US retail spending rose by more than expected last month, keeping the US exceptionalism trade intact and helping support yields across the front end of the curve. According to figures published by the Census Bureau this morning, total receipts at retail stores, online sellers and restaurants rose 0.7 percent on a month-over-month basis in September after an upwardly-revised 0.8-percent gain in August, up 3.4 percent over a year prior. Markets were expecting a 0.3 percent headline gain.

Gas station sales climbed 0.9 percent month-over-month, while motor vehicle and parts dealers posted a 1 percent gain. Receipts at food services operations rose 0.4 percent, and grocery store sales climbed at the same rate. Sales at general merchandise stores increased 0.4 percent, while non-store retailers gained 1.1 percent.

More importantly, so-called “control group” sales – with gasoline, cars, food services, and building materials excluded – rose 0.6 percent, suggesting that consumers increased spending in other categories as overall price growth decelerated. Markets had expected the control group to post a 0.1 percent gain.

The dollar and Treasury yields are ratcheting higher as the likelihood of rate hikes in the coming months strengthens, and a more restrictive policy stance is priced in for 2024.

Canadian headline inflation decelerated in September, and the underlying price indicators followed most closely by the Bank of Canada softened, helping support expectations for a pause at next Wednesday’s policy meeting. Data released by Statistics Canada this morning showed the Consumer Price Index rising 3.8 percent on a year-over-year basis in September, down from the 4 percent increase recorded in August, and slightly below consensus expectations. On a month-over-month basis, the change slipped to -0.1 percent – missing market forecasts that had been set closer to the 0.1-percent mark.

Gasoline prices tumbled -1.3 percent month-over-month, and food prices retreated, falling -0.1 percent. Shelter costs decelerated for a fifth month, up 0.5 percent, with the year-over-year gain flatlining near August’s 6-percent pace as higher borrowing rates took their toll. 

Core inflation, computed as the average of the two price measures now preferred by the Bank of Canada (trim and median), increased 3.75 percent over the same period last year, down from 4 percent in the prior month. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy.

Swap-implied odds on a rate hike at the Bank’s October meeting are moving lower, weighing on yields and generating Canadian dollar losses. Policymakers are likely to consider today’s data helpful in ratifying a decision to stay on hold, but it might also bolster concerns about the strength of the economy itself – although a softening in price pressures is needed, a rapid deceleration could point to a sharper downturn ahead.