Retail sales fell 0.7% in February, much weaker than market forecasts for a 0.1% increase and more in line with RBC's call for a 0.3% decline. Almost all major sales categories posted declines. Sales by new car dealers fell 1.7% with used cars, recreational vehicles and parts dealers seeing a big 2.8% drop in sales.

Excluding autos and parts, sales were also softer-than-expected, falling 0.3%, contrary to forecasts for a 0.4% gain. After price changes were taken into account, sales fell 0.7% but were 5.3% higher than a year earlier.

The broad-based decline in sales activity was headlined by the fall in the automotive sector, but there were also big monthly declines reported by clothing stores, pharmacies, miscellaneous retailers and furniture stores. Sales at food and beverage stores were flat. Five of 10 provinces reported lower sales. Sales in Ontario fell by 1.6% and StatsCan suggested that winter storms and the Family Day holiday may have affected activity in February.

While both the retail and wholesale sales reports for February were disappointing, employment, housing starts and manufacturing sales posted healthy gains, pointing to another month of positive GDP growth, albeit at a more moderate pace than January's strong 0.6% increase. Our estimate is that the economy eked out a 0.1% gain in February which, combined with January's strong performance, still keeps our forecast that the economy recorded a 1.2% annualized growth rate on track.

In the statement accompanying yesterday's 50 basis-point rate cut by the Bank of Canada, policymakers characterized Canada's domestic economy as buoyant, backed by the improved terms of trade and strong labour market. Retail activity during January and February supports this view. Sales, after price changes are taken into account, increased at 5.1% annualized pace in the first two months of the year, although the weakening in February will keep the Bank wary about how the tightening in credit conditions will affect the consumer outlook going forward. More moderate consumer spending combined with the persistent drag coming from net exports will likely result in Canada's economy growing by 1.6% this year, much slower than last year's 2.7% pace.

The Bank's actions yesterday show their commitment to mitigating the downside risks to the economy. The Bank statement signalled that they are in data-watching mode as they assess the impact of the 150 basis points of rate cuts on the economy. We reckon that yesterday's statement left the door open to further easing, although it is likely to be limited. We look for just one more 25 basis-point rate cut in the months ahead, which will get the overnight rate to a stimulative 2.75%, enough to resuscitate the economy in the second half of the year.

U.S. data lull today
No data releases are on tap in the United States today, with the exception of weekly mortgage applications (down 14.2%, with refis off 20.2%). Tomorrow will bring durable orders for March, initial jobless claims and new home sales for March. The final read of the University of Michigan consumer sentiment index for April will be released on Friday.