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Howdy, forex friends! Canada will be simultaneously releasing its CPI and retail sales report this Friday at 12:30 pm GMT.

And that means that there’s 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 CPI Report (June)

What happened last time?

  • Headline CPI m/m: +0.1% vs. +0.4% expected, +0.3% previous
  • Headline CPI y/y: +2.2% vs. +2.5% expected, +2.2% previous
  • Trimmed Mean CPI y/y: +1.9% vs. +2.1% previous
  • Weighted Median CPI y/y: steady at +1.9%
  • Common Component CPI y/y: steady at +1.9%

Canada’s May CPI report was rather disappointing since it revealed that headline CPI only increased by 0.1% month-on-month, missing the +0.4% consensus by a wide margin. The monthly increase is also the slowest in 5 months.

Year-on-year, CPI increased by 2.2%, matching the annual increase in April, but missing the forecast that CPI will accelerate to +2.4%.

As for the BOC’s three preferred measures for the “core” reading, the Weighted Median CPI and Common Component CPI were both steady at +1.9%. The Trimmed Mean CPI, meanwhile, deteriorated from +2.1% to +1.9%.

Looking at the details of the report, 7 of the 8 CPI components printed weaker monthly increases or even decreases, so the weakness was broad-based.

The details for the annual reading are only a little better since 6 of the 8 CPI components printed weaker increases. It just so happens that the cost of transportation jumped by 5.6% (+4.7% previous) since gasoline prices surged by 22.9%, which was able to offset the weaker increases from the CPI components, allowing the annual headline reading for the May period to match the annual reading for the April period.

Anyhow, the May CPI report was disappointing on the surface and the details didn’t really help to alleviate some of the disappointment.

What’s expected this time?

  • Headline CPI m/m: +0.1% expected vs. +0.1% previous
  • Headline CPI y/y: +2.3% expected vs. +2.2% previous

Most economists forecast that that headline CPI rose by 0.1% month-on-month in June, which is same rate of monthly increase as in May.

The year-on-year reading, meanwhile, is expected to accelerate slightly from +2.2% to +2.3%.

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

  • The prices index of the Ivey PMI report jumped from 64.4 to 74.3 in June, which means that input costs increased greatly in June.
  • Markit’s manufacturing PMI report noted that “Robust demand for raw materials contributed to the strongest rate of input cost inflation since April 2011.” More importantly, Canadian manufacturer are apparently passing on their higher costs since “factory gate price inflation also accelerated to its steepest for over seven years, driven by increased cost burdens.”

How about the historical tendencies? Do they offer additional insights?

CPI has slowed down on a monthly basis between the months of May and June. That has been a consistent pattern for at least the last 11 years. And goes against the consensus that the monthly reading for June was able to match the reading for May.

As to how economists fared with their guesstimates, they usually either get it right or overshoot, resulting in downside surprises. And looking at the table below, economists have been getting it right in the last few years.

To summarize, the leading indicators point to a strong increase input price inflation. Markit is even more forthright since it found anecdotal evidence that Canadian manufacturers are passing on their higher costs, which will likely translate to a stronger CPI reading.

However, the findings of the PMI reports aren’t supported by historical trends since the CPI reading for June has been slower compared to May. That has been the case for the last 11 years. Moreover, the PMI reports don’t really line-up with the consensus since most economists forecasts that the monthly reading for June CPI will match the reading recorded in May.

As to how economists historically fared with their guesstimates, they either get it right or are too optimistic. And that skews probability slightly more towards a possible downside surprise for the monthly CPI reading.

But as always, be reminded that we’re playing with probabilities here, so there’s no guarantee that the monthly reading will surprise to the downside.

Canada’s Retail Sales Report (May)

What happened last time?

  • Headline retail sales m/m: -1.2% vs. +0.0% expected, +0.8% previous
  • Core retail sales m/m: -0.1% vs. +0.6% expected, -0.2% previous

Canada’s April retail sales report showed that retail sales value plunged by 1.2% month-on-month, which is very disappointing since the market was expecting a flat reading. Moreover, that’s the fist decline after three straight month of increases.

The negative headline reading was due mainly to the 4.3% decline in vehicle sales. However, 8 of the remaining 10 store types also reported declines or weaker growth in sales, which is why the core reading also ticked lower by 0.1%, which is the second negative reading in a row and contrary to expectations that the core reading will increase by 0.6%.

Overall, the April retail sales report was was pretty bad.

What’s expected this time?

  • Headline retail sales m/m: +0.9% expected vs. -1.2% previous
  • Core retail sales m/m: +0.5% expected vs. -0.1% previous

The general consensus is that headline retail sales recovered by 0.9% month-on-month in May after falling 1.2% in April.

The core reading is also expected to rebound by 0.5% after slipping by 0.1% back in April.

So, do the leading and related economic indicators offer any clues?

  • Canada’s May jobs report showed that the wholesale and retail trade industries generated 3.1K jobs.
  • However, Canada’s June jobs report revealed that the wholesale and retail trade industries axed 14.0K jobs, which implies that business conditions weren’t too good.
  • Canada’s April trade report showed that imports of motor vehicles and parts fell by 1.4% (+6.3% previous), while imports of consumer goods increased by 1.2% (-4.8% previous).

Okay, what about historical tendencies? Do they offer additional clues?

Well, economists apparently have a tendency to be too pessimistic with their guesstimates for both the headline and core readings since there lots of upside surprises over the years.

In summary, the leading and related indicators and reports are pointing to the possibility of that retail sales weakened in May, which goes against the consensus that both the headline and core reading for retail sales recovered.

However, there is still a chance that the core reading may be strengthen since the trade report shows that imports of consumers goods rebounded after last month’s decline.

Also, historical tendencies show that economists tend to undershoot their forecasts, resulting in far more upside surprises for both the headline and core readings, which skews probability more towards a possible upside surprise.

But again, just keep in mind that we’re playing with probabilities here, so a downside surprise is still a possible scenario for both headline and core readings.

Final Thoughts

Canada’s retail sales and CPI reports will be released simultaneously (yet again) this Friday. And if both reports print stronger-than-expected readings, then that usually means a quick bullish boost for the Loonie. But if both reports fail to impress, then expect the Loonie to sold off.

And Loonie’s reaction to last month’s disappointing CPI retail sales report is an example of the latter scenario.

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

But what happens if the reports are mixed? Well, traders usually have their sights on the CPI report because of its more direct link to monetary policy. However, that is not always the case, especially if the retail sales report reveals very surprising numbers.

As for follow-through buying or selling, that usually depends on oil prices. And the Loonie’s later rise after the initial knee-jerk reaction is a good example of this since oil prices were surging at the time.

Anyhow, you may therefore also want to keep an eye on oil prices as well. And if you didn’t know, you can check out oil prices at our Live Market Rates page.