The consumer price index rose 0.5% in July

Week in review

CANADA: The consumer price index rose 0.5% (not seasonally adjusted) in July, allowing the year-on-year rate to climb five ticks to 3.0%, well above the 2.5% expected by consensus. In seasonally adjusted terms, CPI rose 0.5%, thanks to increases in seven of the eight broad categories ─ only clothing went in the other direction by dropping 0.4%. Sizeable jumps were recorded for transportation (+1.1%), recreation/education (+1.1%), household operation (+0.7%) and shelter (+0.4%). Prices for food (+0.2%), and alcohol/tobacco (+0.2%) rose as well, but at a more modest pace. On an annual basis, the CPI-trim rose one tick to 2.1% while CPI-median and CPI-common remained unchanged at 2.0% and 1.9%, respectively.

The CPI data was much stronger than expected with headline annual inflation now standing at the upper end of the central bank's target (1.0% - 3.0%). CPI excluding food and energy, for its part, is rising at its fastest pace since 2007. So, are inflationary pressures running amok? Not so fast. First, we note that July's surprise increase was essentially driven by an atypical monthly surge of 15% in intercity transportation costs. Moreover, the Bank of Canada's preferred gauges, which filter out such noises, are running at a much tamer average annual pace of 2.0%. Also, our in-house replications of CPI-Trim and CPI-median are not showing acceleration on a 3-month annualized basis (respectively at 2.0% and 2.1%).

The Teranet-National Bank Composite National House Price Index climbed 0.8% in July, with 10 of the 11 constituent metropolitan areas recording increases. The monthly gain was below the historical average for July. Once seasonal patterns were accounted for, prices were actually flat on the month. In fact, seasonally adjusted prices were roughly unchanged since March. On a y/y basis, the index rose just 1.8%, its smallest 12-month increase since July 2013. Toronto (-4.0%), Hamilton (-1.5%), Calgary (-0.1%), Edmonton (+0.3%), and Quebec City (+0.6%) contributed to the slowdown. At the other end of the spectrum, Vancouver (+10.6%), Victoria (+6.8%), Ottawa-Gatineau (+5.1%), and Montreal (+4.0%) registered healthy annual gains.

According to the Canadian Real Estate Association (CREA), existing -home sales progressed 1.9% m/m in seasonally adjusted terms in July, marking a fourth consecutive monthly increase. A 7.7% surge in sales in the Greater Toronto Area was responsible for roughly 70% of the hike at the national level. Sales in British Columbia rebounded 0.9% after falling a cumulative 35% over the previous six months. Despite slipping in July (-0.3%), sales in Quebec were still poised for a record year in 2018 thanks to a bustling Montreal market.

Manufacturing shipments rose 1.1% in June after springing a healthy 1.5% the prior month. The report showed that the increase was due mostly to a spike in the petroleum/coal products segment (+15.9%, its steepest jump since 1999) as production ramped up at several refineries following maintenance work in April and May. Excluding the energy sector, shipments actually retraced 0.4% m/m, hampered by poor showings in several categories, led by chemicals (-4.5%) and food products (-1.7%). At the provincial level, Quebec continued to dominate, posting the strongest m/m print in the federation (+3.8%). Manufacturing sales there were up 12.9% on a 12-month basis, compared with just 2.0% in Ontario. The relative under-performance of Canada's largest province was due in large part to a slump in the auto sector (shipments of motor vehicles countrywide were down 11.2% from their level a year earlier). Alternatively, sales of aerospace products—a vital sector in Quebec—were up no less than 17.1% y/y. On a quarterly basis, real manufacturing shipments at the national level expanded an annualized 1.7% in Q2, their tenth such advance in a row, marking the longest streak of uninterrupted quarterly growth since data collection began in 2002. The increase in shipments, combined with a build-up in inventory, means factories should have contributed to GDP growth in the period.

UNITED STATES: Housing starts increased just 0.9% m/m in July (to an annualized 1,168K), a much smaller rebound than expected following the steepest monthly decline in 19 months in June (-12.9%). Groundbreaking picked up a little for both singles (+0.9%) and multis (+0.7%). Given their recent weakness, starts are likely to retreat for a second consecutive quarter in Q3 (after pulling back an annualized 17.7% in Q2), which may translate into a negative contribution to GDP growth from residential investment in the period.

To some extent, a slowdown in residential construction was to be expected after two stellar quarters in Q4 and Q1, when starts shot up 33.5% and 19.6%, respectively. Still, there are reasons to believe that buyers are being priced out of the market at the moment. Clearly, home prices in the country have been rising faster than wages for some time now, thanks in part to the tariffs imposed on Canadian lumber, which, according to the NAHB, have added $9,000 on average to the cost of building a new home. In the past few months, potential buyers have also had to adjust to higher interest rates. All this has caused homebuilder confidence in August to sink to its lowest level in a year. However, there is no need to panic yet. Despite the recent drop, builders' confidence remains high by historical standards. Starts, for their part, still averaged nearly 1270K in the first seven months of 2018, that is roughly 6.0% above the level for the same period last year. What's more, the fact that the number of homes authorized but not yet started struck a cyclical high in July (175K) is very encouraging. Indeed, this leading indicator suggests that starts are set to bounce back.

