Markets turn a blind eye to soft Canadian data
June 28th, 2007 by Marty
In Canada, this week featured some important pieces to the puzzle ahead of the Bank of Canada July 10th fixed announcement date (FAD). On balance, the data came in on the soft side. Wholesale sales plummeted by 3.1% in April, fuelled in part by a hefty 8% drop in automotive activity. In contrast, higher new car sales translated into a gain in retail sales in the same month, but the overall growth rate (+0.4%) fell well short of market expectations. Meanwhile, Canadian inflation came in surprisingly low in May. Overall CPI inflation remained flat, at 2.2%. But the more pleasing result was the decline in the core rate – the Bank of Canada’s preferred measure – which fell from 2.5% to 2.2%.
The string of weaker-than-expected releases did not trigger much of a rally in the bond market. For one, real GDP growth is still set to expand modestly in April and at a brisk 3% in the second quarter as a whole, indicating that the economy continues to operate above its potential. And, second, the drop in the 12-month change in core CPI largely reflected favourable base effects (i.e., a spike in prices in May 2006), rather than any notable slowdown in current price pressures. What’s more, it appears that the favourable base effects will unwind in June, pushing core CPI inflation back up to an estimated 2.4% - a rate that remains stubbornly above the BOC’s 2% target. All told, markets remain braced for a quarter point rate hike on July 10th.
Patrick Lofto
Manager, Residential Mortgages
TD Canada Trust
Tel: (416) 839-5286
Fax: 1 (866) 390-6105
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