CANADA: Retail sales unexpectedly fell by 0.5% in December

Week in review

CANADA: Retail sales unexpectedly fell by 0.5% in December, with 9 of the 11 major subsectors registering declines, including a 0.9% drop for automobiles. Excluding autos, sales retreated 0.3% as a surge in gasoline procurement (+6.6% due to high er pump prices) and gains for sellers of building materials could not make up for deteriorations in all other categories. Most provinces saw lower sales in the month but, on a year-on-year basis, the big three provinces of Ontario, Quebec, and British Columbia continued to perform well, must ering growth on the order of 4.2%, 4.9% and 7.2%, respectively. In real terms, retail sales sagged 1.0% in the last month of 2016 after rising for five consecutive months. Despite declining volumes, real sales managed to grow a solid 4.5% annualized in Q4 thanks to solid employment creation in the quarter. This suggests that consumers made a healthy contribution to GDP growth in the closing quarter of 2016.

Wholesale trade rose 0.7% month over month to C$57.3 billion in December after growing a downwardly revised 0.1% in November. Sales were up for machinery and equipment (+2.5%), building materials and supplies (+1.4%), and farm products (+4.2%) but swung down for motor vehicles and parts (-2.1%). Excluding this last segment, sales progressed 1.4%. Across the country, sales were strong in Quebec (+2.9%), Alberta (+2.3%), and Saskatchewan (+4.4%) but weakened in Ontario (-0.2%) and Manitoba (-0.5%).

The consumer price index (CPI) rose 0.9% in January, allowing the year-on-year inflation rate to increase six ticks to 2.1%. Note that this month's number was amplified by the implementation of a carbon tax in Ontario and Alberta. In seasonally adjusted terms, CPI was up 0.7%. CPI excluding food and energy was up 0.6%, which allowed the year-on-year rate to rise four ticks to 2.2%. In seasonally-adjusted terms, it rose 0.4% month over month. On an annual basis, the CPI-Trim stands at 1.7% (up from 1.6%), CPI-Median at 1.9% (unchanged) and CPI- Common at 1.3% (down from 1. 4%). Headline inflation has soared in January due to the implementation of a carbon tax in two provinces which lift significantly prices for natural gas (+10.2%), fuel (5.7%) and gasoline (+7.4%). CPI ex-food and energy and CPIEX8 were also strong, showing both a monthly increase of 0.4% after season al adjustments. Turning to the three new measures of inflation considered by the Bank of Canada more suitable for operational decisions, inflation looks tamer. By our own calcul ation, CPI-Trim rose 0.2% last month and was running at a pace of 1.6% annualized over the last three months. The CPI-median, rose 0.3% (m/m) and its 3-month annualized rhythm remains tepid at 1.4%. In other words, the surge in headline inflation in January to its highest annual le vel in more than two years is not a good gauge of the underlying inflation trend which remains relatively soft over the past few months. That being said, we continue to expect core CPI to speed up in 2017 on the back of stronger wage inflation and a renewed weakness in the Canadian dollar that could revive inflation via import prices.

According to the Survey of Employment, Payrolls and Hours (SEPH), Canada added 39.2K jobs in December with strong gains in Ontario (+13.5K), Quebec (+8.2K) and British Columbia (+8.5K). Alberta's job market showed signs of life as well, adding 4.9K new jobs after a miserable year in which 60.5K jobs were lost in the province. These results bring Canada's job tally for 2016 to 206.4K. In comparison, the Labour Force Survey showed paid jobs increased by 304K last year. The best perf orming sectors in 2016 were health care and social assistance (+61.0K), accommodation, food and services (+29.9K), educational services (+21.5K), and construction (+15.8K). Ho wever, 12.2K jobs were slashed in the mining sector. Across the country, job creation was especially strong in Ontario (+134.5K), Quebec (+73.9K), and British Columbia (+55.5K).

In addition, the SEPH reported a paltry 1.2% gain in average weekly earnings year on year in December, a result explained in part by a 2.5% slump in average hours worked per week over the same period.

