encourage activity in the housing market nonetheless.

In May, the Markit Flash Composite PMI climbed 0.7 point to a three-month high of 53.9. The gain was driven by the services sector, which saw its PMI rise 0.9 point to 54.0 on stronger employment growth. Alternatively, the manufacturing component of the index slid from 52.8 to an eight-month low of 52.5 as output and new orders expanded at a slower pace than in the prior month. Interestingly, Markit reported the steepest increase in services sector input prices since June 2015. This came after the April survey showed the manufacturing sector registering the strongest cost inflation in two and a half years.

The minutes of the May 2-3 FOMC meeting showed participants remained confident about general economic conditions in the United States despite a weak first quarter. A couple of participants even thought that raising the fed funds rate would have been warranted by the economic outlook, but it was generally agreed that it would be prudent to await more evidence that the recent slowdown in economic activity was indeed only transitory. In other words, though further rate hikes are on the table, they will be delivered only if the economy behaves as expected. If so, nearly all policymakers indicated it would be appropriate to begin reducing the size of the Federal Reserve’s balance sheet this year. Under a proposed approach, the FOMC would announce a set of limits (caps) on the dollar amounts of Treasuries and agency securities that would be allowed to run off each month. The amount of principal repayments that exceeds these limits would be reinvested. The caps would presumably start at a low level before increasing gradually over time. A vast majority of policymakers expressed a favourable view of this general approach.

WORLD: In the Eurozone, the Flash Composite PMI held steady at a six-year high of 56.8 in May. The services index eased marginally from 56.4 to 56.2 while the manufacturing PMI hit a 73-month high of 57.0 as production and exports both expanded at their fastest pace since April 2011. Encouragingly, the composite survey showed firms taking on staff at the second fastest rate since August 2007, driven by the manufacturing sector, which saw payrolls surge at their steepest rate in 20 years. At the national level, the composite PMI increased in Germany (57.3) and France (57.6), where both measures are now hovering at levels unseen since 2011.

Activity really seems to be picking up in the Eurozone. This, in turn, is boosting business confidence. In Germany, for instance, the Ifo Business Climate Index, which tracks businesses’ current assessment of general conditions as well as their expectations for the future, reached its highest level ever in May, rising to 114.6 from 113.0 the month before. This led Ifo, the think tank that publishes the index, to describe overall business sentiment in the country as “euphoric”. A similar positive sentiment is being echoed in France, where the Business Confidence Index for the manufacturing sector struck a post-recession peak of 109 in May.

In Japan, the headline consumer price index (CPI) rose 0.4% year over year in April, accelerating from 0.2% the previous month. Furthermore, core CPI, which excludes fresh food, rose for a fourth consecutive month at 0.3% year over year. Both CPI figures were boosted by a 4.5% increase in the price of energy. Excluding that volatile category, core prices were flat year over year.

Also in Japan, the Nikkei Flash Manufacturing PMI dropped 0.7 point to a six-month low of 52.0 in May. Both the output and the new-orders sub-indices declined in the month, though they remained in expansionary territory. In addition, the employment tracker reported the weakest pace of job creation since last November.

The Organization of the Petroleum Exporting Countries (OPEC) agreed with some non-member countries to extend an existing deal to curb supply in an effort to resolve a threeyear supply glut that has depressed oil prices. Taking October 2016 as the baseline month, the two sides decided to maintain the established cut of 1.8 million barrels per day through March 2018. Thus, OPEC members will continue to reduce their daily production by 1.2 million barrels, while nonmember countries (chiefly Russia) will go on reducing theirs by 0.6 million barrels.

 

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