Howdy, forex friends! Canada will be simultaneously releasing its retail sales and CPI reports this Friday at 12:30 pm GMT.
And that means that there’s a good chance that the Loonie will get a volatility injection. So if you’re looking to pillage some quick pips from the Loonie before the week ends, then you better read up, eh?
1. Canada’s CPI Report (August)
What happened last time?
- Headline CPI m/m: +0.5% vs. +0.1% expected, same as previous
- Headline CPI y/y: +3.0% vs. +2.5% expected, same as previous
- Trimmed Mean CPI y/y: +2.1% vs. +2.0% previous
- Weighted Median CPI y/y: steady at +2.0%
- Common Component CPI y/y: steady at +1.9%
Canada’s July CPI report was rather impressive overall. As for specifics, headline CPI printed a 0.5% month-on-month increase, soundly beating expectations for a much softer 0.1% increase. July’s reading is also the strongest monthly reading in five months.
Year-on-year, headline CPI surged by 3.0%, which is the best reading since September 2011. The market was only expecting a 2.5% increase.
As for the BOC’s three preferred measures for the core reading, the Weighted Median CPI maintained the annual pace of +2.0%. The Common Component CPI was also steady +1.9%. The Trimmed Mean CPI, meanwhile, improved even further from +2.0% to +2.1%.
Looking at the details of the report, 6 of the 8 CPI components were in positive territory. And of those 6 CPI components, 4 printed stronger monthly increases, while 2 printed weaker increase.
For the annual reading, the household operations and equipment CPI component was finally back in positive territory, so all 8 CPI components were printing increases again. And of those 8, half printed stronger annual increases, 3 printed weaker increase, and only 1 maintained the pace.
In summary, the July CPI report was pretty good on the surface and the details were also pretty good. In fact, the CPI report was so good that odds for a September BOC rate hike jumped from from 20% to 30%, market analysts say.
Of course, we now know that the BOC decided to keep rates steady during the September 5 BOC monetary policy statement.
What’s expected this time?
- Headline CPI m/m: -0.1% expected vs. +0.5% previous
- Headline CPI y/y: +2.8% expected vs. +3.0% previous
Most economists forecast that headline CPI fell by 0.1% month-on-month and only increased by 2.8% year-on-year in August.
In other words, there’s a consensus that headline CPI moderated a bit after printing rather impressive readings in July.
So, what do the available leading indicators have to say?
- The prices index of the Ivey PMI report increased slightly from 71.1 to 71.5 in August, which means that input costs increased at a slightly higher rate compared to July.
- Markit’s manufacturing PMI report supports the Ivey report since “Strong demand for raw materials contributed to greater input cost pressures and the second-largest lengthening of suppliers’ lead-times in the survey history. The latest increase in overall cost burdens was the steepest for almost seven-and-a-half years.”
- More importantly, Canadian manufacturers appear to be passing on their higher input costs since the higher input costs and “the introduction of trade tariffs on steel and aluminum resulted in another strong increase in average prices charged by manufacturers in August.”
How about the historical tendencies? Do they offer additional insights?
There are no apparent historical patterns when comparing the monthly reading for August with the monthly reading for July.
However, economists clearly have a strong tendency to be too optimistic with their guesstimates since historical data present a lopsided picture (in favor of downside surprises)
To summarize, the leading indicators point to stronger input price inflation.
Higher input costs don’t automatically translate to higher CPI, but Markit did note that Canadian manufacturers were passing on their higher costs, so there is a chance that CPI may meet or beat the previous month’s monthly reading.
However, that goes against consensus since most economists forecast that CPI fell by 0.1% month-on-month in August.
And while there are no clear historical trends when comparing the readings for August and July, there’s a clear historical tendency for economists to overshoot their guesstimates, resulting in far more downside surprises over the years.
And that skews probability more towards a potential downside surprise.
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. And again, the leading indicators were pointing to stronger inflationary pressure in August.
2. Canada’s Retail Sales Report (July)
What happened last time?
- June headline retail sales m/m: -0.2% vs. -0.1% expected
- May headline retail sales m/m: revised higher from +2.0% to +2.2%
- June core retail sales m/m: -0.1% as expected
- May core retail sales m/m: revised higher from +1.4% to +1.7%
Canada’s June retail sales report showed that retail sales value fell by 0.2% month-on-month, more than the expected 0.1% decline. The core reading, meanwhile, printed a 0.1% decrease, which is in-line with consensus.
And the weakness was somewhat broad-based since 6 of the 11 retail store types reported weaker sales in July.
However, the previous headline reading was upgraded from an impressive +2.0% to an even more impressive +2.2%. The previous core reading was also revised higher from +1.4% to +1.7%.
And despite the negative headline reading for June, retail sales for all of Q2 still increased by 1.0%. In contrast, retail sales fell by 0.5% in Q1, so retail sales was still on track for a positive contribution to Q2 GDP.
And that’s likely why the Loonie found buyers after the initial drop. And it very likely helped that oil prices were on the rise at the time.
What’s expected this time?
- Headline retail sales m/m: +0.3% expected vs. -0.2% previous
- Core retail sales m/m: +0.6% expected vs. -0.1% previous
The general consensus is that headline retail sales recovered by 0.3% month-on-month in July after falling 0.2% in June.
Likewise, the core reading is expected to rebound by 0.6% after slipping by 0.1% previously.
And since the core reading is expected to print a stronger recovery, there’s also an implied consensus that the recovery will be due to non-vehicles sales and that vehicle sales may have even been negative.
So, do the leading and related economic indicators offer any clues?
- Canada’s July jobs report showed that the wholesale and retail trade industries generated 7.1K jobs.
- However, Canada’s August jobs report revealed that the wholesale and retail trade industries shed 19.6K jobs, which implies that business conditions weren’t too good.
- Canada’s July trade report revealed that imports of motor vehicles and parts fell by 1.12% (+0.05% previous).
- However, the trade report also showed that imports of consumer goods fell by 0.08% after printing a 1.52% increase previously.
Okay, what about historical tendencies? Do they offer additional clues?
The headline retail sales reading in July has historically been weaker compared to June, but that historical tendency hasn’t been very strong in recent years.
The core reading, meanwhile, still has a tendency to be weaker in July.
As to how economists fared with their guesstimates, they tend to overshoot their forecasts for both the headline and core readings, resulting in more downside surprises.
However, it’s worth noting that economists seem to be improving when it comes to projecting the headline reading since downside surprises have been rarer in recent years.
In summary, economists expect that both the headline and core retail sales readings will print a recovery in July.
However, the available leading and/or related indicators don’t support the consensus. Historical data also don’t support the consensus since both headline and core retail sales readings have been historically weaker in July. Although it’s worth highlighting that the headline reading has been stronger in recent years.
Economists also have a historical tendency to be too optimistic for their guesstimates, resulting in more downside surprises for both the core and headline readings. But again, the historical tendency for the headline reading hasn’t been very strong lately.
In any case, the historical trends and leading indicators do seem to point more towards potential downside surprises for both headline and core readings.
But again, just be reminded that we’re playing with probabilities here, so upside surprises for both headline and core readings are possible.
Canada’s retail sales and CPI reports will be released simultaneously this Friday.
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 as with all Canadian economic reports, follow-through selling or buying is usually (but not always) dependent on oil, so you may therefore also want to keep an eye on oil prices. And if you didn’t know, you can check out oil prices at our Live Market Rates page.