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Bond yields and Federal Reserve update

  • Andrew Masliwec, Analyst, Capital Markets

Greetings and welcome to another market commentary provided by yours truly.

Oh, no. I’m not Jason. So if you came for stellar movie references, decades of experience and unparalleled financial wit, this isn’t the week. However, if you want to skim economic news, Canadian interest rates and what the “Dotard” said to the “Rocket Man”, you’ve come to the right place.

After the constant build up in yields since the September 6th rate hike, there was finally a reprieve in the selloff of Canadian benchmark bonds. On Monday, we had some comments by a Bank of Canada member which were interpreted across the board as “dovish”.  Basically, the Bank of Canada member Lane mentioned that they would be watching the impact of higher interest rates closely. Duh, that’s their job. Regardless, yields came crashing down toward the end of the day Monday, with the 5 year GoC’s yield dropping to 1.77%. Shortly after the drop, yields are back up once again due a couple of pieces of economic data follow.

As of writing, the 5 year Canada bond is yielding 1.81% and the 10 year is yielding 2.11%. My key takeaway is that 5 year GoC yields are now approximately 20bps off 5 year highs, so before that happens, it could be a good time to refinance that 10-year mortgage you forgot you had.

Midweek, Canada was the side show on the economic front. The US counterparts to the Bank of Canada, the Federal Reserve, decided to leave their federal funds rate unchanged this month. The Fed did mention that their unwinding of the balance sheet (selling treasuries) would begin in October. Overall, it was a pretty status quo result for the meeting and if you ever need a cure for insomnia, watch the live press conference.

A major piece of Canadian economic data came out this Friday morning. Everyone knows Friday’s don’t get any better than newly released Year-over-Year and Month-over-Month CPI (inflation) data. The headline is that the CPI data actually missed estimates, with the August MoM CPI coming it at 0.2% and YoY CPI at 1.4%. This result is a projected average inflation measure of about 1.5% up from 1.2% in July. When inflation is predicted to rise, the BoC will be more likely to raise rates once again. The probability of another 2017 hike is 47.5% for October and 68.5% for December.

To wrap up, markets were once again also reacting to the battle of wits between the President of the United States and our favourite North Korean dictator.  In an impassioned speech in front of the UN, Trump put North Korea on notice by affectionately referring to Kim Jung Un as a suicidal rocket man. In response, Kim Jong Un called him a “Dotard”, which is worth a google, and threatened to test an Hydrogen Bomb in the Pacific.  Kids, what will they say next!

Have a good weekend
Andrew Masliwec, Analyst, Capital Markets