Canadian retail sales looked relatively unchanged on a headline basis in June, with receipts rising by 0.1% from the previous month to a total of $65.9bn. While this was close to the consensus expectation of a flat reading, Canadian consumer spending is far softer than it appears on the surface.
The uptick was driven by rising prices—in volume terms, sales fell by -0.2%. But stripping out autos and gas paints a much weaker image of retail spending. Core receipts were down -0.9%, the second month of decline, and volumes dropped by an even sharper -1.1%. More detailed data indicates that this weakness was widespread, with 6 out of 9 retail sub-sectors posting losses. Furthermore, those that did post losses were concentrated in discretionary and durable categories.
While Q2’s GDP report is yet to be released before the BoC’s next decision, we think the latest rounds of growth, employment, and now retail sales data provide the Governing Council enough cover to pause its hiking cycle once again. Although concerns over inflation persistence have yet to abate, the BoC should take confidence that below-potential growth can still guide inflation back to target.
The obvious counterargument to our view is that the advance indicator for July points to a 0.4% bounce in sales. But we already have inflation data for July, which showed that prices rose by 0.6% month-on-month for all items, and the breadth of above-target price pressures picked up as well. With consumer price growth outpacing the growth in expected nominal retail sales, we are highly likely to get yet another soft print on volumes next month.
Auto dealerships prop up a broadly soft retail sales report
Going back to the June data, auto dealerships were the clear standout. Nominal sales in that sub-sector rose by a strong 2.5%, and were almost entirely driven by higher volumes (+2.4%). The other two sub-sectors posted much smaller gains, with gas station sales up 0.3% and sporting goods up 0.4%. Everything else fell, with losses ranging from -0.5% in health and personal care to -1.6% in furniture, electronics, and appliances.
Drilling further into the motor vehicle sector reveals an interesting pattern. Focusing solely on the volume of goods sold, strength was especially strong in “other vehicles” (+5.5%), which includes items like RVs and boats. New cars were also solid (+2.8%), but used cars (+0.7%) and parts (-3.6%) were much softer. We suspect this has to do with the disparate effects that the soaring cost of living has on different income segments of the population. Inflation hits low-income people the hardest, forcing them to cut back on expenses, but high-income individuals who have not come under financial stress still have the capacity to spend on big-ticket items. It’s especially telling that convenience stores (-1.6%) and general merchandise stores (-2.5%) have seen sales volumes come under pressure.
Unsurprisingly, the report fuelled an uptick in USDCAD, which had previously found a short term equilibrium around the 1.35 handle.
The loonie is now trading at its weakest levels since late May. While much of the recent strength in USDCAD has been driven by a haven bid for US dollars, today’s report adds some fundamental support to the move, with Government of Canada bonds outperforming US Treasuries as markets trim their expectations of possible future BoC hikes on the data.
Jay Zhao-Murray, FX Market Analyst