In July 2025, Canadian retail sales decreased by 0.8%, falling short of the expected 1.5% increase. The report revised down the previously reported gain of 1.5% for the prior period.
Excluding automobiles, sales dropped by 1.2%, whereas a 0.7% decline had been anticipated, with the previous figure being a 1.9% rise. Out of nine subsectors, sales fell in eight, underscoring widespread challenges across retail categories.
Advance August Data
Advance data for August suggests a 1.0% increase in retail sales. RBC cardholder data indicated a 2.2% decline in headline sales, while core sales rose by 0.4%.
Details showed a minor gain of 0.2% at motor vehicle and parts dealers in July. The food and beverage retail sector recorded a 1.3% decline, with supermarkets experiencing a 2.5% drop. Additionally, clothing sales decreased by 3.2%.
Statistics Canada provided a more optimistic advance reading of a 1.0% increase. Some North American retailers have observed Canadian consumer resilience, contrasting with trends in the USA.
The surprise drop in July retail sales points to a much weaker Canadian consumer than we previously thought. This challenges the idea that our economy is holding up well and directly questions the strength of Q3 growth. The fact that sales were down in nearly every category shows this weakness is widespread.
Bank of Canada’s Response
This report gives the Bank of Canada a clear reason to remain on hold and adopt a more dovish tone. Following the August CPI data which showed core inflation easing to 2.9%, this poor consumer spending number reduces the pressure for any further rate hikes. We should see overnight index swaps price out the slim chance of another hike in 2025 and start pricing in a higher probability of rate cuts for early 2026.
For the Canadian dollar, the dismal July result mixed with the strong advance August estimate creates significant uncertainty. This conflict is a perfect setup for increased volatility in the USD/CAD pair, which has been trading in a tight range around 1.3700. Option traders should anticipate a breakout, as implied volatility will likely rise while the market digests whether July was an anomaly or the start of a trend.
We saw a similar pattern of conflicting data back in late 2023, which caused a spike in volatility before the Bank of Canada confirmed its pause on rate hikes. Given the scale of this July miss, traders should consider buying some downside protection for the loonie, such as calls on USD/CAD. This hedges against the August advance number proving too optimistic when the final report is released next month.
The slowdown also has bearish implications for Canadian equities, particularly consumer-focused stocks and the banks that lend to them. The weakness in supermarket and clothing sales is a direct hit to the retail sector. We can expect to see increased interest in buying puts on the S&P/TSX 60 Index as a way to guard against a broader economic slowdown.
