Manufacturing shipments rose 1.1% in April

Week in review

CANADA: The Teranet–National Bank National Composite House Price IndexTM climbed 2.2% in May, the largest-ever increase for that month in the 19 years covered by the index. Home prices rose in all of the 11 metropolitan regions covered, a first in 12 months. Price gains exceeded the national average in Toronto (3.6%, a record for any month), Hamilton (3.1%, matching the record of June 2014) and Victoria (2.5%). On a year-over-year basis, the national index was up 13.9%, close to its record 14.1% increase registered in September 2006. The 12-month increase was driven by three markets: Toronto (+28.7%), Hamilton (+23.5%) and Victoria (+19.2%). Alternatively, prices were down year over year in Edmonton (-2.2%) and Quebec City (−2.6%). Though strong, the increase in Vancouver (+8.2% y/y) was below the national average for a third consecutive month. Previously, house prices in Vancouver had increased year over year at a pace above the national average for 40 consecutive months.

According to the Canadian Real Estate Association (CREA), in May, existing-home sales fell 6.2% in seasonally adjusted terms to 42,925 from an upwardly-revised 45,769 reading in May. The monthly drop in sales, the largest since August 2012, was in good part driven by the Greater Toronto Area market, where sales plummeted 23.5% month on month. In actual numbers (not seasonally adjusted), total sales were down 1.6% from a year earlier. There again, the Toronto area, which registered a 20.8% drop year on year, was responsible for the lackluster print. New listings, for their part, advanced 0.3% from April to May, following a 10% jump the prior month. With sales down considerably, the countrywide sales-to-new listings ratio dropped from 60.2% in April to 56.3% in May, suggesting a more balanced market. Finally, the national inventory to sales ratio increased, from 4.3 months of sales in April to 4.7 months in May. In Ontario’s Golden Horseshoe region though, inventories are still equivalent to less than two months of sales in most metropolitan areas.

Manufacturing shipments rose 1.1% in April, with sales increasing in 13 of the 21 industries surveyed, including petroleum/coal products (+8.9%) and primary metals (+3.8%). On the other hand, sales of motor vehicles declined 3.7%. Without the effect of price increases, factory sales were up 0.5%, just clearing the previous post-recession high reached in July 2014. In real terms, inventories rose for a fourth month running (+0.4%), but the inventory-to-sales ratio remained flat at the rather low level of 1.37. Real unfilled orders, too, increased (+0.7%) for a fourth straight month. Overall, Canadian factories seem to have shifted gears in the five months ended April, as gains in volume sales were recorded in 14 of 21 industries.

International securities transactions data showed foreign investors increasing their holdings of Canadian securities by C$10.6 billion in April, with net buying of bonds (+C$13 billion) more than offsetting net divestment from equities/investment funds (-C$1.3 billion), and money market instruments (-C$1.1 billion). The bond net inflows were largely in Federal government bonds (+C$6.7 billion) and corporates (+C$5.5 billion, including C$1.2 billion in government enterprise bonds), although there was also appetite for provincial government bonds (+C$0.5 billion) and munis (+$192 million). Interestingly, the large majority of bonds purchased by foreigners in April was denominated in Canadian dollars, a change from what we’ve seen earlier. Indeed, in the first four months of 2017, purchases of C$- denominated bonds averaged C$4 billion/month, almost double the amount seen last year.

In a speech on Monday, Bank of Canada Senior Deputy Governor, Carolyn A. Wilkins, laid the groundwork for a tightening of monetary policy sooner than markets were anticipating. Wilkins described Q1 growth—3.7% annualized— as “pretty impressive.” In explaining the performance, she emphasized the contribution of growing business investment and was also keen on reminding her audience that Canada’s good showing was “not being driven by just a few key industries.” Although she acknowledged that exports had come in weak in Q1 and that “higher-than-expected spending, if funded by credit, could add to the vulnerabilities in the household sector,” she still believed that the “broadening sources of growth… across sectors and regions” was a sign that “[t]he adjustment to lower oil prices [was] now largely behind us.” Wilkins declared that, under such conditions, the “Governing Council [would] be assessing whether all of the considerable monetary policy stimulus presently in place [was] still required.” Even if inflation were to remain below the central bank’s target, she seemed inclined towards a more hawkish approach, suggesting that policymakers not only had to focus on current economic conditions, they also had to “anticipate the road ahead.” In accordance with the Deputy Governor’s comments, we now expect the Bank of Canada to raise the overnight rate by 25 basis points in October, three months sooner than previously assumed.

