Published July 26, 2018 | By George Karpouzis
Inflation and Retail Sales Up…So Are Chances of a Rate Hike
Canada’s economy rebounded in the second quarter with inflation and retail sales beating analyst expectations. Stronger data on the Canadian economy will certainly increase the chance the Bank of Canada will raise its key lending rate when it next meets in October. While this suggests the Canadian economy is strong enough to support a rate hike, increased borrowing costs, coupled with a trade war with the U.S., could undermine Canadian stocks.
On Friday, July 20, Statistics Canada announced that the Consumer Price Index advanced 2.5% year-over-year in June; the largest year-over-year increase in more than six years (February 2012). Analysts were forecasting inflation to come in at 2.3%. In May, the Consumer Price Index increased 2.2%. In June 2017, inflation was just 1.0%.
The Consumer Price Index is an important barometer for the health of the Canadian economy because it measures changes in the prices we pay for various goods and services—better known as inflation. Rising inflation reflects the increases Canadian consumers pay for gasoline and food from restaurants. It also echoes recent gains in oil prices.
Statistics Canada also reported that retail sales increased 2.0% in May to $50.8 billion. In April, retail sales fell 0.9%. More broadly, May retail sales were up in 8 of 11 subsectors, which represents 70% of retail trade.
Revenue at motor vehicle and parts dealers increased 3.7% in May after a -3.8% decline in April. The April decline is being blamed on cold weather. While not stated, it’s quite possible the strong reversal in May is a result of Canadians buying vehicles ahead of the projected 25% tariff the U.S. is planning on hitting the Canadian auto sector with. That would add an extra $5,000 on the price of a $40,000 vehicle. Tariffs would also make it more expensive to service the same vehicle. It will be interesting to see how this sector fares in the coming months.
As expected, sales at gas stations were up 4.3% in May. This is the second consecutive month of gains and is partially a result of you paying more for gas. Sales in terms of volume at gas stations increased 2.7%.
It wasn’t all “good” news. Food and beverage stores posted a -2.1% sales decline for the fourth time in five months. The decline was led by lower sales at supermarkets and other grocery stores.
This bullish economic data suggests the Bank of Canada will hike its rate by a quarter of a point when it meets next in October. It has already announced two rate hikes so far in 2018 and four times over the last 12 months.
That might be good news for the Canadian economy but not necessarily the average Canadian or corporate Canada.
First, the Canadian economy is doing well and unemployment levels are low, but Canadian wage growth has been pretty anemic. This is bad news since a rate hike will make borrowing more expensive. If you have a variable mortgage, you’ll be paying more in interest and less on the principle.
It’s not just mortgages, anything with a variable rate will be going up: lines of credit, home equity lines of credit, student loans, and business loans. Not only are Canadians saddled with record debt levels, Canadian businesses have accumulated private debt faster than any other advanced company.
Another rate hike then would hit not just Canadians but corporate Canada as well. Both of which negatively impact Canada’s gross domestic product, corporate profits, and share prices.
On paper, the Canadian economy appears to have rebounded. But not all sectors are performing well. And should Canada and the rest of the free-world be hit with a U.S. trade war, some sectors will do better than others. That said, right now, it appears as though the Bank of Canada is leaning toward raising its key lending rate when it next meets in October. October may sound like it’s a long way away but if investors think the Bank of Canada is going to raise its rates, the markets will react well before that. The trading experts at Learn-To-Trade.com can show you how to read the markets, understand business cycles, and profit if there’s a trade war.
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