Canada: The Consumer price index rose 0.2% m/m

Week in review

CANADA: The Consumer price index rose 0.2% m/m in September in seasonally adjusted terms as price increases for gasoline, food, shelter, transportation, recreation and alcohol/tobacco more than offset declines in healthcare, clothing and household ops. CPI excluding food and energy was flat. Expressed on a 12-month basis, headline inflation was up two ticks to 1.6%, while CPI excluding food and energy was down two ticks to 1.3%. Looking at the BoC's measures of underlying inflation, CPI-trim stood at 1.5% y/y (up from 1.4%), CPI-Median at 1.8% (unchanged from an upwardly revised print) and CPI-Common at 1.5% (unchanged). The average of the three measures came out at 1.6%, the strongest pace since February and a proof that underlying inflation is continuing to grow stronger in the country.

Retail sales fell 0.3% m/m (+6.9% y/y) in August after advancing 0.4% the prior month. While there was an expected sales increase for autos (+0.7%) and gasoline (+3.1%), that was offset by declines in 8 major categories including furniture (- 2.4%) and food/beverage (-2.5%). As a result, ex-auto sales were down 0.7%, the worst drop this year. Ex-auto/gasoline sales fared even worse, plunging a massive 1.3%, also the worst this year. In real terms, Canada's retail spending was down 0.7% m/m in August. Assuming no change in September, real retail sales should decrease slightly in the third quarter. This monthly report, bad as it was, may be a case of Canadians taking a breather rather than a sign of things to come. Indeed, fundamentals remain good for Canadians who are benefiting from the best labour market in years, the Canada Child Benefit program, low interest rates, and wealth effects associated with surging home prices.

Manufacturing shipments advanced 1.6% m/m in August after retreating a cumulative 4.2% in June and July. Of the 21 industries surveyed, only eight saw sales increase. These included machinery (+4.0%, best result in 2017), petroleum/coal products (+3.2%), primary metals (+3.1%) and beverages/tobacco products (+4.2%, 12-month high). Shipments in the transportation segment rose 8.2%, their sharpest jump in 19 months, thanks to a surge in sales of motor vehicles (+12.9%, albeit after a 19.5% decline the prior month) and parts (+5.7%). Excluding transportation, manufacturing sales expanded a more subdued 0.2% m/m. Total manufacturing sales improved in 8 of the 10 Canadian provinces, led by Ontario (+2.8%), the province most exposed to the automotive industry. When the effect of price changes is removed, total factory sales increased 1.2% m/m. Despite this improvement, real factory shipments were on track to fall 3.6% in Q3.

According to the Canadian Real Estate Association (CREA), existing-home sales rose 2.1% m/m in September to 41,077 units in seasonally adjusted terms. That was the second monthly increase for that indicator following the 15.0% cumulative drop recorded from May to July. Furthermore, new listings surged 4.9% in the month, a development that lifted the national new-listings-to-sales ratio to 1.80 from 1.75 the prior month (between 1.60 and 2.1, the ratio indicates a balanced market). Regarding regional data, 7 of the 10 provinces presented a balanced market on the basis of the new-listings-to-sales ratio. In both Newfoundland and Labrador (2.80) and Saskatchewan (2.66), the ratio evidenced a buyers' market. With its ratio at a lowly 1.46, British Columbia was the only province with a sellers' market.

International securities transactions data showed foreign investors increased their holdings of Canadian securities by C$9.8 billion in August thanks to net buying of bonds (+C$8.2 billion), money market instruments (+C$1.5 billion) and equity/investment funds (+C$0.2 billion). The net inflows into debt securities were largely directed towards federal government bonds (+C$6.1 billion) although there was also interest in provincial bonds (+C$1.7 billion) and corporate bonds (+C$2.1 billion). Moreover, the vast majority of debt instruments (C$7.7 billion) purchased by foreigners in August was denominated in Canadian dollars. So far this year, foreigners' intake of Canadian bonds has averaged about C$11.2 billion per month, easily topping last year's record C$9.1 billion. Canadian corporate bonds have been especially popular over this period with an average of C$7.5 billion per month, also a new high.

The autumn edition of the bank of Canada Business Outlook Survey (BOS) continued to convey a positive message regarding economic activity in the country, even though the tone was slightly less upbeat than in the summer issue. Intentions to invest in machinery/equipment and to increase employment sagged slightly but remained positive nonetheless. Indeed, the balance of opinion for investment dropped from 29% to 17%, its lowest in five quarters, while that of future employment fell from 58% to 34%, its lowest in a year. Also, both the proportion of respondents stating either some or significant difficulty in meeting an unexpected increase in demand (47%) or facing labour shortages (25%) stayed roughly unchanged. That said, when asked how labour shortages compared with shortages 12 months earlier, a net 38% declared that the situation had worsened, the highest percentage in 11 years. Tourism, construction and information technology faced the worst shortages and some firms operating in those sectors were reportedly raising wages in response to this state of affairs. Overall, the BOS hinted at mounting capacity pressure in the country.

UNITED STATES: In September, industrial production expanded 0.3% m/m in seasonally adjusted terms (+1.6% y/y). Seeing how this came after two consecutive monthly contractions (-0.7% in August and -0.1% in July), it can hardly be qualified as a stellar result. Still, we must bear in mind that September's output was affected by Hurricanes Harvey and Irma, which, according to the Federal Reserve, subtracted 0.25% from the headline output figure for the month. The details of the report showed output increasing 0.1% in the manufacturing sector, 1.5% in the utilities segment and 0.4% in mining. For Q3 as a whole, industrial production shrank an annualized 1.5% as both the manufacturing (-2.2%) and the utilities segments (-7.8%) retreated. On the other hand, mining output had a decent quarter, expanding an annualized 6.3% after posting impressive figures in Q2 and Q1 (+10.3% and +14.3% respectively). The Fed estimated that, were it not for hurricane-related disruptions, total industrial production would have grown an annualized 0.5% in Q3.

