Canada reported dreadful December retail sales and somewhat stronger than expected price pressures in January. The main take away is that a more dovish line from the central bank when it meets on March 5 is likely avoided.
Here's why: The retail sales collapse can be written off to poor weather and power outages. The central bank has been putting more emphasis on the persistently low inflation and the gains may be harder to ignore, especially as they are desired.
The headline rate of consumer inflation rose 0.3% in January, the largest rise in nearly a year, to lift the year-over-year rate to 1.5%, the highest since June 2012. The consensus had called for 1.3% (after 1.2% in December). More important, from central bank's operational point of view, the core rate also increased more than expected. The core rate in Canada excluded food and energy and several other volatile items. It rose 0.2% for a year-over-year increase of 1.4%, the highest since last summer.
Retail sales in December fell 1.8%, more than four times more than economists expected. Autos were a drag, but even without them, retail sales fell 1.4%. The main culprit is most likely to be the weather. It simply kept people at home. Furniture and home furnishing sales fell 7.8%. Sales of electronic goods fell by a little more than 13%. The weather, as in the US has been brutal this winter and will likely be seen as Q1 data is reported.
Still, the retail sales report will harden expectations that when reported next week, December GDP likely fell. It will be the first monthly contraction since June. It also warns of downside risks to the consensus forecast for a 2.7% annualized rate.
The US dollar had rallied into the reports and quickly spiked to almost the CAD1.12 level and hit a wall of offers. The push back was equally quick, but limited to around CAD1.1130. We are more inclined to see the US dollar recover and make another run at CAD1.12.
The Canadian dollar's weakness may help the stock market extend is streak for the 13th session today. It has risen by about 5.3% in the past 12-sessions. As typically the case in advancing markets, there are numerous reasons cited for encouraging advance: earnings, M&A activity and foreign demand.