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Canadian consumer prices rose 0.4% on a monthly basis in April with core prices posting a like-sized gain
May 18, 2012

• The all-items Canadian CPI rose 0.4% in April, matching the increase in each of the previous three months, though slightly stronger than the 0.3% expected by markets going into the report.
• On a year-over-year basis, the inflation rate edged up to 2.0% from 1.9% in March, reflecting increases among core components.
• The core measure rose 0.4%, stronger than expectations for a 0.2% monthly increase. The annual core inflation rate rose to 2.1% from 1.9% in March.
• The upward surprise in CPI in April puts core inflation modestly above the updated inflation profile provided by the Bank of Canada in last month’s Monetary Policy Report, which takes into account “a gradual reduction in monetary stimulus over the projection horizon.” As such, today’s report provides support to our view that the Bank will start the gradual process of removing policy support toward the end of this year; our forecast calls for a 25-basis-point rate hike in October.

The all-items Canadian CPI rose 0.4% in April, matching the increase in each of the previous three months, though slightly stronger than the 0.3% expected by markets going into the report. The monthly rise was modestly stronger than the 0.3% gain recorded in April 2011, resulting in the year-over-year rate edging up to 2.0% from 1.9% the previous month and above market expectations for a 1.9% increase.

Expectations of a moderation in the pace of increase in energy prices in April came to fruition in May, with the component up 0.9% on a monthly basis compared to 1.7% in March, reflecting a smaller gain in gasoline and electricity prices and a decline in the price of natural gas. Energy prices were up 1.1% on a year-over-year basis, down sharply from 5.1% in March and the slowest annual increase since October 2009. Food prices rose 0.1% in April following the 0.3% March decline and were 2.5% higher than a year earlier, an increase from 2.2% in the previous month.

The core measure, which excludes the prices of the eight most volatile components of the CPI, posted a 0.4% increase, faster than March's 0.2% gain. The April increase was also larger than the 0.2% increase seen a year earlier and as a consequence, the annual rate picked up to 2.1% from 1.9% in February to just a shade above the Bank's 2% target.

The upward surprise in core prices was mainly the result of an outsized gain in the “homeowners’ maintenance and repairs” component, which jumped 4.8% in the month and added 0.1 percentage point to the increase, while prices for the purchase of passenger vehicles moved up 1.2% and contributed another 0.1 percentage point to the core rate.

The upward surprise in CPI in April puts core inflation modestly above the updated profile provided by the Bank of Canada in last month’s Monetary Policy Report that takes into account “a gradual reduction in monetary stimulus over the projection horizon.” As such, today’s report provides support to our view that the Bank will start the gradual process of removing policy support toward the end of this year; our forecast calls for a 25-basis-point rate hike in October.

David Onyett-Jeffries, Economist, RBC Economics

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Recent Economic Updates

US initial jobless claims higher than expected in the week ending May 12
May 17, 2012

• US initial jobless claims were unchanged at an upwardly revised 370,000 in the week ending May 12 (the previous week’s claims were initially reported as 367,000) Market expectations were for a 365,000 reading in the latest week.
• Continuing claims rose 18,000 to 3,265,000 in the week ending May 5 following a 43,000 drop to 3,247,000 the previous week.
• The four-week moving average of initial claims declined for a second consecutive week, falling to 375,000 from 379,750 (was 379,000) the previous week.
• The four-week moving average of initial claims in the latest week, which happens to coincide with the May payroll employment survey week, is in line with the 375,500 that prevailed in April’s survey week, suggesting that the job market could see only minimal improvement upon the disappointing 115,000 gain in nonfarm payrolls posted last month.

There were 370,000 seasonally adjusted initial claims for unemployment insurance in the US in the week ending May 12, unchanged from the previous week’s upwardly revised level (initially reported as 367,000). The four-week moving average of initial claims, which better controls for weekly volatility, declined to 375,000 from 379,750 the previous week (previously reported as 379,000). Continuing claims rose 18,000 to 3,265,000 after falling 43,000 to 3,247,000 the previous week.

The four-week moving average of initial claims in the latest week, which happens to coincide with the May payroll employment survey week, is in line with the 375,500 that prevailed in April’s survey week, suggesting that the job market could see only minimal improvement upon the disappointing 115,000 gain in nonfarm payrolls posted last month. That said, the effectively unchanged four-week moving average still reflects the impact of the bounce in claims that was at least in part related to issues seasonally adjusting the weekly data in mid-April (due to the Easter holiday) as well as the unwinding of the favorable weather effects seen over the winter (warmer-than-normal temperatures resulted in fewer seasonal layoffs). As such, this does not necessarily imply a deterioration in the underlying trend and we continue to expect labour markets conditions to improve, albeit gradually.

