Canadian Retail Sales May Disappoint - Will It Throw Off BOC Expectations?

[B]Retail Sales (MoM) (APR) (12:30 GMT; 08:30 EST) Retail Sales Ex Autos (MoM) (APR) (12:30 GMT; 08:30 EST)
Expected: 1.0% Expected: 0.5%
Previous: 1.9% Previous: 1.1% [/B]

[B]How Will The Markets React?[/B]
Retail sales growth in Canada is anticipated to slow during the month of April, with the headline reading estimated to rise only 1.0 percent after surging 1.9 percent during the month prior. Meanwhile, retail sales excluding automobiles are forecasted to gain a tepid 0.5 percent from 1.1 percent. While these indicators are expected to continue to show a pick up in consumption, signals that spending may not be able to keep pace and thus, may start to contribute to a slowdown in second quarter expansion would not bode well for market speculation that the Bank of Canada will be aggressive with monetary policy tightening this year. Furthermore, the actual release could actually prove to be softer than estimated after wholesale sales for the same period - a fairly reliable leading indicator - surprisingly plunged -3.1 percent , the sharpest decline in nearly four years. The drop was led by automobile sales, which actually contributed the most to the March retail sales report and could take the wind out of the sails of the April reading. Nevertheless, market reaction to this particular piece of data may only be short lived as the Bank of Canada has made it very clear that they will hike in July. What the central bank will do thereafter is up for debate, but it will certainly be largely dependent upon inflation pressures in coming months.
[B]Bonds - 10-Year Canadian Government Bond Futures[/B]
While 10-year Canadian Government Bond futures made decent bullish headway on Wednesday, substantial resistance near 110.42 could limit gains. However, Thursday?s retail sales report could give CGB?s some fuel to make a fierce attempt at that level, as the figure has the potential to prove very disappointing. On the other hand, figures that meet or beat expectations may actually push prices down as yields would rally in anticipation of hawkish policy action by the Bank of Canada in July. Regardless, any moves higher may only be impressive on a short-term basis, as attention is likely to refocus on the central bank?s tightening bias.
[B]10-Year Canadian Government Bond Futures (Intraday Chart)[/B]

The Canadian dollar has been holding within a pretty well-defined range against the US dollar, though 1.0700 has emerged as decent resistance today. Weaker-than-expected wholesale sales helped push USDCAD up towards that level, but given the crystal clear signals that the Bank of Canada has given regarding their intentions to raise rate next month, there is a significant amount of fundamental support for further declines until July 10th. However, the release of retail sales could add a bit of volatility to USDCAD trade on Thursday, as there are indications that the figure will be announced at a disappointing rate. Such a surprise could easily lead price to spike up to 1.0700, and depending upon the degree of difference between the actual figure and estimates, USDCAD could even take aim on 1.0750. Nevertheless, the price action will likely be just a blip on the radar, as persistent inflation above the central bank?s 2.0 percent target remains the more predominant issue for Canadian dollar trade. As a result, USDCAD may return to the bottom of its range even with a sharp fall in retail sales.
[B]USD/CAD (Intraday Chart)

[B]Equities - S&P/TSX Composite Index[/B]
Canadian stocks fell for the second day in a row as an unexpected drop in wholesale sales reinforced concern that a stronger Canadian dollar may be crimping profits for exporters. At the Toronto close, the S&P/TSX was down 1 percent at 13,978.16. A 1.3 percent decline in crude oil for July delivery to $68.19/bbl in New York didn’t help either after an Energy Department report showed that US oil and gasoline stockpiles increased. Suncor Energy Inc., the world’s second-biggest oil-sands producer, dropped C$3.06 to C$95.00 while EnCana Corp., Canada’s largest energy company by market value, fell C$1.47 cents to C$68.90.
Canadian equities could be in for another rough day on Thursday, as the nation?s retail sales report has the potential to fall back more than expected during the month of April. Given the softness already seen in the S&P/TSX, the equity index could become even more vulnerable on such data and ease back towards the 13,650 level. However, a surprisingly strong result would help underpin a retrace up above 14,000, as the figures would signal that though exports may suffer at the hands of a stronger Canadian dollar and damage growth prospects, resilient consumption could help pick up the slack.
[B]S&P/TSX Composite Index (Daily Chart)