Japan industrial production fell 5.2% m/m in February

Week in review

Canada – As widely anticipated, the Bank of Canada left its overnight rate unchanged at 0.50% in April. However, the central bank revised its GDP projections and presented a first forecast for 2018, pegging growth at 2% that year. Though the BoC raised its 2016 growth forecast for Canada from 1.4% to 1.7%, it was careful not to sound too positive. The bank did not wish to stoke the Canadian dollar, which was already at a multimonth high versus the USD. It expected measures introduced at the provincial level to offset some of the federal stimulus. Moreover, the central bank highlighted risks to the global economy but, more importantly, expected a lower growth profile in the United States with “a composition that is less favourable for Canadian exports”, a factor likely to cause trade to be a net drag on the Canadian economy next year. The bank was now forecasting that economic growth in the United States would attain 2.0% in 2016 and 2.1% in 2017, down from 2.4% for both years previously. Consequently, despite the federal government’s fiscal stimulus, the BoC lowered its 2017 projection for domestic growth in Canada from 2.4% to 2.3%. This notwithstanding, the output gap was now slated to close by mid-2017, ahead of the target date set back in January. Slack would be eliminated sooner than previously expected partly because of a lower potential growth rate due largely to the collapse in investment. The BoC raised its inflation forecasts slightly, though headline inflation was still not expected to return to 2% before 2017. The central bank indicated that the risks to inflation were roughly balanced.

In addition, Governor Poloz stated that the monetary/fiscal policy mix in Canada was now better balanced following the last federal budget. All told, the central bank’s message should put to rest speculations regarding further rate cuts in Canada.

The Teranet–National Bank National Composite House Price IndexTM rose 0.8% in March thanks to monthly gains in six of the eleven regions covered. On a year-on-year basis, the composite index was up 7%, the largest 12-month gain since 2010. The annual increase was well above the national average in Vancouver (+17.3% is the highest for that city since 2007), Hamilton (+10.5%), Toronto (+9.0%) and Victoria (+8.5%). Those massive gains contrast sharply with other regions which, with the exception of Winnipeg (+1.2%), are all in deflation mode: Montreal (-0.03%), Ottawa-Gatineau (-0.1%), Edmonton (-0.5%), Quebec City (-2.4%) Calgary (3.7%) and Halifax (- 4.6%).

Manufacturing shipments plunged 3.3% in February, well below the 1.5% decline expected by consensus. Sales were down in 16 of the 21 broad industries. The transportation sector saw a 7.6% drop as both autos sales (-10.5%) and aerospace products (-4.0%) were down. In real terms, factory sales dropped 2.0%, the worst performance in 11 months. Real inventories were up 0.6%, allowing the inventory to sales ratio to rise to 1.44.

Separately, the Canadian Real Estate Association reported that existing home sales rose 1.5% m/m in March. From 12 months ago, sales increased 12%.

United States – In March, retail sales declined 0.3%, running counter to consensus expectations calling for a 0.1% rise. Auto sales were down 2.1% after holding steady in January. Excluding autos, retail sales were up 0.2%, albeit short of the 0.4% increase expected by consensus. Ex-auto sales were driven by building materials, healthcare, and gasoline stations while eating/drinking and clothing lagged. In Q1, retail sales fell at an annual pace of 0.3%. The quarter was severely impacted by the sharp decline in gasoline prices (sales by gasoline stations were down 27% annualized) and by the first quarterly decline in auto sales since 2011 (-3.7% annualized). We are not particularly concerned by the fact that U.S. consumers took a breather early in 2016. Excluding autos and gasoline, retail sales instead accelerated to a decent 3.6% in the quarter. In our view, consumption is set to rebound in Q2 on impetus from energy bill savings and a strong labour market.

Again in March, the consumer price index was up 0.1%, shy of the 0.2% expected by consensus. Energy prices rose 0.9% (a first increase in eight months) while food prices declined 0.2%.

Excluding food and energy, prices rose 0.1%, which also fell short of consensus expectations. Commodity prices excluding food and energy were down 0.2% as prices for both clothing and used cars and trucks declined. Further gains in owners’ equivalent rent, medical care and transportation lifted the exenergy service CPI 0.2%. As a result of monthly increases and base effects, the year-over-year headline and core inflation rates slipped a tick to 0.9% and 2.2%, respectively. Though the core inflation rate may seem a little high, it is important to bear in mind that this gauge is inflated by a strong increase in rents (+3.2%) and owner’s equivalent rent (+3.7%) in the past year. These two components alone represent no less than 40% of the core CPI. As this weight is much lower in the Fed’s preferred measure, the core PCE deflator has risen at a more modest 1.7% in the past year.

