The Federal Budget was released on Wednesday

Week in review

CANADA: The consumer price index rose 0.2% in February, allowing the year-on-year inflation rate to decrease 1 tick to 2.0% compared with the previous month. In seasonally adjusted terms, CPI was down 0.2% as higher prices for recreation (+0.2%), alcohol/tobacco (+0.3%), healthcare (+0.1%) and clothing (+0.1%) were more than offset by the declines in transportation (-1.1%), household ops (-0.2%) and shelter (-0.1%). Food was flat. CPI excluding food and energy rose 0.4%, which caused the year-on-year core inflation rate to drop two ticks to 2.0%. In seasonally-adjusted terms, it was flat month over month. Turning to the Bank of Canada’s favorite measures of the underlying inflation, February’s data also looked weak. On an annual basis, the CPI-trim stood at 1.6% (down from 1.7%), CPI-Median at 1.9% (unchanged) and CPI-Common at 1.3% (unchanged). All three measures remained below the Bank of Canada’s mid-point target of 2.0%, with the average lingering at a modest 1.6%. Nevertheless, we continue to expect core CPI to speed up in 2017 in line with the recent economic momentum. We think that stronger wage inflation and a renewed weakness in the Canadian dollar will revive inflation via import prices.

Retail sales jumped 2.2% in January. Gains were registered in 10 of the 11 major industry categories, including motor vehicles and parts (+3.8%). Excluding autos, sales rose 1.7%. Discretionary spending (i.e., sales excluding gasoline, groceries and health/personal care items) climbed 2.5% to an all-time high. All provinces saw higher sales, with the big three continuing to perform well year on year: British Columbia (+6.6%), Quebec (+4.4%) and Ontario (+3.8%). Another hopeful sign was the recovery observed in energycentric provinces such as Alberta (+4.8%) and Saskatchewan (+6.0%). Adding to the good news, sales were up a healthy 1.3% in real terms, which means that the impressive nominal gains were not caused simply by higher prices. Retail volumes are in fact showing encouraging signs; they are on track to grow about 3.0% in annualized terms in Q1. This is somewhat slower than in the previous quarter, but remains a brisk pace nevertheless. Overall, a high household savings rate, solid employment creation and a positive housing wealth effect converged in Q1 to offset higher-than-usual pump prices and boost spending.

Wholesale trade swelled 3.3% month on month in January (4.7% year on year), its highest monthly upswing since November 2009, and totalled an all-time high C$59.1 billion. Trade was up in four of the nine main categories but was driven primarily by a 17.1% surge in the motor vehicles and parts component, which contributed 3.44 percentage points to overall sales growth. Ex-autos, trade was up 0.3% (3.9% year on year). Regarding the provinces, trade progressed in Ontario (+6.0% to a record C$30.5 billion), Alberta (+2.0%) and British Columbia (+0.8% to a record $5.9 billion). In volume terms, trade increased 3.4% over the previous month.

The Federal Budget was released on Wednesday. It estimated a deficit of C$23.0 billion for the outgoing fiscal year, equivalent to 1.1% of GDP. Larger deficits are projected over the coming two years: C$28.5 billion in 2017-18 (1.4% of GDP), and C$27.4 billion in 2018-19 (1.2% of GDP). The country’s debt-to-GDP ratio is thus set to clock in at 31.5% in the outgoing year before increasing one tick to 31.6% in each of the coming two years. The ratio is predicted to decrease below 31% by 2021-22. In terms of financing, the Canadian government is planning a record C$142 billion-worth of bond auction in the year ahead. The bulk of supply, as well as 32 of the 44 planned auctions, will be in the 2-, 3- and 5-year sectors. In more general terms, the Liberal government's second budget stayed on message, reiterating a goal of inclusive growth and incorporating measures aimed at stimulating innovation, developing skills and communities, as well as advancing gender-related issues.

UNITED STATES: The durables goods report showed new orders rising 1.7% in February, following a 2.3% rise in the prior month (revised up from 2.0%). Orders rose sharply in February in the transportation category (+4.3%) thanks to gains for civilian aircrafts. Ex-transportation, orders rose 0.4%, driven by increases in electrical equipment and primary metals. It was the eight consecutive positive showing for that measure, an impressive feat consistent with surging surveybased indicators for the manufacturing sector. Also noteworthy, total shipments of non-defense capital goods exaircraft, a proxy for business investment spending, rose 1.0%.

The current account deficit shrank 3.1% quarter on quarter to $112.4 billion in Q4 2016, its lowest level since Q2 2015. That number represented 2.4% of GDP, down one tick from Q3. The smaller shortfall reflected the fact that the primary income surplus increased $19.9 billion to $61.5 billion. On the other hand, the goods deficit widened $17.5 billion to $196.1 billion. Meanwhile the services surplus and the secondary income deficit remained largely unchanged at $63.8 billion and $41.5 billion, respectively. For 2016 as a whole, the current account deficit amounted to $481.2 billion, up 3.9% from 2015.

In February, new-home sales grew 6.1% to an annualized 592K after increasing 5.3% the previous month. This was the strongest February showing since 2008. The weather was probably a key factor behind the performance, given that this past February was the second warmest on record. As only 266K new homes entered the market in the month, the supply of new homes sank to 5.4 months of sales, down from 5.6 months in January. Furthermore, the median sales price dropped 4.9% year on year to $296,200.

Existing-home sales fell 3.7% to 5.48 million in annualized terms in February after reaching their highest level in a decade in January at 5.69 million. Contract closings for singlefamily homes declined 3.0%, while those for multis dropped 9.2%. Both segments were hindered by the limited number of properties on the market. Indeed, year on year, inventories were down 6.4% to 1.75 million units. The lower supply contributed in lifting the median sales price 7.7% year on year to $228,400. A further sign of market tightness, the average time required to sell a property fell to 45 days, down from 50 the prior month and 59 a year earlier.

Markit’s flash composite PMI came in at 53.2 in seasonallyadjusted terms, 0.9 point below its February level. The decrease was explained in part by a drop in the employment index from 53.1 to 51.4. The manufacturing PMI lost 0.8 point to 53.4 while the services index went from 53.8 in the previous month to 52.9 in March.

WORLD: In the Eurozone, the Markit flash composite PMI continued its progression, edging up from 56.0 in February to 56.7 in March (adjusted for seasonal effects). It now stands at a 71-month high. The overall index was pushed by positive results in the new orders, output prices and employment components. Both the manufacturing (56.2) and the services (56.5) indices posted better readings than in the previous month. National results showed France’s composite PMI rising from 55.9 to 57.6 while Germany’s index showed a 0.9 point progression to 57.0.

In Japan, the Markit flash manuafacturing PMI for the month of March ceded 0.7 point compared with the previous month to 52.6. The output component of the index declined from 54.1 to 53.4 but remained in expansionary territory for the eight consecutive month. The new orders sub-index also lost ground at 52.9 compared with 54.2 the previous month.

Also in Japan, the trade balance swung into surplus territory in February, posting a positive figure of ¥813.4 billion in nonseasonally adjusted terms. Exports soared 11.3% year on year, their fastest monthly increase in more than two years, while imports advanced 1.2%. In volume terms, exports were up 8.3% over the same month in 2016, while imports fell 4.3%.

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