Still in July, building permit applications rose 1.5% m/m to 1,311K, with advances registered for both singles (+1.9%) and multis (+0.7%).

Retail sales increased for a sixth consecutive month in July, springing a consensus-topping 0.5% m/m. However, the prior month's figure was revised down from +0.5% to +0.2%. Outlays progressed in nine of the ten categories, including clothing (+1.3%), food (+0.6%), gasoline (+0.8%), and non-store retailers (+0.8%). Sales of motor vehicles and parts rose slightly (+0.2%) despite a 3.0% decline in unit auto sales reported by Autodata in July. Sales excluding autos (+0.6%) rose for the 14th month running, their longest streak since 1999. The retail sales report suggested that some of the consumption momentum gathered in Q2 carried over into the third quarter. We see consumption remaining solid in Q3 and again contributing to growth, albeit to a lesser degree than in Q2.

Industrial production edged up 0.1% m/m in July after swelling 1.0% the month before (revised up from 0.6%). Manufacturing output, which represents 74.6% of total industrial production, advanced 0.3% with gains for computers/electronics (+1.3%), motor vehicles (+0.9%), and machinery (+0.6%). Excluding automobile production, manufacturing output grew at the marginally slower rate of 0.2%. Meanwhile, output in the utilities sector retraced 0.5% for a third consecutive monthly decline. Finally, mining output dropped 0.3% m/m but was still up 12.9% y/y thanks in large part to an 8.9% increase in oil and gas well drilling in the 12 months to July prompted by the rise in oil prices.

Also in July, Capacity Utilization in the industrial sector as a whole stayed put at 78.1%. As a point of reference, it stood at 77.0% in January.

The Empire State Manufacturing Index of general business conditions rose 3.0 point to 25.6 in August, its highest level this year. The shipments sub-index climbed 11.1 point to 25.7, just shy of the eight-and-a-half year high reached back in March (27.0). The new order gauge, meanwhile, remained above its 6-month moving average despite a second consecutive monthly decline (to 17.1). As trade war talks abated somewhat, businesses reported an improved outlook on the future, as evidenced by the 3.7-point increase registered by the index tracking firms' expectations of general business conditions over the next six months. The index now stands at 34.8, compared with 18.3 in April (a 24- month nadir).

The import price index (IPI) was flat in July though the prior month's figure was revised upward from -0.4% to -0.1%. July's result was positively affected by a 0.9% increase in the price of petroleum products. Excluding this category, import prices softened for the second month in a row, inching down 0.1%. On a 12-month basis, the headline IPI gained a tick to 4.8%, its strongest print since early 2012, thanks in large part to a massive 43.6% rise in the petroleum category. The less volatile ex-petroleum gauge, meanwhile, held steady at 1.3%, though it has declined since February, when it stood at 2.0%. The year-on-year core IPI measure, which has been flat since the beginning of the year, faces further headwinds in the months ahead. Indeed, the recent appreciation of the greenback (+7% in trade-weighted terms since April) and the stabilization of oil prices are factors that should exert downward pressure on import prices going forward.

The NFIB Small Business Optimism Index rose 0.7 point in July to 107.9, its highest print this cycle and the second best since the survey's inception in the mid-1970s. The details of the report were overwhelmingly positive. The net percentage of polled firms that expected the economic situation to improve rose to 35% from 33% the prior month and the net percentage that expected sales to increase sprang to 29% from 26%. Against such a favourable backdrop, 32% of respondents deemed present conditions conducive to expansion. The NFIB report continued to evidence widespread labour shortages, with an all-time high 37% of small businesses complaining about open positions they could not fill. No less than 29% planned to hire new staff but wondered whether they would be able to find qualified candidates. In this regard, 23% of respondents identified poor quality of labour as their biggest problem in the month, the highest proportion since 2000.

In July, the leading ecnomic indicator index (LEI) extended its streak of non-negative prints to 26 months, as it climbed 0.6 point to an all-time high of 110.7. Meanwhile, the diffusion index went from 80% to 95%, with almost all of the underlying economic indicators contributing to lift the overall index. Jobless claims and the leading credit index, which added 0.15 and 0.12 percentage point to the LEI, respectively, were the principal drivers.

According to the U.S. Department of Labor, nonfarm budiness productivity rose 2.9% in annualized terms in the second quarter of 2018 as output (+4.8%) expanded at a much faster pace than employee hours (+1.9%). Though this was the fastest rate of growth registered since 2015Q1, it came on the heels of two lacklustre quarters (+0.3% and -0.3% in Q1 and Q4, respectively). Year on year, productivity was up 1.3%, three ticks better than in Q1.

Still in Q2, compensation costs rose 2.0% on an annualized quarterly basis. However, strong productivity growth meant that unit labour costs ended up falling an annualized 0.9% in the quarter, their steepest drop since 2014Q3. On a 12-month basis, labour costs were up just 1.9%, compared with 2.5% in 2017Q3.

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