Manufacturing shipments rose 1.5% in November

Week in review

Canada – In Canada, the consumer price index dropped 0.2% in December, but because of base effects the year-onyear inflation rate rose three ticks to 1.5%. This was below consensus expectations calling for a flat print on a monthly basis. In seasonally adjusted terms, CPI was up 0.3% as higher prices for transportation, clothing, household ops, recreation, shelter & healthcare more than offset the decline in alcohol/tobacco. Food was flat. CPI excluding food and energy was down 0.4%, but because of base effects the year-on-year core inflation rate rose one tick to 1.8%. In seasonally-adjusted terms, it rose 0.2%, its strongest showing in 5 months. Statistics Canada published for the second time three other measures of inflation considered by the Bank of Canada more suitable for operational decisions: CPI-Trim, CPI-Median and CPI-common component. On an annual basis, the CPI-trim stands at 1.6% (unchanged compared to November), CPI-Median at 2.0% (unchanged) and CPI-Common at 1.4% (up from 1.3%). Despite December’s inflation being below expectations, the general trend seems to be accelerating. After a poor diffusion in November, no less than 6 categories were rising in December on a seasonally adjusted basis. Stronger wage inflation combined with a renewed weakness of the Canadian dollar should continue to support core inflation in the coming months.

Retail sales rose just 0.2% in November, disappointing consensus which was looking for a 0.5% increase. Sales rose in just five of the 11 major subsectors, including a 0.8% increase for autos. Excluding autos, sales rose a meagre 0.1%, restrained by a 1% decrease for gasoline sales, as well as declines for sellers of food/beverage, clothing/accessories, sporting goods, general merchandise, and miscellaneous items, which offset increases for sellers of building materials, furniture, electronics and health/personal care products. Looking at provinces, on a year-on-year basis, the big three continue to perform well with BC (+5.5%), Quebec (+4.5%) and Ontario (+3.5%) well above the national average of 3%. In contrast, Alberta (-2.1%) continues to lag. The softness in nominal retail sales was due to prices; in real terms, Canada’s retail sales rose a healthy 0.7% in November. In terms of volume sales experienced a third consecutive month of solid growth. Looking at Q4, retail volumes grew a solid 7% annualized during the quarter, even assuming no change in December. That’s the biggest quarterly increase since 2010Q1. Spending was supported by savings from Q3, but more importantly by household incomes which found support in Q4 from further employment gains.

Manufacturing shipments rose 1.5% in November, well above the 1% advance expected by consensus. Sales were up in 14 of the 21 broad industries. Losses in the transportation sector were dwarfed by gains in other categories, including primary metals (+9.1%), petroleum and coal products (+3.7%), and chemicals (+3.4%). In real terms, sales grew a healthy 1.2%, though part of the increase came from a draw on inventories, which shrank 0.7%. Assuming flat sales in December, real factory shipments in Q4 will register their sharpest decline in a year. This is consistent with our view that Canada’s GDP growth softened to about 1.5% annualized in 2016Q4.

International securities transactions data showed foreign investors increased their Canadian securities holdings by C$7.2 billion in November, with net buying of bonds (+C$2.9 billion) and equities/investment funds (+C$5.5 billion) more than offsetting net selling of money market instruments (-C$1.1 billion). The build-up in bonds was accounted for largely by the corporate segment (+C$5.6 billion, including C$1.9 billion in government business enterprise bonds), though there were also small net purchases of federal government bonds (+C$0.2 billion) and municipal bonds (C$51 million). These more than offset a divestment from provincial bonds (-C$3 billion).

Last year saw net inflows average C$9.2 billion/month for bonds and C$4 billion/month for equities, two new record highs (chart). However, 2017 could turn out different. With the TSX’s valuation looking stretched, foreigners might not find Canadian equities as attractive this year. It will also be tough to replicate last year’s foreign inflows into bonds. If we are right about these foreign flows moderating, the Canadian dollar could head towards 1.40 against the USD (or 72 U.S. cents per C$).

Existing home sales rose 2.2% month-on-month in December after the largest monthly retreat in more than four years in November (-5.3%). The lackluster numbers were the result of tighter mortgage regulations that came into effect last month. Actual sales were down 5.0% in the December compared with the same period a year ago.

