Signs of weakening momentum in Canadians’ spending overshadowed better-than-expected retail sales in June and early data showing a strong July.
(Bloomberg) — Signs of weakening momentum in Canadians’ spending overshadowed better-than-expected retail sales in June and early data showing a strong July.
Receipts for retailers jumped 0.4% last month, the strongest pace since April, according to an advance estimate from Statistics Canada released Wednesday. That followed a 0.1% increase a month earlier, which beat the median estimate for a flat reading in a Bloomberg survey.
In volume terms, retail sales edged down 0.2% in June.
“Canadian consumer spending is far softer than it appears on the surface. The uptick was driven by rising prices. But stripping out autos and gas paints a much weaker image of retail spending,” said Jay Zhao-Murray, an analyst at Monex Canada. “More detailed data indicates that this weakness was widespread.”
Only three of nine subsectors saw higher sales: motor vehicle and parts dealers, sporting goods stores and gas stations. Excluding autos, retail sales slid 0.8% versus expectations of a 0.3% gain.
Core retail sales — which exclude autos and gas stations — were down 0.9% in June, a second straight month of decline.
The report shows Canadians are still buying big-ticket items like cars, which may be the result of pent-up demand and delays in shipments during the pandemic. Although sales for sporting goods were still up, spending on other rate-sensitive products, including furniture, contracted in June.
Strength in household spending earlier this year was a major reason the Bank of Canada resumed raising interest rates, driving borrowing costs higher in June and July after a five-month pause. With goods consumption and the overall economy showing some signs of a slowdown, policymakers may have some room to step to the sidelines again and hold the overnight rate at 5% as early as their next meeting on Sept. 6.
After the release, traders in overnight swaps markets pared bets on another hike, with odds around a third of another 25 basis point increase next month.
The weak data also added more fuel to a broader bond rally on Wednesday. The benchmark Canadian two-year yield tumbled 13 basis points to 4.708% at 10:43 a.m. Ottawa time — nearly 24 basis points below comparable US Treasuries.
On a nominal basis, retail sales were unchanged in the second quarter, while in volume terms sales declined 0.8%.
“Strong consumption in the first quarter gave the Bank of Canada reason to resume rate hikes, but consumers throttled back over the spring,” Katherine Judge, an economist at Canadian Imperial Bank of Commerce, said in a report to investors. “Goods consumption looks to have swung from a boost to a drag on growth in the second quarter.”
Regionally, sales rose in four provinces in June, led by Ontario, where sales were up on the strength of higher sales of vehicles and parts.
The statistics agency didn’t provide details on the July estimate, which was based on responses from 45% of companies surveyed.
“The cumulative effect of 475 basis points on interest rate hikes is only starting to have real impact on households’ budgets,” Maria Solovieva, an economist at Toronto-Dominion Bank, said in a report to investors. “As more mortgages roll over at higher rates, homeowners will divert more of their income towards debt servicing. This means that retail sales could be the next in line to roll over.”
–With assistance from Erik Hertzberg.
(Updates with more details and economist comments throughout.)
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