Empire State Manufacturing Index soared to 18.7 in February from 6.5 in January

Week in review

CANADA: The Teranet–National Bank Composite House Price IndexTM rose 0.5% in the first month of the year, matching the largest January increase in the 18-year history of the index. Prices were up in Hamilton (+1.1%), Toronto (+0.8%), Montreal (+0.8%), Vancouver (+0.3%), Victoria (+0.2%), Calgary (+0.1%) and Quebec City (+0.1%). Prices were flat in Halifax and down in Winnipeg (-0.7%), Ottawa- Gatineau (-0.7%) and Edmonton (-0.1%). On a year-over-year basis, the national index was up 13.0%, the largest 12-month gain since January 2007. This surge was driven almost entirely by four markets: Toronto (+20.9%), Hamilton (+17.6%), Victoria (+17.1%) and Vancouver (+16.4%).
Elsewhere prices registered a more subdued increase over the past 12 months or declined, as was the case in Quebec City (-0.2%). In Toronto, nearby Hamilton, and Victoria, house prices, like the Composite Index, have reached record levels. In Toronto, prices are currently growing at the highest 12-month rate since the index’s inception. This is due mostly to dwellings other than condos, a segment where supply is notoriously tight.

Manufacturing shipments surged 2.3% in December after a similar increase the prior month. Interestingly, sales rose in just 8 of the 21 broad industries in December. There was an 11.6% increase for petroleum and coal products and a 7.4% gain for transportation equipment (both autos and aerospace), which more than offset declines in several categories. In real terms, shipments jumped 2.3% while inventories fell 0.8%. As a result, the inventory-to-sales ratio edged down to a six-year low of 1.32. For Q4 as a whole, real factory shipments jumped 2.3%, contributing to economic growth during the quarter. In light of the upgrades to prior factory sales and December’s consensus-topping numbers, we have raised our Q4 GDP growth forecast for Canada to 1.8% annualized.

International securities transactions data showed foreign investors increasing their holdings of Canadian securities by C$10.2 billion in December, with net buying of bonds (+C$2.4 billion) and equities/investment funds (+C$9.7 billion), more than offsetting the net decrease for money market instruments (-C$1.8 billion). For 2016 as a whole, net portfolio inflows amounted to a record C$161.3 billion, thanks to net inflows in equities (+C$53.4 billion, the best ever), and another solid year for bonds (+C$104.8 billion is the second highest ever), while inflows in money market instruments amounted to C$3.1 billion. The bond net inflows in 2016 were in Corporates (+C$80.5 billion is the highest ever, including a net C$7.4 billion investment in bonds of government enterprises), provis (+C$6.3 billion), federal government bonds (+C$17.8 billion) and munis (+$141 million). The large majority of bonds purchased by foreigners in 2016 was denominated in foreign currencies (79%).

UNITED STATES: The consumer price index climbed 0.6% in January on higher energy prices. These were up 4%, their fifth consecutive monthly increase. Food prices were up 0.1%. Excluding food and energy, prices jumped 0.3%. Owners’ equivalent rent and medical care prices rose further, hoisting the ex-energy services CPI 0.3%. Core goods prices found support from apparel (+1.4%, the biggest hike in months), personal computers and tobacco. The overall price increase for January jacked up the headline inflation rate four ticks to 2.5% and the core inflation rate by one tick to 2.3% year on year.

Retail sales advanced 0.4% month over month in January after progressing an upwardly revised 1.0% in December. Excluding autos, sales surged 0.8%, their best showing in nearly a year. This is because, while sales of motor vehicles and parts fell 1.4%, those of electronics, food/beverage, general merchandise, furniture, building materials, health/personal care, and sporting goods all increased.

Receipts at gasoline stations rose 2.3% on account of above-seasonal increases for pump prices. Discretionary sales, i.e., excluding groceries, gasoline, and personal care products, remained strong (currently at an all-time high) thanks to solid job creation and mounting consumer confidence.

