Disappointing Data from the United States

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1 WEEKLY NEWSLETTER Disappointing Data from the United States #1 BEST OVERALL FORECASTER - HIGHLIGHTS ff United States: Serious decline in retail sales and manufacturing output. ff Inflation is down in the United States. ff U.S. household confidence partly recovered in February. ff Canada: Sales of existing properties bounced back in January, but prices fell again. ff Canada: Manufacturing sales declined in December. A LOOK AHEAD ff Canada: Both wholesale and retail sales could drop further. FINANCIAL MARKETS ff The possibility of an extended truce with China helps buoy the stock markets. ff Bond yields had a stronger reaction to poor U.S. economic data. ff Disappointments in the United States curb the greenback s momentum. CONTENTS Key Statistics of the Week... 2 United States, Canada A Look Ahead... 4 United States, Canada, Overseas Financial Markets... 3 Economic Indicators of the Week... 6 Tables Economic indicators... 8 Major financial indicators...10 François Dupuis, Vice-President and Chief Economist Mathieu D Anjou, Deputy Chief Economist Carine Bergevin-Chammah, Economist Benoit P. Durocher, Senior Economist Francis Généreux, Senior Economist Hendrix Vachon, Senior Economist Desjardins, Economic Studies: or , ext desjardins.economics@desjardins.com desjardins.com/economics NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright 2019, Desjardins Group. All rights reserved.

2 Key Statistics of the Week UNITED STATES ff Retail sales fell 1.2% in December after an increase of % in November. Motor vehicle sales increased 1.0%. The value of service station sales dropped 5.1%. Excluding autos and gasoline, sales declined 1.4% after rising % in November. This is the sharpest monthly decline since February Before getting too worried, it is worth asking whether this drop in sales will be short-lived. This happened at the same time as consumer confidence was in retreat and the stock market was falling. The stock market has since improved and it must be remembered that the job market is still strong and should support confidence. As a result, we can hope that sales will rise quickly. However, December s drop in sales will force a downgrade in expectations concerning real consumption in the fourth quarter. ff Existing home sales increased 3.6% in January, ending four consecutive months of retreat. Most provinces saw an upturn over the month, but prices continued to drop and the home price index fell 2% in January, the eighth monthly decline in a row. ff Manufacturing sales fell 1.3% in December. This is the fourth monthly decline in the past five months. Difficulties were rather widespread in December, with sales dropping in 12 of the 21 main sectors, representing 73% of all manufacturing sales. With a monthly drop of 10.4%, petroleum and coal products were again in serious difficulty. In real terms, sales declined 1.2%, while inventories pulled back %. ff Industrial output pulled back % in January after rising % in December (revised from 0.3%). Manufacturing output fell % after a 0.8% gain. Most notable is the 8.8% contraction in automobile production, the worst monthly drop since May Excluding automobiles, manufacturing output was down %. Machinery, electrical and electronic equipment and chemical products were also down. Mining sector activity improved only % after two months of strong increases. Energy production edged up 0.4% after a 6.9% tumble in December. Benoit P. Durocher, Senior economist ff After a considerable drop in January, the University of Michigan s consumer confidence index has partly recovered, according to the preliminary version for February. The index went from 91.2 to 95.5, but the 4.3 point gain could not offset January s 7.1 point decline. ff January saw no change in the total consumer price index (CPI) for the third month in a row. The 3.1% drop in energy prices was offset by % gains in the food component and by the core CPI, which does not include energy or food. Among other things, clothing prices climbed % and new vehicle prices edged up % (after five months of decline or stagnation). The annual change in the CPI lost steam, falling from % to 1.6%. Core inflation is flat at %. Sales of existing properties bounced back in January Existing properties Units/month In $ 47,000 Francis Généreux, Senior economist 45,000 43,000 41,000 39,000 37,000 35, Sales (left) , , , , , , , , , ,000 Home price index (right) Sources: Canadian Real Estate Association and Desjardins, Economic Studies 2

