The only hard data out so far this morning in North America is the US weekly Initial and Continuing Jobless Claims report out of the US. The Initial Jobless Claims number – which has caused considerable anxiety in recent months as it continued to come in at a level higher than expected – appears to have reversed course this week. The actual reading of 398k compares favourably against expectations for a 415k reading, and is considerably lower than last week’s 422k. Continuing Claims were in line with expectations.

One would think that the Jobless Claims number would have pushed rates higher, but perhaps the uncertainty around the US Debt ceiling talks is moderating the reaction. Of course, the debt ceiling talks will continue to be the dominant story in the markets until there is a clear resolution.

In the meantime, there will be a number of important releases on Friday morning.

Canada: Real GDP Growth (May)

US: Q2 GDP Growth (Advance estimate), Personal Income & Expenditures (Advance estimate), Chicago PMI (July), Consumer Sentiment (July).

Markets everywhere continue to shun risk in favour of security this morning, causing our bond market to rally further still.

The sharp rise yesterday afternoon carried into this morning’s early trading activity, and is primarily the result of the deterioration of the financing situation in Greece. The EU and IMF have set aside their differences and agreed on the disbursement of the next tranche of aid, however the Greek government has been having considerable difficulty adopting the austerity measures upon which the aid is dependant. The cabinet is being reshuffled and the government will face a confidence vote on Sunday – it is by no means certain that it will survive that vote. To say that this uncertainty has made markets very uneasy is an understatement.

It is quite likely that rates would have been even lower this morning were it not for a better than expected print on Initial Jobless Claims in the US. Last week, 414k people lost their jobs, marginally better than the 420k that had been expected, and also encouraging in the sense that the market had been overly optimistic on this measure in recent weeks.

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 has rallied once again this morning as poor US data continues disappoint:

-          A secondary estimate of 1^st Quarter GDP growth remained at +1.8% (market expected upward revision to +2.2%)

-          A secondary estimate of 1^st Quarter Personal Consumption growth was revised lower to +2.2% from 2.7% (market expected upward revision to +2.8%)

-          Initial Jobless Claims for the week were 424k (market expected 404k)

In addition to the above, global concerns continue to include talk of restructuring / default in Greece and continuing tensions in the Middle East.

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.

Rates this morning are in line with yesterday’s levels but have been quite choppy. The most closely watched data of the day was the weekly Initial and Continuing Jobless Claims in the US. Initial Claims were mildly better than expected (offset by an upward revision to last week’s number), while Continuing Claims were mildly worse than expected (and last week’s number was also revised higher).

Canada continues to outperform, with Building Permits issued in February up 9.9% MoM.

One notable overseas event was that the European Central Bank raised its benchmark rate by 0.25% to 1.25%, and left the door open for further rate increases as inflation there has breached the stated 2% policy target. This comes the day after Europe’s sovereign debt crisis officially claimed Portugal as its third victim, with an estimated EUR 80bn bailout.

Friday is a relatively important day here as the March Employment & Unemployment data, and Housing Starts will be released for Canada. The US will be reporting Wholesale Trade.

Data released in North America almost met market expectations, taking rates a few basis points lower ahead of tomorrow’s US Nonfarm Payrolls data. In Canada, MoM GDP growth in January was +0.5% (as expected), while in the US, Initial and Continuing Jobless Claims fell short of expected levels, but were within striking distance. Disappointingly, last week’s numbers were revised higher.

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.

The bond market has rallied a touch this morning vs. yesterday’s close on mixed data in the US and global events.

Various measures of the CPI for January were slightly higher than expected (e.g. CPI ex food and energy grew YoY +1.0%, vs. +0.9% expected). Meanwhile, Initial Jobless Claims were 410k (400k exp.) and Continuing Claims were 3,911k (3,893k exp.), demonstrated that labour market weakness still persists in spite of recent favourable numbers.

On the Canadian front, a weak Wholesale Sales growth print of 0.8% for December (+0.9% exp.) disappointed, as did a downward revision of the November reading as well.

The higher CPI numbers tend to exert upward pressure on rates, while the weak employment numbers suggest that rates should remain low. The tiebreaker this morning however, appears to be political risks centered in the Middle East. Everyone knows about regional protests that in some countries are turning quite violent, but last night’s reports that Iran is sending two warships through the Suez Canal has led to some risk being taken off the table.

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.