Rates are essentially flat to yesterday’s close, but not for lack of news in the markets.

Generally, risky assets appear to be in favour this morning, evidenced by rallies in the equities and commodities markets. Events influencing markets this morning include a cease-fire in Libya and some positive developments in Japan.

Normally, this increase in risk appetite would exert upward pressure on bond yields, but the offset in the Canada this morning is quite weak inflation numbers from February. Every measure of the CPI was weaker than the market expected, with the key “Core CPI”, which removes the impact of volatile items such as food and energy, was +0.9% year-over-year. Expectations were for a +1.1% increase, while January’s print was +1.4%. The Bank of Canada makes policy decisions with the goal of keeping this metric at around 2.0%.

CMB rates are within yesterday’s trading range at 2.79/3.63, but the direction for rates this morning is upward.

The Japanese nuclear saga is still ongoing, but markets appear somewhat more calm with respect to the prospects for further deterioration there. This view seems to be in direct conflict with government reports that its control of the situation is diminishing.

With respect to data released today in North America, the picture looks a bit brighter: Canadian Wholesale Sales for January beat expectations (with notable gains in autos, building materials, and machinery / equipment).

In the USA, the weekly jobs report was roughly in line with expectations, while the CPI showed that inflation is running slightly ahead of forecasts. Additionally, the Philadelphia Fed Index of economic activity for March was well ahead of expectations. The preceding positive news creates upward pressure on rates at the margin.

Balancing these positives, US Industrial Production and Capacity Utilization for February both disappointed, as these measures continue to remain at levels below what is typically seen in recoveries.

Remember that tomorrow the Canadian CPI for February is released.

The bond market had sold off early but has reclaimed most of those losses steadily this morning as oil prices rose again, and central bankers point to continued low short-term rates.

The major event today in Canada was the Bank of Canada’s rate announcement. As expected, the Bank held the overnight rate steady at 1.00% and the focus has instead been on the content of the accompanying statement. The statement opined that Canada’s economic recovery was progressing faster than expected but at the same time highlighted considerable challenges and risks including the strong Canadian dollar and poor productivity growth. On balance, the statement was not as ‘hawkish’ as some thought it would be, meaning that expectations for future rate hikes were moderated somewhat.

In the US, Ben Bernanke has been testifying in front of congress this morning that he expects commodity-driven inflation would only lead to a “temporary and modest shift in US consumer price inflation” although he did acknowledge the threat to overall growth and price stability.

Looking ahead, a new month brings fresh data. During the rest of the week watch for:

Canada:                Industrial Producers Price Index, Raw Materials Price Index (Wed)

USA:                      ADP Employment Report, Fed Beige Book (Wed); Productivity, ISM Non-Manufacturing Comp., Initial and Continuing Jobless Claims (Thu), Employment Report, Factory Orders (Fri).

The bond market has rallied a touch this morning vs. yesterday’s close on mixed data in the US and global events.

Various measures of the CPI for January were slightly higher than expected (e.g. CPI ex food and energy grew YoY +1.0%, vs. +0.9% expected). Meanwhile, Initial Jobless Claims were 410k (400k exp.) and Continuing Claims were 3,911k (3,893k exp.), demonstrated that labour market weakness still persists in spite of recent favourable numbers.

On the Canadian front, a weak Wholesale Sales growth print of 0.8% for December (+0.9% exp.) disappointed, as did a downward revision of the November reading as well.

The higher CPI numbers tend to exert upward pressure on rates, while the weak employment numbers suggest that rates should remain low. The tiebreaker this morning however, appears to be political risks centered in the Middle East. Everyone knows about regional protests that in some countries are turning quite violent, but last night’s reports that Iran is sending two warships through the Suez Canal has led to some risk being taken off the table.

An early rally in the bond market has faded somewhat. The rally was largely set off by surprising data released overnight that showed the UK economy contracted 0.5% in the 4^th quarter of 2010. The market had been expecting growth of +0.5% so the surprise was quite large.

In Canada, the December inflation numbers released this morning were a bit softer than expected. The CPI was flat vs. November, and up 2.4% year over year (in both cases, 0.1% less than expected by the market), while the Core CPI was -0.3% vs. November (-0.1% exp.) and +1.5% YoY (+1.6% exp.).

Finally, further south we saw evidence that the post-‘homebuyer tax credit’ price of residential real estate has continued trending downward since reaching post-crash highs in June. The November S&P/Case-Shiller Home Price Indices showed that home prices have once again fallen about 3% in the five months from June to November.

Key events for the rest of the week are US-only. New Home Sales, Fed Meeting (Wed); Pending Home Sales, Durable Goods Orders, Initial and Continuing Jobless Claims (Thu); Q4 GDP, Consumer Sentiment (Fri).

Also note that this week, the annual global economic conference in Davos, Switzerland is taking place, and there is likely to be lots of rhetoric and ideas for the market to digest.

It is a quiet day data-wise but it is worth noting that on Tuesday, the Canadian December CPI numbers will be released, with some material data out in the US as well.

There is no US data out this morning, but there is some Tier I Canadian information. Inflation numbers for November were more tame than the market expected: MoM CPI growth was +0.1% (+0.3% exp.), and YoY growth was 2.0% (2.2% exp.). The ‘Core’ CPI numbers similarly fell short of modest expectations. Weaker inflation expectations, all things equal, would help push bond yields lower.

Also, Canadian Retail Sales for October were released at +0.8%, which beat expectations of +0.5%. This sounds reasonably strong but it is noted that MoM Sales growth was negative after stripping out sales at Gasoline Stations [which were up 7.4%]. Also, the September numbers were revised lower.

There is still some material data to come out during the course of this week, including:

US: Existing Home Sales (Wed); Durable Goods Orders, Personal Income / Expenditures, Consumer Sentiment, New Home Sales, Initial and Continuing Jobless Claims (Thu).

Canada: Real GDP – October (Thu)

The bond market has rallied modestly this morning following the selloff late yesterday.

Largely responsible for stabilizing yields this morning are the US CPI numbers for November, which at 0.1% MoM, were lower than market expectations for 0.2%. These serve as a reminder that while the market has moved to price in certain events, the inflation is not yet evident.

Other positive data in the US include the Empire Manufacturing Index for December at 10.57 (exp. 5.0), growth in Industrial Production for November of 0.4% (exp. 0.3%), and an uptick in Capacity Utilization to 75.2% (exp. 75.0%).

The only Canadian data out this morning was October Manufacturing Sales which were up 1.7% (exp. 1.0%).

In summary, lots of data suggesting the economy is moving in the right direction, but if inflation lurks, it remains well hidden.