As widely expected, the Bank of Canada left its overnight rate unchanged at 0.50% in January. The central bank acknowledged that employment growth was “firm” but also stressed that the labour market still showed significant slack. The Bank lifted its 2017 real GDP growth forecast for Canada from 2.0% to 2.1% while leaving its projection for 2018 unchanged at 2.1%. Potential GDP growth was left unchanged at 1.0% to 2.0% for this year. The BoC estimated that the output gap at the end of 2016 was about 1.25%. The central bank still expected slack to be eliminated by mid-2018. The BoC’s inflation forecasts were raised slightly for this year but the central bank still expected inflation to be close to 2%. Importantly, the BoC made clear that its base case forecast did not account for “prospective protectionist trade measures in the United States”.

United States – In December, the consumer price index climbed 0.3% m/m on higher energy prices (+1.5% for a fourth consecutive increase), as food prices were flat again. Excluding food and energy, prices were up 0.2%. Ex-energy services CPI was hoisted to 0.3% by further gains in owners’ equivalent rent (OER) and medical care. Core goods prices found support from personal computers and tobacco, which offset lower prices for apparel. Year on year, the headline inflation rate rose four ticks to 2.1% (from 1.7% in November) and the core measure inched up one tick to 2.2%. The escalation in the annual CPI inflation rate was largely due to energy. Core prices were mounting as well, but thanks primarily to OER. Excluding OER, core CPI inflation remained very mild and told a story similar to the core PCE deflator, the measure of inflation most closely watched by the Fed.

Industrial production jumped 0.8% in December, making up for the prior month’s downwardly revised 0.7% slump. Utilities surged (+6.6%) and manufacturing rose slightly (+0.2%) on a swell in auto production (+1.8%). The capacity utilization rate sprang from 74.9% to 75.5%. Numbers were roughly in line with consensus. For Q4 as whole, IP was down marginally from the prior quarter owing largely to the fact that the warm autumn depressed utilities. This offset gains for factories and mining. In other words, the decline in IP did not reflect U.S. economic activity, which remained buoyant in the last quarter of the year.

We continue to expect Q4 U.S. GDP growth to come in close to 2% annualized.

Still in December, housing starts jumped 11.3% to 1226K in seasonally adjusted annualized terms. Multis bounced back (+57.3% after plunging 39%) while single-family starts fell 4%. Separately, building permits were roughly flat at 1210K as gains for singles offset declines for multis.

The Empire State Manufacturing Index for January slid 1.1 points to 6.5 after rising 6 points in December. The new-order index slipped 7.3 points but remained positive. As for inventories, the index climbed 16.4 points to move into positive territory for the first time since June 2015. After sinking in December, the number-of-employee index was up 10.5 points, which suggested that manufacturing employment in New York State might have turned the corner.

The weekly jobless claims report showed initial claims fell 13K to 234K in the week ended January 14 from a downwardly revised 247K the week before (beating the consensus figure of 252K). This was close to the all-time low of 233K reached in the week ended November 11, 2016.

The January edition of the FED’s Beige Book acknowledged the continued modest pace of economic growth in the United States. All districts reported growth in employment and tightening labour markets, which resulted in modest wage growth in most districts and greater difficulty filling positions for skilled workers. Many districts expected the upward trend in employment and wages to continue in 2017. As for prices, 8 out of 12 districts observed a modest increase.

World – In the Eurozone, the ECB kept its policy stance unchanged at its latest meeting. According to ECB President Mario Draghi, tapering of the asset-purchase program was not discussed. The ECB noted the acceleration in inflation from 0.6% in November to 1.1% in December but attributed it to base effects and energy prices. It saw no convincing signs of a sustained acceleration in the underlying inflation trend and therefore continued to expect its key interest rate to remain at present or lower levels for an extended period of time. The central bank recognized that inflation trends varied widely across members (1.7% in Germany vs. 0.5% in Italy), but said it expected them to converge more in future.

In China, the government’s statistics bureau announced that the economy grew at rate of 6.8 % in the fourth quarter from a year earlier. The annual growth for 2016 thus reached 6.7% on the back of massive government stimulus and a 9.6% rise in consumer spending compared with last year. Property sales also soared 22.5% in 2016, its fastest advance in seven years, increasing worries about an already crowded market. The growth figure for the year is the lowest since 1990 but still sits within the government’s target range of 6.5-7.0%.

Download The Full Weekly Economic Letter