3 Financial Markets Investors Welcome the Decrease in Certain Risks The U.S. stock market rallied significantly Tuesday after President Donald Trump announced that he was prepared to extend the deadline for the trade truce with China if talks progressed favourably. The rally continued Wednesday as the possibility of a U.S. government shutdown faded. The stock market declined Thursday morning after the release of the worst retail sales data since 2009, but recovered some of its losses in the afternoon. Reassured by the rebound in the confidence index and the dodged shutdown, the stock market advanced Friday morning despite disappointing U.S. industrial production numbers. The S&P 500 index was up more than 2% over the week. SNC-Lavalin woes contributed to the Canadian stock market pullback on Monday. However, the S&P/TSX index rebounded since Tuesday with the easing of China U.S. tensions, the apparent resolution of the U.S. government stalemate and the rise in oil prices. It posted a gain of more than 1% Friday morning. U.S. bond yields moved upwards early in the week. However, the negative retail sales data published Thursday morning resulted in a loss of much of these gains, as economic growth and inflation expectations weakened. The 2 year and 10 year yields were around 0% and 2.65%, respectively, at the time of writing. Canadian yields essentially followed the U.S. trend and were around 0% for the 2 year yield and 0% for the 10 year yield. The U.S. dollar started the week on the rise, but lost steam Tuesday due to a higher risk appetite on the financial markets. The greenback rebounded Wednesday, owing in particular to disappointing economic data in the euro zone. The common currency slid back below US$3. The pound sterling was also under pressure and depreciated to US$1.28 during the week. The concerns raised by lower retail sales and industrial production in the United States held the U.S. dollar back Thursday and Friday. The yen proved to be a better safe haven for investors as a result. As for the Canadian dollar, it was momentarily under pressure Thursday because of disappointing manufacturing sales in Canada. At the time of writing, however, the loonie was trading at around US$55. Hendrix Vachon, Senior Economist Carine Bergevin-Chammah, Economist GRAPH 1 Stock markets Index Index 2,775 16,100 15,800 2,700 15,500 2,625 15,200 2,550 14,900 14,600 2,475 14,300 2,400 14, /01/ /01/ /01/ /01/ /02/ /02/14 S&P 500 (left) S&P/TSX (right) Sources: Datastream and Desjardins, Economic Studies GRAPH 2 Bond markets 10-year yield In % points -0 In % /01/ /01/11 Spread (left) 2019/01/ /01/29 United States (right) 2019/02/ /02/14 Canada (right) Sources: Datastream and Desjardins, Economic Studies GRAPH 3 Currency markets US$/C$ US$/ /01/ /01/ /01/ /01/2019 Canadian dollar (left) 06/02/ /02/2019 Euro (right) Sources: Datastream and Desjardins, Economic Studies 3

