Retail sales advanced 0.7% in January to $26 billion, Statistics Canada reported Monday. The rise was much stronger than analysts expected, and should keep interest rates heading higher.

BMO Nesbitt Burns says that the rise came, “Contrary to widespread expectations of a pullback on weak auto demand.” Nesbitt says that auto sales weren’t as bad as previously thought. “StatsCan had earlier reported that the volume of motor vehicle sales tumbled 14.1% in January, but today’s report suggested that sales dipped a much more muted 1.6% at auto dealerships in the month.”

Also, excluding auto sales, retail sales were also stronger than expected in the month, posting a solid 1.5% advance. “While some of this strength reflected a run-up in gasoline prices (service station receipts jumped 4.9%), sales outside of autos and gasoline were up 1.1%. A snapback in clothing sales (+3.1%) and general merchandise (+1.8%) led the way.”

RBC notes that both numbers were well above expectations but should prove to be of only minor interest to financial markets in this war-dominated and volatile environment. “Until the winds of war die down, the Canadian and U.S. economies will remain under some downward pressure as risk premiums, despite recent improvements, remain present.”

However, CIBC World Markets points out that the nominal headline advance masked a scant 0.1% real sales increase (after controlling for inflation). “Real retail sales have now lost ground over the past twelve months (-0.2%), which outside of September 2001’s distorted tally, is the weakest year-over-year growth rate in four years.”

“While there ended up being little growth to point to in real terms, January’s retail performance was still notably better than expected. Indeed, we had looked for a significant retreat in constant dollar real sales to offset some of the earlier-reported growth in factory shipments and wholesale trade,” says CIBC. “As it now stands, even a surprise January jobs retreat does little to darken the outlook for monthly GDP, where a gain of 0.4% is likely on tap. Such a solid start to the quarter leaves our earlier 2.4% call for Q1 growth looking light.” This surprisingly strong report is bullish for the Canadian dollar and related equities, CIBC concludes.

“Today’s retail result is not as strong as the headline would suggest, but is nevertheless quite a bit stronger than anyone expected,” agrees BMO. “Accordingly, it supports the overall impression that the Canadian economy continues to surprise to the high side. Combined with February’s disappointing CPI release and a recent string of robust domestic reports, the retail sales release will keep the pressure on the Bank of Canada to continue tightening policy.”