Read a review of this week’s BoC announcements here

  • Andrew Masliwec, Analyst, Capital Markets

Good Morning,

Welcome back from the Labour Day long weekend. I hope you are all recovered and ready for some hard-hitting commentary. It’s Andrew filling in for the Treasury Guy this week. To our loyal readers who are wondering where Jason has been, well, he’s been travelling from event-to-event in a tireless schedule to ensure First National stays the largest non-bank lender in Canada and number one in your hearts. You might have even seen him speak recently at said events and if you missed it, reach out to one of our helpful commercial teams to get you more involved. I also hear some of them are licensed, if you are into that sort of thing. It’s not for me… but I digress, you are stuck with me today so let’s get started.


It’s always good to see where rates have moved recently. The 5-year GoC is yielding 2.21% and the 10-year is yielding 2.28% as of writing. That’s a spread of about 7bps, which is tighter than a month ago, August 8th, when it was about 9bps. At that time, the 5s were yielding 2.27% and the 10s were yielding 2.36%. Exactly a year ago, the 5-10 spread was 26bps or .26%, oh how times have changed.  On the credit or CMB side, the current 5-year CMB is yielding 2.50% ( I rounded down) and the current 10-year CMB is yielding 2.675% ( I’m still confused which Ontario curriculum to follow, are we rounding up or down on .5s now?). Now credit spreads, or CHT’s credit worthiness over the Government of Canada’s, has been pretty unchanged as of late. The 5 year CMB spread is about 29bps, which is unchanged from a month ago and is only 3 bps tighter than a year ago. The 10 year CMB is similarly unchanged. The 10-year CMB spread is currently 39 bps, unchanged from last month but a whole 8bps tighter than a year ago. It’s probably due to multiple market factors, like liquidity, but like a colleague always mentions, it’s good to see the CMB’s trade closer to the GoC’s – they are both backed by the Queen herself after all.

Bank of Canada Decision and Economic News

As was highly expected, the Bank of Canada left interest rates unchanged on Wednesday. As they always do, the side-by-side comparison of the BoC statement made some headlines as there were some notable changes. The BoC touched on how recent data, notably how recent GDP prints being in line with their estimates, reinforces the thinking that higher rates are warranted in the future. You’ve heard this before, it’s called being “data dependent”.  The BoC also touched on monitoring how households are adjusting to higher mortgage rates and the new housing policies implemented last year. Although they highlighted business investment proceeding and strong exports as positives, NAFTA still remains a key concern for them.  Finally, they highlighted how they will take a ‘gradual approach’ guided by data (more on this later). The market widely expected all of this and the bond market remained relatively flat.  Without a NAFTA resolution, it’s becoming difficult for market participants to see the BoC hiking this year.  Speaking of NAFTA, those negotiations are still ongoing with everyday bringing a new headline. I am not going to summarize it all but basically, high-powered North American trade lawyers are battling it out over dairy, autos and the CBC, in order to better serve you, the North American. Maybe.

The Senior Deputy Governor at the BoC, Carolyn Wilkins, also turned the market on its head briefly Thursday in a bout some are dubbing “selective” or “exciting” headlining. We hear a lot about that these days. The breaking headline from her economic progress report was that, “The BOC debated dropping ‘gradual approach’ to rate hikes”. This was seen as almost a direct contradiction of Wednesday’s speech. As a headline, this caused a lot of selling of 2s or the short-end of the yield curve (rates were higher by 4bps).  When the report was fully released and digested,  it was much more balanced and yields came down.  That’s why sometimes 140 characters just isn’t enough to make in-depth macroeconomic policy headlines.

Finally, all of Thursday’s events were forgotten when our job and labour numbers came out Friday and stunk to the high heavens. August employment came in at -54.1k vs the +5k the market was expecting.  Some decline was expected due to education shrinking from last print in July, but that category was actually up 5k in total. The weakness came from the goods side, down -30.4k from July, and manufacturing/construction showing sharp declines.  Our unemployment rate was also higher than expected, 6% actual vs 5.9% surveyed. If that wasn’t bad enough, the USA had their job numbers the exact same time and day, but were almost the complete opposite.  USA wages came in as their hourly earnings are now almost at pre-2009-crisis highs. In more exciting headlining, I had a colleague tell me that the US data was probably just a bad Excel sort. Maybe, but probably not. As a reaction to strong US markets, Canada typically trades lower as the USA becomes more appealing and that’s what happened Friday with yields rising and Canadian bonds selling off.

That’s all for this week. If anyone is looking for me, I am in mourning at the bar after work, drinking equal parts spiced rum and Butter Ripple liqueur.

Have a good weekend,