David Onyett-Jeffries, Economist, RBC Economics

Highlights of the Minutes from the April 24/25 FOMC meeting
May 16, 2012

• The FOMC viewed that the economy “had been expanding moderately” in the inter-meeting period and generally agreed that the economic outlook was “broadly similar” to March.
• In terms of the discussion policy, “several members” indicated that “additional monetary policy accommodation could be necessary if the economic recovery lost momentum” or if the downside risks to the outlook “became great enough.” This represents a more dovish tilt than in the March meeting in which “a couple of members” suggested that further policy stimulus could “become necessary if the economy lost momentum” or if inflation seemed likely to come in below the FOMC’s 2% medium-run target.
• The minutes from the FOMC’s April meeting indicate that despite the modest upgrade of the assessment of current conditions and near-term growth and employment forecasts released with the April policy statement (which somewhat reduce the odds of additional securities purchases by the central bank), additional policy accommodation remains on the table. The minutes restated the Fed’s willingness to act if it becomes apparent that the recovery is in need for further policy support.

The Minutes of the April 24/25 FOMC meeting indicated that Committee members viewed that the economy “continued to expand moderately” in the period since the last meeting in March. While some members noted increased confidence in the “durability of the recovery”, other cautioned against prematurely inferring strong underlying trends given the possibility that the data partially reflect the impact of the “mild winter weather or other temporary influences.” The assessment of the outlook was “little changed” as the information flow over the inter-meeting period suggested that growth would “remain moderate over the coming quarters and then pick up gradually.” Given the “broadly similar” outlook, members agreed that it “would be appropriate to maintain the existing highly accommodative stance of monetary policy.”

In the discussion of the economic backdrop, the Committee noted that labour markets had improved in recent months and though the unemployment rate had fallen, almost all members viewed the unemployment rate as elevated relative to the level consistent with its mandate. Strains in the global financial markets stemming from the goings-on in Europe were again noted as posing significant downside risks to growth as were possibilities that US fiscal policy “would be more contractionary than anticipated” and that the uncertainty surrounding fiscal policy could dampen hiring and business investment. With regard to inflation, most members anticipated that recent price pressures would prove temporary and that inflation would subsequently “run at or below” a rate consistent with the Fed’s mandate. One member, however, voiced concern about upside risks to inflation if the current monetary policy stance was maintained “much beyond this year.”

In terms of the discussion policy, “several members” indicated that “additional monetary policy accommodation could be necessary if the economic recovery lost momentum” or if the downside risks to the outlook “became great enough.” This represents a more dovish tilt than in the March meeting in which “a couple of members” suggested that further policy stimulus could “become necessary if the economy lost momentum” or if inflation seemed likely to come in below the FOMC’s 2% medium-run target. Policymakers also discussed adopting simple monetary policy rules as guides for decision-making and external communication about policy, though no consensus was reached and it was planned to discuss the topic further at a future meeting.

The minutes from the FOMC’s April meeting indicate that despite the modest upgrade of the assessment of current conditions and near-term growth and employment forecasts released with the April policy statement (which somewhat reduce the odds of additional securities purchases by the central bank), additional policy accommodation remains on the table. The minutes reiterated that the Fed stands ready to act if it becomes apparent that the recovery is in need of further policy support with a larger contingent (“several” versus “a couple” at the March meeting) supporting the view that further policy accommodation could become necessary. With the next policy decision not due until late next month (June 19/20), the information flow over the coming weeks will likely take on added significance as a determinant of the FOMC’s next policy steps.

David Onyett-Jeffries, Economist, RBC Economics

Canadian manufacturing sales jump 1.9% in March

• Manufacturing sales jumped a stronger-than-expected 1.9 % in March, rebounding following declines of 0.2% (previously was -0.3%) and 2.3% (was -1.3%) in February and January, respectively. Market expectations were for a 0.4% rise in March.
• Much of the increase was concentrated in rising transportation sales as well as an unexpected surge in the petroleum and coal component.
• Controlling for the impact of prices, the volume of manufacturing sales also rose 1.9% in March, following a 0.1% dip in February and a downwardly revised 2.6% (was -1.6%) drop in January. Despite the increase in March, declines in earlier months resulted in the volume of sales in the first quarter as a whole dropping an annualized 2.2% to mark the first quarterly decline since the second quarter of last year.
• The stronger-than-expected jump in the volume of manufacturing sales in March bodes well for monthly GDP growth to return to the positive column in the month following a disappointing 0.2% dip in February. With that said, even if manufacturing strength is sufficient to fully retrace February’s GDP decline, this would still leave the monthly production numbers in the first quarter as a whole tracking our forecast that GDP, on a quarterly expenditure basis, rose an annualized 1.8% in the first quarter, which would match the 1.8% gain in the fourth quarter.

