An unexpected plunge in Canada's retail sales in April and flat inflation figures for May drove the Canadian dollar to a year-low on Friday and cut expectations for a July rate hike to 50-50 at best. Retail sales fell 1.2 percent in April, the largest drop in more than two years, adding slowing consumer spending to a list of concerns facing the Bank of Canada as it tries to raise interest rates in the face of a trade war and housing downturn.
While a July rate hike had been widely expected just weeks ago, the unexpected decline in retail sales and separate data that showed inflation remained at 2.2 percent in May makes it harder for the central bank to push ahead with a hike at its next meeting on July 11. "It really takes the steam out of July at this point," said Brittany Baumann, macro strategist at TD Securities.
Statistics Canada said bad weather hit sales of autos and gardening equipment and economists noted that Bank of Canada officials typically look through a single month of bad data. Analysts in a Reuters poll had forecast no change in retail sales in April. Still, economic data has been patchy since the bank on May 30 signaled more rate hikes were in store.
Canada's once-hot housing market has slowed dramatically in the wake of a series of mortgage rule changes, and consumer and business confidence has taken a hit from an escalating trade dispute with the United States. "The tailwind of the wealth effect is fading fast. Overall spending was weak, and this is kind of confirming that the slowdown in consumer spending is extending from the first quarter into April," Baumann said.
While the May inflation rate is above the Bank of Canada's 2.0 percent target, markets had expected a 2.5 percent uptick. The central bank has raised rates three times since July 2017 and until the data, around 69 percent of market operators expected a hike on July 11. That slipped to just under 50 percent after Wednesday's releases.
The bank has said it will focus closely on monthly economic statistics to guide its decision. "Today's bad data make it even more difficult for the Bank of Canada to hike rates in July," said Royce Mendes, senior economist at CIBC Capital Markets. "But, with the most important numbers yet to come in, GDP and employment, there's still time for the data to turn," he told Reuters.
The news quickly pushed the Canadian dollar to a one-year low of 1.3384 to the US dollar, or 74.72 US cents, down from 1.3279, or 75.31 US cents, before the data was released. It later rebounded somewhat. Five of the eight major components in the inflation index grew at a slower rate than they had in April.
Energy prices, however, rose by 11.6 percent from May 2017 - higher than the year-on-year 6.3 percent increase in April - thanks largely to a 22.9 percent jump in gasoline prices. All three of the central bank's core inflation measures came in at 1.9 percent. These include CPI common, which the central bank says is the best gauge of the economy's underperformance.
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