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Market Commentary: A review of the FOMC meeting and CMB preview

Aug 2, 2019
Capital Markets update
Jason Ellis, Chief Operating Officer

Greetings,

Hello.  Is anybody out there?  Just nod if you can hear me…

It’s the Friday of a long weekend and the bond markets close early today.  So, you know, trade your bonds and hedge your mortgages before lunch. 

In recognition of the half day in the bond market, today’s posting will be about half length.  We’ve all got places to go and people to see so let’s get to it.  Relax…it’s just the basic facts.

This week can be boiled down to three key events.  The FOMC rate cut on Wednesday, the Trump China tweet on Thursday, and US Non-Farm Payrolls this morning.

FOMC

In one of the most anticipated FOMC meetings in recent history the market had a 100% probability of at least a 25bp rate cut priced in and the Fed delivered.  Chairman Powell emphasized global uncertainties and muted inflation pressures as reason for the “mid-cycle adjustment” to policy.  The market interpreted this as hawkish relative to expectations.  In other words, this not expected to mark the start of a longer easing cycle.  The market responded by reducing the probability of additional rate cuts resulting in a flattening of the yield curve. 

In a footnote to the FED, Canadian May GDP beat expectations on Wednesday at +1.4% YoY.  Consensus had called for +1.3% as compared to +1.5% in April. 

The Tweet Heard Around the World

President Donald “Tariff Man” Trump’s sudden announcement Thursday afternoon that he planned to impose a “small additional tariff of 10%” on the remaining $300 billion of Chinese goods annually shocked the markets.  Trump also expressed deep dissatisfaction with the Fed’s cautious language after the rate cut.  In combination, the comments triggered a sharp rally in bonds and rates fell across the curve by as much as 8 basis points.

Non-Farm Payrolls

Earlier this morning, we learned that the US economy added 164,000 jobs in July, in line with expectations.  The unemployment rate remained at 3.7%.  Wages are up 3.2% from a year earlier, a rate that remains above inflation.  Nothing too shocking and market response to the data was muted.

CMB Preview

Looking ahead this month we are expecting the 10 year fixed rate and 5 year floating rate CMB deals to be launched on August 13th.  The 10 year deal will be a re-opening of the September 2029 maturity.  Current market levels suggest pricing around GoC+42 compared to GoC+46 when it was first issued in May.  So that’s nice. 

The FRN will be a re-opening of the September 2024 maturity and current market levels suggest pricing around CDOR -1 basis point.  In other FRN news, RBC issued a 1 year floater this week at CDOR+5.

Special Update from the Commercial Mortgage Department

Jeremy Wedgbury, SVP of Commercial Mortgages and noted charcuterie arranger is pleased to report record new commercial mortgage origination volume of $2.6 billion in the second quarter, a 50% increase compared to $1.7 billion a year ago.  This special update is approved by Treasury Guy. 

Finally

Here’s a piece of wisdom from the Zen philosopher Basho.  ‘A flute with no holes is not a flute.  A donut with no hole is a danish.  Basho was a funny guy.

Have a great weekend.

Treasury Guy

 

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