Industrial production was weaker than expected in March, dropping 0.6% (vs. -0.1% for consensus). Moreover, there was a slight downward revision to the prior month to 0.6% (from 0.5%). The disappointing result in March came from multiple sources as utilities (-1.2%), mining (-2.9%) and manufacturing (- 0.3%) declined. In the manufacturing sector, motor vehicle (- 1.6%) and machinery (-0.4%) were down while computer/electronics (+0.9%) rose. In Q1, industrial production shrank 2.2% (annualized), following a 3.3% decline in Q4. Manufacturing output (+0.7%) grew in the quarter but at a very modest pace. The U.S. economy is set to register a second consecutive quarter of modest growth. In March, capacity utilization dropped to 74.8%, the lowest since 2010.

Still in March, the NFIB Small Business Optimism Index fell 0.3 points to 92.6, its lowest level since February 2014. Though still deep in negative territory (-17), the Expected Condition Index gained four points, which helped contain the overall index decline.

Import prices rose 0.2% m/m in March. Excluding fuel, which jumped 4.9% in the month, import prices notched down 0.1%. The last time that the import price index excluding petroleum posted a m/m increase was March 2014. Export prices were flat in March, which left them 6.1% lower than they were 12 months earlier.

The Empire State Manufacturing Survey jumped nine points to 9.6. This is its highest level since January 2015. Finally, business activity expanded for New York manufacturing firms for the first time since the spring of 2015. The six-month outlook improved further, as the index for future business conditions gained 3.9 points to 29.40, recording a third gain in a row.

The weekly jobless claims report showed initial claims fell 13K to 253K in the week of April 9. The 4-week moving average dipped to 265K.

As expected, the Beige Book indicated that, in most of the 12 Districts, economic growth remained in the modest to moderate range. The Fed`s contacts expected growth to remain in this range going forward. According to the Beige Book, labour market conditions continued to improve, as several Districts reported signs of a pick-up in wage growth. Moreover, low prices impacted energy and mining output. Finally, a majority of Districts reported modest price increases.

World – The IMF revised its global growth forecast for 2016 down to 3.2%, noting that “uncertainty [had] increased and risks of weaker growth scenarios [were] becoming more tangible”. For 2017, the IMF expected global growth to firm up to 3.5%.

As expected, the Bank of England made no changes in monetary policy, maintaining the bank rate at 0.50% and its stock of purchased assets at GBP 375 billion. As far as the domestic political scene was concerned, the bank announced the following: ”There are some signs that uncertainty relating to the EU referendum has begun to weigh on certain areas of activity, as some decisions, including on capital expenditure and commercial property transactions, are being postponed pending the outcome of the vote. This might lead to some softening in growth during the first half of 2016… Referendum effects are likely to make macroeconomic and financial market indicators harder to interpret over the next few months, and the Committee is likely to react more cautiously to data news over this period than would normally be the case.”

In the euro area (E1A19) industrial production fell 0.8% m/m in February after having increased by 1.9% in the previous month. Compared to February 2015, industrial production increased 0.8%. Annual inflation was 0.0% in March, compared to -0.2% in February.

Japan industrial production fell 5.2% m/m in February, following a 6.2% decline in the previous month. Shipments dropped 4.1% in the month and inventories fell 0.4%. The year-on-year.

China’s GDP grew at an annual rate of 6.7% in the first quarter of 2016, compared to 6.8% in the previous quarter. The trade surplus narrowed to US$29.86 billion from US$32.59 billion in February. Exports surged 11.5% in dollar terms while imports fell 7.6%. In March, CPI rose 2.3% y/y, while PPI fell 4.3% y/y.


This presentation may contain certain forward-looking statements about the 2009 Economic and Financial Outlook. Such statements are subject to risk and uncertainties. Actual results may differ materially due to a variety of factors, including legislative or regulatory developments, competition, technological change and economic conditions in Canada, North America or internationally. These and other factors should be considered carefully and readers should not rely unduly on National Bank of Canada’s forward-looking statements. This presentation may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express consent of National Bank.