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Features
Weekly Market Strategy
Economic Outlook
Download the full Weekly Market Strategy (pdf)July 8, 2008
The most recent U.S. price data showed a persistent and accelerating rise in headline inflation with both consumer and import prices gaining momentum in May. This week was no different with the Producer Price Index showing that wholesale and raw material prices increased in May. The headline cost of finished goods, intermediate products and raw materials rose 1.4%, 2.9% and 6.7% month over month respectively, all higher than the previous month’s readings. Inflationary pressures were further demonstrated in the coremeasure for prices of finished goods, intermediate products and raw materials as their numbers rose 0.2%, 2.0% and 5.0% respectively in May. In addition, sluggish growth in the U.S. economy was revealed in the form of the Housing Starts and Building Permits numbers which came in below market expectations. Housing Starts contracted 3.3% month over month, led by an 8% decline in multiple-family homes. Building permits fell by 1.3% month over month with single-family homes, which account for about 65% of overall permits, registering the steepest decline by falling 4% last month. Industrial Production continued to drop for the second time in May with a -0.2% reading as utilities and consumer goods retreated -1.8% and -0.2% respectively while manufacturing remained unchanged. In the end, the reduced business investments help counteract the upside to inflation.
In Canada, the focus was on the headline CPI which increased 1.0% in May to reach an annual rate of 2.2%. The food and energy components were largely responsible for the jump in the consumer inflation data as they increased 1.0% and 5.5% year over year respectively amid global grain and energy based price escalation. The headline gain represents the largest month-over-month jump in CPI since January 1991. Little attention was paid to the fact the core inflation data, which came in as expected at an annual rate of
1.2%, at the low end of the Bank of Canada’s target range of 1-3%, and furthermore, the impact of rising prices in Canada has yet to been seen in consumer spending. Retail Sales continued to grow 4.2% year over year as of April with spending rising 0.6% in the month. Excluding automobiles, retail sales nearly doubled in growth to 1.1% month over month and rising at a 5.9% annual rate. As such, Scotia Economics expects consumer price inreases to average around 2.4% in 2008 and 2009 with the core remaining below the 2% mark.
This week, we will get housing data for the U.S. The S&P/Case-Shiller Home Price Index is set to be released on Tuesday, followed by New Homes Sales numbers on Wednesday and Existing Home Sales on Thursday. On the same day Durable Goods Orders will be revealed, Wednesday’s FOMC will likely steal the show in both Canada and the U.S. Friday, Personal Income and Consumption will be coming out, as well the PCE deflator, the Fed’s preferred inflation metric. There will be no major data releases for Canada.
- Anthony Mentor, Associate, Portfolio Advisory Group – Fixed Income
continued... Download the full Weekly Market Strategy (pdf)