US Inflation Increase Was Broad Based In January

CANADA: Manufacturing shipments fell 1.0% m/m in January, a second consecutive decline following a very strong reading in November (+3.5%). Sales fell in 14 of the 21 broad industries surveyed, including transportation equipment (-6.3%), wood products (-4.1%), and primary metals (-2.8%). These declines were partly offset by a rise in shipments of petroleum/coal products (+6.5%) and chemicals (+6.1%). In real terms, factory sales retreated 1.1%. Looking on a quarterly basis, real manufacturing shipments are on track to fall 1.2% annualized in the first quarter of the year (assuming no change in February and March) after a +3.9% reading in Q4 of 2017.


Teranet-National Bank Composite National House Price Index tm edged 0.1% lower in February, its fourth decline in the past six months. The drop was rather broad-based, with only three of the 11 constituent cities recording increases in the month: Vancouver (+0.4%), Hamilton (+0.2%) and Halifax (+0.8%). Prices were flat in Victoria and declined elsewhere, most significantly in Winnipeg (-1.0%) and Quebec City (- 1.5%). Year over year, the index was up 7.5%, its eighth straight softer reading since its record gain of 14.2% last June and its lowest reading since March 2016. The sharpest y/y advances were recorded by Vancouver (+15.8%), Victoria (+12.4%) and Hamilton (+8.4%). Other cities posted respectable 12-month increases, albeit below the national average: Toronto (+6.2%), Halifax (+5.3%), Montreal (+5.0%) and Ottawa-Gatineau (+3.7%). Alternatively, Edmonton and Quebec City saw their indices slide year over year (-0.3% and -2.3%, respectively).

In a speech titled “Today’s Labour Market and the Future of Work”,

Bank of Canada Governor Stephen Poloz shared his impressions regarding the country’s economic situation with an audience composed of Queen’s University students. Poloz acknowledged the undeniable progress made in the past few months, especially regarding job creation (283,000 jobs in the past year) and unemployment (lowest rate in more than 40 years). He also noted that Canada had reached a “sweet spot” in the economic cycle, where mounting capacity pressures would demand greater investment.

However, Poloz reiterated concerns regarding the labour market, particularly the high number of discouraged workers and the fading demographic support of baby boomers. He emphasized the low participation rate among young people, women, First Nations and newly arrived immigrants. In his opinion, increasing the participation of these groups could add up to 300,000 people to the workforce and lift potential GDP by C$30 billion per year. More importantly from a monetary policy standpoint, bringing these people into the workforce could foster more economic growth in Canada “without generating inflation”. This dovish spin was reinforced later in the speech when Poloz stated that, despite the challenge of determining the limits of capacity building in the country, the Bank of Canada had “an obligation to allow it to occur”.

The take-away from the speech was that Poloz wished to exercise patience before announcing another rate hike. He might even let inflation heat up until the outcome of NAFTA talks becomes clearer. This is congruent with our scenario, which calls for two rate hikes before year end and core inflation running at 2%.

UNITED STATES: Retail Sales dipped 0.1% m/m in February for an unexpected third decrease in a row. Sales of motor vehicles and parts dropped 0.9% for a fourth consecutive monthly decline. Excluding autos, sales inched up 0.2% as gains for building materials (+1.9%), sporting goods (+2.2%), and non-store retailers (+1.0%) more than offset declines for gasoline stations (-1.2%), furniture (-0.8%), and general merchandise (-0.4%). In real terms, retail sales were down 0.2% (using CPI as a proxy for retail prices), which suggests 2018Q1 will register a slowdown on this count. If there is no change in March, real retail sales will decline 3.1% in the first quarter. This is not overly worrisome given that sales surged 8.1% in 2017Q4. All in all, we are still confident that consumers will pick up the slack in the coming months given the strong labour market, rising wages, positive consumer confidence, and the recent payouts from tax cuts.


consumer price index rose 0.2% m/m in February after advancing 0.5% the prior month. The price of energy eked up 0.1% while food costs were flat. Excluding these two categories, inflation was up 0.2% as higher prices for apparel (+1.5% after registering +1.7% the month before), housing (+0.3%) and tobacco (+0.1%) more than offset lower prices for personal computers (-1.2%), autos (-0.5%, the steepest decline since 2009) and medical care (-0.1%). Year over year, headline inflation gained a tick to 2.2% while the core measure stayed put at 1.8% thanks to a negative base effect. The recent momentum is encouraging. On a 3-month annualized basis, core prices were up 3.1% in February, two ticks more than the prior month and the highest reading since 2008. However, we must bear in mind that this late surge was due in large part to the devaluation of the trade-weighted USD. Indeed, most of the increase in y/y core inflation in recent months has stemmed from a moderation of deflation in the goods segment, which depends on currency movements. Meanwhile, the 12-month core CPI for services, a measure that moves in synch with wages and better reflects intrinsic price pressures, has stayed roughly stable.

