Market Brief: US Retail Sales Firm, Canadian Inflation Decelerates

US retail spending climbed slightly more than expected last month, suggesting that resilient consumer demand could continue to power economic outperformance through the all-important holiday season. According to figures published by the Census Bureau this morning, total receipts at retail stores, online sellers and restaurants rose 0.7 percent on a month-over-month basis in November, beating the 0.6-percent consensus forecasts, and up from a revised 0.5 percent in October. So-called “control group” retail sales sales - with gasoline, cars, food services, and building materials excluded - rose by a softer 0.4 percent, matching estimates.

The dollar is holding firm, ten-year Treasury yields are inching higher, and US equity markets are setting up for a positive open as investors prepare for a quarter-point cut—paired with a relatively-hawkish message from Federal Reserve officials—at tomorrow’s meeting.

Canadian headline inflation decelerated as expected last month, helping justify last week’s outsized rate cut, and clearing the way for further easing in the months ahead. Data released by Statistics Canada this morning showed the Consumer Price Index flatlining on a month-over-month basis in November, bringing the year-over-year gain down to 1.9 percent from 2 percent in the prior month.

The exchange rate hit a post-pandemic low yesterday when Chrystia Freeland resigned as finance minister just before she was due to present the government’s Fall Economic Statement, saying she was “at odds” with prime minister Justin Trudeau over the country’s preparations for a Trump presidency. In a tersely-worded letter, she wrote “Our country today faces a grave challenge. The incoming administration in the United States is pursuing a policy of aggressive economic nationalism, including a threat of 25 per cent tariffs. We need to take that threat extremely seriously. That means keeping our fiscal powder dry today, so we have the reserves we may need for a coming tariff war. That means eschewing costly political gimmicks, which we can ill afford and which Canadians doubt that we recognise the gravity of the moment”.

We think this level of political turbulence will raise uncertainty levels for Canadian consumers and businesses, adding to the headwinds already facing productivity-enhancing investment.

The budget update, which was released hours later, showed the government blowing past its own fiscal anchor. Lower revenues, more spending, and a $22-billion dollar increase in indigenous payouts and COVID loan writedowns lifted the projected deficit in the 2023-2024 fiscal year to $62 billion—about 20 percent higher than previously anticipated—with the 2024-25 year seen landing around the $48 billion mark.

This, of course, pales in comparison with the US. As a share of gross domestic product, Canadian deficits would have to more than double to compare with levels seen in the US even before the pandemic hit in 2020, and Ottawa’s overall government debt-to-output levels remain low relative to its advanced-economy counterparts. The country's fiscal position doesn't look likely to impose a binding constraint on policy choices in the year ahead, and a Canadian version of the Liz Truss debacle—in which a serving of poutine would presumably substitute for the infamous lettuce—looks deeply improbable at this juncture.

Rate cut expectations are falling in the UK after wage growth accelerated more than had been expected in the three months to October. In a surprise relative to consensus, average weekly earnings excluding bonuses rose 5.2 percent on a year over year basis—up from September’s 4.9 percent reading—with a 5.4 percent jump in private sector pay driving the bulk of the gain. We’re not sure how seriously to take the print, given that survey response rates have fallen so low, but markets seem to be running with it: odds on a rate cut at the Bank of England’s Thursday meeting are well below the 10 percent threshold, and just two moves are now priced in for next year—down from the three that had been previously anticipated, and well below the four that were recently mooted by Governor Andrew Bailey. Gilt yields are moving higher, and the pound is climbing off a supportive base.

The euro is holding steady after German politicians passed a vote of confidence against chancellor Olaf Scholz, allowing him to dissolve parliament and send the country to the polls on February 23. Markets have expected the move since Scholz fired his finance minister Christian Lindner last month, breaking the “traffic light” coalition that brought him to power. Lawmakers are deeply divided over how to respond to the economy’s malaise, with the vulnerabilities embedded in an energy-reliant and export-dependent industrial growth model having been laid bare in recent years. Delivering increases in investment, social spending, and defence would entail an abandonment of the politically-popular, but economically-questionable “debt brake” that has kept fiscal spending on an even keel since 2009.

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