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US retail spending and Canadian inflation data point to stubbornly-robust demand

US retail spending rose by less than expected last month, but consumer demand remained strong, keeping recessionary fears at bay 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 0.4 percent on a month-over-month basis in April, up 0.2 percent over a year prior. Markets were expecting a 0.8 percent headline gain. Gas station sales fell -0.8 percent month-over-month, while motor vehicle and parts dealers posted a 0.4 percent gain. Receipts at food services operations rose 0.6 percent, and grocery store sales were down -0.4 percent (although moderating food prices were likely a major factor). Sales at general merchandise stores climbed 0.9 percent, while non-store retailers gained 1.2 percent.

Perhaps more critically, so-called “control group” sales – with gasoline, cars, food services, and building materials excluded – rose 0.7 percent, suggesting that consumers increased spending in other categories as overall price growth decelerated. Markets had expected the control group to post a 0.4 percent gain after falling -0.3 percent in March. 

The dollar and ten-year Treasury yields slumped on the initial headline release, but have rebounded on closer examination, with traders raising growth expectations and lowering the implied likelihood of rate cuts in the coming months. 

Canadian inflation accelerated in April, but most underlying price indicators continued to soften, helping support the Bank of Canada’s data-dependent stance. Data released by Statistics Canada this morning showed the Consumer Price Index rising 4.4 percent on a year-over-year basis in April, up from the 4.3 percent increase recorded in March, and slightly above consensus expectations. On a month-over-month basis, the change climbed to 0.7 percent – beating market forecasts that had been set closer to the 0.4 percent mark.

Gasoline prices rose 6.3 percent month-over-month, but the energy sub-index fell -4.2 percent year-over-year – a third consecutive negative print. Food prices slowed their climb, up 9.1 percent month-over-month, with gains decelerating from March’s 9.7-percent increase.

Shelter costs decelerated for a fifth month, up 4.9 percent year-over-year, down from April’s 5.4-percent pace as rate hikes hit the housing market. Mortgage interest costs surged 28.5 percent from the prior year, even as the homeowners’ replacement cost index—a proxy for home prices—continued to lose momentum, up just 0.2 percent year-over-year.

Core inflation, computed as the average of the two price measures now preferred by the Bank of Canada (trim and median), increased 4.2 percent over the same period last year, down from 4.45 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 overwhelmingly expect the central bank to remain on hold for now and today’s data are unlikely to provide major lift to the exchange rate – but odds on rate cuts in the latter half of the year remain vulnerable to change. Although we expect economic momentum to show renewed signs of slowing in coming months, rate expectations could rise somewhat as still-stubborn inflation levels put monetary policymakers on a “higher for longer” trajectory.

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