4 A Look Ahead UNITED STATES THURSDAY February 21 - December m/m 1.7% Desjardins % November 0.8% New durable goods orders (December) [Initially scheduled for release on January 25] After falling 4.2% in October, orders rose 0.8% in November. The aviation sector is expected to contribute strongly to December, based on the data from Boeing. In addition, the rise in motor vehicle production in December indicates an increase in the number of orders in this sector. Durable goods orders excluding transportation are expected to stagnate after declining 0.3% in November. The fall of the new orders component of the ISM manufacturing index to its lowest point since the summer of 2016 appears to point in this direction. On the whole, total durable goods orders should post a % gain. THURSDAY February 21-10:00 January m/m % Desjardins 0.0% December % Leading indicator (January) With a % drop in December, the leading indicator was down for the second time in three months. That gentler pace is slowing down the changes over 6 or 12 months. We do not expect a bounce in January. Good contributions from the ISM index and the stock market will be offset by a weaker contribution from interest rates and net bites from hours worked and household confidence. It is also hard to predict what the Conference Board will estimate for building permits, since no data has been released since the November figures. All in all, there should be no change in the leading indicator. The 6 month annualized change should drop from 3.1% to %, the weakest it has been since fall The annual change should slow from 4.3% to 3.6%. THURSDAY February 21-10:0 January ann. rate 5,000,000 Desjardins 5,000,000 December 4,990,000 Existing home sales (January) Resales suffered their greatest monthly decline since November 2015 this past December. The 6.4% drop took the sales level below 5,000,000 units for the first time in over three years. A rebound might be expected after that underperformance, in line with the uptick in new home sales in November after October s decline. However, other indicators make that doubtful. Pending home sales were down again in December, pointing to even weaker actual sales in January, although mortgage applications for purchasing homes went up in January (before going down again at the beginning of February). Reading those mixed signals, we expect sales of existing homes to remain stable at around 5,000,000 units. THURSDAY February 21 - December m/m Desjardins November -1.0% Wholesale sales (December) Since we have no data on foreign trade due to the shutdown in the United States, it is more difficult to establish a complete projection of wholesale trade in Canada. Nevertheless, there are some indications that November s 1.0% drop in sales could be followed by fewer sales in December. Seasonally adjusted data on the number of new vehicles sold point to a further decline in that sector for the month. In addition, retail sales have not been very robust in recent months. FRIDAY February 22 - December m/m Desjardins -0.4% November -% Retail sales (December) The seasonally adjusted price of goods was down % in December, because the prices of most goods did not rise enough to fully offset the significant drop in gasoline prices. We should therefore expect even lower service station sales in December. Preliminary data also indicate that the number of new cars sold declined again during the month, which will affect auto dealer sales. Even though sales may go up in a number of other sectors, particularly due to a slight increase in prices, total retail sales should be down again in December. 4

5 OVERSEAS THURSDAY February 21 - February 5 January 51.0 : PMI Index (February preliminary) After peaking in 2017, the PMI indexes were among the first indicators showing that the European economy was slowing down. It remains to be seen whether the composite PMI index, which fell to 51.0 in January, will continue its downward slide and go lower than 50. The euro zone s consumer confidence index is also showing a negative trend. Its preliminary February version will be released on Wednesday. s Ifo business confidence indexes will be known on Friday, as will the second estimate of s real GDP for Q4. 5

6 Economic Indicators Week of February 18 to 22, 2019 Day Hour Indicator Period Previous data UNITED STATES MONDAY TUESDAY 19 8:50 10:00 Speech of the Cleveland Fed President, L. Mester NAHB housing market index WEDNESDAY 20 13:30 1 Speech of the St. Louis Fed President, J. Bullard Minutes of the Federal Reserve meeting THURSDAY 21 7:50 10:00 10:00 Speech of the Atlanta Fed President, R. Bostic Initial unemployment claims Philadelphia Fed index Durable goods orders (m/m) Leading indicator (m/m) Existing home sales (ann. rate) FRIDAY 22 10:15 13:30 13:30 17:30 Speech of the New York Fed President, J. Williams Speech of the Philadelphia Fed President, P. Harker Speech of the St. Louis Fed President, J. Bullard Speech of the New York Fed President, J. Williams , ,7% % 5,000, , % 0.0% 5,000, , % % % -1.0% % -0.4% -% -% -% MONDAY TUESDAY WEDNESDAY THURSDAY 21 12:35 Wholesale sales (m/m) Wholesale inventories (m/m) Speech of the Bank of Canada Governor, S. Poloz FRIDAY 22 Retail sales Total (m/m) Excluding automobiles (m/m) Note: Desjardins, Economic Studies are involved every week in the Bloomberg survey for Canada and the United States. Approximately 15 economists are consulted for the Canadian survey and a hundred or so for the United States. The abbreviations m/m, q/q and y/y correspond to monthly, quarterly and yearly variation respectively. Following the quarter, the abbreviations f, s and t correspond to first estimate, second estimate and third estimate respectively. The times shown are Eastern Standard Time (GMT - 5 hours). Forecast of Desjardins, Economic Studies of the Desjardins Group. 6

