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Canadian Retail Sales Weaken Less Than Expected

Karl Schamotta November 22, 2019

Canadian retail sales fell by less than expected in September – suggesting that domestic consumer demand remains relatively strong in the face of growing global uncertainty. Numbers released by Statistics Canada this morning show that overall receipts fell -0.1%, with a -1.0% decline in sales at motor vehicle and parts dealers and a 2.3% fall in gasoline station revenues pulling the headline downward. Markets had expected a -0.3% fall.

But with these categories excluded, sales rose 0.7%, with most other categories showing gains in volume terms – and the August headline print was revised up to 0.1% from the previously-reported -0.1%.

The data, incredibly-critical in gauging the health of Canada’s consumption-led economy, will raise expectations slightly heading into next week’s third-quarter gross domestic product release, and should act to support the Bank of Canada’s currently-neutral monetary policy setting.

In comments at an event in Toronto yesterday, Governor Stephen Poloz said that monetary conditions are “about right, given the situation”.

But in volume terms, retail sales have remained almost-flat for the last year, indicating that record-high levels of debt and falling rates of home price appreciation are taking a toll on consumer consumption. Indeed, as Scott Barlow at the Globe and Mail has observed, Canadian retail sales have tended to move with home prices over the last five years. This suggests that the home-as-ATM psychology that prevailed in the United States before the financial crisis is alive and well in Canada – and that the underlying economic vulnerabilities are similar.

This also limits the Bank’s room for maneuver. On Wednesday, Deputy Governor Carolyn Wilkins suggested that the Bank finds itself caught between a rock and high levels of household leverage, saying, “In the current context, lowering interest rates could provide some insurance against downside risks to inflation. However, this insurance would come at a cost in terms of higher household vulnerabilities down the road”.

In short, the Bank cannot provide relief for Canadian consumers (and the retail sector) without putting Canadian consumers (and the retail sector) at risk.

The Canadian dollar bounced upward almost 40 basis points in the immediate aftermath of the release, but soon hit an invisible wall and reversed direction to sit almost unchanged for the day.

Currency markets are trading with a risk-off tone more broadly as investors downgrade bets on a US-China trade deal by year end. The Trump administration is now expected to delay its next round of tariffs beyond a previously-threatened December 15 deadline – but with rhetoric hardening on both sides of the Pacific, a comprehensive agreement that rolls back previous rounds looks increasingly unlikely.

Karl Schamotta
Chief Market Strategist
@vsualst

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