Merchandise trade balance returned to deficit territory

Week in review

Canada – Real GDP remained essentially unchanged in July as output declines in goods producing industries offset increases in services. The 0.2% decrease in goods output was due to losses in agriculture & forestry (-2.4%), utilities (-2.3%) and mining (-1.5%), which more than offset increases in manufacturing (+1.0%) and construction (+0.4%). The 0.2% increase for services came courtesy of gains in health care (+1.5%), professional services (+0.5%), real estate (+0.2%) and educational services (+0.2%), which more than offset declines in arts , entertainment & recreation (-1.4%), wholesale trade (-0.6%) and transportation & warehousing (-0.4%). All told, while July’s GDP was soft, a moderation was always in the cards after the sharp gains registered in prior months.

The merchandise trade balance returned to deficit territory for the first time in four months with a print of –C$0.61 bn in August. Adding to the bad news, the surplus for the prior month was revised down to C$2.2 bn (from C$2.6 bn). The deterioration in August’s trade balance was due to falling nominal exports (-2.5%) and rising nominal imports (+3.9%). The export decrease was felt in most categories, including energy, autos, electronics, agriculture, forestry and industrial machinery, which more than offset increases for aerospace products. The energy trade surplus fell to C$6.2 bn, the lowest this year, while the non-energy trade deficit widened to C$6.8 bn, the worst in three months. The trade surplus with the U.S. fell to C$3.5 bn, the lowest since November last year. In real terms, Canada’s exports fell 2.2%, while imports were up 3%. Despite the soft August numbers, trade is still on track to contribute to Q3 GDP, with real exports growing faster than imports so far in the quarter.

United States – Non farm payrolls rose 248K in September, well above the 220K expected by consensus. Adding to the good news was a 69K upward revision to the prior months to reflect more complete data ― employment creation in August, which was initially estimated at just 142K, was upgraded to 180K. Coming back to September data, the private sector added 236K jobs. Goods sector employment rose 29K thanks to gains in manufacturing, mining and construction. The private services sector created a net 207K jobs, also with broad based gains. Government added 12K jobs. Average hourly earnings were flat, while aggregate hours worked increased 0.5%. Released at the same time, the household survey, which surveys households as opposed to establishments, showed a gain of 232K jobs, while the participation rate dropped one tick to 62.7%. Those combined to push the unemployment rate down to 5.9%, the lowest since July 2008. All told, the U.S. labour market remains strong. Employment creation has averaged 227K/month this year (+220K/month in the private sector). That’s the best first nine months of the year since 1998.

The ADP employment report showed a 213K increase in September. August was revised down slightly to 202K (from 204K), but that still leaves a huge gap between the ADP and August’s first estimate of private sector employment. The ADP’s job gains in September were mostly in small firms, i.e. those employing less than 50 employees, which added 88K to payrolls. Medium-sized firms added 48K while large firms increased payrolls by a net 77K.

Weekly jobless claims data for the week of September 27th showed initial claims falling to 287K (from an upwardly revised 295K in the prior week). The more reliable 4-week moving average fell to 295K. Continuing claims for the prior week fell 45K to 2.398 million. Overall, the claims data was better than expected. It’s the first time since 2006 that continuing claims have fallen below 2.4 million. Moreover, weekly initial claims averaged 295K in September, the lowest since February 2006.

The ISM manufacturing index fell to a 3-month low of 56.5 in September (from 59 in the prior month). The new orders subindex fell from 66.7 to a three-month low of 60 (in part due to export orders, the latter’s index falling to 53.5), while the employment sub-index dropped to 54.6, also a three-month low. However, the production sub-index was up slightly to 64.6 (from 64.5), the highest since 2010. The non-manufacturing ISM index dropped to 58.6 in September (from 59.6 in the prior month). A reading above 50 implies the services sector is expanding. The business activity index dropped to 62.9, and the new orders sub-index fell to 61, albeit both well in expansion territory. The employment sub-index rose to 58.5, the highest in months. All told, despite the decline, the ISM still shows a services sector expanding at a decent pace.

