Canadian Retail Sales in January Jumped Up in the Month Following a Gain in December

Canadian retail sales in January rose a robust 0.7%, which was slightly stronger than the 0.6% rise expected going into the report. This small upward surprise occurred despite new car sales being much weaker than expected by dropping 2.3%. The offset was an unexpectedly large surge of 1.8% in ex-auto sales that was more than triple the 0.5% gain expected going into the report. The story was not as upbeat on a volumes basis because retail sales were only up 0.1% although this followed a 0.8% gain in December. StatsCan commented that there were large price increases in January in gasoline and new cars. (The latter implies that new car sales volumes declined significantly more than the 2.3% drop in receipts.)

The jump in ex-auto sales was attributable to sales at building and outdoor home supplies stores rising an impressive 7.4%. This strength was attributed to households making purchases before the expiration of the federal government’s Home Renovation Tax Credit. This factor may also have boosted sales at furniture, home furnishings and electronic stores, which rose 2.5% boosted by surge in sales of floor coverings. Notable sales gains were also recorded in food and beverage stores (1.9%) and clothing stores (0.5%).

Sales gains occurred in seven of 10 provinces. Strongest percentage increases occurred in Newfoundland and Labrador (2.1%), PEI (1.6%) and Ontario (1.4%). Sales in BC were flat in the month although the Olympics will likely significantly boost sales activity in February.

The 0.1% rise in the volume of retail sales suggests that little support is coming from this sector in the January GDP add-up; however, it also implies no offset to reports earlier this week of strong gains in manufacturing and wholesale trade of 2% and 3%, respectively. These two reports augur well for January GDP to rise a solid 0.5% in the month and the first quarter of 2010 annualized growth not to slow materially from the 5.0% surge recorded in the fourth quarter of 2009. Solid growth along with the unexpected decline in the February unemployment rate to 8.2% implies that slack built up during the recession is starting to be absorbed. Such an environment flags the need for the Bank of Canada to start moving interest rates higher.

The February CPI report, released earlier this morning, raised some concerns on the inflation front with the year-over-year core rate unexpectedly rising, yet the pressure may prove temporary because for the most part it reflected higher accommodation costs in Vancouver for the Olympics. Strengthening growth sets the stage for policy to start to be tightened although, assuming that the price pressure proves transitory, we expect that the Bank of Canada will adhere to its conditional commitment of holding the overnight rate unchanged at 0.25% until the end of the second quarter; however, during the second half of this year, the overnight rate is expected to start moving higher finishing 2010 at 1.25%.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.