The only data out this morning (US Initial and Continuing Jobless Claims) were in-line with expectations but the bond market has been rallying aggressively since mid-morning so I thought a mid-day note making an attempt at providing context/direction would help.

Overnight, Japan devalued the Yen by around 4% and the ECB has resumed purchasing of bonds to try and contain sovereign debt concerns but both of those were known before North American markets opened so they can’t be held fully responsible for today’s bond market rally (or the 3-4% drop in equities).

There is no one smoking gun here – just generally nervous markets with concerns about economic prospects, and those concerns gaining momentum. Tomorrow morning’s release for July Non-Farm Payrolls in the US will go a long way to either calm fears or exacerbate them. The market forecast is for +85,000 new jobs.

The recent bond market rally continues this morning as more disappointing data comes out of the US.

523,000 Housing Starts (annualized) for April fell well short of the modest 569,000 that were expected [this series is normally between 1.5 to 2.0 million, but has been stuck below 700,000 since late 2008]. Also, Building Permits for April were 551,000 (annualized), also well short of the 590,000 the market was hoping for.

Additionally, Industrial Production did not grow during April (market expected +0.4%) and Capacity Utilization of 76.9% was also below expectations. While some commentators are pointing to Japan-related supply chain disruptions (which are valid), I’m pretty sure forecasters were aware of the situation in Japan when they cobbled together their numbers.

In any event, the above data are quite weak, and the market’s appetite for risk this morning is reflective of that.

Data for the rest of the week includes:

-          Canada: Wholesale Trade (Wed); CPI, Retail Sales (Fri)

-          US: Existing Home Sales, Leading Indicators, Philly Fed, Initial and Continuing Jobless Claims (Thu)

Markets are a bit more cautious this morning, which is more evident in the pullback of the 5yr rate. Some of this stems from the ongoing earthquakes in Japan and recent reports that the long term fallout of the Japanese nuclear incident may surpass Chernobyl. I cannot say how accurate this is, but I don’t think traders are waiting for the IAEA report either.

Some of the North American data that came out was disappointing however:

-          The Canadian trade balance for February was nonexistent (exp. $0.5bn)

-          The US trade deficit for February was $45.8bn (exp. $44.0bn)

Finally, as expected, the Bank of Canada decided to keep its overnight rate at 1.0%, but its language shifted, hinting at more rate hikes sooner than later. But with a strong dollar and a world where some kind of crisis or other has managed to consistently arise over the past several years, there are enough headwinds and potholes ahead to keep the Bank from getting too alarmed.

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.

With so many moving parts globally, it is not surprising that investors are generally continuing to play it safe, taking bond yields lower once again (vs. yesterday’s close but higher than yesterday’s open).

The nuclear-related concerns in Japan are not to be taken lightly, but as the initial shock of the Japanese events subsides, we are reminded that unrest in the middle east is continuing (Bahrain, Libya), and that peripheral eurozone nations still have not solved their fiscal troubles. In short, there is plenty of reason for caution.

In terms of North American numbers, Canada’s Manufacturing Sales growth for January was 4.5%, well in excess of the +1.0% growth that was expected. Growth was largely driven by a pickup in autos and related activity.

Down south, the US reported that Housing Starts fell (again) in February to 479k annualized  (exp. was 566k but historically this number has been closer to 1.5MM) confirming that the housing/construction market is even weaker than the very modest expectations the market has developed). Further, various Producer Price measures in the US were up significantly, perhaps showing the effects of the weak dollar.

Remember, US CPI on Thursday and Canadian CPI on Friday.

The bond market has rallied substantially, sending rates down sharply.  

This morning all that matters in asset markets are events Japan, for several reasons:

-          Confirmation of some radioactive contamination having escaped from multiple nuclear plants, at levels that are harmful to humans;

-          The disruption of the Japanese economy poses a significant risk to the fragile global recovery;

-          As the most indebted advanced economy with the oldest population, the Japanese government is scarcely in the position to spend more money rebuilding the damaged infrastructure.

The net effect of the uncertainty in Japan is that investors have fled risk assets: equities, oil, gold, and other commodities are all trading lower this morning as investors once again exhibit their preference for fixed income securities in times of uncertainty.

Bonds are relatively steady this morning in spite of some disappointing economic data in the US:

-          Durable Goods Orders [Dec] -2.5% (exp. +1.5%)

-          Durable Goods ex Transportation [Dec] +0.5% (exp. +0.9%)

-          Initial Jobless Claims 454k (exp. 405k)

-          Continuing Jobless Claims 3.991MM (exp. 3.873MM)

While the durable goods orders were quite weak, the November set was revised higher, providing a bit of an offset. There is no such balance in the case of the jobless numbers.

Globally, S&P downgraded Japan’s credit rating, reminding markets that sovereign debt issues have not gone away. Evidently a debt to GDP ratio of 200% warrants a AA- rating, not the AA level that it had enjoyed at 195%.

There is no Canadian data out until Monday when we get Real GDP numbers for December, but watch Friday morning’s advance estimate of Q4 GDP in the US.