Surprised by the strength of retail sales in August, economists are still insisting that rate cuts are coming tomorrow. Contrary to expectations, Canadian retail sales rose 0.3% gain in August, reversing two months of declines. As well, July’s number was revised up from a 0.5% drop to a 0.3% drop. But economists aren’t falling for the good news.

“Despite these apparently positive signs, there are three major negatives to keep in mind,” say the economists at BMO Nesbitt Burns. “Early indications point to a sizeable setback in September, most of the August gain was due to a 3% rebound in service station receipts owing to higher gasoline prices, and the three-month trend is still in the negative territory.”

“Like all pre-September data, todayÕs gain will be largely discounted, with mounting job losses and a shattered consumer psyche leaving retailers increasingly uneasy,” says CIBC World Markets.

“TodayÕs real retail gain, on top of better-than-expected performances in last weekÕs manufacturing shipments and wholesale trade data, suggest that August GDP will register a modest increase. A 0.1% monthly GDP gain would snap the economyÕs two month losing streak, but still leave third quarter output in rough waters.
Faltering domestic demand, combined with an anemic external economic backdrop, should translate into negative GDP growth in each of final two quarters of the year.”

RBC DS Capital Markets says, “Although the rebound in sales ultimately falls in the good news camp, markets are unlikely to attach much significance given its pre-September nature. With consumers glued to their television sets rather than shopping malls, retailers are expected to report a drop in September sales. Beyond this temporary distortion, however, slack in incomes and labour market conditions was already restraining purchases before Sept. 11 and is expected to continue to do so ahead. Today’s report does not change our view that the Ban of Canada will cut by 50 bps tomorrow.”

CIBC agrees. “Despite todayÕs consensus-topping retail report, the case for a 50 bps rate cut by the Bank of Canada tomorrow morning remains a good one. Economic risks remain clustered clearly to the down side, with an overnight rate of 2% likely needed before CanadanÕs expansion resumes in
earnest.”