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 began rallying in the early afternoon yesterday on the back of intense fighting in Libya, and that rally has gathered momentum this morning following disappointing economic results in Canada and the US.

In Canada, the Trade Balance was considerably worse than expected: $0.1bn in our favour vs. expectations of a $2.6bn surplus. While exports held steady in spite of an ever-stronger loonie, imports grew 5% month over month. Moreover, the $3.0bn surplus in December, which at the time was a massive upside surprise, has been revised lower to $1.7bn.

South of the border, the Trade Balance was also worse than expected: a deficit of $46.3bn vs.  expectations of a $41.5bn shortfall. More importantly in the US, jobless numbers were relatively disappointing once more: Initial Jobless Claims of 397k last week exceeded the 376k expected, with a similar sized miss on Continuing Jobless Claims.  

While the week has been relatively quiet, Friday is a big day. In Canada, the February Employment Report will be released, while Retail Sales, Consumer Sentiment, and Business Inventories will be released down south.

Ghadafeed again. 

Libya continues to dominate broad market movements.  With oil prices bubbling up over $100, bonds are benefiting from an assumed tax on consumption with higher energy prices bringing yields down further.

There are no economic reports in Canada today, but we can look forward to next Tuesday’s BoC rate decision.  At this point, we don’t expect an increase.  In fact…fewer than 60bps are baked into the forward curve for the balance of 2011.  

GoC Rates:

2.00% Jun 2016’s at 2.71%

3.25% Jun 2021’s at 3.41%

CMB Rates:

‘WI’ Jun 2016’s at 2.94%

3.80% Jun 2021’s at 3.71%

(‘WI’ means ‘When Issued’)