The bond market continues to rally as risk aversion remains the dominant theme.

Growth in Canadian Building Permits for March of 17.2% [exp. -2.5%] should, in isolation, send rates higher.

Any positive economic story that the Permits number told was overshadowed by US weekly Initial Jobless Claims of 474k, which continue to remain stubbornly high. Last week’s print was 431k and expectations for this week were 410k. Ongoing labour market weakness will continue to undermine the notion of a self-sustaining recovery, and all else equal, will conspire to keep rates lower than what they otherwise would be.

Watch out for Friday’s Employment numbers for April, both in Canada and the US.

The bond market is roughly in line with yesterday’s closing levels, following a decent employment report out of the US this morning. Nonfarm Payroll growth of 192k was largely in line with expectations, while growth in the Private Payrolls and Manufacturing Payrolls components were slightly better than expected. Also, there were some upward revisions to the weak January report. One gets the sense, however, that given strong ADP numbers on Wednesday, encouraging weekly and continuing claims yesterday, and an artificially weak January jobs report, the market is disappointed that this morning’s report wasn’t materially better than published forecasts.

The real weakness in the report was that the US Unemployment Rate fell to 8.9% from 9.0% last month, but had actually been expected to rise to 9.1% as formerly discouraged workers were expected to start wading back into the job market. Evidently, job prospects are less appealing on the ground than commonly believed, because these workers don’t seem to be reinitiating their job searches. This weakness in underscored by a lack of earnings growth for employees, and flat weekly hours also included in this morning’s report.

There is some additional data coming out at 10am (US Factory Orders, Canadian Ivey PMI) .

The key driver seems to be better than expected Initial and Continuing Jobless Claims reports in the US. 368,000 Individuals filed their initial jobless claims last week (395k expected) and 3.774MM filed continuing jobless claims (3.815MM expected). Together with yesterday’s better than expected ADP Employment Report, these results are helping lift hopes for tomorrow’s February Nonfarm Payrolls number (which is already set to benefit from the activity that was inhibited due to snowstorms in January).

An additional ‘positive’ was a pickup in Productivity in the US at the end of last year. The fact that this gain comes due to lower unit labour costs is not desirable in the long term, but the gain in productivity will be lauded nonetheless.

No data of note in Canada until tomorrow with the Ivey PMI, however everyone’s attention will be firmly fixated on the US Employment Report.

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.

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’)

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).

A bond selloff this morning has been catalyzed largely by a large “beat” in the US Housing Starts numbers for January. On an annualized basis, Housing Starts of 596k were much higher than the 539k that was expected, representing MoM growth of 14.6%. The upside was due to the multifamily segment, which is quite volatile by its nature. [I have included a chart which puts this uptick in perspective relative to the past]

Other US releases indicated that Producer Prices as measure in the PPI are rising faster than expected, +0.5% MoM (vs. exp +0.2%) when excluding Food and Energy.

Both of the above would tend to lead rates higher, while some balance is provided by weak Industrial Production (-0.1% vs. +0.5% expected) and Capacity Utilization (76.1% vs. 76.3% expected) numbers.

Canadian economic data was limited to Leading Indicators (Jan) and Manufacturing Sales (Dec), both of which fell short of expectations.

In spite of the mixed nature of the data, the housing starts number seems to be stealing the show this morning.

Lots of Tier I data is out over the next two days, including US CPI (Thu) and Canadian CPI (Fri).

The only hard data out in North America this morning was in the US. Retail Sales growth for January was softer than expected: +0.3% vs. 0.5% consensus, and there were some downward revisions to the December data as well.

The Empire Manufacturing Index was a touch higher than expected, while the Import Price Index surged: +1.5% MoM (exp. +0.8%) and +5.3% YoY (exp. +4.4%).

The retail numbers exert downward pressure on yields, while the rest of the data works to move yields higher.

Other notable headlines this morning include the accelerating rate of inflation in China (officially 4.9% YoY, with food prices up 10.3% YoY).

The rest of the week will be quite eventful, including the January CPI for both Canada and the US:

-          Canada: Manufacturing Shipments, Leading Indicators (Wed), Wholesale Trade (Thu), CPI (Fri)

-          US: Housing Starts, Building Permits, Industrial Production, Capacity Utilization, FOMC Meeting Minutes (Wed), CPI, Leading Indicators, Philadelphia Fed, Initial and Continuing Jobless Claims (Thu).

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.