May 18, 2018 Table of Contents What we ll be watching... p. 5 Calendar of upcoming releases... p. 6 Annex Economic tables... A1 Week in review CANADA: Canada s rose 0.1% (m/m) in April in seasonally adjusted terms causing the year-on-year inflation rate to decline one tick to 2.2%. On a month-tomonth basis, in five categories prices were rising with alcohol/tobacco, clothing, and household operations experiencing the strongest increases while recreation, healthcare and transportation posted declines. CPI excluding food and energy was flat in seasonally adjusted terms and the year-on-year inflation rate declined one tick to 1.8%. On an annual basis, the CPI-trim stood at 2.1% (up one tick from 2.0%), CPI-Median at 2.1% (up one tick from 2.0%) and CPI- Common at 1.9% (unchanged). This is essentially the pace we expect this year in a context of full-employment that has already generated the strongest wage inflation since 2012 (3.6%, y/y). All in all, inflation has accelerated since the last Bank of Canada s rate hike in January, meaning that real policy rate has turned more accommodative. We continue to think that a next rate hike will occur in July as we see the economy accelerating in Q2. Canada: Underlying inflation running on target Consumer price index: Total and average of the three core measures preferred by the Bank of Canada 4.0 y/y % chg. 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 April 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 NBF Economics and Strategy (data via Statistics Canada) BoC mid-point target Total (+2.2%) Average core (2.0%) increased 0.6% m/m in March to C$50.2 billion. That result came after an upwardly revised +0.5% reading the prior month (initially reported at +0.4%). In March, sales were up in 6 of the 11 categories surveyed including a 3.0% gain in the motor vehicles/parts segment. Excluding autos sales actually fell 0.2% on a monthly basis as increased outlays on furniture (+3.9%) and clothing (+2.5%) were more than offset by drawbacks for electronics (-2.4%), food (-1.2%) and gasoline stations (-1.9%). Discretionary sales, i.e. sales excluding gasoline, groceries and health products, rose for a third consecutive month, climbing 1.6% m/m. In real term, retail spending countrywide was up a healthy 0.8% in March. The good monthly showing Canada-wide will not be sufficient to salvage Q1 s performance. Indeed, real retail sales are on pace to decline 4.0% in annualized terms in the quarter, a result which could translate into the first negative contribution to GDP from consumption spending on goods since 2015Q1. Several elements can explain that poor showing notably the moderation of job creation in the first three month of the year and particularly poor weather early in 2018. Canada: Consumption spending could have acted as a drag on growth in Q1 Real consumption spending on goods versus real retail sales 11 10 9 8 7 6 5 4 3 2 1 0-1 -2-3 -4-5 q/q % chg. saar Last negative contribution to growth 2015Q1 2015Q4 2016Q3 2017Q2 2018Q1 NBF Economics and Strategy (data via Statistics Canada) Real consumption spending on goods (from national accounts) Retail volumes In March, rose 1.4% m/m to C$57.1 billion. Sales were up in 13 of the 21 broad industries surveyed, including transportation equipment (+1.5%), primary metal manufacturing (+4.2%), and fabricated metal products (+4.6%). Alternatively, shipments of machinery (- 1.7%), chemicals (-0.9%), and petroleum/coal products (- 0.3%) declined. If the effect of price changes is removed, total factory sales increased 0.6% on a monthly basis. Although economic growth in Canada probably slowed down in the first quarter, the manufacturing sector likely still provided some lift. In addition to inventories growing, real manufacturing shipments jumped 4.0% annualized in Q1. This followed a +4.2% reading in 2017Q4 and, if confirmed, will represent a ninth consecutive quarterly advance (longest such stretch on record).