UNITED STATES: In May, retail sales registered their steepest monthly drop since January 2016, pulling back 0.3% after advancing 0.4% in April. Eight of the 13 major retail categories posted a decline in terms of sales value, including gasoline stations (-2.4%, the sharpest fall in 15 months), electronics (-2.8%, the worst showing in more than seven years), and motor vehicles and parts (-0.2%, albeit after a 0.5% gain the prior month). Excluding autos, sales sank 0.3%. Discretionary spending (i.e., retail sales excluding gasoline, groceries, and health/personal care) was down just 0.1%. Though the monthly retail data was soft, part of the weakness in nominal sales were due to lower prices in the month. On a quarterly basis, sales volumes were still increasing at a decent pace. Indeed, assuming no change in June, retail volumes were on track to grow about 3.0% annualized in Q2.

Industrial production was flat in May (+2.2% y/y) after expanding an upwardly revised 1.1% in April. The manufacturing sector’s output, which represents 78.5% of total industrial production, shrank 0.4% as production of motor vehicles and parts slumped 2.0% (albeit after a 4.1% increase in April, its largest monthly gain in almost two years). Excluding autos and parts, manufacturing production contracted 0.2% on reduced production of computers and electronics (-0.5% m/m). The utilities and mining sectors, each accounting for 10.8% of overall output, registered monthly gains of 0.4% and 1.6%, respectively. Despite the moderation in May, the overall picture remains positive for U.S. output. Even assuming no change in June, industrial production is on track to grow more than 5% annualized in Q2, its biggest quarterly jump in three years.

Meanwhile, the capacity utilization rate in the industrial sector ticked down to 76.6%. In the manufacturing sector, capacity utilization stood at 75.5%, down from 75.8% the prior month.

The NIFB Small Business Optimism Index stayed unchanged at 104.5 in May. That flat reading meant that the index slipped below its 6-month moving average (105.1) for the first time since last September. Nevertheless, it remained up significantly from its May 2016 level (93.8) and close to the cyclical peak it reached last January (105.9). The survey showed that a net 39% of polled businesses expected economic conditions to improve, down from a peak of 50% in December. Moreover, the net percentage of firms expecting better sales over the next three months increased from 20% to 22%. The most interesting parts of the survey had to do with employment, which continued to show signs of tightening. To be sure, 18% of polled firms were planning to increase payrolls, the highest proportion since November 2006. Meanwhile, 34% said they were unable to fill some of their job openings, which was more than at any time since November 2000. In addition, 19% of firms stated that poor labour quality was their single most important problem, up from 16% the month before.

The Empire State Manufacturing Survey’s index of general business conditions spiked 20.8 points to 19.8 in June after falling into negative territory the month before. This was its biggest single-month advance since 2005 and the level reached was its highest since September 2014. The monthly surge also erased all of the losses registered between March and May (a combined -19.7). As for the other components of the survey, the new-orders sub-index sprang from -4.4 in May to 18.1 in June. Over the same period the shipments gauge jumped from 10.6 to 22.3. As the Fed’s Empire State survey tends to be volatile from one month to another, it is probably more representative of broad trends in the manufacturing sector when analyzed on a quarterly basis. From this perspective, it appears that general business conditions were slightly less positive in Q2 (8.0) than in Q1 (13.9).

In June, the Philadelphia Fed index of general business conditions fell 11.2 points to 27.6. In Q2, it averaged 29.5, down from 33.2 in Q1.

The consumer price index (CPI) dipped 0.1% in May after climbing 0.2% the prior month. A 2.7% slump in energy prices, only partially compensated by a 0.2% hike in food prices, contributed to pull headline CPI down in the month. Gasoline prices were hit particularly hard, retreating 6.4%, their largest drop since February 2016. Excluding food and energy, prices edged up 0.1% month on month. On a year-on-year basis, headline inflation slipped three ticks to 1.9%. In the meantime, core inflation slid two ticks to just 1.7%, its lowest reading in two years. The trend observed in core goods inflation (-0.8% y/y) continued to diverge from services inflation (+2.7% y/y). Prices in the goods sector have been on a downward trend since the beginning of 2012, and have suffered lately from persistently low inflation in the apparel, vehicles and alcoholic beverages segments. Meanwhile services prices, which are increasing at a nearly 3.0% rhythm year on year, continued to be supported by rising shelter costs (+3.3% y/y in May).

