Canadian retail sales data for December will be released on Friday, providing an indication of the resilience of the economy and housing market in the face of a sharp slowdown in global growth.
Economists expect December retail sales will be reported lower by 0.3 per cent month-over-month when Statscan produces the numbers at 8:30 a.m. ET. The data carry widespread implications for consumers and investors as an indicator for the loonie, dividend stocks and the housing market.
Weak consumption data would put downward pressure on domestic bond yields at a time when bond yield spreads – specifically the difference between Canadian and U.S. two-year bond yields – have been the primary driver of the domestic currency.
Lower yields would be negative for the loonie but a positive for investors in utilities, real estate investment trusts and other income-generating equity instruments. When risk-free bond yields fall, the higher income streams from equity products becomes more attractive in comparison.
The global economic backdrop for the retail sales report is far from positive in light of the domestic economy’s significant sensitivity to global trade and manufacturing activity. The first accompanying chart highlights the significant downdraft in worldwide business activity.
The Citi Economic Surprise Index for global growth compares reported data with consensus expectations. In a hypothetical case in which all reports came in exactly as economist consensus expected, the Citi index would be at zero. Positive index readings indicate economic data are coming in above expectations and negative levels point to disappointing growth.
The chart illustrates the cycles of optimism and pessimism over the past three years. Between October, 2016, and March, 2017, global economic data consistently exceeded estimates only to raise hopes that were dashed by a steady stream of below-forecast results from March to June, 2017. A similar “up then down” cycle occurred over the next 12 months.
The most recent index pattern shows a decline that is more impressive for its speed than magnitude. At the beginning of February, the Citi benchmark was in negative territory at minus-11.8, indicating that economic reports were already being issued below economists’ estimates. Thanks to further disappointment in European, Asian and U.S. data, the surprise index is now mired much more deeply in negative territory at minus-22.3.
Friday’s consumption data should provide a hint as to the extent the domestic economy is being affected by the deteriorating global environment.
As the second chart indicates, Canadian retail sales growth (the purple line) has been anemic in recent months, the weakest since December, 2012, and barely positive on a year-over-year basis. An outright annual decline, if it occurs as a result of Friday’s report, could represent a psychological blow to consumers and investors.
Retail sales results also have implications for the domestic housing market. Canadian households have amassed record debt loads – predominantly mortgages – amounting to 170 per cent of disposable income.
Because monthly mortgage payments are not optional, and at least of portion of consumption can be deferred for most households, the negative economic effects of higher debt should first be visible in weaker spending results. A prolonged period of weak spending might be a precursor for mortgage defaults and falling home prices.
The happier scenario – retail sales results above expectations – is also possible. Retail sales is a volatile data series and November’s results were so far below expectations that a partially offsetting positive surprise is plausible.
The global growth slowdown, however, will remain a hurdle for the domestic economy. Investors should be paying close attention to not only Friday’s retail sales numbers, but all domestic economic data points for the foreseeable future.
Scott Barlow, Globe Investor’s in-house market strategist, writes exclusively for our subscribers at Inside the Market.