Week of January 26, 2015

FEATURED ARTICLE: 7-year slump of the global economy MARKET STATISTICS: Weekly Change

ECONOMIC STATISTICS:

WEEKLY ECONOMIC REPORT

JANUARY 26, 2015

Ronald Chow, Chief Economist ! ronaldchow@crescentschool.org

BANK OF CANADA CUT KEY INTEREST RATE Bank of Canada Policy Announcement and Monetary Policy Report - January The Bank of Canada (BoC) cut key interest rate by 0.25% as the Bank of Canada tries to provide a onetime “insurance” move. The Bank believes that “outside the energy sector, we are beginning to see the anticipated sequence of increased foreign demand, strong exports, improved business confidence and investment, and employment growth”, but also “considerable uncertainty about the speed with which this sequence will evolve and how it will be affected by the drop in oil prices”. As well, they stated that the oil price shock “increases both downside risks to the inflation profile and financial stability risks”, and hence pronounced their decision was to “provide insurance against these risks”.

This interest rate cut comes on the tail-end of an unmoving key interest rate of 1% since September 2010.

However, further cuts cannot be ruled out, as Governor Poloz indicated that the Bank could take out more insurance if the world changes again.

CANADIAN CPI FALLS Canadian Consumer Price Index – December Canadian consumer prices tumbled 0.7% in December, as expected, amid the 9.8% plunge in gasoline prices in the month. As a result, the headline inflation fell down to 1.5% from 2.0% in the prior month; a further drop is expected for next month as pump prices continue to head down another 11% in January.

Core prices fell 0.3% m/m unadjusted; seasonally adjusted, core CPI in fact rose 0.2% m/m. Compared with the wild gyrations in gasoline, most of the other CPI components looks positively sedate. But there were some noteworthy moves: grocery prices rose 0.5%, lifting the annual rate to a nearthree-year high of 4.2%. As well, there was only one province with negative inflation (not considered to be “deflation” yet) – Prince Edward Island at -0.4% y/y.

Looking past the dramatic dive in gasoline prices, there is little indication that underlying Canadian inflation trends are being dragged down by the plunge in oil prices. On the contrary, core inflation appears pegged above the 2% threshold for some time yet, especially with the upward fpressure from a weakening exchange rate. While these realities didn’t deter the Bank of Canada from cutting rates last week, they would make the next cut an even more difficult decision were they to persist.

BLACK FRIDAY, CYBER MONDAY BOOST SALES Canadian Retail Sales – November Canadian retail sales unexpectedly rose 0.4% in November, as Black Friday shopping appears to have provided a big boost to activity. The underlying details were even stronger, with sales excluding autos up 0.7% and sales excluding autos & gas up 1%. Clothing & shoes surged 5.9%, sporting goods was up 4.6% and appliances also gained 4.6% while department stores gained 3.3% and furniture gained 1.5%.

There is no denying the November retail sales are impressive, but it’s highly unlikely they are sustainable.

WEEKLY ECONOMIC REPORT

JANUARY 26, 2015

Ronald Chow, Chief Economist ! ronaldchow@crescentschool.org

U.S. EXISTING HOME SALES REBOUND U.S. Existing Home Sales – December U.S. existing home sales rebounded in December, up 2.5% (below expected) to 5.04 million units annualized. While the rebound is good news, it wasn’t enough to erase November’s 6.3% dive. Sales are 3.5% above year-ago levels, the fastest pace in 14 months. Single-family home accounted for all of the gain, up 3.5%, while the number of existing homes that were available dropped for the 5th straight month.

GROUND-BREAKING NEWS FOR U.S. HOUSING STARTS U.S. Housing Starts and Building Permits – December U.S. housing starts rebounded in December. The 4.4% jump burst past expectations of a moderate 1%’ish rise, leaving starts at 1,089k units annualized. Single-unit construction, which accounted for 2/3rds of starts, was responsible for the entire gain, up 7.2%. However, building permits dropped for the second consecutive month, down 1.9%. The report certainly releases good ground-breaking news… literally.

FEATURED ARTICLE: 7-YEAR SLUMP OF THE GLOBAL ECONOMY Seven years after Europe and the United States slipped into what would become one of the deepest global recessions in history, and five and a half years since the North American economy returned to growth, the global recovery remains a perplexing, inconsistent and frustratingly elusive work in progress.

In many respects, the global economy looks much better than it did several years ago. Growth is modest but generally positive; unemployment has declined; the financial system still has some issues, but is on much more solid ground compared with the brink on which it teetered in 2008. However, the economy has never really gotten back to its old self: every step forward seems to be followed by a stumble backward.

The world has started 2015 in full stumble: the International Monetary Fund cut its forecast for global growth by 0.3 percentage points to 3.5 per cent this year and 3.7 per cent next year. In Canada, the pattern is disturbingly similar; the U.S. revival was supposed to finally lead Canada’s economy to the promised land but the plunge in prices for oil and other commodities will hold some major sectors and economic regions down.

Breaking free from the clutches of a post-financial-crisis isn’t easy. However, there are plans for a modest and peaceful effort by global governments – last year, the G20 countries (who account for 90% of the global economy) agreed to work together to raise the level of global output. The infrastructure investment seems to be the best way for governments to contribute to the solution, and fortunately they think so too.

THE WEEK AHEAD U.S. Durable Goods Orders – December - Tuesday, January 27, 2015 at 8:30am

U.S. New Home Sales – December - Tuesday, January 27, 2015 at 10:00am

Canadian Real GDP at Basic Prices – November - Friday, January 30, 2015 at 8:30am

U.S. Real GDP – Q4 - Friday, January 30, 2015 at 8:30am

UPCOMING CSIT MEETINGS Tuesday, January 27, 2015 at 1:30pm - Sector Meetings WEEKLY ECONOMIC REPORT

Thursday, January 29, 2015 at 3:30pm - Team-Wide Meeting JANUARY 26, 2015

Ronald Chow, Chief Economist ! ronaldchow@crescentschool.org