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Howdy, forex friends! Canad will be simultaneously releasing its CPI and retail sales report this Friday (Sept. 22, 12:30 pm GMT). There’s therefore a good chance that the Loonie will get a volatility boost. So if you’re looking to pillage some quick pips from the Loonie before the week ends, then you better read up, eh?

Canada’s Retail Sales Report (July)

What happened last time?

  • Headline retail sales m/m: +0.1% vs. +0.2% expected, +0.5% previous
  • Core retail sales m/m: +0.7% vs. +0.0% expected, -0.1% previous

Canada’s June retail sales report was mixed since the headline value of retail sales only rose by 0.1% month-on-month, which missed expectations for a 0.2% increase and is much weaker compared to the 0.5% increased recorded in May.

However, the core reading printed a solid 0.7%, soundly beating expectations that core retail sales would be flat in June. The 0.7% increase is also a major rebound after the 0.1% contraction during the previous month.

Taking a closer look at the details of the retail sales report, the 1.4% drop in sales reported by motor vehicles and parts dealers, as well as the 1.8% drop in sales from gasoline stores, helped to drag the headline reading down.

However, sales of vehicles are excluded from the core reading. In addition, 6 of the 11 store types actually reported higher sales, which is why the core reading jumped by 0.7% in June.

Overall, the June retail sales report was mixed, but the details were net positive and the core reading was able to soundly beat expectations, which is why the Loonie jumped higher as a result.

CAD Overlay: 15-Minute Forex Chart
CAD Overlay: 15-Minute Forex Chart

What’s expected this time?

  • Headline retail sales m/m: +0.2% vs. +0.1% previous
  • Core retail sales m/m: +0.4% vs. +0.7% previous

For the upcoming retail sales report, the general consensus is that the headline value of retail sales rose by 0.2%, which is an improvement over the previous month’s +0.1%.

The core reading, meanwhile, is expected to print a 0.4% increase, which is weaker than the previous month’s +0.7%.

The implied consensus, therefore, is that vehicles sales recovered after the slump in June.

Another implied consensus is that other store types will print weaker sales because, as mentioned earlier, 6 of the 11 store types reported stronger sales back in June, which is why the core retail sales reading for June was much better-than-expected.

Looking at the available leading and related indicators, average hourly earnings fell by 0.35% in July (+0.00% previous), which may have dampened consumer spending.

Moving on, a closer look at Canada’s July jobs report shows that the wholesale and retail trade industries generated 21.9K jobs back in July. However, the wholesale and retail trade industries later shed 6.7K jobs in August.

This may mean that wholesale and retail companies were expecting stronger sales in July, so they increased their payroll numbers. But later decided to trim their payroll numbers when business didn’t do too well.

Moving right along, Canada’s July trade report reveals that imports of consumer goods fell by 1.3% month-on-month in July, which supports the implied consensus that sales in other store types fell and a weaker core reading.

In the same vein, imports for passenger cars and light trucks increased by 2.3%, which is also in-line with the implied consensus that sales at vehicles and parts dealers picked up, resulting in a stronger headline reading.

As to how economists have fared with their guesstimates, economists appear to be too optimistic and end up overshooting their forecasts for the headline reading, resulting in far more downside surprises.

And the same can apparently be said of the core reading, since there have been a lot of downside surprises in the past 10 years and only two upside surprises.

Overall, the leading and related indicators seem to be leaning more towards a general weakness in the retail trade industry and retail sales because the retail and wholesale trade industries boosted their payroll numbers in July only to shed them in August.

Meanwhile, wage growth fell in July, which may have dampened consumer spending. Also, trade data shows that imports of consumer goods fell in July.

Given all that, the consensus that the core retail sales reading weakened in July sounds about right.

However, the July trade report also showed a rebound in imports of passenger vehicles, so the general consensus for a better headline reading, because of the implied consensus that vehicle sales picked up, also sounds about right.

As to how the readings will likely turn out, probability seems skewed more towards a downside surprise for both the headline and core readings, given how economists has historically fared with their guesstimates.

Canada’s CPI Report (August)

What happened last time?

