Conference Board Consumer Confidence index climbed 2.4 points to 128.0

Week in review

CANADA: Real GDP expanded at an annualized pace of just 1.3% in the first quarter of 2018, well below the 1.8% expected by consensus. Trade was a drag on the economy as imports grew faster than exports. Inventories, for their part, shaved one-tenth of a percentage point from growth. These negative contributions were more than offset by a decent contribution from domestic demand, where increases in government spending, business investment and consumption far outweighed a decline in residential investment. While consumption spending did add to real GDP, its growth was the weakest in three years. This was likely due to moderation in employment creation, which hammered real disposable income in Q1. Fading housing wealth effects amid softening home prices might have borne down on consumer outlays as well. In nominal terms, GDP grew 2.6% for a ninth consecutive quarterly increase. Looking ahead to Q2 we take solace in the good handoff from March, where real GDP grew 0.3% m/m. For 2018 as a whole, we still anticipate real GDP to grow about 2.2%, assuming employment and consumption spending growth bounce back.

Also in Q1, the current account deficit increased by C$3.0 billion to C$19.5 billion, or roughly 3.5% of GDP. This was due largely to wider deficits on the goods trade and investment income accounts, which dwarfed an improvement in services trade. For the first time in years, the deficit was financed not by short-term portfolio flows, which turned negative as foreigners ditched Canadian securities, particularly federal government bonds, but by foreign direct investments (FDI), which are more stable and hence more desirable. Net FDI inflows turned positive in the quarter for the first time since 2015 thanks to a combination of lower Canadian investment abroad (dragged down by slower M&A activity) and stronger FDI into Canada.

In May,  Market's manufacturing PMI rose 0.7 point to 56.2, indicating the steepest rate of expansion for Canadian factories since April 2011. New orders, which piled up at the fastest pace in more than a year supported by strong international demand, were a key driver explaining the upswing of the overall index. Factory output also improved, but failed to keep up with new orders. As a result, order books lengthened significantly. The report also evidenced growing capacity constraints as delivery times increased and input prices surged the most since early 2014. May marked the 27th consecutive month of expansion for the Canadian manufacturing sector.

According to the Survey of Employment, Payrolls and Hours (SEPH) , average weekly hours worked were up 0.3% m/m and 0.9% y/y in March. Average weekly earnings, for their part, were flat on a monthly basis but up 3.1% y/y.

As widely expected, the Bank of Canada left the overnight rate unchanged at 1.25%. The central bank stated that, because of rising gasoline prices, it now anticipated slightly higher inflation in the near term than it had forecast back in April. While acknowledging the uncertainties surrounding trade policy and housing (amid the ongoing adjustment to new mortgage guidelines), the BoC nonetheless affirmed that "developments since April further reinforce the Governing Council's view that higher interest rates will be warranted to keep inflation near target."

The central bank's statement was conspicuously more upbeat about the economy than prior communications. Among other things, the central bank emphasized expectations that solid labour income growth would support housing activity and consumption going forward. Also noticeable in the statement was the change from a "cautious" to a "gradual" approach to policy adjustments. Moreover, the reminder that "some monetary policy accommodation will still be needed" was removed. In getting rid of several dovish passages in its statement, the Bank of Canada clearly opened the door to a July hike.

UNITED STATES: The establishment survey non farm payrolls showed rising a consensus-topping 223K in May. Adding to the good news were upward revisions to prior months which added a net 15K to payrolls. The private sector added 218K jobs in the month, buoyed by cyclical sectors like construction and manufacturing. Government, meanwhile, added 4K jobs as gains at the state/local levels more than made up for cuts at the federal level. Average hourly earnings rose 0.3% in the month, pushing the year-on-year print to 2.7%.

Released at the same time, the household survey suggested 293K new jobs were created in May as solid gains for full time employment (which reached an all-time high in the month and a decade high as a proportion of total employment) dwarfed losses for part-timers. The massive gains in full-time employment more than made up for a one-tick decline in the participation rate (to 62.7%), allowing the jobless rate to fall to just 3.8%, the lowest since April 2000. The two employment reports continued to defy expectations of a moderation in employment creation amidst a reported skills shortage and should give the FOMC the green light to raise interest rates in June.

The ISM Manufacturing Index rose 1.4 points in May to an elevated 58.7. This was above consensus expectations, which had anticipated a 58.2 print. Several key indicators were up in the month, including production (61.5 from 57.2 the prior month), new orders (63.7 from 61.2), and employment (56.3 from 54.2). Moreover, the price tracker (79.5 vs. 79.3) rose for a sixth consecutive month and reached a level not seen since 2011, a sign of growing price pressure in the manufacturing sector. Capacity pressures also appeared to be building, as suppliers delivery time (62.0 vs. 61.1) expanded considerably in the month. Looking ahead, these capacity constraints may limit growth in factory activity barring more business investment. In the meantime, the uptick in employment should help alleviate some pressure.

Nominal personal income increased 0.3% in April. The wage/salary component of income sprang 0.4%, as did disposable income. Nominal personal spending, for its part, advanced 0.6% after progressing 0.5% in March. Adjusted for inflation, disposable income grew 0.2% in April while spending rose 0.4%. As a result, the saving rate slipped two ticks to 2.8%.

Still in April, the headline PCE deflator rose 0.2% m/m and 2.0% y/y (same y/y rate as in March). Concurrently, the core PCE measure advanced 0.2% m/m and 1.8% y/y, which was still slightly below the Fed's 2.0% target.