Canada: Factory output will add to growth in Q1 Real manufacturing shipments and inventories 9 q/q % chg. saar 8 Inventories 7 6 5 4 3 2 1 0-1 Shipments -2-3 -4-5 -6 2016Q1 2016Q3 2017Q1 2017Q3 2018Q1 NBF Economics and Strategy (data via Statistics Canada) In April, the rose 0.2% m/m. Eight of the 11 constituent metropolitan areas swung upward, led by Quebec City (+1.5%), Hamilton (+0.8%), and Halifax (+0.6%). Alternatively, the index slid 0.1% in Ottawa-Gatineau and 0.8% in Winnipeg. On a y/y basis, the Composite Index climbed 5.6%, its smallest gain since September 2015. Vancouver (+15.9%) and Victoria (+11.0%) lifted the national average, while growth was more subdued in other metropolitan areas: Halifax (+5.3%), Hamilton (+4.5%), Montreal (+3.9%), Ottawa/Gatineau (+3.0%), Quebec City (+2.4%), Toronto (+1.9%), Winnipeg (+1.2%), Edmonton (+0.4%), and Calgary (+0.2%). Moderate increases will likely continue to characterize the Composite Index over the coming months as conditions in the two major constituent home resale markets, Toronto and Vancouver, are now balanced (current active-listings to-sales ratios close to their long-term average). The Composite Index has stabilized in recent months Teranet-National Bank National Composite House Price Index TM 224 222 220 218 216 214 212 210 208 206 204 202 200 198 196 194 Index June 2005 = 100 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 NBF Economics and Strategy (data via Teranet-National Bank House Price Index) According to the Canadian Real Estate Association (CREA), fell 2.9% m/m in April, marking a fourth consecutive monthly decline. Year on year, sales tumbled 19.7%, their steepest fall since October 2010. All of the provinces saw sales drop except for New Brunswick, Prince Edward Island, and Saskatchewan. The active-listings-to-sales ratio rose two ticks to 5.6, which is slightly above its longterm average but well within the parameters for a balanced market. By our calculations, the resale market is favourable to buyers in Alberta, Saskatchewan, Manitoba, and Newfoundland and Labrador. Alternatively, the PEI and Ontario markets look tight. Canada: Active-listings-to-sales ratio, April 2018 Seasonally adjusted data 5 4 3 2 1 0-1 -2-3 Number of standard deviations from mean CA NL PE NS NB QC ON MB SK AB BC NBF Economics and Strategy (data from CREA) data showed foreign investors increasing their holdings of Canadian securities by C$18.3 bn in the first quarter of 2018 as inflows in money market instruments (+C$15.4 bn) and equities (+C$6.1 bn) dwarfed net divestment from bonds (-C$3.1 bn). The bond net outflows during Q1 the first time that happens since 2013Q2 were largely due to federal government bonds (-$C27.6 bn) which offset net purchases of corporates (+C$22.5 bn, including C$3.2 bn in government enterprise bonds) and provis (+C$2.4 bn). The bonds from which foreigners divested were largely denominated in Canadian dollars. UNITED STATES: In April, rose 0.3% m/m after springing an upwardly revised 0.8% (from 0.6%) the prior month. Sales of motor vehicles and parts inched up 0.1%. Excluding this category, sales still advanced 0.3% thanks to gains for clothing (+1.4%), furniture (+0.8%), gasoline stations (+0.8%), and miscellaneous items (+0.9%). Sales increased in 9 of the 13 categories surveyed. Core sales, which are used to calculate GDP and exclude food services, auto dealers, building materials, and gasoline stations, jumped 0.4% after increasing an upwardly revised 0.5% the month before. Though still a bit early to make projections for Q2, retail sales certainly look set to rebound after a lacklustre Q1 that saw consumption s contribution to growth sink to just 0.7 point from 2.8 points in 2017Q4. To be sure, the strong handoff from March and April s decent results bode well for an acceleration of household consumption in Q2. fell 3.7% m/m in April to 1.287K in annualized terms after reaching their highest level since the recession the previous month (an upwardly revised 1,336K). While single-family starts were generally unchanged (+0.1% to 894K), multi-unit starts fell sharply (-11.3% to 393K). Buyers market Balanced market Sellers market 2
Apartment construction appears to be slowing as the vacancy rate in major markets are leading to increases in leasing concessions. Furthermore, the moderation of residential construction in the first month of Q2 might reflect challenges for builders, who are reportedly struggling to keep costs down in the face of a labour shortage and high lumber costs (in part due to import duties imposed by the U.S. government). Even without these difficulties, a slowdown was foreseeable after starts expanded 31.8% and 21.3% in annualized terms in Q4 and Q1, respectively. These recent increases mean that, despite the lackluster April results, housing starts remained 10.5% above their level 12 months earlier., for their part, retreated 1.8% m/m in April (March was upwardly revised from +2.5% to +4.1%), coming in at 1,352K on an annualized basis. The contraction was due above all to a 6.3% drop in the multifamily segment (to 493K). Permits for single-family dwellings, meanwhile, climbed 0.9% (to 859K). Still in April, progressed 0.7% m/m for a second month in a row. Manufacturing output, which represents 74.6% of total industrial production, expanded 0.5% on gains for