Week in review: Consumer price index rose 0.6%

Week in review

Canada – Wholesale trade surged 1.9% in April, blowing past consensus expectations for a mere 0.3% rise. Adding to the good news was an upward revision to the prior month’s growth from 0.8% to 1%. There were increases in 4 of the 7 subsectors, including motor vehicle and parts (9.3%), machinery, equipment and supplies, and personal and household goods. These offset declines in building material and supplies, as well as food, beverage and tobacco. Inventories were up 0.5%. In real terms, wholesale trade progressed 2%.

Manufacturing shipments fell 2.1% in April, losing most of the ground gained in March. Though sales declined in only 8 of the 21 broad industry groups, these 8 account for nearly twothirds of total Canadian manufacturing. The largest contributors to the drop were food (-5.7%), aerospace (-17.8%), petroleum and coal products (-2.7%), motor vehicles (-2.5%), and machinery (-2.7%). Inventories were up 0.8% owing to petroleum and coal products (+12.0%). The inventory-to-sales ratio rose from 1.41 to 1.45. On a regional basis, two-thirds of the national sales decline was located in Quebec (-5.4%). In real terms, Canadian sales were down 1.0% in April after gaining 2.6% in March. Unfilled orders fell 0.6%. Real inventories were up 1.3%, lifting the inventory-to-sales ratio from 1.46 to 1.50, its highest mark since July 2009. The steep decrease in aerospace sales was due to the appreciation of the Canadian dollar (sales in the industry are reported in U.S. dollars). That said, the collapse in oil prices has affected shipments of mining and oil and gas machinery since the beginning of the year. Finally, it should be noted that real sales were down in April for the fifth time in seven months.

Retail sales were down -0.1% in April, much below expectations (+0.7%), after an upward revised increase of 0.9% in the prior month. Sales rose or remained constant in 7 of the 11 subsectors, with autos/parts dealers posting a 1.3% increase. Excluding autos, sales were down -0.6% in April. Increases experienced in furniture (3.4%) and clothing (1.3%) were not enough to offset the significant drop in electronics/appliances (-8.8%), food (-1.3%) and health (- 1.2%). In real terms, sales were down -0.2%. Nominal sales saw the Atlantic Provinces posting the highest increases, while Quebec, Manitoba, Alberta and British Colombia showed declines. The Canadian retail results were much weaker than expected, but a silver lining is that there was an upward revision to the prior month.

While real household consumption expenditures in Q2 might be set to easily beat the meagre 0.4% advance in Q1, yet as far as economic growth is concerned April indicators released this week do not bode particularly well. Indeed volume for both retail and manufacturing sales were down. However, wholesale trade grew significantly in April. Still, given the inventory buildup and the poor Q1 handoff, we don’t expect Q2 GDP to be spectacular, i.e. possibly in the 1-1.5% range (annualized).

The consumer price index rose 0.6% in April, allowing the year-on-year inflation rate to rise to 0.9%. In seasonally adjusted terms, CPI increased 0.4%, as gains for recreation/education, transportation and food among others more than offset losses in clothing/footwear. The core CPI, which excludes eight of the most volatile items, was up 0.4%, but that did not prevent a one-tick drop in the year-on-year core inflation rate to 2.2% (from 2.3%). In seasonally-adjusted terms, core CPI was up 0.2%. Assuming seasonal patterns hold in June, CPI is on track to grow in Q2 by 0.8% annualized for the headline and 2.2% annualized for the core, very close to the Bank of Canada’s April’s Monetary Policy Report estimates of 0.8%for the headline and 2.1% for the core.

United States – The Empire State Manufacturing Survey showed that, in June, business conditions deteriorated slightly for manufacturers in the New York region. The headline index sank more than 5 points to -1.98 from 3.09 in May. In April, it had stood at -1.19. The last three months suggest that activity has remained relatively unchanged in the region in the second quarter. The index for future general business conditions went from 29.8 to 25.84 for a second consecutive drop. However, the Philadelphia Fed Index of Manufacturing Activity jumped to a consensus-topping 15.2 in June from 6.7 the prior month. This represents a 6-month high for the headline index. The increase was driven by new orders and shipments, which both struck their highest level this year. On the month, the Philly Fed Index contrasted sharply with the New York Fed Empire Index. However, as these regional surveys can be choppy, they need to be interpreted with caution. Nevertheless, we are heartened by the fact that employment and shipments were in expansion territory for both survey. This is consistent with a ramp up in factory output in Q2 after a disappointing 2015Q1.