7 Economic Indicators Week of February 18 to 22, 2019 Country Hour Indicator Period m/m (q/q) y/y Previous data m/m (q/q) y/y OVERSEAS MONDAY TUESDAY 19 Italy United Kingdom Japan 4:30 5:00 5:00 5:00 18:50 Current account ( B) Current account ( M) ILO unemployment rate Construction ZEW survey Current situation ZEW survey Expectations Trade balance ( B) 4.0% WEDNESDAY 20 Japan Japan 2:00 10:00 19:30 23:30 Producer price index Consumer confidence preliminary PMI manufacturing index preliminary All industry activity index -% % % -0.4% % THURSDAY 21 Japan 2:00 2:45 2:45 2:45 3:15 3:15 3:15 3:30 3:30 3:30 1 Consumer price index final Business confidence Production outlook Consumer price index final PMI composite index preliminary PMI manufacturing index preliminary PMI services index preliminary PMI composite index preliminary PMI manufacturing index preliminary PMI services index preliminary PMI composite index preliminary PMI manufacturing index preliminary PMI services index preliminary Consumer price index -0.8% 1.4% -0.8% % 1.2% -% % 1.4% FRIDAY 22 2:00 5:00 Real GDP final Ifo survey Business climate Ifo survey Current situation Ifo survey Expectations Consumer price index Q4 0.0% % % 1.4% , % % % % % 1.2% 0.3% % 1.6% Note: In contrast to the situation in Canada and the United States, disclosure of overseas economic fi gures is much more approximate. The day of publication is therefore shown for information purposes only. The abbreviations m/m, q/q and y/y correspond to monthly, quarterly and yearly variation respectively. The times shown are Eastern Standard Time (GMT - 5 hours). 7

8 UNITED STATES Quarterly economic indicators REF. QUART. Gross domestic product (2009 $B) Consumption (2009 $B) Government spending (2009 $B) Residential investment (2009 $B) Non-residential investment (2009 $B) Business inventory change (2009 $B)1 Exports (2009 $B) Imports (2009 $B) Final domestic demand (2009 $B) GDP deflator (2009 = 100) Labor productivity (2009 = 100) Unit labor cost (2009 = 100) Employment cost index ( 2005 = 100) Current account balance ($B)1 1 VARIATION (%) LEVEL 2018 Q4 ANNUAL VARIATION (%) Quart. ann. 1 year ,665 12,953 3, , ,542 3,492 19, Statistics representing the level during the period; * New statistic in comparison with last week. UNITED STATES Monthly economic indicators REF. MONTH Leading indicator (2010 = 100) ISM manufacturing index1 ISM non-manufacturing index1 Cons. confidence Conference Board (1985 = 100)1 Personal consumption expenditure (2009 $B) Disposable personal income (2009 $B) Consumer credit ($B) Retail sales ($M) VARIATION (%) LEVEL -1 month -3 months -6 months -1 year * ,083 14,461 4, , * 400, * * * * , ,794 1,981 1,256 1, ,990-49, , ,217 1, ,330-55, ,280 1, ,150-53, ,329 1, ,380-42,754 1, ,303 1, ,560-48,952 2, * Excluding food and energy Producer price (2009 = 100) Export prices (2000 = 100) Import prices (2000 = 100) * * * Excluding automobiles ($M) Industrial production (2007 = 100) Production capacity utilization rate (%)1 New machinery orders ($M) New durable good orders ($M) Business inventories ($B) Housing starts (k)1 Building permits (k)1 New home sales (k)1 Existing home sales (k)1 Commercial surplus ($M)1 Nonfarm employment (k)2 Unemployment rate (%)1 Consumer price ( = 100) Excluding food and energy Personal cons. expenditure deflator (2009 = 100) 1 Statistic shows the level of the month of the column; 2 Statistic shows the variation since the reference month; * New statistic in comparison with last week. 8

