Week in review
CANADA: International securities transactions data showed foreign investors increased their holdings of Canadian securities by C$6.2 billion in January. Net buying of bonds (+C$10 billion) easily compensated for net selling of equities/investment funds (-C$1.0 billion) and money market instruments (-C$2.7 billion). The bond net inflows were largely due to corporates (+C$12.7 billion, of which C$9.7 billion were private) and ex-federal government bonds (+C$2.9 billion). Alternatively, foreign investors reduced their holdings of federal government bonds by C$5.6 billion, the largest such divestment since June 2016. After recordhigh foreign purchases of Canadian securities in 2016, net foreign investment moderated in the first month of 2017.
Equities lost some of their shine as high valuations continued to be a concern. Similarly, money market instruments lost favour owing to the widening rate differential with the United States. Foreign demand for bonds remained strong, however, particularly for private corporate bonds. This suggests that foreigners remain confident about the outlook in Canada.
The Teranet–National Bank National Composite House Price IndexTM rose 1.0% in February, the largest gain for that month in the index’s 18-year history. This unusually large increase for the season was attributable primarily to three of the 11 metropolitan markets surveyed: Toronto (+1.9%), Hamilton (+1.4%) and Vancouver (+1.4%). While prices were also up in Ottawa-Gatineau (+0.9%), they declined elsewhere: Victoria (-0.1%), Montreal (-0.2%), Edmonton (- 0.5%), Winnipeg (-0.5%), Quebec City (-0.9%), Calgary (- 1.3%) and Halifax (-1.9%). Year over year, the national index sprang 13.4%, its sharpest 12-month upswing since November 2006. This surge was driven mostly by prices in three cities: Toronto (+23.0%, a record), Hamilton (+19.7%, also a record) and Victoria (+15.9%). The Toronto market has become especially worrisome. Historically low supply there contributed to a 20% hike in the price of dwellings other than condos in the past 12 months. In a city where apartments account for only 26% of sales, this has created an acute affordability problem. However, in spite of soaring prices, sales for dwellings other than condos remain near their historical peak in Ontario’s capital.
In Canada, manufacturing shipments increased 0.6% in January. However, there was a slight downward revision to the prior month’s reading from 2.3% to 2.1%. Interestingly, sales rose in 14 of the 21 broad industries in January. There was an 7.0% increase for petroleum and coal products (a fourth consecutive gain), a 2.5% gain for chemicals, and a 2.4% increase in fabricated metal products which more than offset declines in other categories. Transportation (-2.9%) was down due to a sharp decline in aerospace and railroads which contrasted with a 3.9% rise in the motor vehicles segment. In real terms, shipments increased 0.7%. The manufacturing sector is benefiting recently from the acceleration of the North-American economy and a competitive USD/CAD ratio. That being said, significant challenges remain, such as decreasing competitiveness against other trading partners than the U.S., declining capital stock due to lack of investments, and the potential introduction of protectionist measures.
UNITED STATES: The consumer price index edged up 0.1% in February as higher prices for food (+0.2%), apparel (+0.6%) and recreation (+0.6%) were in part offset by lower energy prices (-1.0%). Core inflation, which excludes food and energy, went up 0.2%. Core inflation has been relatively strong in the past three months, climbing an annualized 3.0%. Further gains for owners’ equivalent rent (+0.3%) and medical care (+0.1%) lifted ex-energy services CPI 0.3%. Year over year, headline CPI rose 2.7%, its steepest jump since March 2012, while the core measure progressed 2.2%.
In February, retail sales advanced 0.1% in seasonally adjusted terms, their smallest gain in six months. Excluding motor vehicles and parts (-0.2%), sales increased 0.2%.
Month over month, advancing sales of building materials (+1.8%), non-store retailers (+1.2%) and healthcare (+0.7%) more than offset retreats in electronics (-2.8%), gasoline stations (-0.6%), and clothing (-0.5%). Overall, sales increased in only four of the 13 major retail categories.
However, February’s lacklustre showing must be put into perspective. Indeed, it came on the heels of a really good performance in January, which saw sales and ex-auto sales increase 0.6% and 1.2%, respectively. February sales were also dragged down by slumping gasoline prices and delayed tax refunds. Nonetheless, so far in Q1 (based on January and February data), retail sales growth is still running at a very decent annualized pace of 5.7%, after clocking in at a healthy 7.2% the prior quarter. Discretionary spending is robust as well, growing at a brisk 5.4%. This reflects the strength of the labour market and the high level of consumer confidence.
Industrial production was flat in February compared to a month earlier. The seasonally-adjusted +0.0% reading followed an upwardly-revised -0.1% monthly figure in January. The lukewarm result was due to a 5.7% slump in utilities output explained by abnormally warm weather in the U.S. for that time of the year. Manufacturing output, which accounts for 75% of overall industrial production and 12% of GDP, actually performed very well, increasing by 0.5% for a second consecutive month, the best back-to-back postings in three years. Mining production progressed 2.7% as oil production in the U.S. picks up pace. February’s industrial production numbers translated into a one tick retreat in capacity utilization to 75.4%. Yet again, the overall figure was hampered by a 4.4% m/m drop in the utilities segment. Looking at the manufacturing sector in isolation, capacity utilization gained a balmy 0.3% m/m and now sits at 75.6%, its highest level since October 2015. In the mining sector capacity utilization nudged up from 78.4% in January to 80.5% in February.
