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Jason Ellis reviews Canada’s unemployment rate and credit and market news

Jan 12, 2018
Capital Markets update
Jason Ellis, Senior Vice President and Managing Director, Capital Markets

Welcome back mortgage people.

Well…it feels like work again.  The holidays already feel like a long time ago in a galaxy far, far away.  Alas, now it’s time to get back to the Bank of Canada, Bitcoin, credit spreads and Kraft Dinner…and apparently, alliteration.

We begin our story one week ago.  All was peaceful on Friday January 5th until Canada’s unemployment rate plunged to 5.7%, the lowest level in more than 40 years.  78,600 new jobs were created (compared to 2,000 expected), indicative of rapidly diminishing slack in the labour market.  That’s the kind of data that could motivate the Bank of Canada to take action.  In fact, the implied probability of a rate hike on January 17thth surged from 41% to 80% on the news.  The implied probability is based on where Overnight Index Swaps (OIS) are trading.  OIS is a derivative in which two parties exchange, for an agreed period, a fixed interest rate for a floating overnight rate.  These swaps provide an excellent gauge of market expectations for future Bank policy changes.

The employment news had a predictable effect on bond yields.  5yr bonds quickly sold off and ended the day about 7 basis points higher at 1.97%.  (Prices go down, yields go up…but you know that already).

The economic optimism was extended on Monday with the Canadian Business Outlook Survey.  BoC headlines included phrases like “wage pressure picking up” and “production capacity pressure at highest since recession”.  All that is ‘hawkish’ news.   Not that the BoC needed much more evidence, but the report added to the case for a rate hike next Wednesday.  Probability jumped from 80% to 92% and 5 year bond yields climbed another 5 bps to top 2.00% for the first time since September 2013.

The volatility (and fun!) didn’t end there though.  NAFTA headlines starting hitting the wires on Wednesday suggesting that Canada was increasingly convinced President Trump would shortly announce that the US is pulling out of the trade deal.  Bonds rallied hard (prices up) on the news and 5 year bond yields fell from 2.03% back down to 1.95%.  No NAFTA could create headwinds to growth, and put a damper on Bank of Canada plans.  In response, rate hike probability drops back down to 70%.  Not long after, however, a White House official states that there is no change in Trump’s position on NAFTA and much of the move is reversed.  BoC implied probability back to 86% as of this morning.  What a ride!

In Summary

So…that’s a few minutes of your life you’ll never get back, but long story short, here’s where we are at the moment: 

5 year bond yields are at 1.98%.  10 year bond yields are at 2.17%.  Those are up 17 and 21 basis points respectively since Christmas and the market is poised for a 25bp rate hike by the BoC next week.

Speaking of Trump…

Trump Quote: “What do we want Haitians here for?  Why do we want all these people from Africa here?  Why do we want all these people from ‘sh##hole’ countries?”  Seriously.  He said that.

Not surprisingly, that kind of comment renewed talks around the 25th Amendment which would allow the president’s Cabinet to remove him from office. 

Trump responded to the threat with the following tweet:

 “…my two greatest assets have been mental stability and being, like, really smart…I went from successful businessman, to top TV Star to President (on my first try).  I think that would qualify as not smart, but genius…and a very stable genius at that!” 

He forgot to mention that he was really, really, really ridiculously good looking too. 

Credit Market and New Issues

All good.  Seriously good.  As a noted commentator at TD often says, “when the ducks are quaking, feed them”.  Investors are swarming for new issue product as evidenced by a few deals launched this week.   Yesterday, John Deere issued $300 million 5 year notes rated ‘A’ at GoC +70.  I know tractors aren’t particularly  relevant to mortgages, but of note was the fact that the deal was 7 times oversubscribed and was priced in the context of where a big bank would print a deposit note.  Crazy!  Earlier in the week Manulife Bank issued a $500 million 5 year note at GoC+84…also 7x oversubscribed and instantly trading 4-5bps tighter in the secondary market.  Finally, in a deal with something to do with real estate, Choice Properties REIT was in the market with a ‘deal of the year’ type trade.  A total of $650 million BBB notes were issued in 4.2 and 7.0 year terms at GoC +103 and +140 respectively.  Massive demand supported by the fact that each bond order came with  boxes of Presidents Choice Mini Quiches,  Jalapeno Cheese Bites, and a Puff Pastry Hors D’ Oeuvres collection. 

Finally

I should stop here.  This has gone on longer than you wanted and I’ve got to get moving.  I’m supposed be at Tosche Station to pick up some power converters and if I don’t have those units in the south ridge repaired by midday there’ll be hell to pay.  Seriously, my job description goes way beyond bond trading. 

Live long and prosper and may the force be with you…or whatever you nerds say.  Regardless, it’s Friday, might as well go for a soda. 

Cheers,

Treasury Guy

 

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