Canadian manufacturing sales rose 1.9% in March, rebounding from 0.2% and 2.3% drops in February and January, respectively. Much of the gain in March was concentrated in transportation and petroleum and coal sales, with more modest, albeit still solid, gains elsewhere. Boosting the transportation component, motor vehicle sales climbed 2.3% to partially retrace an 8.6% decline in February while aerospace sales rose 9.9% after an outsized 33.7% gain in February that retraced a similar sized 33.5% decline in January. Petroleum and coal sales jumped 4.5%, with Statistics Canada noting that most of the increase was the result of higher volumes rather than prices. The increase in petroleum and coal sales was unexpected given earlier anecdotal reports that some refineries may have seen reduced production due to unplanned maintenance in the month.

Excluding both the transportation and petroleum and coal components, sales rose 1.0%, led by solid increases in chemical (3.2%) and food (1.2%) sales. Excluding the impact of prices, the volume of overall sales jumped 1.9% in March following a 0.1% dip in February and a downwardly revised 2.6% drop in January.

On a regional basis, the gain in sales was concentrated in Ontario (1.9%), New Brunswick (21.3%) and Quebec (1.2%).

The stronger-than-expected jump in the volume of manufacturing sales in March bodes well for monthly GDP growth to return to the positive column in the month, following a disappointing 0.2% dip in February. With that said, we continue to expect that some offset to indications of stronger manufacturing in the month will come from weakness in the oil and gas sector, reflecting anecdotal reports of temporary maintenance shutdowns at oil refineries. As well, even if manufacturing strength is sufficient to fully retrace February’s GDP decline, this would still leave the monthly production numbers in the first quarter as a whole tracking our forecast that GDP, on a quarterly expenditure basis, rose an annualized 1.8% in the first quarter, which would match the 1.8% gain in the fourth quarter. With that said, we expect that growth in the first quarter would have been significantly stronger in the absence of a number of temporary production disruptions, particularly in the mining, oil and gas sectors. A reversal of these temporary factors would be consistent with our expectation that GDP growth will strengthen notably to 3.1% in the second quarter.

Nathan Janzen, Economist, RBC Economics

US housing starts rose in April; first quarter revised up

• Housing starts rose 2.6% to an annualized pace of 717,000 units in April from an upwardly revised 699,000 in March, beating market expectations for 685,000 units. Building permits slipped by 7.0% following March's sharp 8.8% jump.
• Multiple-unit starts up 3.2% to 225,000 from 218,000 in March. Single starts up 2.3% to 492,000 from 481,000.
• Regionally, Southern states and Midwest posted gains that were only partially offset by declines in the Northeast and West.

Warmer-than-usual winter weather was partly responsible for the pickup in construction activity in the first quarter, with April providing a cleaner read on activity levels. To the extent that starts remained close to the first quarter's level, this report suggests that the housing market has found its feet. However, the average price of a new home in the first quarter was 14.6% below its peak and at 8.1%, the unemployment rate remains historically high. These factors will limit the upside to residential construction activity with only a gradual rise in starts expected in 2012/2013.

Privately owned housing starts in the US rose 2.6% in April to an annualized pace of 717,000 units, from a revised 699,000 units in March (previously reported as 654K,000) Market expectations going into the report had been for an increase to 685,000 (+4.7%) while RBC looked for a 2.4% gain. April's increase was the result of a 3.2% increase in the volatile multiples component to an annualized pace of 225,000 from 218,000 the prior month. Single starts posted a 2.3% rise to 492,000.

Building permits dropped by 7.0% in April following the sharp 8.8% rise in March. On net, permits stood at 715,000 in April, just slightly below the first-quarter average of 720,000. Market expectations going into the report were for a 2.2% drop in permits. April's decrease was due to a 20.8% drop in the multiples component, with permits for single-family homes rising 1.9%. Multiple-unit permits surged by 32.3% in March, with April's decline leaving the level just shy of the first quarter's 255,000 average.

Housing starts stabilized in April after rising in the first quarter to average 712,000 annualized units, a 5.0% increase over the fourth quarter and a 22.1% increase on a year-over-year basis. Warmer-than-usual winter weather was partly responsible for the pickup in construction activity in the first quarter, with April providing a cleaner read on activity levels. To the extent that starts remained at the first quarter's elevated levels, this report suggests that the housing market has found its feet. This was corroborated by yesterday's Homebuilders' housing market sentiment index, which hit a post-recession high. The improvement in the labour market in 2012, combined with record low interest rates and low housing prices, has made housing affordability very attractive. Having said that, the average price of a new home in the first quarter was 14.6% below its peak and at 8.1%, the unemployment rate remains historically elevated. These factors will limit the upside to residential construction activity, with only a gradual rise in starts in 2012/2013 expected.

