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).

This sell-off is mainly a Canadian phenomenon, firmly on the back of higher than expected December GDP numbers. +0.5% monthly growth (+0.3% expected) lifted Q4 GDP growth to an annualized rate of 3.3% (+3.0% expected). Also, Q3 was revised higher to +1.8% from +1.0% (annualized). The upside was due largely to very strong exports (primarily mining, oil, and gas).

Elsewhere, the data was more balanced. US Personal Income growth for January exceeded expectations, while growth in Personal Spending disappointed.

Geopolitical risk remains elevated as the Libya situation plays out but at this time is not causing the markets more angst. What it has done is drawn attention away from Friday’s elections in Ireland which brought in a new government that campaigned on a promise to renegotiate key parts of the bailout that country received from the EU in 2010.

Canada managed to add 69,200 new jobs in January, with a good mix of private, public, and self-employed job creation. There was a bias in favour of part-time over full-time, but this report is undoubtedly strong, and much better than the +15,000 jobs the market expected.

Despite the gains in jobs, the Unemployment Rate rose to 7.8% from 7.6% as more people dive into the labour force looking for work. Remember, you need to be actively seeking employment in order to be counted as unemployed.

South of the border, there is a lot of confusion. Nonfarm Payrolls grew by +36k in January (expectation was for +146k), however the Unemployment Rate fell from 9.0% to 9.4% (and was expected to rise to 9.5%). Many analysts are suggesting that the US numbers were skewed by weather patterns (as they often are in the winter months) and that the reported Nonfarm number is too low (i.e. jobs grew more) and that the Unemployment Rate is also misreported and will be revised higher in subsequent months. It is the first inference which seems to be capturing the market’s imagination.

In comparison, last February there was a large weather effect that resulted in an upward revision from +62k to +158k the following month. The weather effect is not estimated to be quite as large for the current period but the market seems to be acting as though the +146k was blown away, which doesn’t seem probable, even on revision.

The bond market in North America has sold off somewhat this morning, in part reflecting mildly positive economic data in the US. Initial and Continuing Jobless Claims for the last week were 415k and 3.925MM respectively, with both having managed to better the street’s forecast by a sliver. The magnitude of the selloff, however, is outsized compared to this data alone and appears to reflect heightened inflationary concerns as commodities have rallied sharply in recent days.

Friday is a big day in Canada and the US as the January Employment / Unemployment Reports and related items are released.

Bonds have sold off very mildly vs. last night’s close on the back of mixed US data.

The key data out this morning shows that US GDP grew at a 3.2% annualized rate in the 4^th Quarter of 2010, which was actually below consensus estimates of 3.5%.

Despite this ‘disappointment’, the market seems to be taking strength from the fact that the Personal Consumption component of GDP grew by 4.4% in the quarter, higher than the 4.0% that had been expected. It is likely that you will see articles declaring that the US consumer is ‘back’ over the next day or two.

Canadian December GDP is out on Monday.

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.

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.