Canadian manufacturing shipments beat expectations

Canadian manufacturing shipments beat expectations
August 16, 2006

Manufacturing shipments rose 1.9% in June, besting expectations of a 0.2% rise. May’s reading was revised down to -0.7%. The much better-than-expected data will be negative for bonds and positive for the currency.

June’s 1.9% rise puts the level of shipments at its highest since January. Gains were posted in 13 of 21 industries. Durable goods shipments increased by 1.1%. Shipments of motor vehicles increased 3%. Shipments of non-durable goods increased 2.8%, led by petroleum and coal products as refinery output returned to normal production levels. Shipments in Quebec and Ontario both increased.

Inventories fell by 0.7%. The inventory-to-sales ratio, a measure of how long it would take to exhaust inventories at the current rate of shipments, declined from its recent high of 1.31 to 1.28 in June. Unfilled orders were up 0.1%, up from May’s 0.6% decline. Manufacturing employment fell by 4,100. June’s gain puts the average monthly gain of shipments at a modest 0.1% for the quarter.
Although manufacturers are suffering, as evidenced by declines in manufacturing employment, this report suggests that they may be managing to cope with the effects of the Canadian dollar and increased global competition.

Monthly pace of increase in U.S. core inflation slows down
The seasonally adjusted all-items CPI rose 0.4% in July, but the less volatile and more closely watched core CPI rose only 0.2%, below the market forecast for a 0.3% increase. Yesterday’s rally in U.S. Treasuries on the back of a round of weak data will likely continue as the monthly increase in the core inflation rate was lower than market forecasts. The report should be negative for the U.S. dollar.

The not seasonally adjusted core CPI rose 2.7% on a year-over-year basis, the fastest pace of increase since December 2001, and above the Fed’s comfort level given its most recent central tendency forecast for an increase in the core rate of inflation of 2.25% to 2.5% over the four quarters of 2006.

However, the monthly pace of increase in July was slower than in the previous four months when prices increased at a 0.3% pace and, as such, is feeding market sentiment that price pressures are abating.

A 1.2% decline in apparel prices was largely responsible for the slowing in the pace of increase in the core inflation in the month. The all-items index rose by 0.4% reflecting a 2.9% jump in prices for energy products with gasoline prices rising at a strong 5.3% pace.

The core rate increased on a year-over-year basis for the fourth consecutive month and our proprietary model tracking core inflation, which is based on the lagged impact of changes in unit labour costs and core producer prices, points to a continued climb in the core inflation rate in the months ahead.

While recent data have increased sentiment that the next move by the Federal Reserve could be an easing in interest rates, we continue to be cautious about this view and expect that, if our forecast for the core inflation rate to continue to trend higher in the months ahead proves to be correct, another 25 basis-point rate increase is more likely than an easing move.

Deceleration in U.S. housing market activity continues
July housing starts fell 2.5% to an annualized rate of 1.795 million units from a downwardly revised 1.841 million pace in June. The July reading was weaker than expected with the market consensus calling for a decrease to a pace of 1.810 million units. The weaker-than-expected data will be negative for the currency, positive for bonds.

Housing activity decelerated in July, with housing starts falling to a rate of 1.795 million units, the slowest pace since May 2003 and building on the deterioration in the second quarter.

Both single and multiple unit starts registered decreases, with starts of singles falling to 1.452 million units from 1.486 million units and multiples starts falling to 343,000 from June’s reading of 355,000. Building permits, a precursor to future housing market activity, fell by 6.5% in July. The National Association of Homebuilders Housing Market Index, a gauge of homebuilders’ optimism, fell to 32 in August after falling to 39 in July. Both of these reads are very low.

These factors suggest that there may be continued deceleration in housing market activity. This report gives support to the view that, for the near-term, the Fed will remain on hold, but the rise in the year-over-year rate in core CPI suggests that inflationary risks remain.
Source: "Financial Markets Monthly", Economics Departnment, RBC Financial Group



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