Round up of News:

Retail Sales

January’s Canadian retail sales failed to impress faling 0.3% when market economist were expecting 1% growth.  Weather could be the issue, but this is the great white north for God sake, snowstorm just slow us down a little.  Car sales were the biggest culprit, but the rest of the market was hardly inspiring.  One aspect could be rising fuel and food prices (the two aspect of cost inflation that consumer see the more directly), its is after all the fourth month of disappointing sales data.  Personally, I cannot think of a reason, except that Canadians are overexposed to the U.S. news market, and there the news is simply not good at all.

Federal Deficit & Friends

Canada’s conservative government’s budget is a dead duck, as all three opposition parties have said they will vote against it, and this will result in a non-confidence vote that will trigger elections (in about 5 weeks).  However, there are a few aspects of Canada’s budget (even if its not passed whoever wins will probably adopt very similar policies.  Last year the federal government budget deficit was around 3% of GDP (provinces have very big budgets too), but next year it is anticipated to drop to 1.5% of GDP on very conservative growth projections.  Based on the same projections Canada’s Federal government would return to balance budget by 2015/16 – a year ahead of its 2009 plan.  This compares very well to the US Federal government that is running an 8% budget deficit.  

David Rossenberg said it best:

The Federal debt-to-GDP ratio is expected to drift below 30% over the course of the next five years from the current level of around 34%, the best since 2008 before the recession hit, solidifying Canada’s status as one of having AAA balance sheets. The economic assumptions, which are the foundations for the projections, remain reasonable as the Canadian government uses private-sector projections as a starting point. They assume 2.9% real GDP growth for this year and 2.8% growth for next year. On top of this, they built some padding into nominal GDP forecasts assuming that nominal GDP will come in $1.5 billion less than projected by the private sector over each of the next five years, increasing the odds that Ottawa will meet its budget projections. There was not a lot of new spending announced. Program expenses-to-GDP are expected to move lower over the five-year time horizon

Bank of Canada policy options

Bottom line with a strong (and getting stronger CAD), there bank of Canada’s decision to raise rate has probably been further delayed; inflation (CPI at 2.2% and Core CPI at 0.9%) is well contained, retail sales are shrinking (and that in an atmosphere where GDP growth forecast of 2.8% for 2011 looks well short of what will be achieved), and high fuel and food costs will dramatically reduce the BoC’s appetite for raising interest rates.  The BoC’s quarterly market review is due in a few weeks, and I would suspect that from the BoC’s perspective there are lots of external risks that warrant taking a wait and see stance (unlike the ECB and the BoE – which are facing very real inflation pressures). Finally, the BoC will not raise rates until after the elections and a new cabinet has been formed.