The leaves are finally changing colour which means it’s “that time” of the year again. By “that time”, I am of course referring to pumpkin spice season, in which food and drink companies make all sorts of pumpkin spice abominations in order to get that final sales push before year end. You can see it from doughnuts to lattes, to even beers. The winner this year? Well I think that would have to be the always delicious Spam, the meat in the can product for you (us) Millennials, which had a limited run of pumpkin spiced meat in Walmart stores in the USA. Delicious.
Back to the important stuff, bond yields are having a week of all weeks, as they are about 25 bps higher than a week ago. The current 5 year Canada is yielding about 1.52% and the 10 year is yielding 1.50%. That’s inverted for those of you who are keeping track. A week ago, the 5 year was yielding 1.25% and the 10 year was yielding 1.23%. But you shouldn’t feel like you missed out on some low rates last week, as 3 months ago the 5 year yield was 1.55% and the 10 year was 1.61%.
On the credit curve Canada Mortgage Bonds reacted similarly. The 5 year CMB is yielding 1.83% while a week ago it was 1.57%. The 10 year is currently yielding 1.93% and a week ago it was 1.67%. At least the CMB curve looks somewhat like those ‘upward sloping yield curves’ you read so much about in text books.
All this volatility in the rate space may not be good for your investments, but it does favour a lender like First National who offers their clients flexibility on rate locks. As a client of First National, you get the benefit of taking advantage of rates that suit your borrowing needs with our flexible rate lock program. After all, that’s even part of my job. Let us help you.
Economics Releases and Tariffs
So what caused the jump in bond yields this week? Well, just looking at the 5 year Canada bond, it’s about 10 bps higher on the day, and today is a half day in the bond market, so you know traders would’ve preferred to sit on their hands this morning. A move that big could only mean Trump was tweeting again, or we had strong economic data come out. For once, it was more of the latter.
This morning had employment data come out for September. The net change in employment beat by a much wider margin than expected, with +53.7K jobs created vs. the +7.5K expected. That’s a huge (!) increase, but even stronger was full time jobs coming in at 70,000 new jobs. Remember that we had a large August number ( +81K) so many in the market were expecting a reversion to the mean. That didn’t happen and bond prices plummeted.
Unemployment for September was also lower than expected, that’s good, with the unemployment rate in Canada coming at 5.5% vs. the 5.7% expected. Further to the strong release, we had wage growth increase much more than expected as well coming it at +4.3% vs. the estimated +3.8%. As one economist has pointed out, the “Phillips Curve” is alive and well in Canada. If you’re not familiar, it’s the economic concept that as unemployment decreases, wages must increase to attract the smaller talent pool and those increase wage costs are passed along into increased prices. The Bank of Canada uses concepts like those and will be looking at the strong wage growth and low unemployment when they consider their ideal overnight rate at their next meeting. The market has estimated the probability of any rate cuts by the BoC much lower this morning after the release. The cut probability currently sits at a 13% in 2019.
I would be remiss if I didn’t briefly mention the trade war between the USA and China. Positive trade headlines also helped move the market this week as some timelines and ground work for a trade deal have started. At this point though, you’ve heard it all before. This has been going on since 2018 and I’m even tired writing about it, so it’s probably best to take any China news tweet-by-tweet and day-by-day. After all, I mostly get my China news from a source I can trust, South Park.
Finally, to follow-up on the repo news from last commentary, the Fed decided they would start T-bill purchases again to help relieve the overnight repo rate south of the border. Continuing T-bill purchases sends more cash into the financial system, which some in the market considered “Quantitative Easing” or QE. However, the Fed president Jerome Powell said don’t call it that, so I won’t. So far, there’s been no spillover in my borrowing rates, so that’s nice.
I’ll leave it there for this week. As I mentioned previously, the bond market has an early close today for Thanksgiving/Columbus Day and there’s a pumpkin spiced craft beer somewhere with my name on it.
Have a great Thanksgiving,