Unexpectedly soft Canadian retail sales in January, and a rise in the leading indicator for February added to a recent spate of mixed economic data that reduces the need for the Bank of Canada to raise interest rates soon.
Retail sales dropped by 0.3 per cent in January from December, pushed down by lower sales at new car dealers, Statistics Canada data indicated Tuesday.
It was the second decline in a row and contrasted with the 1-per-cent rise forecast by market operators. It also provided more evidence the Canadian economy is still having trouble fully recovering from the global crisis.
"Today's report is a clear negative for the (Canadian dollar), a plus for fixed income, further reducing pressure on the Bank to begin retightening soon," said Peter Buchanan, a senior economist at CIBC World Markets.
The currency fell 43 basis points to $0.9802 (Canadian) to the U.S. dollar, or $1.0202 (U.S.), turning lower on the day following the disappointing January retail sales data. Government bond prices pared gains, while interest rate hike expectations remained firm on an October bet.
The Bank of Canada has kept its benchmark rate on hold at 1.0 per cent since September, pending more evidence of a sustained recovery.
Primary dealer forecasts for when the central bank will increase rates were largely split between its May 31 and July 19 policy announcement dates, according to a Reuters poll last week.
Volumes were another weak spot in the retail sales data, suggesting that the Canadian consumer may be becoming cautious on spending. Sales excluding autos and parts were little changed, while sales in volume terms dropped by 0.6 per cent.
Sales were off in seven of 11 subsectors, representing 55 per cent of total retail sales, and fell in four major provinces, which account for 85 per cent of total retail sales.
The surprisingly weak data will probably hurt first-quarter economic growth, which will dampened by an earlier sharp deterioration in net exports, said Scotia Capital economists.
"An unexpected contraction in January retail sales - both in volume and nominal terms - will detract from expectations for January's GDP print, especially so since this report marks the second straight month of accelerating declines in volumes," said Derek Holt and Gorica Djeric in a note.
Separately, Canada's composite leading indicator rose 0.8 per cent in February from January, in part due to new-found strength in the manufacturing sector.
The better-than-expected leading indicator was double the gains of the previous three months and the largest single increase since last May.
In manufacturing, new orders for durable goods increased by 1 per cent after three straight declines. Statscan linked this to a marked improvement in exports in December.
Stock market prices, boosted by the energy sector, rose by 2.7 per cent for their sixth straight monthly advance. The housing index rose by 1.8 per cent on higher existing home sales - its fourth consecutive month-on-month gain.
Nine of the 10 components of the leading indicator posted gains while one fell. The unsmoothed index for February grew by 0.2 per cent.
Follow us on Twitter: