Market Commentary

Market Commentary - May 29, 2015


Monday was a non-event with markets closed in London and NYC and most Canadian fixed income traders (including yours truly) 'on course'. Tuesday saw a slew of second tier US reports on durable goods, new home sales, housing prices, and consumer confidence. Durable goods orders fell in line with expectations, but core shipments jumped for the second consecutive month. Consumer confidence was good, but not great. No Canadian data ahead of the BoC meeting on Wednesday. Yields fall about 5bps on the day and 5yr GoCs finish below 1.00% for the first time since end of April.

Focus on Wednesday was the BoC rate announcement and related statement. The bank delivered exactly what the market expected…no change in rates and comments that give the market no reason to alter views that rates are (probably) on hold for the rest of the year (unless they're not). To be honest, the statement had a real mix of positive and negative signals. At the margin, it might have left the market a little more dovish (less worried about inflation). Like the US, monetary policy for the balance of 2015 remains very data dependent, and central banks may swing from Dovish to Hawkish and back again before we're done. Yields fell another 4bps on the day.

GDP releases in Canada and the US had the markets full attention this morning. Canadian real GDP was overall weaker than expected, and will keep speculation about another rate cut alive. In the US, an already weak Q1 GDP number was revised down into negative territory. This revision, however, was expected and market reaction should be muted. Nonetheless, the uninspiring GDP news combined with continued uncertainties surrounding Greece, have put the market in a mood to buy (ie: take yields lower). Yields are down yet another 4bps this morning.

All told, the 5yr GoC benchmark (1.50% Mar 2020) yield is now 0.92%, about 13bps lower since we closed the books last Friday. The 10yr (2.25% Jun 2025) is at 1.63%, down about 14bps. CMB spreads are about half a basis point wider on the week but have outperformed weaker risk assets.

In mortgage insurance news, CMHC's market share is down to a record low 50% of new residential mortgages. CMHC CEO Evan Siddall said that after several years of cutting its share to reduce taxpayer risk to the mortgage market, the agency plans to hold on to the market share it has left. (For context, CMHC had about 90% share prior to the liquidity crisis). CMHC is now comfortably below the $600 billion insurance cap, and should have lots of room for new commercial multi-family lending going forward…in case you were worried about that.

Finally, if you happen to be in Nepal, happy Ganatantra Diwas Day! Enjoy the long weekend. 

Jason Ellis, Treasury Guy
Managing Director, Capital Markets

by First National Financial LP 29. May 2015 10:24

Market Commentary - March 4, 2015

Good Afternoon. At 10:00 this morning the Bank of Canada announced that it was leaving the overnight target rate unchanged at 0.75%. This was largely the expected outcome, however, the policy statement was decidedly less 'dovish' than expected. The bank cited balanced risks around inflation and financial stability suggesting no bias for policy ahead. In fact, rather than less 'dovish', one might even say the statement was more 'hawkish'. The bank went on to say that the "anticipated rotation into stronger growth in non-energy exports and investment is well underway" and the prevailing conditions since the January rate cut should "mitigate the negative effects of the oil price shock".

Bonds predictably sold off on the news and yields are up about 10bps across the curve on the day. 5 and 10yr GoC benchmarks now yielding 0.92% and 1.51% respectively. Since the close last Friday, yields are about 20 basis points higher.

The implied probability of a cut at the April 15th meeting has fallen to about 20%. In fact, some economists are now discussing the possibility of a "one and done" scenario and are suggesting no future rate cuts at all. Time will tell.

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 4. March 2015 13:25

January 23, 2015

Good morning. Apologies for the lateness of today's posting, but I've only just returned from a Financial Services Regulatory Conference. Good times. I really only go for the free danishes.

Anyway, a couple of important updates since the Bank of Canada's shocking decision to drop rates.

First, as you probably have noticed by now, the big banks have not followed the BoC lead and have left Prime rates unchanged at 3.00%. An article in Bloomberg suggested that the failure by the banks to reduce Prime would 'raise the ire of the Bank of Canada since the rate decline would not flow through into consumer lending rates. In truth, I bet this is EXACTLY what the BoC wanted. I don't imagine this rate cut was intended to make mortgages, car loans, or lines of credit any cheaper. It has, however, had the desired effect on the Canadian dollar which will be supportive of manufacturing and exports.

The good news for our commercial borrowers is that your insured construction or adjustable rate mortgage is based on our Asset Backed Commercial Paper cost of funds, which is closely tied to BA's, which did fall about 25bps in sympathy with the BoC rate. It will take a couple of months for the decrease to filter through as older paper matures and new paper is issued at prevailing rates, but our insured floating rate cost of funds will reflect the change in rates.

Second, in the press conference that followed, Governor Poloz noted that the Bank could take out more insurance in the form of another rate cut should the outlook deteriorate further. The key wildcard remains the price of oil. It is now very possible that the bank will follow through with another 25bps rate cut as early as March before moving to the sidelines.