UNITED STATES: New home sales climbed 3.7% monthly in January and reached an annualized figure of 555K. Despite rising sales, the supply-to-sales ratio remained at 5.7 as inventories rose by 265,000 homes in the first month of the year (the sharpest increase since July 2009). Median sale price for new properties swelled by 7.5% to $312,900.

Existing-home sales jumped 3.3% to 5.69 million annualized in January from an upwardly -revised 5.51 million in December. Sales of single-family homes were up 2.6%, while those of multis surged 8.3%. After rising in five of the past six months, sales of previously owned homes have now reached a post-recession high. Meanwhile the inventory-to-sales ratio conti nues to evidence tight supply, hovering around record lows (3.6). The 7.1% slide in inventories in the past 12 months, combined with sustained demand, has translated into a reduction in the average time required to sell an existing home from 64 days a year ago to 50 days now. It has also led to a 7.1% surge in the median selling price to $228,900 over 12 months.

The Markit Flash Composite PMI for February slipped 1.5 points to 54.3. The decline is not necessarily bad news given that the index reached a 14-month high of 55.8 in January. The manufacturing component of the index fell from 55.0 to 54.3 on weaker output an d slightly lower new orders while the services component sank from 55.6 to 53.9 on lower employment levels and moderation in new business expansion. Overall, however, the composite index remains firmly in expansion territory (>50).

The minutes of the last FOMC meeting (January 31 st – February 1 st ) were released. They showed that, while many participants though it might be appropriate to raise rates "fairly soon", many voting me mbers still thought that the current situation left the Fed plenty of time to respond if signs of rising inflation were to gain momentum. This suggested no sense of urgency and, consequently, the market's reaction was muted. The probability of a rate hike at the next meeting still oscillate around 38%. The uncertainty regarding President Trump's fiscal policy was also discussed and most participants thought "some time" would likely be required for the outlook to become clearer. Trump's administration may provide food for thought before the upcoming FOMC meeting, either in next week's State of the Union Address or in a budget outlook due later in March.

Probably reacting to an Open Market Desk's survey of dealers and market participants that showed more respondents anticipating changes in the Fed reinvestment policy once the federal funds rate reaches 1% to 1.5%, a majority of participants in the last FOMC meeting agreed that a discussion about the management of the balance sheet should begin at upcoming meetings. That said, Fed Chair Janet Yellen stated to Congress last week that her plan was to wind down the Fed's balance sheet once the economy became strong enough and policy normalization was well underway. This sugges ts that a tapering of the reinvestment policy may happen at a later time than expected by market participants, perhaps when the Fed funds rate reaches a level closer to 2.0%.

WORLD: In the Eurozone , the preliminary flash Composite PMI for February came in at 56.0, 1.6 points above January's 54.4. Both components of the in dex improved to post-recession highs: The Services PMI sprang from 53.7 to 55.6 while the Manufacturing PMI climbed from 55.2 to 55.5. According to the survey, despite booming, output is still struggling to keep pace with surging new orders. As a re sult, the backlog-of-work index has registered its sharpest increase in 69 months. Employment, too, seems to be thriving; the su rvey suggests that the rate of job creation is at its highest since August 2007. The strong gain by the Eurozone-wide PMI was the result of impressive showings in both France and Germany, where the PMIs reached multi-year highs this month.

In Japan , the non-seasonally adjusted trade deficit widened to ¥1.09 trillion in January fr om ¥640.4 billion in December. Exports in the month rose 1.3% year over year for a second consecutive increase after a 14-month negative streak. However, imports surged 8.5% in what was the first gain for this indicator since Dece mber 2014. The increase was due in part to higher energy import prices but it also reflected a 6.2% jump in import volumes.

Still in Japan, the Nikkei Flash Manufacturing PMI hit a 35-month high of 53.5 in February, climbing 0.8 point from January's 52.7. The new-orders and output sub-indices rose to their highest levels since ea rly 2014. The overall index has spent the past six months in expansionary territory (>50).

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