Canada November retail sales rose 1.3% month-over-month

Key Concepts

• Retail Sales: Indicator of consumer spending, showing a 1.3% rise in November but an estimated -0.5% decline in December.
• Bank of Canada (BoC) Monetary Policy: Current stance is “on hold” regarding interest rates, with potential for easing (rate cuts) later in the year.
• Inflation: Remains “sticky” and above the BoC’s 2% target, a key factor influencing policy.
• Employment: Surprisingly strong numbers despite a fairly elevated unemployment rate, contributing to the BoC’s cautious approach.
• GDP Growth: Currently positive, but potential downturn is a trigger for more stimulative policy.
• USMCA Uncertainty: A significant drag on Canadian business investment and growth, potentially leading to BoC easing.
• 10-Year Bond Yields: Relatively flat due to US Treasury support and reduced bond issuance, impacting mortgage rates and business borrowing costs.
• Corporate Bonds: Becoming more attractive due to stable 10-year yields, offering higher returns above inflation.
• Business Survey Outlook: Reflects uncertainty around USMCA and influences BoC’s assessment of economic conditions.

Canadian Economic Outlook & Bank of Canada Policy – Analysis with Earl Davis (Beimo Global Asset Management)

I. Recent Economic Data & Consumer Spending

Canada’s November retail sales experienced a 1.3% increase, exceeding expectations, particularly in the core figure (excluding autos) which rose 1.7% compared to the expected 1%. However, early estimates indicate a 0.5% decline in retail sales for December. Earl Davis notes that the November increase was partially driven by temporary factors, specifically strikes in British Columbia and increased sales of beverages and beer, suggesting the headline number requires some discounting. This points towards a potentially weakening consumer in the coming months, given the broader economic and global uncertainties.

II. Bank of Canada’s Interest Rate Policy – Current Stance & Metrics

The Bank of Canada is expected to remain “on hold” regarding interest rate adjustments at its next announcement. Davis emphasizes that the recent retail sales data doesn’t significantly alter this outlook. He identifies two “top tier” metrics the BoC closely monitors:

• Inflation: Remains above the BoC’s target midpoint of 2%, posing a challenge to rate cuts. While rents are exerting a negative influence on inflation, their overall impact is limited.
• Employment: Despite a relatively elevated unemployment rate, the numbers have been surprisingly strong, indicating continued consumer spending capacity.

Davis’ team anticipates potential easing (one to two rate cuts) by the end of the year, driven by ongoing uncertainty surrounding the USMCA trade agreement and its impact on business investment.

III. Stimulative Policy & GDP Growth

The BoC’s current policy is described as “neutral to mildly stimulative.” More aggressive stimulative measures would be triggered by a significant downturn in economic growth. Employment is identified as a leading indicator of growth and consumer spending. A prolonged period of USMCA uncertainty could necessitate a modest easing of monetary policy to provide an “extra boost” to the economy, even if the impact of individual basis point cuts is limited. Davis highlights the psychological impact on consumers as a crucial aspect of monetary policy.

IV. Importance of Business Sentiment & Surveys

The BoC also pays close attention to business surveys, particularly the recent business survey outlook, which reflects the uncertainty surrounding USMCA. A further downturn in business sentiment would likely accelerate the implementation of stimulative measures through interest rate adjustments.

V. Bond Market Dynamics & Investment Strategy

Canada’s 10-year bond yields have remained remarkably flat for over a year. This stability is attributed to support from the US Treasury, which has intervened to maintain yields, and reduced issuance of 10-year bonds in the US due to tariff income. Beimo Global Asset Management believes 10-year yields will remain within the 2025 range, currently trading near the midpoint.

The stable 10-year yield environment makes corporate bonds increasingly attractive. They offer a stable coupon yield plus a corporate spread, resulting in returns above inflation. Beimo is currently “overweight” corporate bonds, actively buying during periods of volatility. Davis draws a parallel between corporate bond market movements and equity market fluctuations.

VI. Notable Quotes

• “The only thing that's negative from an inflationary perspective are rents. Uh but again the influence of that on the overall inflation number is is limited.” – Earl Davis, regarding inflationary pressures.
• “Employment is usually a leading indicator of growth. You know, less people employed, there's less production. Um and it's a leading indicator of consumer spending and the ability to afford rent.” – Earl Davis, explaining the relationship between employment and economic activity.
• “Although uh interest rates won't uh have a dramatic impact, especially it's only one or two basis point eases, it does infect impact the psyche of the consumer and that's a very important aspect as well.” – Earl Davis, on the psychological impact of rate cuts.

VII. Technical Terms Explained

• USMCA: United States-Mexico-Canada Agreement – a trade agreement replacing NAFTA.
• Core Retail Sales: Retail sales excluding automobile sales, providing a clearer picture of underlying consumer spending.
• Basis Points: A unit of measurement used in finance, equal to 0.01% (e.g., 25 basis points = 0.25%).
• Sovereign Bonds: Bonds issued by a national government.
• Corporate Bonds: Bonds issued by corporations.
• Corporate Spread: The difference in yield between a corporate bond and a comparable sovereign bond, reflecting the credit risk of the corporation.

Conclusion

The Canadian economic outlook remains uncertain, with a weakening consumer and ongoing global and trade-related risks. The Bank of Canada is maintaining a cautious “on hold” stance on interest rates, closely monitoring inflation, employment, and GDP growth. While potential easing is anticipated later in the year, it is contingent on further economic developments, particularly the resolution of USMCA uncertainty. The stable bond yield environment is shifting investment focus towards corporate bonds, offering attractive returns above inflation. The BoC’s policy decisions will be heavily influenced by both economic data and the sentiment of businesses and consumers.