Still in September, the capacity utilization rate in the industrial sector climbed two ticks to 76.0%. In the manufacturing segment, the rate stayed put at 75.1%.

In October, the Empire Satate Manufacturing Survey 's index of general business conditions rose 5.8 points m/m to a threeyear high of 30.2 well above the indicator's six-month moving average of 18.1. It marked one of the strongest reported growth rates for U.S. factories since the recession. In fact, the index has equaled or surpassed its October level only three times in the past 13 years. Several of the survey's key sub-indices advanced in the month, including shipments (eight-year high of 27.5 vs. 16.2 the prior month) and number of employees (15.6 vs. 10.6). On the other hand, the new orders gauge sank 6.9 points to 18.0, although this came after the indicator posted its best showing in eight years the previous month (24.9). What's more, the index tracking firms' expectations of general business conditions for the next six months came in at a lofty 44.8, up from 39.3 in September.

Still in October, the Philly Fed Manufacturing Business Outlook Survey evidenced a stronger rate of expansion in the manufacturing sector as the General Business Activity Diffusion Index advanced 4.1 points to a five-month high of 27.9. The details of the report showed the number of employees sub-index soaring no fewer than 24 points to 30.6, its best reading ever recorded by far. The average workweek tracker spiked as well, jumping from 11.9 in September to 19.4 in October, affording further proof of the labour market's vigour. On a less positive note, both the new orders (19.6 vs 29.5 the prior month) and the shipments (24.4 vs. 37.8) sub-indices pulled back in the month, though the latter measure were still consistent with a relatively strong rate of expansion.

Housing starts slipped for a third month in a row in September, dropping 4.7% to a 12-month low of 1,127K in annualized term. Both the single-family (-4.6%) and the multiunit (-5.1%) segments contributed to the overall decline. Once again, the fallout from Hurricanes Harvey and Irma no doubt had a bearing on the data as starts in the South declined 9.3% in the month. However, the downturn was not circumscribed to the region hit by the storms. Starts also plunged in the Midwest (-20.2%) and the Northeast (-9.2%), suggesting a more generalized trend. Thanks to an elevated starting point, starts managed to limit their quarterly slide to 0.6% in annualized term in Q3 despite retreating a cumulative 7.4% from June to September.

Separately, building permits fell 4.5% in September to an annualized 1,215K. Permits for single-family units mustered a small advance (+2.4%) while those for multifamily dwellings tumbled 16.1%. Relative to their level 12 months earlier, total permits were down 10% (not seasonally adjusted), with those for multi-family units collapsing 29.0%. Over the same period, the single-family segment progressed 4.6%.

Sales of existing homes edged up 0.7% m/m in September to an annualized 5,390K after falling to their lowest total in a year in August (5,350K). Contract closings increased 1.1% in the single-family segment but retraced 1.6% in the multifamily sector. In Q3 as a whole, existing home sales fell an annualized 11.7%, hampered by a catastrophic hurricane season.

In September, the import price index shot up 0.7% m/m, its steepest jump in 16 months, after climbing a strong 0.6% in August. A good share of the increase was due to a 4.5% surge in the price of petroleum imports owing to hurricane-related disruptions. Excluding petroleum, import prices rose a more modest 0.3% m/m on higher prices for industrial supplies (+2.4%). On a 12-month basis, the headline IPI gained 2.7%, up six ticks from its level in August. However, the figure was pulled upward by a 20.1% y/y spike in petroleum prices. Expetroleum import prices, which are less volatile, advanced at a much cooler 1.2% pace over the 12 months to August. While this was the third largest year-on-year print recorded in the past five years, it was still only tepid at best in light of the U.S. dollar's poor performance in the 12 months to September.

The leading economic indicators index (LEI) declined 0.2% to 128.6 in September. This was the index's first monthly drop in 13 months. Jobless claims (-0.21 percentage point), building permits (-0.14 percentage point) and the average workweek (-0.13 percentage point) all impacted the headline index negatively. On the other hand, ISM new orders (+0.19 percentage point) and the interest rate spread (+0.12 percentage point) provided the strongest positive input. Overall, 6 of the 10 indicators contributed to lift the index, the smallest number in 2017.

The latest edition of the Fed's Beige Book reported that economic activity increased at a modest to moderate pace in all 12 U.S. districts in September through early October. Most districts reported flat to moderate increases in employment growth. Still, it was reported that employers were having difficulty finding qualified workers in many places and that this phenomenon was restraining business growth. The sectors most affected by labour shortages were construction, transportation, skilled manufacturing, and healthcare services. Perhaps counterintuitively in light of the above, the majority of districts reported only modest to moderate wage pressure. However, wages were said to be increasing at a more rapid pace in some sectors, notably transportation. What's more, it was reported that the use of sign-on bonuses, overtime, and other non-wage efforts to attract and retain workers was on the rise, a sign of diminishing slack in the labour market.

WORLD: In China , real GDP expanded 6.8% in the third quarter from a year earlier, a tick slower than in Q2. With the first three quarters of the year now on the books, China is on track to exceed the 6.5% annual growth target set by the government.

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