9 Quarterly economic indicators REF. QUART. Gross domestic product (2007 $M) Household consumption (2007 $M) Government consumption (2007 $M) Residential investment (2007 $M) Non-residential investment (2007 $M) VARIATION (%) LEVEL ANNUAL VARIATION (%) Quart. ann. 1 year Current account balance ($M)1 2,059,104 1,161, , , ,268 6, , ,581 2,048, , , , , , , ,537 Production capacity utilization rate (%)1 Disposable personal income ($M) Corporate net operating surplus (2007 $M) ,230, , Business inventory change (2007 $M)1 Exports (2007 $M) Imports (2007 $M) Final domestic demand (2007 $M) GDP deflator (2007 = 100) Labour productivity (2007 = 100) Unit labour cost (2007 = 100) 1 Statistics representing the level during the period; * New statistic in comparison with last week. Monthly economic indicators REF. MONTH Gross domestic product (2007 $M) Industrial production (2007 $M) Manufacturing sales ($M) Housing starts (k)1 Building permits ($M) Retail sales ($M) Excluding automobiles ($M) Wholesale trade sales ($M) Commercial surplus ($M)1 Exports ($M) Imports ($M) Employment (k)2 1 Unemployment rate (%) Average weekly earnings ($) Number of salaried employees (k)2 Consumer price (2002 = 100) Excluding food and energy Excluding 8 volatile items Industrial product price (2002 = 100) Raw materials price (2002 = 100) Money supply M1+ ($M) 1 VARIATION (%) LEVEL -1 month -3 months -6 months -1 year 1,944, ,723 56, ,812 50, , ,991-2, , ,942 48,329 50, , ,012 16, ,008, * Statistic shows the level of the month of the column; 2 Statistic shows the variation since the reference month; * New statistic in comparison with last week. 9

10 UNITED STATES,, OVERSEAS Major financial indicators PREVIOUS DATA ACTUAL LAST 52 WEEKS IN % (EXPECTED IF INDICATED) month -3 months -6 months -1 year Higher Average Lower United States Federal funds target Treasury bill 3 months Treasury bonds 2 years Treasury bonds 5 years Treasury bonds 10 years Treasury bonds 30 years S&P 500 index (level) DJIA index (level) Gold price (US$/ounce) CRB index (level) WTI oil (US$/barrel) ,770 25,778 1, ,708 25,106 1, ,671 24,706 1, ,736 25,413 1, ,850 25,669 1, ,732 25,219 1, ,931 26,828 1, ,730 24,914 1, ,351 21,792 1, Canada Overnight target Treasury bill 3 months Treasury bonds 2 years Treasury bonds 5 years Treasury bonds 10 years Treasury bonds 30 years Spread with the U.S. rate (% points) Overnight target -5 Treasury bill 3 months -4 Treasury bonds 2 years -4 Treasury bonds 5 years -9 Treasury bonds 10 years -7 Treasury bonds 30 years S&P/TSX index (level) Exchange rate (C$/US$) Exchange rate (C$/ ) 15, , , , , , , , , Overseas ECB Refinancing rate Exchange rate (US$/ ) United Kingdom BoE Base rate Bonds 10 years FTSE index (level) Exchange rate (US$/ ) 5 7 7, , , , , , , , , Bonds 10 years DAX index (level) 1 11, , , , , , , , ,382 Japan BoJ Main policy rate Nikkei index (level) Exchange rate (US$/ ) 0 20, , , , , , , , , CRB: Commodity Research Bureau; WTI: West Texas Intermediate; ECB: European Central Bank; BoE: Bank of England; BoJ: Bank of Japan Note: Data taken at markets closing, with the exeption of the current day where they were taken at 11:00 a.m. 10