Rates are several basis points higher this morning as the data and economic outlook have improved on several fronts today.

In Canada, the Capacity Utilization Rate for the 1^st quarter of 79.0% was well ahead of expectations of 77.2%, and the reading for Q4 2010 was revised upward somewhat.

In the US, May Retail Sales fell 0.2%, but were slightly better than the market had projected.

Finally, Industrial Production and Retail Sales numbers out of China were better than expected, and that has generated a more positive tone globally.

The rest of the week includes the following economic releases:

Canada: Manufacturing Shipments (Wed), Wholesale Trade (Fri)

US: CPI, Empire State Manufacturing Index, Industrial Production & Capacity Utilization (Wed); Initial and Continuing Jobless Claims, Housing Starts & Building Permits, Philadelphia Fed (Thu); Consumer Sentiment, Leading Indicators (Fri)

The new week has brought with it a ‘risk-off’ tone, driving rates lower this morning.

Much of this movement has been driven by undesirable developments in the Middle East – particularly Libya – as the anti-dictator movement continues.

Closer to home, Canadian Retail Sales for December were reported this morning as down -0.2% MoM. Weakness was relatively broad based, while the only notable gainer was Gasoline Stations, up 7.6% vs. November.

In the US, S&P/Case-Shiller home price numbers for December were released and confirmed that a renewed down-leg in US home prices is well under way.

Keep your watch on geo-political developments for the rest of the week, as well as the following data out of the US:

Existing Home Sales (Wed); Durable Goods Orders, New Home Sales, Initial and Continuing Jobless Claims (Thu); Revised Q4 GDP (Fri).

Some important Canadian data was released today, including the September CPI, which on a year-over-year basis grew +1.9%, up from +1.7% last month but also in line with expectations. Conversely, the Bank of Canada “Core” rate of inflation was +1.5%, below the consensus expectation of +1.6%. Other positive news includes August Retail Sales up 0.5% (consensus was for a -0.1% decline), driven by strength in the Autos, Gas, and Furniture / Home Furnishings segments.

In other events, the current G20 meeting in South Korea and the continuing earnings reports, as always, have the potential to impact markets as well.

A sharp rally this morning has been driven by a broad “risk-off” move by markets overnight as fears about the strength of the global economic recovery refuse to leave the stage. Specific comments Tuesday afternoon by the US Fed warned of the risks of deflation and a slowing recovery – together interpreted as having laid the groundwork for the next round of Quantitative Easing. As the primary driver of long-term rates is inflation expectations, nagging concerns about deflation put downward pressure on rates.

In terms of firm data this morning, July Retail Sales for Canada were released and they disappointed: sales fell 0.1% vs. expectations of a +0.6% rise (retail excluding autos fell -0.4% vs. an expected rise of +0.4%). The market in its infinite wisdom expected robust sales growth despite the fact that the HST came into effect in July in Ontario and BC, which coincidentally were the drivers of the decline: Ontario sales fell -0.3% and BC fell by 0.4%. On an industry basis, Furniture / Home Furnishings and Electronics / Appliances were the primary losers during the month – relatively big ticket items that actually had a very strong June as purchases were brought forward.

US data during the rest of the week includes Existing Home Sales, Leading Indicators, Weekly Jobs Report (Thu), as well as Durable Goods Orders and New Home Sales on Friday.

Finally, as summer drew to a close yesterday, Obama’s chief economic policy advisor Larry Summers announced that he will step down from that position at the end of the year. We are less than two months away from US  mid-term elections and this type of news will become more frequent and relevant as the US political landscape reshapes for the next two years.

The bond market continues to march higher on widespread concern that stimulus-driven recoveries are stalling. Specific North American data so far this morning is limited to Canadian Retail data for June. MoM retail sales growth of +0.1% was below the expected +0.4%, while the May retail sales figure was revised downward from -0.2% to -0.4%. Retail Sales ex. Autos were down -0.5%, also below the +0.1% expectation.

An important one to watch this morning will be US Existing Home Sales for July, out at 10am.

Tomorrow is also a big day with Durable Goods and New Home Sales in the US.