Latest Fiscal News in Quebec / Canadian Retail Sales / CPI Preview

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Latest Fiscal News in Quebec / Canadian Retail Sales / CPI Preview
Good morning,
The latest monthly report on financial transactions was published this morning by the Quebec government. This
report shows a stellar financial performance for the fiscal year 2016-17 that ended last March, supportive of last
Friday’s upgrade by the S&P credit agency (from A+ to AA-). The report indicates a surplus of $2.5B for FY 2016-17
representing 0.6% of GDP, significantly surpassing the budget 2017 expectations of a $250M surplus. If we take into
account the additional $2.0B dedicated to the Generations Fund, the $4.5B difference between revenues and
expenditures unambiguously shows that the Quebec government is generating a large surplus for a second
consecutive year. Similar to last year, the Quebec government will allocate this $2.5B surplus to the stabilization
reserve rather than spending the money in new programs or announcing new tax cuts. The stabilization reserve will
soar to a record-high $4.7B, allowing the Quebec government to maintain a balanced budget in future years in case
an unexpected economic downturn occurs.
One particular area of strength generating higher fiscal revenues in Quebec has been the positive momentum in job
creation and household spending growth. For instance, the surge in retail sales in Quebec during the month of April
(+1.6% m/m; +6.8% year-over-year) has been a major contributor to the upbeat Canadian retail sales report released
by Statistics Canada this morning. Nominal retail sales rose by 0.8% m/m nationwide, surpassing the 0.4% m/m
consensus and reinforcing the odds of a BoC policy rate hike at the July 12th meeting.
This being said, a 25bps hike in mid-July is not a done deal given the recent decline in crude oil prices. WTI lost
another US$3 per barrel since Wilkins’ hawkish remarks of last week. Also, Friday’s Canadian CPI report for the
month of May is the other key piece of information that will help determine if the BoC will move away from the
sidelines or not. Most notably, the three core inflation measures the BoC monitors ideally need to move toward the
2% target in order to facilitate the announcement of a 25bps hike in mid-July. These three core inflation measures
averaged only 1.4% in April, the lowest figure since Stephen Poloz was appointed BoC Governor in 2013. We expect
total CPI to rise by only 0.1% m/m in May (consensus at +0.2% m/m), which will bring total CPI inflation down from
1.6% in April to 1.5% in May. If total CPI inflation slips further away from the 2% target, this could prevent core
inflation measures from trending up and, in turn, delay the 25bps hike later this year until a concrete turnaround in
inflation is in the cards. The timing of the BoC first hike is difficult to call at this point. Similar to the Fed’s first hike of
its on-going tightening cycle that started in December 2015, one has to keep in mind that the BoC would likely prefer
to hike at a meeting which is followed by a press conference to give the opportunity to Governor Poloz to fully explain
the decision. The July and October meetings will be supported by a MPR and followed by such a press conference
but not the September meeting. In other words, passing on a July early hike may imply increasing the policy rate at
the September meeting with no press conference or waiting in late October which is four months away. None of
these appear ideal which makes the CPI report on Friday a significant event. Also, investors will also pay attention to
Governor Poloz’s panel remarks in Portugal on June 28th (9:30 ET). Deputy Governor Lynn Patterson gives a speech
in Calgary the same day (14:15 ET).
Sébastien Lavoie | Chief Economist
514 350-2931 | lavoies@vmbl.ca