In May, the Conference Board Consumer Confidence index climbed 2.4 points to 128.0, just 2.0 points shy of its cyclical high reached in February. The rise was due in large part to the present situation sub-index, which jumped 4.2 points to 161.7, its highest level in more than 17 years. The expectations gauge, which tracks consumer expectations for the next six months, rose as well albeit to a lesser degree, gaining 1.3 points to 105.6. The report also showed households remained upbeat about employment as evidenced by the fact that respondents that deemed jobs plentiful exceeded by 26.6 percentage points those that found jobs hard to come by. This was the widest differential since March 2001. Overall, the report showed consumer confidence remained robust in early Q2, a fact that should underpin consumption in the quarter.

In April,  pending sales of previously owned homes fell 1.3% m/m in seasonally adjusted terms after increasing 0.6% in March. Year on year, contract signings were up 0.4% on an unadjusted basis.

According to the S&P Corelogic Case-Shiller 20-City Index, home prices rose 0.53% in March in seasonally adjusted terms after climbing 0.84% the previous month. Nineteen of the 20 cities covered by the index recorded higher prices, Cleveland (-0.20%) being the sole exception. The monthly price hike was particularly strong in Minneapolis (+1.35%), Seattle (+1.27%) and Las Vegas (+1.27%). On a 12-month unadjusted basis, the 20-city index was up a healthy 6.8% thanks to strong gains in Seattle (+13.0%), Las Vegas (+12.4%), and San Francisco (+11.3%). House price growth in the United States continues to outstrip wage growth, supported by the tightness of the resale market. But there is a limit to how high prices can go, especially in an environment of rising interest rates. According to Freddie Mac, the average rate for a 30-year mortgage is now at its highest level since 2011.

The second estimate of Q1 GDP growth came in at 2.2% in annualized terms, one tick below the advance estimate. There were upgrades to business investment but these were offset by a weaker contribution from inventories. Trade's contribution was also a touch smaller than what had initially been reported. Overall, the quarterly revision does not change our outlook for 2018. We still see GDP accelerating strongly in Q2 to about 3.2% and clocking in at 2.8% for the year as a whole.

According to the latest edition of the Fed's Beige Book, economic activity increased at a "moderate" pace in most of the 12 Federal districts in late April and early May, an upgrade from the "modest to moderate" qualification used in the prior report. In the Dallas district, the pace of activity was even described as "solid", probably owing to the rebound in energy prices. Manufacturing appeared in particularly good shape with one-third of the districts reporting "strong" activity in the sector. Consumer spending, however, slackened as auto sales stagnated and ex-auto retail sales progressed at a slower pace than in the Beige Book's previous edition. The general outlook of Fed contacts remained favourable, though international trade policy remained a concern for businesses in several sectors. Employment kept growing despite mounting difficulty finding qualified candidates across a broad array of industries and skill levels. To deal with the labour shortage, U.S. businesses said they were enhancing compensation packages. Still, wage increases were characterized as modest in most Districts. As for price inflation, it was deemed moderate in most regions, although there were reports of sharper price hikes for steel, aluminum, and lumber, all of which were hit by tariffs in the past few months. The rapid rise in the price of oil products was noted as well.

WORLD: In the Eurozone, the flash estimate of the consumer price index showed prices rose 1.9% y/y in May, seven ticks higher than in April and the most in over a year. While a good chunk of the increase was due to a 6.1% spike in energy prices, there were hints that underlying prices were also moving up. The CPI excluding energy, for instance, rose the most since September 2013, climbing 1.4% on an annual basis, up from 1.1% the prior month. Meanwhile, core inflation, which excludes energy, food, alcohol and tobacco, picked up four ticks to 1.1%.

In May, the European Commission's Index of Economic Confidence retreated for a fifth straight month since hitting a 17-year high in December. The index slid 0.2 point to a ninemonth low of 112.5 but remained high by historical standards (the long-term average of this indicator stands just above 100). Sinking the index was lower confidence in three sectors: manufacturing (6.8 vs. 7.3 the prior month), services (14.3 vs. 14.7) and consumers (0.2 vs. 0.3). Alternatively, confidence improved in two sectors: retail (0.7 vs. -0.7) and construction (7.0 vs. 4.6). At the national level, economic confidence sagged in France (108.4 vs. 110.2), Italy (108.4 vs. 109.4), and Spain (109.4 vs. 110.6) but stayed roughly even in Germany (112.7 vs. 112.6).

Again in the Eurozone, the seasonally adjusted unemployment rate dipped a tick in April to 8.5%, its lowest mark since December 2008. At the national level the jobless rate fell to multi-year lows in Germany (3.4% vs. 3.5% the prior month) and Spain (15.9% vs. 16.1%) but held steady in France (9.2%). In Italy, the rate inched up a tick to 11.2%.

In Japan, the unemployment rate stayed put at 2.5% in April, a mere tick above the 25-year low struck in January (2.4%). The number of employed persons in the country slid 10K, but this was offset by a 50K contraction in the size of the labour force. The participation rate rose to 61.7% (not seasonally adjusted), its highest mark since 2003. The job-to-applicant ratio was unchanged at a 40-year low of 1.59 as the number of applicants (+0.6%) rose apace of job offers (+0.7%).

 

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