CPI annual inflation rate was 1.8%

Week in review

Canada – Real gross domestic product rose 0.4% in November, more than recouping the prior month's losses (October's slump was revised from -0.3% to -0.2%). November's increase was the fifth in the past six months. Goods producing industries saw output jump 0.9% as gains in manufacturing, mining, oil and gas, and construction more than offset decreases for agriculture and utilities. Industrial production grew 0.9% as a result. Output in the services sector swelled 0.2% thanks to gains in retailing, transportation/warehousing, education, health and finance/insurance. (This last category reached an all-time peak.) After nine consecutive months of positive growth, the services sector's output stood at a record high. November's overall output gains put the economy in a good position to expand further in Q4 after a strong third quarter. Assuming no change in December, Q4 GDP growth could come in around 1.6% annualized, close to the Bank of Canada's estimate of 1.5% for the quarter.

Bank of Canada Governor Stephen Poloz held a Q&A session at the University of Alberta in Edmonton in which he highlighted the divergence between the Canadian and the U.S. economies. He described the latter as operating at close to full capacity, unlike the former where, in his opinion, significant slack remained. Poloz deplored the fact that, despite this state of affairs, the Canadian dollar continued to appreciate against most non-USD currencies. He referred to the loonie's ascent as a "headwind" for the economy. In an attempt to set things straight, he made it clear that Canada's monetary policy was set to deviate from the United States' in the foreseeable future. The governor also drew the crowd's attention to rising mortgage rates, which were affecting an already weak housing sector in Canada. As for the possible implementation of protectionist trade measures by the new U.S. administration, he described it as a risk but also said that "[w]e can't model them without knowing what they will be."

United States – Non farm payrolls rose 227K in January. The private sector added 237K jobs, with gains in both goods and services. Goods sector employment jumped 45K with gains in construction, manufacturing and even mining. The 192K increase for private services sector employment was driven by education/health (+24K), leisure/hospitality (+34K), business services (+39K), and trade/transportation (+44K almost entirely due to retailing). Government cut 10K positions as declines at the state/municipal levels more than offset gains at the federal level. Average hourly earnings rose 0.1% in the month and was up 2.5% on a year-on-year basis (down from 2.8% the prior month). Hours worked rose 0.2% while the private sector employment diffusion index fell to 58.8. The employment report points to continued strength in the U.S. labour market. Particularly encouraging is the increase in cyclical sectors such as manufacturing and construction (the latter is the best in months) reflecting an economy comfortably in expansion mode.

The other U.S. employment report, the household survey (similar methodology to Canada's LFS) showed employment falling 30K in January, as losses for part-timers more than offset gains for full-time positions. The two-tick increase in the participation rate to 62.9%, helped push up the jobless rate to 4.8%. The increase in the jobless rate is not necessarily bad news because it reflects the increase in labour force participation, possibly a result of increased confidence by previously discouraged unemployed Americans.

The ADP employment report, a gauge of the private sector component of non-farm payrolls, showed that 246K jobs were created in January. Those were split as follows: 83K for large firms (500+ employees), 62K for small firms (<50 employees), and 102K for medium-sized firms.

The ISM Manufacturing Index beat expectations in January by climbing to 56, its highest level since November 2014. Production, new orders and employment all grew at a swifter pace than in the prior month, which contributed to lift the overall index. According to the survey, factory employment expanded at its fastest pace since 2014. The ISM data is consistent with continued U.S. GDP expansion in Q1.

The ISM Non-Manufacturing Index remained stable at 56.5 for January. The business activity, new orders and inventory subindices declined while prices paid and employment made gains.

Construction spending fell 0.2% in December as a 0.4% gain in the residential sector was offset by a 0.7% drop in the nonresidential segment.

Personal income rose 0.3% in December after increasing 0.1% the previous month. The jump was due to a rebound in wages and salary income, which sprang 0.4% after dipping 0.1% in November. Personal spending rose a consensus-matching 0.5% in the last month of 2016. Spending on goods was especially strong, surging 0.6% after declining 0.2% the month before. Spending on durable goods led the way with a 1.4% increase on the back of strong auto sales.

The PCE deflator posted a 0.2% increase in December, pulling the year-over-year figure up to 1.6% from 1.4% in November. Core PCE, the Fed's favoured inflation gauge, nudged up 0.1% after holding level the previous month. At 1.6% and 1.7%, respectively, the year-over-year headline and core PCE drew closer to the Fed's forecast for 2017 (1.9% and 1.8%) but remained below its 2% target.

As was widely expected following December's rate hike, the Federal Reserve left monetary policy unchanged. The target range for the fed funds rate was kept at 0.50-0.75% and the Fed maintained its policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities (MBS) in agency MBS. The Fed also stated that it would continue to roll over maturing Treasury securities. It highlighted the improvement in consumer and business confidence and acknowledged the strengthening labour market, again referring to the job gains as "solid". It said that while inflation had increased in recent quarters, it was still below the FOMC's 2% longer-run objective, adding that market-based measures of inflation compensation remained low. Still, the Fed indicated that near-term risks to the economic outlook were "roughly balanced". The decision was unanimous.

World – In Japan, the unemployment rate stayed put at 3.1% in December. However, the job-to-applicant ratio rose from 1.41 in November to 1.43 (its highest level since July 1991), signaling a tightening of the labour market. Also in December, real household spending fell 0.3% year over year. This was much better than the 0.9% drop expected and a considerable improvement on the 1.5% decline recorded in November. Industrial production beat consensus as well, registering a 0.5% gain in December after its best showing in six months in November (1.5%). On a less positive note, retail trade retreated a sizeable 1.7% in December.

In this environment, the Bank of Japan decided to leave its monetary policy on hold, keeping its short-term interest rates slightly negative (-0.1%). It also vowed to continue to buy ¥80 trillion-worth of government debt per year in order to keep 10- year bond rates around its 0% target. The BoJ raised its GDP growth forecast from 1.0% to 1.4% for the fiscal year to March 2017, from 1.3% to 1.5% for the fiscal year to March 2018, and from 0.9% to 1.1% for the fiscal year to March 2019. The Bank's inflation forecast remained unchanged at 1.5% for fiscal 2017 and at 1.7% for the following year.

In the Eurozone, GDP grew 0.5% unannualized in Q4 after expanding 0.4% in Q3 (revised up from 0.3%). This progression, the best in 2016, meant that the European economy grew 1.7% in 2016, three ticks slower than it did in 2015. The flash estimate for January's CPI annual inflation rate was 1.8%, much higher than the 1.1% expected by consensus. Though the estimate approached the ECB's target of 2%, it need be said that it was driven up by energy prices. The core measure of inflation, estimated at 0.9% for January, remains muted.

In China, the Manufacturing PMI exceeded expectations, coming in at 51.3 for January. The Non-Manufacturing PMI reached 54.5, a gain of 0.1 point.

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