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Strong economic data shows increases in CMB bonds

  • Andrew Masliwec, Analyst, Capital Markets

O Canada,

I’ll try to keep it brief, as it may be tough to hold your attention before a well-deserved long weekend. The major theme this week was rates and bond prices, as the Bank of Canada has been active hinting at a possible rate hike, sooner rather than later.

Bond Yields
I like numbers, always have. They take up page space and get the point across quickly. The past week has seen some large moves in benchmark bond yields:

                   Today   Monday  2 weeks ago  4 weeks ago  Trump Bump™
(Nov 10) 
 5yr GoC  1.38  1.12  1.13  0.93  0.82
10yr GoC  1.76  1.46  1.52  1.39  1.47

I’ll save you the math, in the 5 year that’s > 20% increase in yields from Monday.  CMB bonds, which are benchmarked to the above bonds, have had similar moves this past week. On Monday, the 5 Year CMB yield was 1.51% and now sits at 1.77%. The 10 year CMB was yielding 1.95% and is now at 2.24%.  There are a few factors that are contributing to the higher yields we are seeing, from hawkish central bankers to NHL hockey teams. I’ll get into some of that below. 

Economic News
On Friday, a major economic indicator came out in Month-over-Month GDP. Canada met consensus expectations smack on at a 0.2% gain in April. This carries the sixth straight month of GDP increase and the 12th in the last 13 months. Year over Year, this would come in at 3.3% which is higher than the BoC’s estimated potential.   This is extra cannon fodder for the widely held view now that July 12th may see the first rate hike since 2010.  Depending on your view of higher interest rates, in part you can thank your local NHL team. Services and entertainment jumped 2.8% in April, mostly in part to 5/7 Canadian NHL clubs making the playoffs. Who knows what would’ve happened if the Jets and Canucks got it together last season.

The reason for the delay on commentary, aside from my 10 words-per-minute speed, was the Business Outlook Survey that came out today at 10:30 am EST.  The BOS is a forward looking survey used by the BoC to judge businesses views and perspectives on topics of interest to the bank and economic activity. In sum, the BoC saw ‘Broad-Based Improvement” in firm’s sentiment about future sales and increases in labour hiring. 

Further to the strong economic data, central bankers here and abroad have been making ‘hawkish’ comments which have helped drive the probability of a July 12th hike to 83%. On Wednesday, while in Portugal for a meeting with the world’s Central Bankers, Stephen Poloz reiterated Wilkins’ comments from two weeks ago (see Jason’s commentary last week). In basics, Poloz mentioned that rates are extraordinarily low, mentioning that the rate cut from the 2015 oil crisis has had the desired effect for the economy. Furthermore, Mario Draghi of the ECB and Mark Carney of the BoE hinted at the possible removal of stimulus, bringing most of the world’s central banks closer to US Policy.

Finally, my friend Boomer gave his opinion on the BoC’s rate decision July 12th: “There's a time to think, and a time to act. And this, gentlemen, is no time to think.”. Personally, I don’t subscribe to his opinion, nor should you, so I am glad it’s in the Bank’s hands.

Happy Canada 150,

Andrew Masliwec, Analyst, Capital Markets