Dawn Desjardins, Assistant Chief Economist, RBC Economics

US industrial production posts larger-than-expected gain in April

• Industrial production jumped 1.1% in April, beating expectations for a 0.6% increase going into the report.
• The previously reported flat readings for both February and March were revised to show changes of +0.4% and -0.6%, respectively, though the first-quarter average was unchanged.
• Manufacturing production rose 0.6% to more than reverse the previous month’s downwardly revised 0.5% decline. Mining posted a 1.6% monthly increase to retrace the similar-sized decline seen in March while utilities output surged 4.5%.
• The capacity utilization rate jumped to 79.2% in April from 78.2% (previously 78.6%) in March.
• Despite the significant weakness seen in utilities output over the winter as warmer-than-usual temperatures significantly reduced demand for home heating, industrial production managed to post solid quarterly increases in the fourth quarter of 2011 and the first quarter of 2012 as strength in the manufacturing sector buoyed overall measure. The return of normal weather conditions likely means that the recent improvement in the utilities sector will be maintained in the near term, which combined with the continued underlying strength in manufacturing should set the stage for further expansion in overall industrial production in the second quarter.

US industrial production jumped 1.1% in April, beating market expectations going into the report for a 0.6% increase. The previously reported flat readings for both February and March were revised to show changes of +0.4% and -0.6%, respectively, though the net impact of the revisions saw the first-quarter average remain unchanged. With the jump in production, the capacity utilization rate rose to 79.2% in April from a revised 78.4% level in March (initially reported as 78.6%). This represents the highest level of capacity utilization since April 2008.

The headline jump in industrial production in April reflected solid gains across industry groups. Manufacturing production rose 0.6% to more than reverse the previous month’s 0.5% decline and bring the index to its highest level since August 2008. Within manufacturing, strength was seen in the durable goods component (+1.3%) reflecting a 3.9% jump in motor vehicle & parts production. Non-durable goods production posted its second consecutive decline (-0.2%) to provide some offset. Utilities output surged 4.5% in April, reflecting the return to more seasonal conditions after the warmer-than-usual weather significantly reduced demand over the winter. Mining output also increased in April, rising 1.6% to mostly retrace the previous month’s 1.7% decline.

The unseasonably warm winter this year reduced home-heating demand and weighed heavily on utilities output in the fourth quarter of 2011 and the first quarter of 2012, seeing production drop by a cumulative 7% over that period. Despite this significant weakness, industrial production managed to post solid quarterly increases as strength in the manufacturing sector buoyed overall measure. The return of more normal weather conditions likely means that the recent improvement seen in the utilities sector will be maintained in the near term, which combined with the continued underlying strength in manufacturing should set the stage for further expansion in industrial production in the second quarter. Overall, today’s report suggests that the industrial sector of the US is maintaining its momentum into the second quarter of 2012, suggesting that the sector should continue to provide significant support to the expansion of the economy as a whole.

David Onyett-Jeffries, Economist, RBC Economics

U.S. retail sales increased as expected in April
May 15, 2012

• Retail spending inched up 0.1% in April 2012, which was in line with market expectations, and followed solid 0.7% (revised from 0.8%) and 1.0% (was 1.1%) gains in March and February, respectively.
• Motor vehicles and parts sales rose 0.5% in April, which was consistent with the previously reported 0.4% rise in unit vehicle sales in the month.
• Excluding the auto component, sales also rose a modest 0.1% following an unrevised 0.8% jump in March. Much of the moderation in the pace of growth reflected declines in sales at gasoline and building material stores. The rise in April was modestly below market expectations for a 0.2% increase.
• The so called ‘control’ retail sales (which exclude sales of gasoline, motor vehicles, and building materials, and they enter directly into the Bureau of Economic Analysis’ consumer spending estimate) climbed a decent 0.4% following a similar 0.4% increase in March and a 0.6% gain in February.
• The gain in control sales in April following solid increases in prior months left the measure at an already annualized 3.5% above its first-quarter 2012 average. As well, while the weaker gain in overall April retail sales likely reflected some payback from weather-related strength during the winter, we expect some offset from a bounce back in utilities spending that will support spending on services. As a result, we continue to expect an annualized 2.7% gain in real consumer spending in the second quarter of 2012, which would be close to the solid 2.9% increase in the first quarter.

