NFIB Small Business Optimism Index

Canada – In September, the Teranet–National Bank National Composite House Price Index™ rose 0.8% over the previous month. This was the second largest September increase since the index’s inception in 1999. Prices were up in six of the eleven regions covered: Toronto (+2.2%), Hamilton (+1.4%), Victoria (+1.1%), Calgary (+0.3%), Vancouver (+0.2%) and Winnipeg (+0.1%). They were stable in Halifax and declined in Edmonton (-0.4%), Ottawa-Gatineau (-0.6%), Montreal and Quebec City (-0.8% respectively). Year over year, the national index sprang 11.7%, its steepest 12-month jump since June 2010. Leading the charge were Vancouver (+24.0%), Victoria (+17.9%), Toronto (+16.4%) and Hamilton (+13.1%), followed at a good distance by Winnipeg (+4.6%), Ottawa-Gatineau (+0.9%) and Montreal (+0.2%). Prices were down from a year earlier in Edmonton (−0.7%), Halifax (-0.9%), Quebec City (−2.0%) and Calgary (−4.9%). In Vancouver, after seven hefty monthly increases in a row, prices were virtually flat m/m. This was consistent with a recent loosening of the resale market. Indeed, since hitting an all-time high last February, sales have dropped month after month for a cumulative decline of 44%.

Toronto is now the red hot market with sales breaking records in each of the past three months. High demand and low supply have combined there to lift monthly price growth to 2.9% on average over the past four months.

Again in September, housing starts rose at an annual rate of 19.7% to 220.6K. In urban areas, multiple starts were up 25.1K (+22.3%) to 137.8K, and single-detached starts increased 8.1K (+14.4%) to 64.0K. In rural areas, starts were estimated at 18.8K units, up 3.1K (+20.4%). On a regional basis, starts increased sharply in British Columbia (+13.4K), Quebec (+13.1K), Alberta (+9.3K), Nova Scotia (+3.0K) and New Brunswick (+2.0K). They progressed at a much slower pace in Manitoba (+0.3K) and fell in the other provinces: Ontario (-2.8K), Saskatchewan (-1.7K), Prince Edward Island (-0.1K) and Newfoundland and Labrador (-0.1K). Following September’s surge, starts in Q3 were up an annualized 4.2% over Q2. They thus contributed to economic growth in the quarter, especially as they were tilted towards single-family homes, which were up 7.3%.

United States – Retail sales were up a consensusmatching 0.6% in September. The prior month was revised up one tick to -0.2% (from -0.3%). September sales got a lift from motor vehicles/parts (+1.1%), but there were also contributions from several other categories. Indeed, excluding autos, sales were up a healthy 0.5%, also matching consensus expectations, buoyed by increases in gasoline station receipts and higher sales of building materials, furniture, and sporting goods. Nonstore retailers also posted gains. All of those gains more than offset declines for sellers of electronics, health/personal care items, and general merchandise. Retail sales excluding auto, gasoline and building materials increased by only 0.1% m/m in September, following a 0.2% m/m decline in July and a 0.1% m/m fall in August. All in all, assuming consensus is right about CPI growing 0.3% in September (due next week), then retail sales grew a healthy 0.3% in real terms in the month. Thanks to September’s gains, real retail spending grew roughly 3.3% annualized in Q3 (compared to the prior quarter’s gains of 4.7%). The results do not change our view U.S. GDP growth accelerated to over 3% annualized in the third quarter.

The NFIB Small Business Optimism Index slipped three ticks to 94.1 for a second straight drop. Four of the 10 components rose, while the other six declined. Though the outlook for business conditions registered the strongest advance, its 12- point gain merely brought the component back to a net 0% expecting improvement. Moreover, though earnings trends improved three points, it still meant that a net -20% reported a q/q improvement in profits. Two components recorded sharp losses: job openings (-6 points) and plans for inventory investment (-8 points).

In August, job openings fell 388K to 5.44 million, their steepest monthly decline since August 2015. The number of total separations, which includes layoffs and discharges (1.6 million), quits (3 million) and other separations (350K), was little changed at 5 million. The quits rate held firm at 2.1%.

Separately, the producer price index rose 0.3% in September, boosted in part by gains for food and energy. Excluding those items, the PPI rose 0.2% thanks in part to services. On a yearon- year basis, the PPI printed 0.7% on the headline measure and 1.2% on the core, both still very mild. Upstream price pressures remain very soft according to the PPI. So, while next week’s CPI will likely show an increase, consumer price inflation is set to remain under wraps over the coming months.

In September, import prices edged up 0.1% m/m, reversing part of the previous month’s decline (-0.2%). A 1.2% hike in imported petroleum prices accounted for much of the overall increase. Ex-petroleum import prices were flat. Relative to September 2015, import prices were down 1.1%. Export prices rose 0.3% m/m.

The Minutes of the FOMC`s September meeting showed that participants had divergent views on the degree of slack still left in the economy. Not surprisingly they also disagreed on when it would be appropriate to raise the fed funds target range. In this context, participants discussed the costs and benefits associated with undershooting the normal rate of unemployment. Among the participants who supported waiting further before hiking the policy rate, several stated that the decision was a close call. Some participants were of the opinion that it would be appropriate to raise the target range for the fed funds rate relatively soon, while three members voted to raise it by 25 bps at the September meeting. Several expressed concern that, in light of recent economic data, continuing to delay an increase in the target rate risked eroding the FOMC`s credibility. Members generally agreed that the case for an increase in the policy rate had strengthened leading up to the September meeting and most participants expected one rate increase this year (see dot plot).

Consequently, we share Fed Chair Janet Yellen`s point of view expressed in her post-FOMC meeting press conference to the effect that such a move should be expected if the economy stayed the current course of labour market improvement and no major new risks developed. In our view, a quarter-point increase in the fed funds target range is highly likely in December.

World – In September, the Caixin China Services PMI edged down one tick to 52.0 from a month earlier, pulling the composite index down four ticks to 51.4. The trade report was disappointing as well, as it showed exports fell 10% in USD terms from a year earlier. This was the sixth consecutive decline and followed a 2.8% y/y drop the previous month. Imports sank 1.9% y/y. Consequently, China’s trade surplus shrank to US$41.99 billion from US$52.05 billion in August. Producerprices rose 0.1% y/y in September. The last time China’s PPI was not in a deflationary mode was in January 2012. The Consumer Price Index rose 1.9% y/y in September.

In August, Eurozone industrial production grew 1.6% m/m. The sectors that contributed to growth included durable consumer goods (+4.3%), capital goods (+3.5%), energy (+3.3%) and intermediate goods (+1.4%). Non-durable consumer goods production detracted from growth as it pulled back 0.6% on the month. Relative to August 2015, industrial production grew 1.8%.

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