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North American data prints bolster soft landing hopes

US retail spending rose by less than expected last month, but underlying consumer demand remained strong, bolstering “soft landing” hopes in financial markets. According to figures published by the Census Bureau this morning, total receipts at retail stores, online sellers and restaurants rose 0.2 percent on a month-over-month basis in June, missing market forecasts for a 0.5 percent headline gain.

Gas station sales fell 1.4 percent month-over-month, while motor vehicle and parts dealers posted a 0.3 percent gain. Receipts in the food and beverage category fell -0.7 percent, and restaurant sales gained just 0.1 percent. Sales at general merchandise stores inched -0.1 percent lower, while non-store retailers gained 1.9 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 even as overall price growth decelerated. Markets had expected the control group to post a 0.3 percent gain after rising 0.2 percent in May.

Canadian inflation slowed more than anticipated in June, helping support expectations for a extended plateau in the Bank of Canada’s benchmark lending rate. Data released by Statistics Canada this morning showed the Consumer Price Index rising 2.8 percent on a year-over-year basis in June, down from the 3.4 percent increase recorded in May, and slightly below consensus expectations. On a month-over-month basis, prices rose 0.1 percent – missing market forecasts that had been set closer to the 0.3 percent mark.

Gasoline prices rose 1.9 percent month-over-month, but were down -21.6 percent year-over-year. Food price growth decelerated sharply, up just 0.1 percent month-over-month after gaining 0.8 percent in the prior month. Mortgage interest costs jumped 30.1 percent from the prior year, and the shelter sub-index rose 4.8 percent, up from 4.7 percent in the prior month.

Core inflation, computed as the average of the two price measures now preferred by the Bank of Canada (trim and median), increased 3.8 percent over the same period last year, down from 3.9 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.

Markets are overwhelmingly convinced the central bank is now done hiking, meaning that the focus is now likely to shift toward growth risks in helping determine when rate cuts might start. We expect economic momentum to show renewed signs of slowing in coming months.

More generally, broadly-overstretched currency markets are still pulling back, with the dollar inching off a one-year low against a basket of currencies, while the euro retreats from 17-month highs, and the pound retraces some of its gains. The Canadian dollar is back on the defensive.

Commodities also remain under pressure after China’s second-quarter gross domestic product numbers missed estimates but failed to build a compelling case for a large-scale housing- and infrastructure-led stimulus push. Numbers released on Sunday night showed output expanding 6.3 percent year-over-year in the three months ended in June, with retail sales essentially flatlining and youth unemployment hitting record highs. Authorities look increasingly unlikely to double down on the malinvestment that characterized much of the recovery from the global financial crisis in 2008, and remain wary of sparking another bubble in real estate markets – suggesting that stimulus efforts will be much more narrowly targeted in scope, and far less raw-materials intensive.

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