Need To Know News

Statistics Canada will release the July Consumer Price Index tomorrow at 7am EDT. July headline CPI is expected to ease back to a 0.4% gain from the 0.7% rise in June, while y-o-y CPI is expected at 3.4% from 3.1% prior. The BOC has predicted inflation could accelerate to a 4% clip before the end of the year.

Core CPI is expected to accelerate to a 0.2% increase from 0.1% previous. Y-o-Y core prices are expected up 1.6% from 1.5% in June.

Lower energy prices over the July period should give the BOC some breathing room on inflation, though persistently elevated prices could trickle through to core CPI, as they did in Canada’s southern neighbor that month.

Initial Jobless Claims for the week ended August 16 are expected at 440k from 450k the previous week. Tomorrow’s report will likely be the 5th straight week of claims over 400k, the number typically associated with a recession. Labor officials have attributed the high numbers of the last 3 weeks to more people checking their eligibility for emergency unemployment benefits and learning they were actually eligible for regular benefits.

Continuing Claims are expected at 3.405mln, lower than the 3.417mln last week (which was the highest since Nov-03).

The 4-week moving average for claims was 441k last week, compared to 421k the prior week. The 4-week moving average for continuing claims was 3.274mln for the week ended August 2, from 3.167mln the prior week.

The August Philly Fed Index is expected to improve to -12.6 following a -16.3 reading in July and a -17.1 reading in June. The July New Orders Index improved slightly to -12.1, the July Shipments Index fell to -8, the July Employee’s Index fell to -7.3 and the July Prices Paid Index surged to 75.6 from 69.3 in June.

Despite the considerable improvement from its record low in April at -24.9, the Philly Fed Index continues to underperform the other major manufacturing surveys. Elevated prices will continue to complicate the performance of manufacturers in the region going forward.

The Empire State Index improved to 2.8 in August from -4.9 in July; however prices remained elevated as New York manufactures noted higher resource and employee benefit costs. The Philly Fed Index has underperformed the Empire State Index almost every month for the past 2 years.

The July US Leading Economic Index(LEI) is expected to fall 0.2% following a 0.1% decrease in June and a 0.2% decrease in May. The July LEI was down 2.1% year-over-year and was down 1.7% on a 6month annualized basis. The June Coincident Index was up 0.1% in June following a 0.1% decrease in May and the June Lagging Index was down 0.3% in June following a 0.2% drop in May.

Positive contributions to the July LEI include:

• Improvement in the 10yr Treasury relative to Fed funds. The 10yr yield fell to 4.095 early in July before improving to 4.33% later in the month.
• Improved UofM Confidence data. The UofM Confidence survey bounced off an all time low in June, and though still generally negative will help boost July LEI.

Negative contributions to the July LEI include:

• Declines in equity markets. The S&P cash index was dropped nearly 5% in July.
• Higher initial jobless claims. Initial jobless claims grew to 449k during the last week of July from 348k during the first week of the month.
• Fewer building permits. July building permits fell to 937k from an upwardly revised 1.138mln in June.

Other Index components expected to have limited impact on July LEI include:

• ISM supplier deliveries which were unchanged at 55.1 in July
• Roughly unchanged factory workweek
• Nearly unchanged Consumer Goods Orders
• Nearly unchanged M2 money supply
• Slight improvement in real non-durable consumer goods orders

Crude: 1mln build expected vs. 316k draw prior

Unleaded: 3mln draw expected vs. 6.394mln draw prior

Distillates: 1mln build expected vs. 1.759mln draw prior

Refinery Usage: 0.35% increase expected vs. 1.06% decline prior

Tomorrow morning Statistics Canada will release June Retail Sales and July Leading Indicators at 8:30am EDT.

Retail Sales are expected to edge up 0.4% in June, the same as previous. The surprising 1% drop in New Motor Vehicle sales reported earlier this month is expected to provide a drag on total sales although strong gasoline prices are expected to provide a balancing boost. However the slowing domestic economy suggests Retail Sales could still disappoint.

Meanwhile excluding Autos, Retail Sales are expected to increase 0.6% from 0.4% prior.

July Leading Indicators are expected to rise 0.1% in July following the flat (0%) report last month. Stocks are expected to provide a drag, as is Manufacturing, though the latter could surprise on the upside given the unexpected 2.1% growth reported for June Shipments last week.

Continued growth in consumer spending suggests that economic activity is still expanding in spite of a cooldown in the housing sector and the twin challenges of a strong currency and a US slowdown faced by the manufacturing sector.

Johnson Redbook Retail Sales for the week ended August 16 will be released at 8:55am EDT. Sales in the week ended August 9 were up 1.5% y-o-y week, up 1.5% y-o-y month and down 1.9% m-o-m.

Redbook sales for the week ended August 2 rose 3.5% y-o-y week, increased 2.9% y-o-y month and added 1.4% m-o-m.

Monthly figures are seasonally adjusted, while y-o-y figures are not. There are no estimates for the Redbook Index, as weekly retail data are highly volatile.

July PPI is expected to increase 0.6%, following a 1.8% rise prior, which would put y-o-y headline PPI to 9.3%. July Core PPI is expected to match June’s 0.2% increase, and would push y-o-y Core PPI to 3.2% from 3% prior.

Higher energy prices are expected to be the largest contributing factor to the expected increase in July headline PPI, but this impact should be more subdued than in June when energy prices jumped 6%, including a 9% increase in gasoline prices. The July CPI report revealed a 4% increase in energy prices, which included a 4.1% increase in gasoline prices and a 7.4% increase in Natural Gas prices. Imported petroleum product prices rose 4% in July and imported natural gas prices rose 5.8%.

Food prices are also expected to have an upward impact on headline PPI, but less so than the 1.5% increase in June. July CPI revealed a 0.9% increase in food prices with cereals, meats, fruits and vegetables each gaining over 1%. The July Ag-Price Index grew 1.9% and the Ag-Export Price Index rose a hefty 6.7%, which each pose upside risks to July headline PPI.

Core PPI is expected to remain subdued for a 2nd consecutive month, though the threat of pipeline inflation continues to linger in the balance. Core consumer goods prices rose 0.3% in June, led by a 2.2% increase in car prices.

Higher-than-expected PPI may provide a good excuse to buy USD, though lingering growth concerns and fears surrounding Freddie and Fannie could limit USD support and lend a bid to the bond market.

June Housing Starts surged to 1.066mln, a 9.1% increase over the May data. June Building Permits, normally thought of as a forerunner to Starts, were up 11.6%. The surge in these data is very nearly all attributable to rule changes for permitting in New York City. The rush to get in under the implementation deadline drove June’s gains. Indeed, if not for the New York City rush, June would have recorded a 4% drop in Starts and only a 0.7% increase in Permits.

July Starts are expected at 960k and Permits are expected at 970k - a sharp return to the downtrend that has gripped the market since the high of 2.273mln Starts in January of 06. The June data was clearly indicative of urban building starts with the 5 units or more Starts jumping from 278k to 400k. Single Family Starts fell 36k, on pace with the 37k drop per month seen since June 2007.

Of interest in the day’s report will be the total number of Homes Under Construction; the June data, at 965k, was the lowest level since September 1998. Single Family Homes Under Construction, at 507k, was the lowest level since April 1993. Homes Under Construction has been dropping at an average rate of about 15k per month since June 2007. Back-of-the-envelope calculation brings these data to 492k.

If no further distortions occur, expect that Starts and Permits will go back to trend with a muted market reaction.