It’s been a while since the last commentary but not due to a lack of trying. Apparently read rates before a long weekend are in the ones and two’s of people, so it just didn’t make economic sense from a utility perspective. That was also shocking to me. Where else are my loyal readers getting their capital markets and mortgage information from? Is there someone else out there who does it better? Are you cheating on us? I just can’t handle the unknown.
As is tradition, I will now briefly recap the last few weeks in bond yields because that’s what you are here for. The on-the-run 5 years are trading at 2.23% this morning and 10 years are 2.31%. A week ago the 5 year was yielding 2.25% and the 10 was yielding 2.35%. If you want to see what a flat yield curve looks like, that’s pretty close, as the 5-10 spread is 8bps. A year ago, the 5-10 spread was 38 bps. Insert your own opinions about what’s underperforming. Canada Mortgage Bonds are being thinly traded recently, as one trader noted that one day this past week, only 100 Million 10 year CMB’s were traded on screen. That’s a low number in market terms but I think I could stretch out $100 Million over a couple decades. Anyways, the 5 year CMB is trading at 2.53% this morning and the 10 year CMB is trading at 2.70%. Those are some great rates for your mortgage coupon, in my opinion. It’s also worth noting that this month is a CMB issuance month and the 10 year is getting a new maturity date of December 2028.
This week was all about MBS. No, not mortgage-backed securities, but Mohammad Bin Salman, the Crown Prince of Saudi Arabia. If you haven’t heard, which you probably didn’t because you’re a loyal reader, Canada and Saudi Arabia got into a war of words over the arrest of civil rights activists. Since it’s 2018, in retaliation to the tweet sent by Canada Foreign Policy, Saudi Arabia: expelled Canada’s ambassador, suspended all business and trade, cancelled flights, blacklisted Canadian wheat/barley and ordered their asset managers to dump Canadian assets. Shocking to few, Saudi Arabia, a country highly dependent on oil export said that oil exports between the two nations would not be affected. The spat has dominated the media cycle but it seems the market was nonchalant about the tit for tat. The CAD is weaker this week on the news and is currently at $1.31/USD.
This week also brought some factual economic data and not just tweets. This morning brought jobs numbers, which beat expectations. Net Change in Employment for July was surveyed at +17k but actually came in at 54.1K. The unemployment rate was also beat as it was expected at 5.9% and came in at 5.8%. This would typically be strong news. However, looking into the numbers they are a bit deceptive. Total jobs were up 54.1k as mentioned but full-time job growth actually fell by 28,000. This means that majority of the gains were from part time work. Educational services grew by +36.5k, which makes sense for summer months but this will bring added volatility come September (when teachers head back to their full-time work). Finally, core job growth, which is measured by private paid employment, only rose by 5.2k. Overall, this is a hard release to parse through, which is best described as noisy or volatile.
On the real estate front, we actually had a surprising result earlier this week as Canadian housing starts fell in July. Economists predicted starts of 219K while the result was 206.3k as data released by CMHC showed that the July was decreasing from near-historical highs in June. It is worth noting that starts remain well-above historical averages. Multi-unit residential building starts are carrying the brunt of that load.
Finally, the big news in Ontario was buck-a-beer this week as the PC government announced they would be starting a non-financial incentive plan for brewers on August 27th. I won’t get into the semantics and economics of a minimum price per bottle or price floors and how there are complaints about the program not having the desired effect. Instead, I will depart with you the irreplaceable knowledge that there’s a law (the Fairness at the Pumps Act) in Canada that states pints must be 20 ounces if classified as a pint. It’s illegal otherwise. Now that you know, get out there and change the world. For the better.
Bottoms up (safely),