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Market Wire - Hot North American Data Keeps Rate Expectations Elevated

CalendarFebruary 16, 2022
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Karl Schamotta - Chief Market Strategist, kschamotta@cambridgefx.com

Retail sales rebounded strongly in January, defying rising inflation and collapsing consumer sentiment levels to smash market expectations. According to figures published by the Census Bureau this morning, sales at retail stores, online sellers and restaurants climbed 3.8 percent on a month-over-month basis in January, up sharply from a revised 2.5 percent loss in December. Markets were anticipating a gain closer to 2 percent.

Month-over-month gains were spectacular: E-commerce sales jumped 14.5 percent month-over-month (yes, you’re reading that correctly), while department stores posted a 9.2 percent gain. Receipts at auto dealers were up 5.7 percent, furniture leapt 7.2 percent, and ‘control group’ sales (excluding cars, gas, building materials, and food) rose 4.8 percent.

Omicron took a modest toll on services spending: Restaurants posted one of the rare declines in the report, down 0.9 percent in the month as businesses shut their doors and citizens stayed home.

Treasury yields ratcheted up and the dollar climbed: The greenback moved up slightly as investors raised bets on tighter policy from the Federal Reserve.

Canadian prices accelerated last month: Data released by Statistics Canada this morning showed the Consumer Price Index rising 5.1 percent on a year-over-year basis in January, with the month-over-month change speeding up to 0.9 percent - beating consensus economic forecasts for a 0.6 percent gain.

Housing costs played an important role: The homeowners' replacement cost index – a proxy for new home prices – was up 13.5 percent over the prior year. The other owned accommodation expenses index, which includes commission fees on the sale of real estate, gained 14 percent, and mortgage interest costs were down 6.8 percent over the same period.

Energy prices jumped: Gasoline prices leapt 4.8 percent higher month-over-month, reflecting January’s rise in global oil benchmarks.

The Bank of Canada’s measures: Core inflation, computed as the average of the three price measures preferred by the Bank of Canada (trim, median, and common), increased an annualized 3.2 percent, the highest since 1991. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy.

And workers lost out: With hourly earnings rising only 2.4 percent over the same period, Statistics Canada said “Canadians experienced a decline in purchasing power” over the last year.

This is well outside the Bank of Canada’s comfort zone: Price growth has exceeded the target range for ten consecutive months, and markets overwhelmingly expect the central bank to hike rates on March 2, with another six increases to follow over the course of the year.

But two year spreads remain negative: After last week’s shift to a front-loaded tightening cycle in the US, the difference between 2-year US and Canadian yields has turned negative, meaning that interest rate differentials are tilted against the loonie. The gap has narrowed this morning, but continues to point to a slight lag in the Bank of Canada’s tightening trajectory, relative to the Federal Reserve. The Canadian dollar is up roughly 40 basis points this morning.

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