Still in February, the

producer price index (PPI) for final demand climbed a seasonally adjusted 0.2% m/m after rising 0.4% the prior month. The increase reflected higher prices for services (+0.3%), which make up about two-thirds of the overall index. Alternatively, prices for goods sagged 0.1%, the first monthly drop since May. Excluding the volatile items of energy and food, wholesale prices advanced 0.2% m/m. On a yearly basis, the headline PPI and the PPI excluding food and energy came in at 2.8% and 2.5%, respectively. For core wholesale prices, this represented the sharpest 12-month jump since January 2012.


import price index (IPI) rose 0.4% m/m in February despite a 0.5% slump in the price of petroleum imports. Excluding these, import prices were up 0.5% for a second month in a row, capping the steepest two-month increase for ex-petroleum import prices since 2011. On a 12-month basis, the headline IPI gained one tick to 3.5% while the less volatile ex-petroleum gauge advanced 2.1%, its highest reading since January 2012. Judging from the sizeable decline of the tradeweighted USD in recent months (-7% in the year to February), there might be more upside in store for ex-petroleum import prices in the near future.

Again in February,

industrial production progressed 1.1% m/m following a -0.3% print the prior month. Manufacturing output, which represents 74.6% of total industrial production, jumped 1.2%, thanks to strong gains in the motor vehicles/parts (+3.9%, the steepest increase in 10 months) and computer/electronics (+1.5%) categories. Meanwhile output in the utilities sector slid 4.7% but that came after two months in which colder-than-normal temperatures contributed in boosting electricity and gas output. Finally, production in the mining sector advanced 4.3% in the month and was up a healthy 9.7% on its level a year ago, thanks to rising oil prices over that period. After two months of data, industrial production is on track to grow 2.7% in the first quarter of the year following an astounding showing last quarter (+8.4%).


capacity utilization rate in the industrial sector as a whole rose from 77.4% in January to a two-year high of 78.1% in February. In the manufacturing sector, utilization reached 76.9%, a cyclical high. Such elevated levels of capacity usage should spur investment going forward.

Housing Starts fell 7.0% m/m in February to 1,236K in annualized terms. That figure was lower than consensus expectations but it came after the highest reading in more than ten years in January (1,329K). In February, starts edged up 2.9% in the single family segment. Alternatively, they collapsed 26.1% in the volatile multifamily category, albeit after a 25.6% increase the previous month. Despite the monthly drop, starts are still on pace to expand an annualized 8.8% in Q1 and that after a very good showing in Q4 (+31.7%). That suggests residential construction will once more contribute to GDP growth in the first quarter of the year.


uilding permit applications, for their part, retraced 5.7% m/m in February, coming in at 1,298K on an annualized basis.


NFIB Small Business Optimism Index rose 0.7 point in February to 107.6, just one-tenth below its all-time high reached back in 1983. The details of the report were overwhelmingly positive. For starters, the percentage of polled firms that expected the economic situation to improve rose from 41% to 43%. The percentage of those that anticipated higher sales was up as well, from 25% to 28%. However, the problem of labour shortages persisted. Indeed, 34% of respondents reported positions they could not fill in February, a very high level by historical standards. With so many firms looking to hire from within a diminishing pool of potential employees, an acceleration of wage growth is to be expected. In this regard, fully 31% of firms reported an increase in worker compensation in the past 3-6 months. Some of these costs were already being passed along to consumers as a net 13% of firms reported higher selling prices, a cyclical high.

In March, the

Empire State Manufacturing Index of general business conditions sprang 9.4 points to 22.5, topping its sixmonth moving average (20.3) for the first time since October. The new orders sub-index (16.8 from 13.5 the prior month) showed bookings piling up at their fastest pace in three months. This added to an already swamped order book, pushing the unfilled orders sub-index up 7.8 points to a 12- month high of 12.7. In an attempt to meet growing demand, firms ramped up shipments, driving the corresponding subindex to an eight-year high of 27.0. Meanwhile, payrolls continued to expand at a decent pace (9.4 vs. 10.9 the prior month). Interestingly, the input prices paid by New York’s manufacturing businesses kept rising at a vigorous clip, with the prices paid tracker climbing 1.7 points to a seven-year high of 50.3. Similarly, factory gate prices (sub-index up from 21.5 to 22.4) rose at a rate unseen since early 2012. These higher prices, which have been evidenced also in other manufacturing sector reports (e.g., ISM and Markit), suggests U.S. factories are facing mounting capacity pressures.


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