Housing starts jumped 3.0% in February to an annualized 1288K in seasonally adjusted terms, their highest level in four months. Starts of single-family houses grew 6.5%, their fastest pace since October 2007. Starts of multis, on the other hand, declined 3.7%. February’s numbers were buoyed by abnormally warm weather, which allowed an early start to the spring construction season. Separately, building permits fell 6.2% to 1213K in February as a sharp drop in the multis category (-21.6%) more than offset a rise in the singles segment (+3.1%). Also, the home builder sentiment index spiked to 71 in March from 65 the prior month.
Despite rising mortgage rates, the index is now at its highest level since June 2005. Also worthy of note, the measure of prospective buyer traffic shot up from 46 to 54.
In February, the NFIB Small Business Optimism Index slipped to 105.3 from 105.9 the prior month. Despite this small setback, the index remains near its post-recession high following an 11-point rally from October to January.
According to the survey, the net percentage of firms expecting the economic situation to improve stood at 47%, a mere 1 point lower than in the previous month but still 54 points ahead of October’s level. In addition, a net 22% considered the actual environment as conducive to expansion, down from 25% in January. The net percentage of firms planning to hire decreased as well, sliding 3 points to 15%. Interestingly, a net 32% of small businesses reported not being able to fill vacant positions, the highest percentage since February 2001. This suggests that the labour market has tightened in the United States, all the more so in light of the fact that finding qualified workers has now overtaken government regulations as the second biggest problem for small firms next to taxes.
The New York Fed’s Empire State Manufacturing Index slid 2.3 points to 16.4 in March after soaring 12.2 points in February. The decline was explained in part by a near 7- point drop in the shipments diffusion sub-index from 18.2 to 11.3. Overall, though, the index still conveys a high level of optimism in the manufacturing sector, with the new orders gauge reading 21.3, its highest level since April 2010.
a level unseen since December 1987.Employment indicators were strong as well, with the current number of employees index vaulting from 2.0 to 8.8 and the average workweek rocketing from 4.1 to 15.1.
The Philadelphia Fed’s Manufacturing Business Outlook Survey plunged 10.5 points to 32.8 in March following an unsustainable 20-point increase that hoisted the index to a 33-year high the previous month. Despite the correction, the index is still far above its 2016 average of 4.8. The new orders component of the index continued its ascension, reaching 38.6, a level unseen since December 1987.
Shipments moved up as well, gaining 4.3 points to 32.9. The labour components, too, were exceptionally strong with the average workweek going from 13.6 to 18.5 and the number of employees climbing 6.4 points to 17.5.
According to the Bureau of Labor Statistics, job openings rose to 5.626 million in January from 5.539 million a month earlier. The hiring rate stood at 3.7%, one-tenth of a point above December’s level, while the quit rate went up by 0.1% to hit a post-recession high of 2.2%, suggesting workers were confident enough about their prospects of finding better jobs.
As expected, the Federal Reserve raised the fed funds rate 25 basis points. The rate’s lower and upper bounds are now 0.75% and 1.00%. The FOMC was encouraged in its decision by the strength of the labour market and by the pick-up in business fixed investments. It pointed out, also, that headline inflation had increased in recent quarters and now stood close to its 2% objective. In the meantime, core inflation continued to run somewhat below 2%. The Fed expected economic activity to expand, the labour market to strengthen further, and inflation to stabilize towards its target. We were pleased to see Fed Chair Janet Yellen acknowledge the recent rise in the labour participation rate in her press conference and identify that trend as a factor that could limit wage inflation. This is consistent with our current view that the Fed need not hike more than three times in 2017. The decision to tighten monetary policy was almost unanimous. Neel Kashkari was the sole FOMC member in favour of keeping rates unchanged.
The FOMC’s median projections for the appropriate target range for the federal funds rate were left unchanged at 1.4% and 2.1% for 2017 and 2018, respectively, but was bumped up one tick to 3.0% for 2019. Nine of the 17 participants now fixed the midpoint of the fed funds range at 1.375% at the end of 2017, compared with six participants in December.
WORLD: In the Eurozone, industrial production expanded 0.9% m/m in January in seasonally adjusted terms, recouping some of the losses sustained in December (-1.2%). Capital goods production accounted for 0.8 percentage point of the headline figure, while energy added 0.3 percentage point. On the other hand, production of durable consumer goods, non-durable goods and intermediate goods reduced the headline figure by a cumulative 0.2 percentage point. Presently, industry is set to contribute to GDP growth in Q1 based on the fact that the index is currently standing 0.6% above its Q4 level.
In Japan, the central bank kept monetary policy on hold. Consequently, short-term interest rates will remain at -0.1% and the Bank of Japan will maintain its target rate for 10- year government bonds at about 0.0%. Asset purchases will continue unperturbed at a rate of approximately ¥80 trillion per year. In its statement, the BoJ acknowledged the moderate economic recovery in the country but underscored that inflation expectations remained weak. Core inflation, which turned positive year on year in January (+0.1%) for the first time since 2015, was still very low. The chances of seeing inflation firm up in the near future are faint given that wage growth continues to disappoint in spite of low unemployment levels.
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