Canadian May Retail Sales and Inflation keep markets guessing on BoC

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On Friday last week, the Canadian May Retail Sales and Inflation economic data was released. The mixed results saw the markets clearly divided on the next monetary policy move from the Bank of Canada.

Data from Statistics Canada showed that the annual inflation rate grew at a slower pace. However, inflation still remained above 2% for the third consecutive month amid a gauge of underlying inflation rose to the highest levels in nearly six years.

Canada’s annual inflation rate or consumer price index rose 2.2% on the year in the month ending April. This was slightly short of the 2.3% increase that was forecast by the economists.

On a monthly basis, consumer prices were seen rising 0.3% in April compared to the month before. The core inflation rate was seen moving higher as well. The three different measures of inflation used by the Bank of Canada showed that the average core inflation rate increased to 2.03% marking the highest increase since February 2012. The Bank of Canada is targeting a 2% inflation rate. So, lets break down the Canadian May Retail Sales and Inflation data.

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Retail sales rises 0.6% in March

In a separate report, data showed that the Canadian retail sales increased for the third consecutive month beating estimates. The gains came in on higher car sales activity while data for January and February were also revised higher.

The total value of retail sales in the month of March rose 0.6% to a seasonally adjusted 50.24 billion Canadian dollars. Data from Statistics Canada showed that this surpassed the median estimates which pointed to a 0.3% increase. On a price adjusted basis, retail sales were seen even higher at 0.8% in March.

There were also revisions to the previous data which indicated that sales increased at the fastest pace in the previous months of January and February that what was initially reported.

Retail sales for January was seen advancing 0.3% compared to the initial reports showing a 0.1% increase. Data for February showed that retail sales increased 0.5% compared to the 0.4% increase registered previously.

Further reports indicated that a total of six out of eleven subsectors increased. The biggest gains came from new car dealers which increased 3.3%.

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Excluding autos, retail sales in Canada actually declined 0.2%. This indicated that Canadian households were expected to scale back on spending amid higher borrowing costs and debt levels. The Bank of Canada governor Stephen Poloz, in a speech earlier this month said that credit growth was slowing but that consumers were adapting to the higher interest rates. At the same time, the newly introduced mortgage financing rules were also expected to play an impact.

The data from Canada on Friday however saw the markets clearly divided in terms of the Bank of Canada’s rate hike expectations. This comes amid the Canadian dollar falling strongly against the U.S. dollar.

Analysts at the Bank of Nova Scotia expect that the markets were misreading the data from Friday and primarily basing their views on the slump in the USDCAD. According to the bank, the interpretation of the data suggests that underlying inflation remains strong and remained in an upward trend.

They say that this was evidenced from the strong retail sales figures and that this could cement the case for the Bank of Canada’s expectations of 1.3% growth this year. Derek Holt, an economist said that the BoC’s scorecard which is data dependent has been pointing to favorable conditions from the BoC’s point of view and this means that the central bank could hike rates as early as the May 30th meeting.

On the other hand, some market watchers say that the Canadian May Retail Sales and Inflation data from last Friday does not justify a rate hike from the Bank of Canada. Although the numbers were better slightly better than expected, there wasn’t enough reason for the Bank of Canada to justify with a rate hike.

Analysts at BMO Capital Markets note that this was evident from the decline in the Canadian dollar. By some estimates, the next BoC rate hike could be expected in the month of July.

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