Today’s retail sales numbers were so strong, some economists are rethinking their expectations for further rate cuts in Canada.

Retail sales rose for the second month in a row in April, gaining 1.6%. This gain is about double the consensus estimates, and it marks the strongest month-to-month gain since December 1999. Auto sales drove the gain, but even dropping them out, sales were ahead of expectations up 0.6%. “Despite the soft tone in the Canadian manufacturing data earlier this week, today’s retail sales report indicates that domestic conditions remain solid,” observe BMO Nesbitt Burns economists.

These strong domestic conditions have kept the Bank of Canada on a more gentle easing path than the U.S. Federal Reserve Board, and this data reinforces that trend. “Momentum in domestic demand has been the key Canadian theme thus far in 2001,” say RBC DS economists. “The consumer has played the largest part, responding to rising employment and incomes, tax cuts and low interest rates. Today’s report boldly extends that trend.”

DS notes that this has kept the Bank cautious, which may spell trouble if the U.S. fails to bounce back. “The Canadian economy will be increasingly at risk if the U.S. fails to recover in the months ahead. The Bank acknowledges these risks and remains biased towards easier policy, but recent ugly CPI figures and stronger activity data may give the Bank pause on July 17, the next announcement date.”

CIBC World Markets economists suggest that disappearing jobs may undermine the consumer performance in the months ahead. “As in the U.S., consumer spending is not the weakest link in what looks to be a generally softer overall growth performance in the second quarter. The risk, however, is that mounting factory layoffs will undermine consumer momentum over the latter half of the year.”