Another day, another disappointing jobs stat out of the US. Initial Jobless Claims for last week were 427k (exp. 419k), a level that continues to be much too high (and headed in the wrong direction) at this stage of the cycle. On a positive note, the US trade deficit declined considerably and was much lower than had been expected on the back of an increase in exports and a decrease in imports. While it appears that the weak dollar policy is affecting the composition of trade in and out of the US, the $43.7bn monthly deficit remains a huge drag on that already tapped out economy.

In all, it seems that the market is giving a bit more consideration to the unexpectedly positive trade data, sending rates a few bps higher this morning.

In contrast, Canada’s trade balance seems to be heading in the wrong direction. Canada ran a trade deficit of $900MM for April (exp. was for surplus of $600MM), and the $600MM surplus for March was revised lower by $1bn. Overall trade fell in April, however exports fell more than did imports.

Watch for Canada’s May employment report, released Friday 7am.

The bond market sold off considerably during the latter half of trading on Tuesday and this morning has been volatile but CMB prices are now in line with yesterday’s close.

Tuesday’s selloff was not sparked by any particular piece of news – perhaps the lack of bad economic news was reason enough to embrace risk.

This morning’s economic data in North America is a bit of a mixed bag: the Canadian trade surplus was better than expected, and the US trade deficit was worse than expected.

The week will end off with some important data releases, primarily in the US, where we will see Retail Sales, Inventories, Initial and Continuing Jobless Claims on Thursday and CPI data on Friday.

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.

At the margin, markets continue to embrace risk on the back of Fed beige book comments yesterday that confirm the slowdown in US economic growth has not yet turned into a contraction.

In terms of hard data reinforcing this point, the US Trade Deficit for July was smaller than expected (-$42.8bn vs. -$47.0bn exp.) on the back of an increase in exports and a decrease in imports.

In Canada, Housing Starts for August were roughly in line with expectations and unlike the US, our Trade Deficit was larger than expected (-$2.8bn vs. -$0.8bn exp.) Regrettably, our exports declined (exports to the US declined and the gains in exports to other nations were insufficient to offset entirely) and imports increased.

The big Canadian data for Friday is the August employment report.