Retail sales rose a modest 0.1% in April 2012, slowing from sizeable 0.7% and 1.0% gains in March and February, respectively. Sales of motor vehicles and parts rose for a third consecutive month, posting a 0.5% increase that was in line with a previously reported 0.4% rise in unit vehicle sales in the month.

Excluding the auto component, retail sales inched up a similar 0.1%, slowing from solid 0.8% and 1.0% increases in March and February, respectively. Part of this slowing was the result of a 0.3% drop in sales at gasoline stations following sizeable increases of 1.0%, 3.3%, and 1.5% from March to January, respectively. This pattern largely reflected changes in gasoline prices that rose sharply in the first quarter of the year before falling, on a seasonally adjusted basis, in April. As well, building material sales fell 1.8% following solid increases in the previous four months. The retracement of part of this strength in April likely reflected an easing in this positive weather effect as temperatures returned to closer to normal in the spring.

The component of retail sales that goes into the GDP add-up, the so called control retail sales that exclude the motor vehicle, gasoline station, and building materials components, climbed 0.4% in April following a similar 0.4% gain in March and a 0.6% increase in February thereby suggesting a relatively minimal weather effect on this key component.

The gain in control sales in April, following solid growth in previous months, left the measure already at an annualized 3.5% above its first quarter level. As well, while a return to seasonal weather in the spring likely was a factor that weighed on overall April retail sales, the effect of weather on overall consumer spending in the month is not unambiguous. In particular, spending on services, which is not captured in the retail trade survey, was weighed down in the fourth quarter of last year and the first quarter of 2012 by sharp declines in utilities consumption because warmer than normal winter temperatures reduced the need for home heating. A return to normal temperatures in the spring should see much of that weakness reversed. As a result, we continue to expect an annualized 2.7% gain in real consumer spending in the second quarter of 2012, which would be close to the solid 2.9% increase in the first quarter of the year.

Nathan Janzen, Economist, RBC Economics

U.S. consumer prices held steady in April, but core prices increased

• April 2012 consumer prices met expectations and held steady in the month following the 0.3% gain in March.
• Gasoline prices fell 2.6% partially to unwind the increases seen in the previous three months.
• Core prices also came in as expected by rising 0.2% in the month.
• The annual increase in the overall CPI moderated to 2.3% in April from 2.7% in March while the core rate held at 2.3%.
• The decline in energy prices in general, and gasoline prices specifically, was the main factor weighing on headline consumer price index (CPI) in April and resulted in the sharp moderation in the year-over-year rate. The annual increase in core prices remains above 2%; however, we continue to expect that the persistently high unemployment rate and implied slack in labour markets will put downward pressure on core inflation, seeing the rate drift below 2% during the course of this year.

Expectations for the April 2012 consumer price index (CPI) report were for weakness in energy prices in the month to offset another modest increase in core prices and leave the overall index unchanged from March. In the event, this expectation was confirmed as the overall CPI held steady following March’s 0.3% increase as the energy component, which had increased in each of the previous three months, declined by 1.7% thereby reflecting a 2.6% decline in gasoline prices. On a year-over-year basis, the overall inflation rate moderated to 2.3% from 2.7% in March. This represented the slowest pace of annual growth since February 2011.

Excluding food and energy prices, the ‘core’ measure rose an expected 0.2% in April thereby matching the like-sized gain seen in March. The upward pressure reflected sizable increases in prices for shelter, new and used vehicles, apparel, airline fares, and medical care services. On a year-over-year basis, the core CPI measure was up 2.3% in April thereby matching the annual rate seen in March.

The decline in energy prices in general, and gasoline prices specifically, was the main factor weighing on headline CPI in April, and while energy prices have posted strong gains during the early part of 2012 (up 10% on an unadjusted basis since December), they showed far greater upward pressure at this time last year thereby resulting in the sharp moderation in the year-over-year rate. With that said, the annual increase in core prices remains above 2% into the second quarter of this year as was the case in both the first quarter of 2012 and the final quarter of 2011. We continue to expect that the persistently high unemployment rate and implied slack in labour markets will put downward pressure on core inflation thereby seeing the rate drift below 2% during the course of this year. Such benign inflationary pressures would allow the Fed to focus on sustaining the recovery with the fed funds rate likely remaining in its current 0% to 0.25% range into 2014.

David Onyett-Jeffries, Economist, RBC Economics

RBC Economics Research contacts:
Paul Ferley, Assistant Chief Economist
Dawn Desjardins, Assistant Chief Economist
Kirsten Cornelson, Economist
Nathan Janzen, Economist
David Onyett-Jeffries, Economist

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