Week in review: Wholesale trade grew 1.3% to $55.3 billion

Week in review

Canada – In June, wholesale trade grew 1.3% to $55.3 billion. Five of the seven broad subsectors (representing 86% of total sales) registered gains, led by motor vehicle and parts (+3.0%) and personal and household goods (+2.2%). Farm product and miscellaneous contracted 2.6% and 1.7%, respectively. Inventories were up 1.1%, though the inventory-to-sales ratio remained unchanged. In real terms, wholesale trade swelled 1.1% and manufacturing sales increased 0.5%, suggesting that the Canadian economy was back in expansion mode after receding for a fifth consecutive month in May.

Retails sales rose a robust 0.6% in June, easily beating the consensus estimate calling for a 0.2% increase. Most sectors were up on the months with notable increases in discretionary goods such as electronics (+9.4%), sporting goods (+1.3%) and furniture (+0.5%). Auto sales took a break (-0.1%) following a surge in the two previous months. Discretionary spending was up 0.4% in June. In volume terms, retail sales were flat on the month. Currency depreciation is having a significant impact on Canadian retail sales: nominal sales were up 7.8% during in Q2 vs. only 1.6% for volume sales (-1.5% in Q1). The 6.1% surge in retail prices in Q2 was the largest quarterly increase in over a decade. We view the flat June reading on volume sales as a disappointment. Though we expect volume sales to pick up in the coming months on the back of tax relief (enhanced family allowances).

The consumer price index rose 0.1% in July, allowing the year-on-year inflation rate to accelerate three ticks to 1.3% (from 1.0%). In seasonally adjusted terms, CPI rose 0.2%, with gains in 6 of the eight broad categories: clothing/footwear (+0.6%), transportation (+0.4%), shelter (+0.2%), health/personal care (+0.2%), household operations (+0.1%) and alcohol/beverage (+0.1%). Prices were flat for recreation/education and food. The core CPI, which excludes eight of the most volatile items, was flat (but up 0.2% in seasonally adjusted terms), causing a one-tick increase in the year-on-year core inflation rate to 2.4% (from 2.3%). The Canadian CPI data was essentially in line with expectations. Despite weak economic growth, the core inflation remains high on an historical basis. The year-overyear rate is at 2.4% while the 3-month change annualized is even higher at 2.6%. However, this should not be a concern for the Bank of Canada given deflationary international developments. Weakness in commodity prices will put downward pressure on headline inflation while sinking Asian currencies could mean lower price for imported goods. We expect core inflation to moderate in the further months.

United States – In August, the New York Fed’s Empire State Manufacturing Index plunged to -14.9, its lowest point since the 2009 recession. Both shipments and new orders dropped into negative territory, registering their sharpest declines in years. Employment, for its part, remained in positive territory. In contrast, the Philadelphia Fed Manufacturing Index sprang to a consensus-topping 8.3, up from 5.7 in July. However, the sub-indexes sent a mixed message, with shipments and employment rising, and new orders slipping a tad (while remaining in expansion territory). The flash manufacturing purchasing manager’s survey index by Markit Economics fell to 52.9 in August, compared to last month final estimate of 53.8. Despite the decline, the index remained in expansion territory.

In August, the National Association of Home Builders Index moved up a notch to 61 after holding at 60 for two consecutive months. A reading above 50 indicates more respondents reported good market conditions than not. The last three months have demonstrated a sustained improvement in the housing market.

In July, housing starts jumped 0.2% to an annualized pace of 1.21 million units, their highest level since October 2007. The gain was concentrated in the single-family segment (+12.8%). The multi-family category tumbled 17.0% after surging 36.3% the previous month, when the expiration of a real estate tax break in New York City helped boost results.

In July, building permit applications slid 16.3% to just 1119K, a four-month low. The drop was due largely to the multi-family segment (-31.8%), though permits for singlefamily homes were down as well (-1.9%).

Still in July, existing-home sales rose 2.00% to 5.59 million units, their highest mark since February 2007. The increase derived from the single-family category (+2.7%) as multifamily units pulled back (-3.1%) after vaulting 6.6% the prior month. The months’ supply of homes at the current sales rate fell to 4.8, its lowest point four months. The median resale price sagged to $234,000 but was still 5.6% higher than the year-ago level (+5.8% for singles and +3.2% for multifamily). The July report for existing-home sales was much better than expected. A solid labour market and persistently low mortgage rates are clearly contributing to bolster the U.S. housing market. The declining inventory in the resale market means that housing starts, which are already at a cyclical high, should make further gains in the months ahead.

In July, the Consumer Price Index edged up 0.1%. On a year-over-year basis, headline inflation was 0.2% higher. Energy price inflation slowed to 0.1% m/m after picking up 1.7% the previous month. Food prices were up 0.2%. Shelter costs increased 0.4% while airline fares shrank 5.6%. Core CPI rose 0.1% m/m and 1.8% y/y.

The minutes of the July 28-29 FOMC meeting showed participants remained undetermined on the timing of the first rate hike. Though most of them judged that conditions for policy firming had not yet been achieved, they noted that these were approaching the tipping point. However, some participants still argued that incoming information had not yet provided the grounds for reasonable confidence that inflation would move back to 2% over the medium term. Some participants also discussed the risk that a divergence in interest rates between the United States and other countries might lead to further appreciation of the U.S. dollar, thus prolonging the downward pressure on commodity prices and the weakness in net export.

In our view, recent developments on the international front (i.e., China’s devaluation of the yuan) together with a renewed decline in commodity prices are certainly giving the doves the upper hand. It appears that the odds of a September rate hike have significantly diminished, at least for the time being. We still think that a Fed rate hike is more likely in October if financial conditions stabilize.

World – In Japan, GDP shrank an annualized 1.6% in Q2 on the back of weak trade numbers.

The privately complied manufacturing survey published by Caixin Median and Markit Economics showed China' manufacturing PMI fell to 47.1 in August from a final 47.8 reading in June. The report suggests the weakness evident in Chinese economy during July continued in August, exacerbating fears that have roiled global markets recently.

Markit Eurozone Manufacturing PMIs hold steady in August at 52.4 while the services index rose to 54.3. Strong German orders data contributed to boost the German manufacturing PMI (53.2), which compensated for another drop in the French reading (48.6). The Eurozone composite PMI rose slightly to 54.1 in August from 53.9 in the previous month, pointing to further improvements of the economy in Q3.