Industrial production sank 0.3% in January. The figure was explained primarily by a 5.7% decline in utilities output, the worst performance in 11 years. However, as the slump was due to unseasonably warm weather in the month, it is unlikely to mark the beginning of a trend. Manufacturing output, which accounts for 12% of U.S. GDP, fared better, progressing 0.2%. While it has grown in four of the past five months, manufacturing output remains sluggish, having managed to expand only 0.5% since January 2016. The mining sector performed much better on the month, cranking output up 2.8%.

In line with the lukewarm industrial production data, capacity utilization retreated 0.3 point in January to 75.3%. Most of the pullback was explained by a 2% drop in utilities capacity utilization. Manufacturing capacity utilization inched up 0.1 point to 75.1% while mining sprang to 79.1% from 77.1% the previous month.

Housing starts in January came in at 1246K in seasonally adjusted annualized terms. This was 2.6% below the upwardly revised figure for December. Starts in the singlefamily segment rose 1.9% while those in the multi-family segment dropped 10.2%. As this decline followed a 57.3% monthly gain the previous month, it should not be cause for concern. Separately, building permit applications grew at their fastest pace since November 2015, surging 4.6% to 1285K. A strong gain in the multi-family sector (+19.8%) more than offset a slight downturn in the single-family sector (-2.7%).

The Empire State Manufacturing Index soared to 18.7 in February from 6.5 in January. The index now stands at its highest level since September 2014. According to the survey, manufacturing conditions are improving across the board. The new-orders sub-index shot up from 3.1 in January to 13.5 while the shipments sub-index more than doubled to 18.2, which is three times its 6-month moving average. Employment figures improved as well, with both the number-of-employees sub-index and the work-hours sub-index moving upward. The Philadelphia Fed’s Manufacturing Business Outlook Survey corroborated the Empire results, posting a massive increase in its diffusion index from 23.6 in January to a 44-year high of 43.3. Taken together, this month’s Fed surveys provide evidence of buoyant optimism among American businesses.

In January, the NFIB Small Business Optimism Index gained 0.1 percentage points to 105.9, reaching its highest level since December 2004. Compared to September 2016, the index has risen 11.6 percentage points while the net percentage of those feeling the next three months will be a good time to expand has more than tripled, from 7% to 25%. In January, 15 % of owners mentioned the difficulty in finding qualified workers as their single most important business problem (up 3 points). The net percentage of firms reporting that compensation cost increased during the past three months rose 4 points to 30 percent, its highest level since February 2007.

WORLD: In the Eurozone, Q4 GDP growth was revised down to 0.4% from the previous estimate of 0.5%. Both the German and Italian figures came in 0.1 point short of estimates at +0.4% and +0.2%, respectively. The numbers for France and Spain were in line with expectations at +0.4% and +0.7%, respectively. Though it accounts for only a very small portion of Eurozone output, it is interesting to note that Greece’s economy contracted in Q4 (-0.4%) after two consecutive quarters of positive growth. This unwelcome news will no doubt be a talking point in discussions between the IMF and Eurozone officials concerning an extension of Greece’s bailout. December’s industrial production numbers were also released this week. Output decreased 1.6% month over month, its worst showing in four years. That’s not a good handoff to 2017.

In Japan, GDP expanded 1.0% in Q4 in annualized terms (0.2% quarter on quarter), just shy of the 1.1% anticipated. This was a fourth consecutive quarter in positive growth territory for the country, the longest such streak in three years. Held back by tepid wage growth, domestic demand stagnated quarter on quarter. Exports grew 2.6%, easily outstripping a 1.3% rise in imports. The favourable terms of trade meant that net exports contributed 0.2 percentage point to growth in Q4. Non-residential investments added another 0.1 point while change in inventories shaved 0.1 point from the total. For 2016 as a whole, Japan’s economy grew 1.0%.

 

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