Supported by the federal government’s pipeline approvals, OPEC’s agreement to cut production and the expectation that Trump’s fiscal policy will further reinforce U.S. economic growth, market participants are now anticipating a full 25bps rate hike by the BoC in 12 months from now.
In our view, the three economic reports to be released this week in Canada – namely CPI for the month of November, retail sales for the month of October and real GDP for the month of October – will fall short of showing a fast-growing Canadian economy. Thus, the data should contribute to lower market expectations regarding a BoC hike in 2017.
CPI: The LBS Economic Research and Strategy team expects a 0.3% m/m pullback in the CPI for the month of November (consensus at -0.2% m/m). Our estimate is notably driven by early rebates offered by Canadian retailers for the holiday shopping season and the price reduction announced by the Quebec Liquor Board SAQ on 1600 bottles of wine. This is expected to bring down the year-over-year CPI inflation figure from 1.5% to 1.3% (consensus at 1.4%). Also, market participants learned from the BoC in October that CPIX is not the main short-term guide for monetary policy actions anymore.
The BoC now has three preferred measures of core inflation: CPI-trim (excluding components which rates of change are located in the tails), CPI-median (corresponding to the price change of the item located at the 50th percentile) and CPI-common (a statistical measure tracking common price changes across all categories in the CPI basket). Overall, the BoC says that these three measures better capture persistent movements in inflation and tend to move with macroeconomic drivers. In recent years, the three measures have been slightly lower and less volatile than CPIX (see chart below).
Retail Sales: Throughout the year, year-over-year growth in total retail sales has been decelerating (to about 2%), driven by less supportive underlying factors: stagnation in inflation-adjusted average weekly earnings, a predominant creation of part-time positions and a record high household debt-to-income ratio (167%). Fortunately, the federal middle-class income tax cut and the Canada child benefit to families contributed to maintain a decent pace of growth in disposable income, therefore preventing year-over-year growth in total retail sales from falling closer to 0%. Altogether, the bar appears high to see the pace of growth in retail sales to surpass the +0.2% m/m consensus in November.
Real GDP: The real GDP report will be released on Friday morning, 24 hours after the release of the CPI and retail sales reports. The Canadian economy was in “rebound mode” during the previous four months after the temporary disruption caused by the wildfires in Alberta (see chart below). For November, we anticipate economic growth to return closer to its underlying trend rate. Robust resale transactions in the GTA and a brisk pace of growth in services-oriented industries, other than retail trade, are expected to weigh more in the balance than the pullback registered in manufacturing output. Thus, we do not expect a blockbuster number but rather a modest 0.1% m/m increase in real GDP for the month of October, a notch above consensus (0.0% m/m).
