RBC economists Rachel Battaglia and Abbey Xu report that Canadian cardholder spending rose modestly in February, while consumers kept cutting back on discretionary goods. Their core retail sales measure, based on a three-month average, stayed negative but improved compared with January. The core retail sales measure was -0.1% on a three-month average in February, compared with -0.3% in January on a seasonally adjusted basis. The easing followed weather-related disruption and post-holiday fatigue that weighed on spending in January.

Discretionary Goods Remain Under Pressure

The February contraction came entirely from discretionary goods, with clothing and related retail segments among the weakest. Spending growth in discretionary services and essentials partly offset this weakness in goods. Travel, entertainment and art recorded the strongest gains on a three-month average, pointing to firmer demand for experience-related categories. RBC expects higher oil prices to lift purchases at petrol stations, while effects on other essentials and discretionary spending may depend on household income allocation and savings use. Based on the February cardholder data, we see a market that is treading water rather than recovering strongly. The modest improvement in the three-month average retail spending, moving to -0.1% from -0.3%, suggests the worst of the winter slowdown may be over. This slight uptick points towards cautious optimism, but the underlying weakness in goods spending should temper any outright bullish bets. The key takeaway is the clear split between consumer preferences for experiences over physical items. While spending on discretionary goods like clothing continues to fall, categories like travel and entertainment are showing persistent strength. For instance, while retailers like Canadian Tire (CTC.A) might face headwinds, we could see continued momentum in stocks like Air Canada (AC), which recently beat earnings expectations on strong travel demand.

Trading Approaches By Sector

This divergence suggests that sector-specific strategies will outperform broad market plays in the coming weeks. We are looking at opportunities to buy calls or sell put spreads on resilient travel and service-oriented companies. Conversely, buying puts on non-essential goods retailers could be a prudent hedge against the ongoing consumer pullback in that area, a trend that has become more pronounced compared to what we saw in early 2025. Looking back to last year, the consumer was just beginning to grapple with the full effect of the 2024 interest rate holds. We saw a similar, though less defined, preference for services back in the first quarter of 2025. The data now confirms this is an entrenched behaviour, not a temporary fad, making it a more reliable basis for trading decisions. The wildcard is the recent surge in oil prices, with WTI now trading over $85 a barrel. This will boost revenues for energy producers and likely increase inflation, which currently hovers around 2.9% according to the latest Statistics Canada release. This creates uncertainty, as higher gas prices could either further dampen discretionary spending or be absorbed by consumers’ savings. Given this mixed picture, volatility plays on the S&P/TSX 60 index may be attractive. Options strategies like long straddles or strangles could prove profitable as the market digests the competing forces of resilient service spending and inflationary pressure from energy costs. This allows a trader to capitalize on a significant market move in either direction without having to predict which force will win out. Create your live VT Markets account and start trading now.

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