Weak Inflation and Retail Sales Slump Tempers Expectations Ahead of Bank of Canada Decision

Underlying inflation pressures are still "missing in action", leading to a steady core-CPI number, while a fall in takings at food and beverage stores drove the decline in retail sales.

The Canadian Dollar took a knock Friday after September inflation came in weaker than expected and August retail sales slumped, further increasing the risk of more dovish commentary from the Bank of Canada next week.

Headline inflation rose by 0.2% month-on-month, up from 0.1% in July, but below the economist consensus for an increase of 0.3%. On an annualised basis, headline inflation now sits at 1.6%, according to Statistics Canada data.

After stipping out gasoline costs, core-inflation held steady at its July and August levels during the September month, printing an annualised rate of 1.1% and prompting one economist to describe underlying inflation pressures as “missing in actions”.

Canadian retail sales took a dive during the month of August, falling by 0.7% in volume terms, when they had been forecast by economists to rise 0.3%. In nominal terms the value of all retail trade fell by 0.3% to $48.9 billion.

“A very slow turn in prices, and what looks like another ho-hum month for GDP augurs for a dovish take on the Bank of Canada on Wednesday next week,” says Nick Exarhos, an economist at CIBC Capital Markets. “Negative for the C$ and positive for the front end of the curve.”

Weaker sales at food and beverage stores were the principal driver behind the decline.

Friday’s data could give Bank of Canada policy makers pause for thought about the contents of any statements they make alongside the October rate decision, due Wednesday, 25, October.

The BoC has hiked rates twice within the last three months and, in doing so, prompted a sudden repricing of future rate expectations.

“Governor Poloz used his recent speaking opportunity to throw a bit of cold water on the market’s judgement that a September hike signaled that the Bank of Canada was in a hurry to move again,” writes Avery Shenfeld, chief economist at CIBC, in a recent briefing.

The Pound-to-Canadian-Dollar rate drew a boost from Friday’s data, extending gains to 0.85% for the session, with bids and offers accepted around the 1.6556 level.

“Three months of decline in export volumes, a cooling in Ontario housing, and fresh trade uncertainties are enough reason to wait and see until well into 2018,” adds Shenfeld.

With oil prices showing losses, NAFTA uncertainty still in the air and question marks now hanging over the Bank of Canada, the Dollar was quoted lower broadly against the full G10 basket Friday.

The USD/CAD rate was 0.68% higher at 1.2566, above a key resistance level, while the CAD/NZD rate was quoted 0.04% lower at 1.1383.

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