UPDATE 2-Canada retail sales disappoint, rate hike in view

* Retail sales climb 0.1 percent in June from May

* Sales ex-autos fall 0.5 percent; volumes up 0.9 percent

* Rate hike still expected on Sept. 8
(Adds market reaction, analysts)

By Louise Egan

OTTAWA, Aug 24 (BestGrowthStock) – Meager growth in June Canadian
retail sales disappointed markets, but sales surged in volume
terms on consumer demand for cars and other goods, leaving
expectations intact for a September interest rate hike.

The value of retail sales edged up just 0.1 percent after
two months of declines as falling gasoline prices partly offset
strong demand for vehicles, household goods and building
materials, Statistics Canada said on Tuesday. Markets had
expected sales to rise 0.4 percent.

Statscan revised downward its May figures to show a decline
of 0.4 percent versus a decline of 0.2 percent initially.

“All the news on Canadian retail sales made the headline
figure feel like another monthly decline,” said Jonathan
Basile, an economist at Credit Suisse Securities.

The Canadian dollar (CAD=D4: ) slid to a seven-week low after
the data, reaching as low as C$1.0660 against the U.S. dollar,
or 93.81 U.S. cents, more than a penny below Monday’s finish at
C$1.0523 to the U.S. dollar. [ID: nN24243102]

The silver lining in the report was sales volume, which
jumped 0.9 percent. While little comfort to retailers and not
necessarily a sign of underlying economic strength, some
analysts were heartened at the willingness to spend on
nonessentials such as new cars, sporting goods and computers.

“Given a significant sales pick-up in what are largely
discretionary categories, (that) tends to suggest that while
consumer spending is soft to sluggish, it isn’t exactly the
picture of a consumer that is turning turtle and necessarily
hunkering down,” said Stewart Hall, an economist at HSBC
Canada.

Motor vehicle and parts dealers saw the biggest gains, with
a 2.1 percent increase. Sales fell most sharply at gas
stations, down 2.7 percent, as prices fell for the third
straight month after an 11-month climb.

Excluding the auto sector, sales fell 0.5 percent in the
month, defying expectations of a 0.1 percent rise.

CONSUMERS STEPPING BACK

Consumer spending has been the main engine of Canada’s
rapid recovery from a mild recession, with growth averaging 5.5
percent, annualized, over the previous two quarters. That pace
is seen slowing to about 2.5 percent in the second quarter.

The Bank of Canada had already factored a cooling of
consumer spending into its outlook and is unlikely to alter its
interest rates path based on the disappointing retail figure.

The central bank raised its benchmark rate in both June and
July. The market is split on its next move on Sept. 8, but
primary securities dealers expect it to lift rates again to a
still very accommodative 1.0 percent.

“We expect the bank will follow up these increases with
another 25 basis point hike on September 8,” said Dawn
Desjardins, assistant chief economist at Royal Bank of Canada.

“Flagging momentum in the U.S. economy in recent months
presents a key downside risk to Canada’s outlook and will
likely see the Bank of Canada temporarily pause in its rate
hike cycle in the fourth quarter,” she said.

Yields on overnight index swaps, which trade based on
market expectations for the central bank’s Sept. 8 rate
decision, fell further after the retail data to show a less
than 50 percent chance of an increase, according to Reuters’
calculations. (BOCWATCH: )

The horizon for retail sales is uncertain. Economists
suspect consumers may have brought forward big-ticket purchases
to take advantage of low rates and to beat the July 1
introduction of new sales taxes in the major provinces of
Ontario and British Columbia.

With consumer spending no longer the powerful engine
driving the recovery, analysts business investment and exports
will have to take up some of the slack.
(Reporting by Louise Egan; editing by Rob Wilson)

UPDATE 2-Canada retail sales disappoint, rate hike in view