computer/electronics (+1.2%) and machinery (+2.3%). Meanwhile, output in the utilities sector expanded 1.9% after swelling 6.1% in March, which was its strongest push in a year. Finally, mining output grew 1.1% and was up a healthy 10.6% on its level a year earlier, hoisted by higher oil prices. On a quarterly basis, if we assume no change in May and June, industrial production is still on track to grow more than 5% annualized in Q2 (i.e., more than twice the prior quarter s pace). The in the industrial sector as a whole went from 77.6% in March to a three-year high of 78.0% in April. In the mining sector, utilization reached 90.6%, its highest level since the 2014-15 drop in oil prices. Such levels of capacity utilization should continue to spur business investment in 2018. United States: Capacity pressures should spur investment in 2018 Capacity utilization. Last observation: April 2018 86 % 84 82 80 78 76 74 72 70 68 66 Industrial sector as a whole (L) 64 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 NBF Economics and Strategy (data via Datastream) 96 94 92 Mining (R) 90 88 86 84 82 80 78 76 74 The of general business conditions rebounded 4.3 points to 20.1 in May after dropping 6.7 points in April. Both the new orders sub-index (16.0 from 9.0 the prior month) and the shipments sub-index (19.1 from 17.5) rose and surpassed their respective six-month moving average. The number of employees gauge bounced back as well (from 6.0 to 8.7) but remained far below the levels reached at the end of last year (22.9 in December). As trade war talks abated somewhat, businesses reported a significantly improved outlook on the future, as evidenced by the 12.8-point spike registered by the index tracking firms expectations of general business conditions over the next six months (though the index did plunge 25.8 points the prior month). Interestingly, the input prices paid by New York manufacturing businesses continued to rise at a vigorous clip, with the prices paid tracker climbing 6.6 points to a sevenyear high of 54.0. Rising energy prices and the weakness of the U.S. dollar at the beginning of the year are to blame at least in part for that surge in manufacturing prices. United States: Manufacturing input prices rising at fastest pace in years Prices paid indices: Empire Manufacturing Survey vs. ISM Manufacturing PMI 80 70 60 50 40 30 20 10 0-10 Index -20 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 NBF Economics and Strategy (data via Datastream) Empire (L) ISM (R) 110 Index 100 The was also up in May, rising 11.2 points to 34.2. The shipments index went from 23.9 to 25.8 while the new orders tracker rocketed from 18.4 to 40.6 points. Employment was running strong with both the average workweek (21.6 to 34.4) and number of employees (27.1 to 30.2) sub-indices making gains. In April, the (LEI) extended its streak of non-negative prints to 23 months, as it gained 0.4 point to an all-time high of 109.4. Meanwhile, the diffusion index rose from 60% to 80%, with most of the underlying economic indicators still contributing to lift the overall index. The interest rate spread and average workweek, which added 0.13 percentage point to the LEI respectively, were the principal drivers. Alternatively, stock prices (-0.07 pp) and building permits (-0.05 pp) acted as a drag on the headline index. WORLD: In, shrank 0.6% in annualized terms in Q1, breaking the streak of eight consecutive positive quarterly readings, the longest in 30 years. The decline was 90 80 70 60 50 40 30 20 10 3
driven primarily by inventory rundown, which shaved 0.6 point from growth. Residential investment also bore down on the headline figure. On the other hand, trade lifted GDP 0.3 percentage point as exports expanded faster than imports did. Meanwhile private consumption, business investment, and government spending were roughly flat. Though Q1 results were certainly not encouraging, they need to be contextualized. As the Japanese economy expanded at a pace well above potential in 2017, a slowdown was to be expected. As far as monetary policy is concerned, the poor showing in the quarter should reinforce the Bank of Japan s current stance in favour of continued stimulus. Japan: GDP shrank for first time in more than two years in Q1 Quarterly GDP growth Contributions to Q1 real GDP growth 5 %, saar 4 Final domestic demand Inventories Trade GDP Q1 2018 Q4 2017 GDP -0.6 0.6 3 Consumption 0.0 0.5 2 Business Investment 0.0 0.4 Residential Investment -0.3-0.3 1 Government 0.0-0.1 Final Domestic Demand -0.3 0.5 0 Exports 0.5 1.5-1 Imports -0.2-1.9-2 Trade 0.3-0.4 2016Q1 2016Q3 2017Q1 2017Q3 2018Q1 Inventories -0.6 0.4 NBF Economics and Strategy (data via Datastream) Still in, the national headline (CPI) rose 0.6% in April, down five ticks from 1.1% in March. The downswing was in part caused by a slowdown in fresh food (-1.5% vs. +6.3%) and energy prices (+5.3% y/y vs. +5.7% y/y the prior month). Excluding the price effects from those two categories, CPI rose just 0.4% in the twelve months to March. CPI excluding fresh food, the core measure preferred by the Bank of Japan, edged down two ticks to 0.7%, still far below the BoJ target of 2.0%. Jocelyn Paquet et al. 4