In May, the Producer Price Index (PPI) stayed put on a monthly basis after rising 0.5% in April. Year over year, the PPI was up 2.4%, down a tick from the 5-year summit it reached in April (+2.5%). The lacklustre monthly print was largely driven by a 3.0% month-on-month drop in energy prices. On the other hand, the services component, which makes up roughly 64% of the headline figure, saw prices increase 0.3% month on month and 2.1% year on year (its largest gain since December 2014). The core PPI measure, which excludes the volatile items of food, energy and trade services, was down 0.1% but still managed to post a 2.1% jump on a 12-month basis. The latter figure, unchanged from the prior month, still stood at its highest level since August 2014.

Still in May, the Import Price Index fell 0.3% month on month after rising a downwardly revised 0.2% in April (initially reported at 0.5%). Most of the decline was attributable to a 3.9% drop in the price of petroleum imports. Excluding these, import prices were flat. On a 12-month basis, the total index was up 2.1%, down significantly from 3.6% in April. Not counting a 16.2% surge in the price of petroleum imports in the past 12 months (you will recall that energy prices were quite depressed a year ago), the Import Price Index progressed only 1.0% over this period.

In May, housing starts fell 5.5% to a 9-month low of 1,092K in annualized terms from a downwardly revised 1,156K in April. Single-family starts were down 3.9% to 794K, while multiunits starts dropped 9.7% to 298K. Both single and multi starts moved well below their six-month moving average (824K and 381K respectively), and the latter segment was down a massive 23.0% from its May 2016 level. As for overall starts, they are now down 2.4% on a 12-month basis. May’s softness could be just a blip but one cannot rule out a cyclical slowdown in the U.S. housing sector as the Fed continues to tighten its policy.

Separately, building permits were down 4.9% to 1,168K in May with applications falling in both the single-family (-1.9% m/m) and multi (-10.4%) segments. Compared with their May 2016 level, total permits were down 0.8% as the value of applications in the multi-units category plunged 12.2%. Single family permits, for their part, increased 6.0% on a 12-month basis.

As widely expected, the Federal Reserve raised the fed funds rate by 25 basis points to 1.25%. The vote to tighten the policy rate passed by a majority of 8 to 1. Minneapolis Fed President Neel Kashkari, a known dove, was the only dissenter. While bemoaning below-target inflation, the Fed continued to expect inflation to stabilize around the 2% objective over the medium term. The FOMC also gave details regarding the implementation of its balance sheet normalization program, which is set to begin this year “provided that the economy evolves broadly as anticipated.” Under the plan, the Fed will reinvest only the portion of principal payments that exceeds gradually rising caps. For Treasuries, the cap is expected to be set at $6 billion/month initially and then rise an additional $6 billion every three months until it hits $30 billion/month. For agency debt and MBS the cap will be $4 billion/month at the onset and increase by increments of $4 billion every three months until it reaches $20 billion/month.

WORLD: In the Eurozone, industrial production expanded 0.5% on a seasonally adjusted monthly basis (1.6% y/y) in April after growing an upwardly revised 0.2% in March. April’s solid performance was driven entirely by the energy sector, which recorded a 4.7% surge in the month that added 0.7 percentage point to the overall output figure. Intermediate goods (+0.1% m/m), durable consumer goods (+0.6% m/m) and non-durable consumer goods (+0.2% m/m) made positive albeit negligible contributions to overall output. Alternatively, production of capital goods (-0.7% m/m) shaved 0.2 percentage point from overall industrial production in the month. Germany’s output, which grew 1.0% in April, was the largest contributor to the Eurozone’s output growth, adding 0.7 percentage point to the overall figure. On the other hand, France (-0.6% m/m), Italy (-0.4%), and Spain (-0.1%) detracted from overall growth. Assuming flat readings in both May and June, the Eurozone’s industrial production is on pace to expand 6.0% in annualized terms in Q2.

As anticipated, the Bank of Japan kept monetary policy on hold, maintaining its overnight interest rate at -0.1%, stating its intention to continue capping 10-year bond yields at 0%, and extending its ¥80tn-a-year government bond purchase program.

 

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