In May, Canada’s retail sales dropped by 1.1%, aligning with projections. This followed a revised increase of 0.4% from a prior figure of 0.3%.
When excluding auto sales, the monthly decline was 0.2%, slightly less than the anticipated 0.3% fall. The advance report for June suggests a rebound with a 1.6% rise in sales.
Retail Sales Growth
Retail sales on a year-over-year basis saw a 4.9% growth, just shy of the preceding 5.0%.
Feedback from May indicated that 32% of retail businesses experienced effects from trade tensions between Canada and the United States, a decrease from 36% in April. Notable impacts included price hikes, changes in product demand, and increased raw material, shipping, and labour costs.
The reported 1.1% drop for May was fully anticipated by the market and is now old news. We believe the focus should be squarely on the advance estimate for June, which shows a strong 1.6% rebound. This forward-looking data suggests underlying consumer strength is returning faster than the headline number implies.
Canadian Dollar Outlook
This anticipated recovery in spending, coupled with easing business concerns over trade, strengthens the outlook for the Canadian dollar. We see this as an opportunity to position for a lower USD/CAD exchange rate in the coming weeks. Historically, periods of surprisingly resilient domestic data have provided a significant tailwind for the currency.
The stronger-than-expected activity will likely force the Bank of Canada to maintain a cautious stance on further interest rate cuts. With Canada’s annual inflation rate holding at a stubborn 2.9% in May, policymakers cannot afford to be complacent. We would position for short-term interest rates to remain elevated, as the case for aggressive easing has weakened considerably.
A healthy consumer is a direct positive for Canadian corporate earnings, creating a favorable backdrop for equity markets. We see potential for upside in the S&P/TSX 60 index, particularly in consumer discretionary stocks that benefit from robust spending. This data supports taking a more bullish stance through index futures or call options.
The market often overreacts to lagging data, and we believe this is one of those moments. The narrative is shifting from a weak May to a robust June, which isn’t yet fully priced into asset values. This discrepancy presents a window to act before the stronger economic reality becomes consensus.