Oh right. One more thing. Super Mario and the ECB announced its Quantitative Easing (QE) program. Too early to really say how this impacts our world, but it certainly adds a new dynamic to the markets.

Bond yields have been range bound the last couple of days and continue to trade around the levels they plummeted to on Wednesday. I'll try my best to keep you posted but hold on tight in the meantime, because it's going to be a *&%$* bumpy ride!

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 25. January 2015 19:47

Market Commentary - January 21, 2015

Bank of Canada cuts the overnight rate from 1.00% to 0.75%.

Responding to concerns about the impact of cheaper oil on growth and inflation prospects, the Bank of Canada cut its overnight target by 25bps to 0.75% this morning. The last change in the overnight rate was in September 2010 when the rate moved up from 0.75% to 1.00%.

The surprisingly dovish statement stresses the downside risks to both the inflation profile and financial stability from energy market developments. This surprise move (none of the surveyed economists anticipated this) is intended to provided insurance against these risks. Obviously, very negative for the C$ and very positive for fixed income. CAD now trading at 1.2358 vs the US dollar (up 2.5 cents). The curve has steepened this morning with 2 year bond yields down 26pbs, 5 year bonds yields down 19bps and 10 year bond yields down 5bps.

All of this, of course is against the backdrop of a very challenging credit environment and changes in sovereign bond rates will not necessarily translate into cheap credit. Still no word on Prime rate, but the last time the Bank of Canada cut rates by 75bps in 2008, the banks only lowered Prime by 50bps, taking the Prime-Bank Rate basis from 1.75% to 2.00%. We'll have to wait and see what the banks do, but I expect Prime will be reduced to 2.75%. I expect fixed mortgage rates and other consumer lending rates to be more sticky though. (Bank stocks are up sharply, by the way).

Commercial mortgage spreads have been trending up over the last 30 days from a low in the fourth quarter of 2014 at approximately 160 – 170 basis points over Canada's to 190 to 200 over Canada's for 5 year product. 10 year spreads have moved in a similar fashion to 210 to 220 basis points over Canada's. This is consistent with increases in other credit products such as corporate bonds and bank deposit notes. For example, First Capital Realty Inc. issued a 10 year unsecured debenture yesterday at a spread equivalent of 213 over Canada's. We would expect to see floor rates used by most lenders to protect their all in coupons from further bond spread compression.

Jason Ellis
Managing Director, Capital Markets
First National Financial LP

by First National Financial LP 21. January 2015 21:32

June 29, 2011

Rates have moved much higher over the past 24 hours. The bond market sold off steadily on Tuesday as the continuing efforts in Europe to stave off a Greek default appear to be bearing fruit. Positive progress in debating a package combining spending cuts and tax increases yesterday will be voted on later today. As the Greek dilemma had been a primary cause of rates declining so much over the past month or so, it is not surprising that a positive near-term resolution should unwind some of that activity.


Adding fuel to the selloff this morning was a surprisingly strong May inflation report for Canada. The market had expected YoY inflation of 3.3% but got 3.7%. The Core inflation reading, which excludes volatile food and energy components (and is the one the Bank of Canada bases rate decisions on), was up 1.8% Year over Year (exp. +1.5%), and 0.5% Month over Month (exp. +0.2%). This 1.8% YoY reading for Core Inflation is below the 2.0% the Bank of Canada is targeting, so there is still a bit of room but obviously less so than the market thought yesterday.


Some important data out Thursday includes Canadian GDP growth for April, and the Chicago PMI.

by First National Financial LP 29. June 2011 09:39

February 15, 2011

The only hard data out in North America this morning was in the US. Retail Sales growth for January was softer than expected: +0.3% vs. 0.5% consensus, and there were some downward revisions to the December data as well.


The Empire Manufacturing Index was a touch higher than expected, while the Import Price Index surged: +1.5% MoM (exp. +0.8%) and +5.3% YoY (exp. +4.4%).


The retail numbers exert downward pressure on yields, while the rest of the data works to move yields higher.


Other notable headlines this morning include the accelerating rate of inflation in China (officially 4.9% YoY, with food prices up 10.3% YoY).


The rest of the week will be quite eventful, including the January CPI for both Canada and the US:


-          Canada: Manufacturing Shipments, Leading Indicators (Wed), Wholesale Trade (Thu), CPI (Fri)

-          US: Housing Starts, Building Permits, Industrial Production, Capacity Utilization, FOMC Meeting Minutes (Wed), CPI, Leading Indicators, Philadelphia Fed, Initial and Continuing Jobless Claims (Thu).


by First National Financial LP 15. February 2011 08:55

January 25, 2011

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 4th 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.

by First National Financial LP 27. January 2011 15:59

December 21, 2010

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)

by First National Financial LP 21. December 2010 09:34