Retail sales jumped 1.1% in April

Week in review

Canada – The consumer price index rose a consensustopping 0.5% in May, helping take the year-on-year inflation rate to 2.3%. In seasonally adjusted terms, CPI rose 0.2%, as all eight broad categories saw price increases, including a 0.8% jump for alcohol/tobacco. The core CPI, which excludes eight of the most volatile items, rose a consensus-topping 0.5%, causing the year-on-year core inflation rate to rise to 1.7%. In seasonally-adjusted terms, core CPI rose 0.2%. Assuming seasonal patterns hold in June, Q2 year-on-year inflation is now tracking 2.2% for the headline and 1.6% for the core, much higher than the Bank of Canada’s estimates from last April’s Monetary Policy Report which estimated Q2 yearon- year inflation at 1.6% for the headline and 1.2% for the core.

Retail sales jumped 1.1% in April, much better than consensus which was expecting only a 0.6% gain. Sales rose in 10 of the 11 subsectors. Auto sales jumped 2.4%, more than erasing the prior month’s drop. Excluding autos, sales rose 0.7%, also much better than expected, thanks to gains in all of the categories except miscellaneous stores. In real terms overall retail sales rose 0.8%.

Wholesale sales rose 1.2% in April thanks to gains in all broad categories, with the exception of “food, beverage and tobacco”. There was a notable 3.6% jump in sales of building materials and a 1.1% increase for autos/parts. Inventories grew 0.7%. In real terms, wholesale sales rose 1.2%. Assuming no change in May and June, real wholesale sales are growing at an annualized pace of 5.8%, in sharp contrast to Q1’s 1.3% contraction. The volume gains in wholesaling, and retailing bode well for April GDP.

International securities transactions data for April showed foreign investors adding Canadian securities to their holdings to the amount of C$10.1 bn. The net buying was split between bonds (+C$2.4 bn), money market instruments (+C$4.1 bn) and equities (+C$3.6 bn). The net increase in foreign holdings of bonds was centered on corporate bonds (+C$5.8 bn, of which only C$0.5 bn was in government enterprises), provis (+C$0.4 bn), and munis (+C$0.1 bn), which more than offset the net divestment from federal government bonds (-C$3.9 bn).

Despite April’s gains, net foreign inflows amounted to just C$16 bn in the first four months of 2014, the worst start of the year since 2007. That’s because foreigners have been net sellers of Canadian money market instruments and federal government bonds, which has offset the increased appetite for Canadian equities. The divestment from federal government bonds extends a trend, i.e. a cumulative divestment of C$15.4 bn over the period September to April, the worst eight month performance in a decade. That contrasts sharply with equityrelated inflows. April was the eighth straight month of net foreign inflows into Canadian equities, with a cumulative total of C$34 bn over the period. The last time equities saw such inflows was between end-1999 and mid-2000.

United States – The consumer price index (CPI) rose 0.4% in May, causing the annual inflation rate to rise one tick to 2.1% (from 2.0%), the highest since October 2012. There was a 0.9% jump in energy prices and a 0.5% increase in food prices. Excluding food and energy, prices rose 0.3%, allowing the year-on-year core inflation rate to rise two ticks to 2.0%. Core CPI was supported by increases in medical care (fifth increase in a row), apparel, tobacco, education, which more than offset price declines for personal computers and the flat print for recreation.

Industrial production rose a consensus-topping 0.6% in May. Driving the increase was the manufacturing sector (+0.6% overall, as a 1.5% increase for auto/parts output was complemented by a 0.5% increase ex-autos) as well as the mining sector (+1.3%) which more than offset the 0.8% decline in output for utilities. Capacity utilization rose to 79.1%.

It seems that manufacturing sector momentum extended to June. Indeed, the New York Fed’s Empire index of manufacturing activity showed a print of 19.28 in June, the highest in four years. The increase in June was driven by the jump in the new orders sub-index to 18.36, the highest since 2010. The shipments and employment sub-indices fell a bit, but both remain well in expansion territory. The Philadelphia Fed index of manufacturing activity rose more than two points to 17.8 in June (from the prior month’s reading of 15.4). That’s the highest Philly since September last year. All of the major sub-indices not only remained well in expansion territory but also rose further, with new orders and employment rising to the highest since October 2013.

Housing starts fell 6.5% to 1001K in May, due to both multifamily homes (-7.6%), and singles (-5.9%). Building permit applications fell 6.4% in May to reach 991K with the decrease entirely due to multis which fell 19.5%, while those for single family units rose 3.7%.

The current account for Q1 showed the deficit widening to US$111.2 bn (from a revised deficit of US$87.3 bn). The US$23.8 bn deterioration was due to a lower surplus on the investment income account, and a larger goods trade deficit.

Weekly jobless claims data for the week of June 14th showed initial claims falling to 312K, from an upwardly revised 318K. The more reliable 4-week moving average fell to 312K. Continuing claims for the prior week fell 54K to 2.56 million, the lowest since 2007.

The FOMC maintained its stance with regards to tapering its asset purchases by another $10 bn/month, i.e. it will now buy Treasuries at a pace of US$20 bn/month and MBS at a pace of $15 bn/month starting July. The FOMC also left intact its forward guidance about the fed funds rate which it expects to remain low “for a considerable time” after QE ends. The decision was unanimous for the second consecutive meeting. The central tendency forecast for GDP growth (Q4/Q4) is now 2.1-2.3% for 2014 (versus 2.8-3.0% in last March’s update), while those for 2015 and 2016 were left unchanged at 3.0- 3.2% and 2.5-3.0% respectively. The central tendency projections for the unemployment rate were lowered a touch: 6.0-6.1% for 2014 (6.1-6.3% previously), 5.4-5.7% for 2015 (5.6-5.9% previously), and 5.1-5.5% for 2016 (5.2-5.6% previously). Inflation forecasts were largely unchanged. The FOMC presented information about how participants feel about the pace of policy firming going forward. Just like last March, one of the FOMC participants believes that rate hikes are appropriate this year. For 2015, eight participants (compared to five in March) see rates above 1%. There are only three members (previously four) that see rates remaining below 2% by the end of 2016. FOMC members now think the fed funds rate should be in the 3.25-4.25% range over the longer run.

In the press conference, Chair Yellen was asked if she could comment on what “considerable time” means and if she was still comfortable with the 6-month guidance that she had provided in the past. She seized that opportunity to reiterate that there is no mechanical formula to define what it means, but instead the notion depends on the progress that will be made towards achieving the FOMC’s dual objectives. As far as the dots (showing the appropriate pace of policy firming) are concerned, Chair Yellen recognized that there was a slight decline in what participants perceived as the long term normal fed funds rate. With regards to the mechanics of policy normalization, Chair Yellen mentioned that no conclusions had yet been reached by participants, although discussions are progressing and a revised set of exit principles should be made public later this year.

World – The eurozone’s annual inflation rate for May was left unrevised at 0.5%. The zone’s construction output grew 0.8% in April, and is now 8% above last year’s level. In Japan, trade data for May showed a widening deficit, with exports down 2.7% from last year’s level.