What We ll Be Watching In the U.S., the week will provide important information about the housing market in April. To start with, may have retreated slightly in April, hampered by extremely low inventory levels. may also have cooled following a healthy 7.8% cumulative increase between January and March. In other news, probably retreated in April based on falling civilian plane orders. We ll also keep an eye on the release of for May and on the publication of the that took place on May 2 nd. In Canada, a relatively light data week will feature for March. Previous NBF forecasts Existing home sales (April, saar) 5600K 5500K Durable goods orders (April, m/m chg.) 2.6% -1.9% U.S.: Orders of durable goods probably weakened in April Durable goods orders 7 6 5 4 3 2 1 0-1 m/m % chg. Elsewhere in the world, we ll get preliminary s readings in both the Eurozone and Japan. Still in Japan, April s numbers will be released. -2-3 -4-1.9% -5-6 -7 2017M01 2017M04 2017M07 2017M10 2018M01 2018M04 NBF Economics and Strategy (data via Datastream) NBF Forecast 5
Economic Calendar Canada & U.S. 6
Annex Economic Tables A1
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Annex Economic Tables A3
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Economics and Strategy Montreal Office Toronto Office 514-879-2529 416-869-8598 Stéfane Marion Marc Pinsonneault Kyle Dahms Warren Lovely Chief Economist and Strategist Senior Economist Economist MD & Head of Public Sector Strategy stefane.marion@nbc.ca marc.pinsonneault@nbc.ca kyle.dahms@nbc.ca warren.lovely@nbc.ca Paul-André Pinsonnault Matthieu Arseneau Jocelyn Paquet Senior Fixed Income Economist Senior Economist Economist paulandre.pinsonnault@nbc.ca matthieu.arseneau@nbc.ca jocelyn.paquet@nbc.ca Krishen Rangasamy Senior Economist krishen.rangasamy@nbc.ca Angelo Katsoras Geopolitical Analyst angelo.katsoras@nbc.ca General This Report was prepared by National Bank Financial, Inc. (NBF), (a Canadian investment dealer, member of IIROC), an indirect wholly owned subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on the Toronto Stock Exchange. The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete and may be subject to change without notice. The information is current as of the date of this document. Neither the author nor NBF assumes any obligation to update the information or advise on further developments relating to the topics or securities discussed. The opinions expressed are based upon the author(s) analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein, and nothing in this Report constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient s individual circumstances. In all cases, investors should conduct their own investigation and analysis of such information before taking or omitting to take any action in relation to securities or markets that are analyzed in this Report. The Report alone is not intended to form the basis for an investment decision, or to replace any due diligence or analytical work required by you in making an investment decision. This Report is for distribution only under such circumstances as may be permitted by applicable law. This Report is not directed at you if NBF or any affiliate distributing this Report is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that NBF is permitted to provide this Report to you under relevant legislation and regulations. National Bank of Canada Financial Markets is a trade name used by National Bank Financial and National Bank of Canada Financial Inc. National Bank Financial Inc. or an affiliate thereof, owns or controls an equity interest in TMX Group Limited ( TMX Group ) and has a nominee director serving on the TMX Group s board of directors. As such, each such investment dealer may be considered to have an economic interest in the listing of securities on any exchange owned or operated by TMX Group, including the Toronto Stock Exchange, the TSX Venture Exchange and the Alpha Exchange. No person or company is required to obtain products or services from TMX Group or its affiliates as a condition of any such dealer supplying or continuing to supply a product or service. Canadian Residents NBF or its affiliates may engage in any trading strategies described herein for their own account or on a discretionary basis on behalf of certain clients and as market conditions change, may amend or change investment strategy including full and complete divestment. The trading interests of NBF and its affiliates may also be contrary to any opinions expressed in this Report. NBF or its affiliates often act as financial advisor, agent or underwriter for certain issuers mentioned herein and may receive remuneration for its services. As well NBF and its affiliates and/or their officers, directors, representatives, associates, may have a position in the securities mentioned herein and may make purchases and/or sales of these securities from time to time in the open market or otherwise. NBF and its affiliates may make a market in securities mentioned in this Report. This Report may not be independent of the proprietary interests of NBF and its affiliates. This Report is not considered a research product under Canadian law and regulation, and consequently is not governed by Canadian rules applicable to the publication and distribution of research Reports, including relevant restrictions or disclosures required to be included in research Reports.
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