Canada's consumer price index rose 0.1%

Week in review

CANADA: Canada's consumer price index rose 0.1% (m/m) in April in seasonally adjusted terms causing the year-on-year inflation rate to decline one tick to 2.2%. On a month-tomonth basis, in five categories prices were rising with alcohol/tobacco, clothing, and household operations experiencing the strongest increases while recreation, healthcare and transportation posted declines. CPI excluding food and energy was flat in seasonally adjusted terms and the year-on-year inflation rate declined one tick to 1.8%. On an annual basis, the CPI-trim stood at 2.1% (up one tick from 2.0%), CPI-Median at 2.1% (up one tick from 2.0%) and CPICommon at 1.9% (unchanged). This is essentially the pace we expect this year in a context of full-employment that has already generated the strongest wage inflation since 2012 (3.6%, y/y). All in all, inflation has accelerated since the last Bank of Canada's rate hike in January, meaning that real policy rate has turned more accommodative. We continue to think that a next rate hike will occur in July as we see the economy accelerating in Q2.

Retail sales increased 0.6% m/m in March to C$50.2 billion. That result came after an upwardly revised +0.5% reading the prior month (initially reported at +0.4%). In March, sales were up in 6 of the 11 categories surveyed including a 3.0% gain in the motor vehicles/parts segment. Excluding autos sales actually fell 0.2% on a monthly basis as increased outlays on furniture (+3.9%) and clothing (+2.5%) were more than offset by drawbacks for electronics (-2.4%), food (-1.2%) and gasoline stations (-1.9%). Discretionary sales, i.e. sales excluding gasoline, groceries and health products, rose for a third consecutive month, climbing 1.6% m/m. In real term, retail spending countrywide was up a healthy 0.8% in March. The good monthly showing Canada-wide will not be sufficient to salvage Q1's performance. Indeed, real retail sales are on pace to decline 4.0% in annualized terms in the quarter, a result which could translate into the first negative contribution to GDP from consumption spending on goods since 2015Q1. Several elements can explain that poor showing notably the moderation of job creation in the first three month of the year and particularly poor weather early in 2018.

In March, manufacturing shipments rose 1.4% m/m to C$57.1 billion. Sales were up in 13 of the 21 broad industries surveyed, including transportation equipment (+1.5%), primary metal manufacturing (+4.2%), and fabricated metal products (+4.6%). Alternatively, shipments of machinery (- 1.7%), chemicals (-0.9%), and petroleum/coal products (- 0.3%) declined. If the effect of price changes is removed, total factory sales increased 0.6% on a monthly basis. Although economic growth in Canada probably slowed down in the first quarter, the manufacturing sector likely still provided some lift. In addition to inventories growing, real manufacturing shipments jumped 4.0% annualized in Q1. This followed a +4.2% reading in 2017Q4 and, if confirmed, will represent a ninth consecutive quarterly advance (longest such stretch on record).

In April, the Teranet-National Bank Composite National House Price Index rose 0.2% m/m. Eight of the 11 constituent metropolitan areas swung upward, led by Quebec City (+1.5%), Hamilton (+0.8%), and Halifax (+0.6%). Alternatively, the index slid 0.1% in Ottawa-Gatineau and 0.8% in Winnipeg. On a y/y basis, the Composite Index climbed 5.6%, its smallest gain since September 2015. Vancouver (+15.9%) and Victoria (+11.0%) lifted the national average, while growth was more subdued in other metropolitan areas: Halifax (+5.3%), Hamilton (+4.5%), Montreal (+3.9%), Ottawa/Gatineau (+3.0%), Quebec City (+2.4%), Toronto (+1.9%), Winnipeg (+1.2%), Edmonton (+0.4%), and Calgary (+0.2%). Moderate increases will likely continue to characterize the Composite Index over the coming months as conditions in the two major constituent home resale markets, Toronto and Vancouver, are now balanced (current active-listings–to-sales ratios close to their long-term average).

According to the Canadian Real Estate Association (CREA), existing home sales fell 2.9% m/m in April, marking a fourth consecutive monthly decline. Year on year, sales tumbled 19.7%, their steepest fall since October 2010. All of the provinces saw sales drop except for New Brunswick, Prince Edward Island, and Saskatchewan. The active-listings-to-sales ratio rose two ticks to 5.6, which is slightly above its longterm average but well within the parameters for a balanced market. By our calculations, the resale market is favourable to buyers in Alberta, Saskatchewan, Manitoba, and Newfoundland and Labrador. Alternatively, the PEI and Ontario markets look tight.

International securities transactions data showed foreign investors increasing their holdings of Canadian securities by C$18.3 bn in the first quarter of 2018 as inflows in money market instruments (+C$15.4 bn) and equities (+C$6.1 bn) dwarfed net divestment from bonds (-C$3.1 bn). The bond net outflows during Q1 ─ the first time that happens since 2013Q2 ─ were largely due to federal government bonds (-$C27.6 bn) which offset net purchases of corporates (+C$22.5 bn, including C$3.2 bn in government enterprise bonds) and provis (+C$2.4 bn). The bonds from which foreigners divested were largely denominated in Canadian dollars.

