OTTAWA - The economy registered its lowest inflation in more than three years in January and its largest decline in retail sales in almost three years in December, a double whammy of data that depressed the Canadian dollar and bond yields.
“All of this would feed into a dovish Bank of Canada and Canadian dollar weakness,” said Camilla Sutton, chief currency strategist at Scotiabank.
Statistics Canada said on Friday that lower gas prices helped push the annual inflation rate down to 0.5% in January from 0.8% in December, the lowest since the 0.1% recorded in October 2009.
The rate is less than the 0.7% predicted by market analysts and farther outside the Bank of Canada’s target range of 1 to 3%, offering further proof that the central bank is under no pressure to raise interest rates.
The Bank of Canada’s closely watched core rate, which excludes the prices of items such as energy, tobacco and some food, slipped to 1% from 1.1% in December.
Sutton also noted with concern that on a seasonally adjusted basis, prices fell 0.1% in January from December.
The 2.1% fall in seasonally adjusted retail sales in December from November was far larger than the 0.3% decline predicted by market operators and suggested already muted expectations for fourth quarter growth might be too optimistic.
The monthly fall in retail sales was the greatest since the 2.4% decline recorded in April 2010. Trade was pulled down by slumping new car sales and a weak Christmas shopping season. Year on year, sales were down 0.7%, the worst since October 2009.
Last month the Bank of Canada already cut its fourth quarter growth forecast to 1% from 2.5%. December growth is likely to be disappointing given poor manufacturing and wholesale and now retail trade. Statscan is to release December and fourth quarter gross domestic product data on March 1.
In volume terms, used for calculating real gross domestic product moves, retail sales fell 1.6%.
Sales by auto and parts dealers dropped by 6.4% Sales at electronics and appliance stores, which jumped in November as Apple rolled out its iPad mini, fell by 12.1%.
Last month the Bank of Canada already cut its forecast for fourth quarter growth to 1% from 2.5%. December growth is likely to be disappointing given poor manufacturing and wholesale and now retail trade. Statscan releases December and fourth quarter GDP data on March 1.
“Basically this combination of data just piles on what had already been a weak footing for the Canadian dollar. Both numbers came in below already weak expectations. Obviously the real eye-opener here was the retail sales result,” BMO Capital Markets chief economist Doug Porter said.
“We had been looking for a decline, but nothing on the order of that. And of course December just happens to be the most important month of the year for retailers. So obviously what had been a so-so year for retailers ended with a thud in December.”
The Canadian dollar softened to its weakest level in seven months on the data, touching $1.0230 versus the U.S. dollar, or 97.75 cents US. It was at $1.0210, or 97.94 cents US shortly before the data release and finished Thursday’s North American session at $1.087, or 98.16 cents US.
Overnight index swaps, which trade based on expectations for the central bank’s key policy rate, showed that after the data traders eliminated already small bets on a rate increase in late 2013.