Canadian retail sales rose 1.0% (m/m) in May, following a decline of 0.1% last month. Today's reading came in above market expectations of a 0.6% increase. In volume terms, sales were up a more modest 0.4%.The details of the reports were encouraging across the board. In line with an improvement in consumer confidence for the month of May, sales rose in 9 out of the 11 subsectors, representing 92% of retail trade.

"The strength in today's report was supported by a 1.3% increase in sales at motor vehicle and parts dealers. Additionally, rising gas prices (+4.9% m/m) helped prop up sales at gasoline stations (+1.9%) - which marks only the second monthly advance since June 2014. As such, excluding autos and gas, core retail sales were up a more modest 0.7%", says TD Economics.

Meanwhile, receipts at electronics stores (+6.1%) bounced back in May but did not erase last month's significant decline. Notable gains were also recorded in building material (+1.9%) and food and beverage stores (+0.6%). On the other side of the coin, clothing (-0.5%) and sporting goods (-1.8%) stores posted the only monthly declines. Regionally, sales were up in 9 provinces on the month, with Nova Scotia (+7.3%) and Prince Edward Island (+3.7%) leading the way. Sales in Saskatchewan slipped a modest -0.1%.

TD Economic notes

Today's data report brings our current tracking for real consumer spending growth to above 3.0% (annualized) for Q2 - a significant improvement from the first quarter (+0.4%). Yet, the modest rise in retail sales volumes was among the few bright spots in Canadian data in May, outside of the housing market. As such, today's data release reinforces our view that the Canadian economy likely shrank for a second consecutive quarter in 2015, with Q2 growth expected to come in between -0.5% and -1.0% (annualized).

The current low interest rate environment remains supportive of consumer spending, particularly for categories related to big ticket items such as autos and housing. However, with rates already low for some time, the effects of last week's interest rate cut are likely to be relatively mild. That said, the July rate cut helped drive the loonie under 77 US cents - a level not seen since 2004. The pass-through effects from the lower loonie will put additional upward pressure on prices of products with high import content, thereby offsetting some of the savings to consumers from lower interest rates.