  • Headline CPI m/m: +0.0% as expected vs. -0.1% previous
  • Headline CPI y/y: +1.2% vs. +1.2% expected, +1.0% previous
  • Trimmed Mean CPI y/y: +1.3% vs. 1.2% previous
  • Weighted Median CPI y/y: +1.7% vs. +1.6% previous
  • Common Component CPI y/y: +1.4%, same as previous

As expected, Canada’s headline CPI was flat in July after ticking lower by 0.1% previously. Year-on-year, this translates to a 1.2% increase, which is also in-line with expectations.

But on a more upbeat note, this is the first year-on-year uptick in six months and is a welcome recovery after headline CPI fell to a 20-month low of 1.0% back in June.

And more importantly, especially for rate hike junkies, two of the BOC’s three preferred measures for inflation ticked higher, which is a good sign for underlying inflation.

To be more specific, trimmed mean CPI ticked higher from 1.2% to 1.3%, which is the first uptick in six months. The weighted median CPI, meanwhile, rose to 1.7% after holding steady at 1.6% in the past three months. As for the common component CPI, it maintained the previous month’s pace of 1.4%.

On the surface, the July CPI report was flatly within expectations. However, the details were more much more impressive, particularly the upticks in two of the BOC’s preferred measures for underlying inflation. And so the Loonie spurted higher across the board as a result.

CAD Overlay: 15-Minute Forex Chart
CAD Overlay: 15-Minute Forex Chart

What’s expected this time?

  • Headline CPI m/m: +0.2% expected vs. +0.0% previous
  • Headline CPI y/y: +1.5% expected vs. +1.2% previous

For the inflation situation in August, the general consensus among economists is that headline CPI rose by 0.2% month-on-month and 1.5% year-on-year.

The general consensus among economists, therefore, is that the upcoming CPI report will be an improvement over the previous CPI report, at least with regard to the headline readings.

So, what do the available leading indicators have to say?

Well, the prices index of the comprehensive August Ivey PMI report slumped from 69.2 to 59.9. This means that survey respondents reported an increase in input costs in August, albeit at a much slower pace compared to July. However, this does not immediately mean a weaker headline CPI reading since the prices index does not show whether or not Canadian companies were passing on their input costs to consumers.

Markit’s manufacturing PMI report affirms Ivey’s findings since Markit noted that “Higher raw material costs contributed to a further round of input price inflation, albeit the least marked in 11 months.”

Even better, Markit noted that “Some firms passed higher costs on to their customers in the form of increased charges.”

Also, gasoline prices in August have generally been higher in August, relative to gasoline prices during the month of July.

As to how analysts have fared with their guesstimates, just like with the retail sales report, they seem to be too optimistic, so there are more downside surprises than upside surprises.

Overall, the two leading indicators agree that input costs continued to rise but the rate of increase slowed. Even so, companies (manufacturing companies at least) do pass on their higher input costs.

That seems to contradict with the general consensus that inflation picked up the pace in August. However, economists have the higher gasoline prices in August going for them, so it’s still possible for the increase in CPI to be faster in August.

However, just note that economists tend to be too optimistic and overshoot their forecasts, which is why there are far more downside surprises than upside surprises.

Final thoughts

Forex traders are generally more focused on the core reading for the retail sales report. And as usual, a better-than-expected reading usually pushes the Loonie higher while a miss drags the Loonie down.

As for the CPI report, traders used to have their sights on the headline reading. However, now that the BOC is in a hiking cycle, focus has shifted to the BOC’s three preferred measures for underlying inflation.

So even if the headline reading is a miss but the three measures for underlying inflation either hold steady or improve, then chances are good that the Loonie may still encounter buying pressure.

Also note that the retail sales and CPI reports will be released simultaneously. If both top-tier reports beat expectations, then that would very likely send the Loonie higher. Conversely, if both reports disappoint, then that will likely kick the Loonie lower.

But if the readings are mixed, then the CPI report will likely have a bigger impact on the Loonie’s price action since it’s tied more directly to BOC rate hike expectations.

And again, forex traders will likely have their sights on the BOC’s preferred measures for underlying inflation. By the way, you can directly access them here when they’re finally available. You may have to refresh the page a few times on the day itself, though.

And as always, do note that Canadian economic reports are usually only good for pillaging quick pips from the Loonie since oil prices usually define follow-through buying and selling, although that seems to have weakened recently. Anyhow, just make sure to keep an eye on oil prices. You can check real-time prices of oil futures here and here.