UNITED STATES: In April, retail sales rose 0.3% m/m after springing an upwardly revised 0.8% (from 0.6%) the prior month. Sales of motor vehicles and parts inched up 0.1%. Excluding this category, sales still advanced 0.3% thanks to gains for clothing (+1.4%), furniture (+0.8%), gasoline stations (+0.8%), and miscellaneous items (+0.9%). Sales increased in 9 of the 13 categories surveyed. Core sales, which are used to calculate GDP and exclude food services, auto dealers, building materials, and gasoline stations, jumped 0.4% after increasing an upwardly revised 0.5% the month before. Though still a bit early to make projections for Q2, retail sales certainly look set to rebound after a lacklustre Q1 that saw consumption's contribution to growth sink to just 0.7 point from 2.8 points in 2017Q4. To be sure, the strong handoff from March and April's decent results bode well for an acceleration of household consumption in Q2.

Housing starts fell 3.7% m/m in April to 1.287K in annualized terms after reaching their highest level since the recession the previous month (an upwardly revised 1,336K). While single-family starts were generally unchanged (+0.1% to 894K), multi-unit starts fell sharply (-11.3% to 393K). Apartment construction appears to be slowing as the vacancy rate in major markets are leading to increases in leasing concessions. Furthermore, the moderation of residential construction in the first month of Q2 might reflect challenges for builders, who are reportedly struggling to keep costs down in the face of a labour shortage and high lumber costs (in part due to import duties imposed by the U.S. government). Even without these difficulties, a slowdown was foreseeable after starts expanded 31.8% and 21.3% in annualized terms in Q4 and Q1, respectively. These recent increases mean that, despite the lackluster April results, housing starts remained 10.5% above their level 12 months earlier.

Building permit applications, for their part, retreated 1.8% m/m in April (March was upwardly revised from +2.5% to +4.1%), coming in at 1,352K on an annualized basis. The contraction was due above all to a 6.3% drop in the multifamily segment (to 493K). Permits for single-family dwellings, meanwhile, climbed 0.9% (to 859K).

Still in April, industrial production progressed 0.7% m/m for a second month in a row. Manufacturing output, which represents 74.6% of total industrial production, expanded 0.5% on gains for computer/electronics (+1.2%) and machinery (+2.3%). Meanwhile, output in the utilities sector expanded 1.9% after swelling 6.1% in March, which was its strongest push in a year. Finally, mining output grew 1.1% and was up a healthy 10.6% on its level a year earlier, hoisted by higher oil prices. On a quarterly basis, if we assume no change in May and June, industrial production is still on track to grow more than 5% annualized in Q2 (i.e., more than twice the prior quarter's pace).

The capacity utilization rate in the industrial sector as a whole went from 77.6% in March to a three-year high of 78.0% in April. In the mining sector, utilization reached 90.6%, its highest level since the 2014-15 drop in oil prices. Such levels of capacity utilization should continue to spur business investment in 2018.

The Empire State Manufacturing Index of general business conditions rebounded 4.3 points to 20.1 in May after dropping 6.7 points in April. Both the new orders sub-index (16.0 from 9.0 the prior month) and the shipments sub-index (19.1 from 17.5) rose and surpassed their respective six-month moving average. The number of employees gauge bounced back as well (from 6.0 to 8.7) but remained far below the levels reached at the end of last year (22.9 in December). As trade war talks abated somewhat, businesses reported a significantly improved outlook on the future, as evidenced by the 12.8-point spike registered by the index tracking firms' expectations of general business conditions over the next six months (though the index did plunge 25.8 points the prior month). Interestingly, the input prices paid by New York manufacturing businesses continued to rise at a vigorous clip, with the prices paid tracker climbing 6.6 points to a sevenyear high of 54.0. Rising energy prices and the weakness of the U.S. dollar at the beginning of the year are to blame at least in part for that surge in manufacturing prices.

The Philly Fed Manufacturing Business Outlook Survey was also up in May, rising 11.2 points to 34.2. The shipments index went from 23.9 to 25.8 while the new orders tracker rocketed from 18.4 to 40.6 points. Employment was running strong with both the average workweek (21.6 to 34.4) and number of employees (27.1 to 30.2) sub-indices making gains.

In April, the leading economic indicator index (LEI) extended its streak of non-negative prints to 23 months, as it gained 0.4 point to an all-time high of 109.4. Meanwhile, the diffusion index rose from 60% to 80%, with most of the underlying economic indicators still contributing to lift the overall index. The interest rate spread and average workweek, which added 0.13 percentage point to the LEI respectively, were the principal drivers. Alternatively, stock prices (-0.07 pp) and building permits (-0.05 pp) acted as a drag on the headline index.

WORLD: In Japan, real GDP, shrank 0.6% in annualized terms in Q1, breaking the streak of eight consecutive positive quarterly readings, the longest in 30 years. The decline was driven primarily by inventory rundown, which shaved 0.6 point from growth. Residential investment also bore down on the headline figure. On the other hand, trade lifted GDP 0.3 percentage point as exports expanded faster than imports did. Meanwhile private consumption, business investment, and government spending were roughly flat. Though Q1 results were certainly not encouraging, they need to be contextualized. As the Japanese economy expanded at a pace well above potential in 2017, a slowdown was to be expected. As far as monetary policy is concerned, the poor showing in the quarter should reinforce the Bank of Japan's current stance in favour of continued stimulus.

Still in Japan, the national headline consumer price index (CPI) rose 0.6% in April, down five ticks from 1.1% in March. The downswing was in part caused by a slowdown in fresh food (-1.5% vs. +6.3%) and energy prices (+5.3% y/y vs. +5.7% y/y the prior month). Excluding the price effects from those two categories, CPI rose just 0.4% in the twelve months to March. CPI excluding fresh food, the core measure preferred by the Bank of Japan, edged down two ticks to 0.7%, still far below the BoJ target of 2.0%.

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