Economic Indicators Review: April 24, 2012

In March, Canada’s consumer price index rose 0.4% month-over-month. Three of its eight broad components saw prices decrease considerably: clothing/footwear (-0.8%, exactly reversing the prior month's increase), food and shelter. Prices were flat for household operations. Alcohol/beverages registered the steepest increase (+0.7%) among the other four components. Despite the monthly advance, the year-on-year inflation rate fell to 1.9% from 2.6% in February. This was largely due to a base effect, as the March 2011 surge of 1.1% no longer affected the year-on-year rate.

In seasonally adjusted terms, the CPI rose 0.2% from February. Core CPI climbed 0.3%, but only 0.1% in seasonally adjusted terms. This allowed the year-on-year core inflation rate to slip four ticks to 1.9% (matching consensus). The three-month annualized pace for core CPI stood at 2% (s.a.). Though we expect consumer price growth to decline month-over-month in the near-term, the underlying trend should remain near 2% over the medium-term with inflation picking up later this summer.

Although the Bank of Canada left its key policy rate unchanged at 1.00% at its April rate-setting meeting, it did make a significant change to its message. The bank indicated that “some modest withdrawal” of existing stimulus might become appropriate. The wording suggests that a rate hike, though not imminent, is not as far down the road as markets were anticipating. Accordingly, the front end of the yield curve swerved up immediately following the press release, while the yield on 2-year U.S. notes held steady.

The bank also updated its economic projections. The Monetary Policy Report acknowledged that the U.S. economy was "slightly stronger" than expected. The outlook for Europe had improved and the eurozone was  now projected to move out of recession in 2012H2. Elevated oil prices posed a risk to the outlook. Canada’s GDP growth forecast was revised up four ticks to 2.4% for 2012 but down four ticks to 2.4% for 2013.

The call for 2014 was for 2.2% growth. The output gap was expected to close in 2013H1 (instead of 2013Q3 as per January's MPR). As a result, inflation was perceived to be somewhat hotter than back in January. Both headline and core CPI were now expected by the BoC to hover around 2% "over the balance of the projection horizon." Hence, the possibility of a rate hike this year cannot be dismissed outright. However, factors other than domestic are also at play. Europe, one of the potential downside risks evoked by the BoC, remains quite significant to our eyes and could put off a first hike to 2013 (our base case scenario).

In a separate report, Canadian securities transactions data for February showed that foreigners added C$12.5 billion of Canadian assets to their holdings. Net purchases amounted to +C$13.7 billion for corporate and government bonds, +C$442 million for stocks, but -C$1.7 billion for money market instruments.

March retail sales grew 0.8% in the United States, more than double consensus expectations. The prior month’s figure was revised down one tick to 1%. Auto sales surprised to the upside, rising 0.9% despite lower unit sales. Excluding these, sales still progressed 0.8%, topping the 0.6% advance expected by consensus. The ex-autos increase was driven by broad-based gains, including in housing-related categories such as building materials (+3%) and furniture (+1.1%).

Discretionary spending (i.e., retail sales excluding gasoline, groceries, and health/personal care) jumped 0.9%, marking a tenth monthly increase in a row. With March’s gains, real retail spending grew at an annualized pace of 5.3% in 2012Q1, down from 7.8% in 2011Q4 but still healthy considering the impact of higher gasoline prices on consumers. The prolonged positive streak in discretionary spending is good news as well. However, the resilience in consumer spending can be explained not only by job gains but also by the fact that the savings rate dropped to its lowest point in two-and-a-half years. As raiding the piggy bank is not a sustainable practice, employment will need to pick up going forward, otherwise America’s primary growth engine–consumption spending–could shift down a gear or two.

Again in March, industrial production was flat for a second straight month, thus disappointing consensus expectations for a 0.3% increase. Capacity utilization slid one tick to 78.6%. Manufacturing output shrank for the first time in four months as higher auto production was more than offset by factory declines elsewhere. Mining output rebounded 0.2% after contracting sharply the month before. Utilities output, which had been hammered by an unseasonably warm winter, bounced back with a +1.5% print.

The industrial production report for March was generally softer than expected. Still, thanks to the good start to the year, industrial output grew at an annualized pace of 5.4% in 2012Q1 after expanding 5% in 2011Q4. This is consistent with our new Q1 GDP growth forecast of about 2.6% annualized. Manufacturing output increased 10.4% annualized in Q1 with auto assemblies soaring 44%.

In April, the New York Fed’s Empire State Index of manufacturing activity sank to 6.56, its lowest mark since November, from an upwardly revised 20.2 in March. The shipments index slumped to 6.56, its lowest point since October. The new orders component fell further to 6.48, a four-month low. Though the Empire State Index was disappointing, it does have a reputation for being choppy.

The Philadelphia Fed Index of manufacturing activity, like its New York counterpart, pointed to a slowdown in activity in April, having dropped to 8.5. The new orders sub-index fell to 2.7, its lowest since September of last year. The shipments sub-index retreated for a second consecutive month, reaching 2.8. The employment sub-index, instead, rose to 17.9, its highest level in 11 months.

In March, existing home sales surprisingly fell 2.6% to 4.48 million units from an upwardly revised 4.6 million the previous month. There were lower sales of both single and multiple units. However, the month's supply was unchanged at 6.3 at the current sales rate. The median sales price was up for a second month running. Housing starts posted a disappointing decline as well, falling 5.8%. Multi-family starts dove 16.9% and accounted for most of the decline.

Despite recent reports, we are sticking to our view that the U.S. housing market is on the verge of turning around. Demand/supply fundamentals have improved considerably compared with 12 months ago and there has been a string of monthly increases in real estate loans for the first time in years.