WRAPUP 1-June rate hike still an option after Canada data

* Inflation, retail sales higher than expected

* Rate hike pressures grow, but uncertainty reigns

* Q1 growth may be stronger than expected

By Louise Egan

OTTAWA, May 21 (BestGrowthStock) – Canadian consumer prices rose in
April, and March retail sales raced past expectations,
suggesting considerable strength in the economy and keeping
alive the possibility of a June rate hike by the central bank.

Investors have been hedging their bets on the Bank of
Canada’s next move due to fears over Europe’s debt problems,
but data released by Statistics Canada on Friday adds slightly
more pressure on the bank to raise rates as early as possible.

Inflation was higher than expected in April at 1.8 percent,
up from 1.4 percent in March, mainly due to rising gasoline
prices. The closely watched core rate jumped to 1.9 percent,
nudging up against the central bank’s 2 percent target.

“I think many in the market were looking for a soft figure
that would provide easy cover for the Bank of Canada to pause
on June 1. Unfortunately, that outcome did not manifest
itself,” said Eric Lascelles, chief Canada macro strategist at
TD Securities.

“The Bank of Canada still has a real struggle here in terms
of figuring out what to do in June. It will remain data
dependent with retail sales and GDP, and it will remain very
euro focused as well, and I suspect we won’t know the answer
until 9 a.m. on June 1,” Lascelles said.

Retail sales in March posted their biggest monthly gain in
five years, jumping 2.1 percent from February as consumers
spent heavily on motor vehicles.

The Canadian dollar (CAD=D4: ) briefly firmed just after the
report but later weakened to a 14-week low at C$1.0753 to the
U.S. dollar, or 93.00 U.S. cents, down from C$1.0696, or 93.49
U.S. cents just before the data.

The Statscan reports may prompt Bank of Canada Governor
Mark Carney to look to tighten monetary policy now to prevent
the economy from eventually overheating, although the cloudy
outlook could hold him back for fear of choking the recovery.

Yields on overnight index swaps, which reflect market
expectations of the key policy rate, edged higher after the
report to suggest a 57.5 percent chance the bank will raise
rates by 25 basis points in June, compared with 54.09 percent
earlier.

FOCUS ON EUROPE

Analysts argue that domestic data has almost become a
sideshow now that markets are gyrating violently over the Greek
debt crisis and broader sovereign debt concerns elsewhere.

“It really comes down to the European credit situation and
financial markets, whether they can settle down over the next
week. I think the Bank of Canada is probably more focused on
that situation than the inflation story right now,” said Sal
Guatieri, senior economist at BMO Capital Markets.

Unlike the United States, where consumer prices
unexpectedly slipped in April, they rose 0.3 percent in Canada
versus an analyst forecast of 0.2 percent.

In the year through April, gasoline prices contributed most
to the rise in CPI, while natural gas prices rose for the first
time in a year. Seven of the eight components of the CPI showed
price increases, with clothing and footwear being the only item
to decline.

The sizzling retail numbers for March are the latest in a
string of data suggesting economic growth could be even faster
than the 5 percent annualized rate seen in the final quarter of
last year.

“Given previously reported gains in the volumes of
wholesale and manufacturing sales, today’s report suggests that
GDP rose by a solid 0.5 percent in March … This suggests some
upside risk to our current forecast that GDP, on a quarterly
expenditure basis, rose 5.5 percent in the first quarter of
2010,” economist Nathan Janzen of RBC Economics wrote in a note
to clients.

Stock Market Research

(Additional reporting by John McCrank and Ka Yan Ng in
Toronto; editing by Rob Wilson)

WRAPUP 1-June rate hike still an option after Canada data