The Conference Board’s consumer confidence index dropped to 86.0 in September, its lowest level in four months, after reaching a cyclical high of 93.4 in the prior month. September’s decline in confidence was due to a drop in the perceptions about the economic prospects (sub-index declining to 83.7 from 93.1) while consumers were also less upbeat about the present situation (declining 89.4 from 93.9). Consumers were a bit more pessimistic than in the prior month about employment. They were less upbeat than in August about buying autos and homes but more keen to purchase major appliances.

Personal income rose 0.3% and personal spending jumped 0.5% in August (after an upwardly revised flat print in the prior month). With spending rising faster than income, the savings rate fell two ticks to 5.4% in August (from 5.6%). In real terms, disposable income was up 0.3% while spending rose 0.5%. The PCE deflator was flat in August, causing the year-on-year rate to drop one tick to 1.5%. The core PCE deflator was up 0.1%, leaving the annual core rate unchanged at 1.5%. Even assuming no change in September, real consumption spending is on track to grow at an annualized pace of 1.9% in Q3, after a 2.5% print in the prior quarter. The results are consistent with our view that US GDP growth is set to decelerate to around 3% annualized in Q3 after an unsustainably hot 4.6% print in the second quarter.

Construction spending fell 0.8% in August, erasing part of the prior month’s gains (the latter revised down to +1.2% from an initial +1.8%). August’s decline was mostly due to the nonresidential sector (-1.2%), but there was also a 0.1% drop in the residential sector. Overall, construction spending is up 5% compared to levels of August 2013 (+3.3% for residential and +6% for non-res). The factory report showed a 10.1% drop in orders in August, after an unrevised 10.5% increase in the prior month. Transportation orders slumped 42.2%, erasing part of the prior month’s gains, as Boeing’s orders returned to normal. Excluding transportation, new factory orders fell 0.1% as declines for non-durables (-0.4%) more than offset gains for durables (+0.4%). Total factory shipments dropped 1%, with declines for both durables and non-durables, the latter down 0.4%. Still, the quarter as a whole doesn’t look too bad. Assuming no change in September, orders are set to grow in Q3, even excluding the volatile transportation category. That suggests production has potential to expand until at least the final quarter of the year. The trade deficit narrowed to $40.1 bn in August, from a $40.3 bn deficit in the prior month. The small improvement in the trade balance was due exports (+0.2%) rising faster than imports (+0.1%) in nominal terms. In real terms, exports rose 1%, while real imports increased 0.8%.

The Case-Shiller home price index fell 0.5% on a seasonallyadjusted basis in July, taking the annual home price inflation rate down to 6.75%. On a 3-month annualized basis, home prices are down 4.4%.

World – The European Central Bank left monetary policy unchanged at its meeting of October 1st. The ECB, however, gave details about the asset purchase plan it announced back in September. The ECB will start buying covered bonds in the second half of this month and ABS in the current quarter. The central bank believes those will have a sizable impact on its balance sheet. The programs will last at least two years. The Eurosystem’s collateral framework will be the guiding principle for accepting assets as collateral, although an exception will be made for some assets from Greece and Cyprus that are not eligible ― the latter will be “subject to specific rules with riskmitigating measures”. President Draghi reiterated during the press conference that the objective is to grow the ECB’s balance sheet to levels of 2012. He said that the ECB is open to buying government bonds as well, should the inflation outlook deteriorate. Still in the eurozone, the first estimate of September CPI revealed an annual inflation of just 0.3%, the lowest since 2009. The zone’s jobless rate for August was unchanged at 11.5%. The unemployment rate among the youth was also unchanged, albeit at a still-elevated 23.3%. In Japan, the Tankan survey suggested manufacturers were a bit more optimistic about the outlook, with firms generally upgrading their investment forecasts.