Canada – The consumer price index fell 0.5%

Week in review

Canada – The consumer price index fell 0.5% in December, but because of base effects, the year-on-year inflation rate jumped to 1.6% from 1.4%. In seasonally adjusted terms, CPI rose 0.1% as gains for food, transportation, household operations and shelter more than offset declines for clothing, healthcare and alcohol/tobacco. Prices for recreation were flat. The core CPI, which excludes eight of the most volatile items, was down 0.3%, which allowed the year-on-year core inflation rate to fall to 1.9%. In seasonally-adjusted terms, core CPI was up 0.1%. Excluding food and energy, prices rose 0.1% in seasonally adjusted terms in December. The Canadian CPI data for December was a bit softer than expected. The surprise stemmed from the sharp decline in clothing prices. There is reason to believe that this is temporary due to warmer temperatures than usual in December. Retailers could have made some discounts to attract consumers. As expected, the food category was impacted by the weakness of the CAD via the import channel rising 0.6% in December and 3.6% on a y/y basis. Given the weakness of the CAD, we expect core inflation to remain closer to the mid-point target of the BoC (2.0%).

Retail sales rose a consensus-topping 1.7% in November. Sales were up in 10 of the 11 subsectors, including a 3.5% increase for autos/parts dealers. Excluding autos, sales rose 1.1% with gains in all categories with the exception of gasoline, the latter’s sales falling in synch with lower prices. The retail results were much better than expected. The increase in retail volumes (1.5%), coupled with earlier-reported gains in manufacturing and wholesaling, suggest real GDP grew about 0.3% in November. However, given the poor start to the quarter, Q4 GDP is likely to end up no better than flat. Consumption seems to have strengthened in the quarter, but there was likely offsets elsewhere such as plunging investment spending.

The Bank of Canada left the overnight rate unchanged at 0.50%.The central bank lowered its growth forecast for 2016 to just 1.4% (from 2.0%), and even lowered next year’s forecast to 2.4% (from 2.5%). The BoC made clear those forecasts did not include any assumptions about the upcoming Federal budget. The BoC’s inflation forecasts were lowered, with headline inflation not expected to return to 2% before 2017. Governor Poloz started his press conference by saying that the deliberation about the rate decision began with a bias toward further monetary easing. However, the likelihood of new fiscal stimulus was an important consideration in the decision to stand still on rates. Thanks to the sinking Canadian dollar, monetary conditions are the most stimulative in more than a dozen years, allowing the Bank to wait patiently for Finance Minister Bill Morneau’s first budget. With the central bank highlighting some potential downside risks such as falling oil prices and “threshold effects on growth”, further easing cannot be ruled out. But, the future course of monetary policy will to a large extent hinge on what the federal government will deliver on the fiscal front.

United States – The consumer price index fell 0.1% in December as soft energy prices (-2.4%) and food prices (- 0.2%) offset gains elsewhere. Excluding food and energy, prices rose 0.1%. There were further gains for the owners’ equivalent rent and medical care which allowed ex-energy services CPI to rise 0.2%. Core goods prices were restrained by declines for apparel, personal computers which offset gains for tobacco. But thanks to base effects, the year-on-year inflation rate rose two ticks to 0.7% for the headline and one tick to 2.1% for the core measure. The inflation data was a bit softer than expected. While the annual inflation rate rose a bit, that was largely due to base effects. Prices remain mild even excluding energy, capped in part by the US dollar’s surge. That will be at the back of minds of FOMC members when they decide on monetary policy next week.

Housing starts fell 2.5% to 1149K in December in seasonally adjusted annualized terms. Construction of multiple units fell 1% (albeit after an 8% gain the prior month) while those of single family homes fell 3.3% (after an 11% surge the prior month). Similarly, building permit applications fell 3.9% to 1232K in December. The decrease was entirely due to multis (-11.4%) which offset the 1.8% increase for single family homes. The weaker housing starts are disappointing, although it must be noted the decline came after outsized gains the prior month. Moreover, such data can be choppy and often prone to revisions. The uptrending permits and high builder confidence (NAHB) suggest we may have a rebound in starts sooner rather than later.

Existing home sales rose 14.7% to 5.46 million units in December. The rise was concentrated in single family units (+16.1%) but multis were also up (+4.9%). The month’s supply of homes at the current sales rate declined to 3.9 from 5.1, the lowest since 2005. The median resale price rose to $224,100 i.e. 7.6% higher than year-ago levels (+8.0% for singles and +4.9% for multis). About 24% of December sales were made to cash buyers, while the share of distressed sales in total sales declined to 8%.

The Philadelphia Fed Manufacturing Business Outlook Survey increased to minus 3.5 in January from a revised reading of minus 10.2 in December. The index for new orders gained 10 points, but nonetheless remained negative at -1.4. The employment index fell from 2.2 to minus 1.9. While 69% of the firms reported no change in employment, 16% reported decreases which was slightly larger than the 14% that reported increases. The diffusion index for future activity fell 5 points to 19.1 in the month. Its lowest reading since November 2012.

The index of leading economic indicators fell 0.2% in December, following a gain of 0.5% in the previous month. This was the first decline recorded in three months. The coincident index increased 0.1% in December, matching the gain recorded in November.

Markit Economics published its flash manufacturing purchasing manager`s index. It rose 1.5 points in January to 52.7, while new orders gained 2.5 points to 53.7 (highest reading since October 2015).

World – China’s growth edged down to 6.8%y/y in Q4 from 6.9% in the previous quarter. The GDP deflator was negative at -0.9% y/y, leaving the nominal GDP growth rate at 6.0%y/y. Industrial production was softer than expected at 5.9% y/y (consensus 6.0% y/y). In November, the y/y print was 6.2%. Retail sales growth was also softer in December (11.1% y/y) compared to November (11.2% y/y).

Eurozone - The ECB has kept the interest rates on the marginal lending facility and the deposit facility unchanged at 0.05%, 0.30% and -0.30% respectively. However, ECB President Mario Draghi, during his press conference, has widely opened the door for further easing by the European central bank at the March meeting. He pointed out that the inflation dynamics continue to be weaker than expected. According to the Governing Council, it will therefore be necessary to review and possibly reconsider the monetary policy stance at the March 10th meeting. This will be done in light of new staff macroeconomic projections that will include the year 2018.

The January Markit flash composite purchasing managers’ index fell to 53.5 from 54.3 in December. Looking at the components, the manufacturing index edged down 0.9 point to 52.3, with new orders printing 53.1, compared to 54.2 a month ago. The service sector was also weaker in January at 53.6 (down 0.6 points).

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