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Rosie: Canada Third Quarter Unfolding As Expected

Submitted by derailedcapitalism on 10/25/2010 13:32 -0400

With the Bank of Canada lowering their economic outlook for the third quarter,
the BoC maybe accurate as many of the most recent data points have remained tepid. These data points
indicate that the Bank of Canada will most likely sit tight on any
further monetary tightening at the next policy meeting.

From Breakfast with Dave:

Total CPI rose 0.2% MoM in September, which left the
year-over-year rate slightly higher, at 1.9%. The Bank of Canada’s core
measure, which strips out the eight most volatile items and indirect
taxes, rose just 0.1% for the month, and on a yearly basis, slipped to
1.5% — the lowest in eight months. For the quarter, core inflation
slowed to 1.6% — spot on the BoC’s forecast. They expect inflation to
hover around these levels for the next two-to-three months and given the
amount of slack in the economy and the strong CAD, we think they could
be right.

Meanwhile as inflation remains contained, the Canadian consumer is leveraging up to drive retail sales skyward:

Canadian shoppers were out in full force in August, driving up
total retail sales by 0.5% MoM, the best reading in two months. Autos
sales were strong for the third month running, up 0.9%, and excluding
autos, sales were up a respectable 0.4%. After a slightly negative month
in July, inflation-adjusted retail sales rose 0.3% and capped off a
strong month of data (manufacturing shipments +2.1% and wholesale sales
0.9%). Our tally for August real GDP is at 0.3% MoM and if we are right,
will leave the quarter at around 1.5% — again in line with the BoC’s
fresh forecasts.

And finally, Rosie questions if the Canadian economy weaken beyond Q3:

What about the near-term outlook? Canadian economic data tends to
lag, but we did receive a forward-looking indicator and it suggested
that the fourth quarter could be weak; the index of leading economic
indicators (LEI) fell 0.1% MoM in September, the first decline since May
2009.

The headline LEI is actually the five-month smooth average, so we
prefer to look at the unsmoothed indicator to get a sense of the most
recent trends; and on this basis it was dreadful — down 1.7% MoM, the
largest drop since February 2009, when the Canadian economy was
officially in a recession. And, it wasn’t even the housing component
that dragged it down, but by the combination of hours, employment and
orders. The Bank is expecting that Q3 will be the low point in their
economic forecast but this early Q4 indicator suggests that this quarter
could be equally weak. More evidence that the Bank will be on hold for a
while.