Retails sales rose 1.1% month-over-month in September, easily outpacing the 0.4% gain expected by the markets. In volume terms, sales rose a still strong 0.7%. Even excluding autos, sales rose a still strong 0.8%; the markets had been looking for a more subdued gain of 0.2%. For the prior month, ex-auto sales were revised up from -0.3% month-over-month to -0.2%.

A 2.9% gain in new automobile sales marked the first monthly rise in eight months and the strongest gain since March of 2007, more than making up for the prior month's 1.1% fall.

Sales ex-autos often give a better sense of the trend in overall retail sales since auto sales can be quite volatile. The 0.8% month-over-month rise in nominal sales of all other items, while impressive, is in part attributable to a jump in gasoline sales. This component rose a full 1.7% after falling 3.1% August.

Excluding both new autos and gasoline sales, the gain in retail sales was more subdued, rising 0.6% on a monthly basis. Food and beverage sales rose 1.2% and general merchandise sales gained 1.6%, although building and outdoor home supply stores recorded a 0.7% drop and computer and software store sales fell 3.9%.

Despite today's respectable showing, downside risks to the economy have been increasing. Continued credit market strains combined with a deteriorating global economic backdrop will likely result in the Bank of Canada cutting interest rates.

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