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Market Commentary – February 19, 2016

Feb 19, 2016

Good Morning.

Welcome to the Doom and Gloom edition.  What goes up must come down.  Risk assets are under pressure (again), global equity markets are losing ground and oil remains close to $30 as traders have been unconvinced by developments from the major oil producing nations.  Market volatility continues to be top of mind and the brief window optimism that seemed to open up near the end of last week is closing.  

Bond yields in Canada are up this week.  5 year bond yields are around 0.60% this morning after bouncing off a low of 0.48% last Wednesday.  10 year bond yields are around 1.11% after dipping just below 1.00% last Wednesday.  The US based investment grade spread index (CDX IG25) continues to move higher and now stands at 120 compared to 80 in November and 60 one year ago.  Higher is worse in case you were wondering.

In up to the minute news, reports this morning showed that Canada’s inflation rate increased the most since November 2014.  You may recall that BoC Governor Poloz kept the overnight rate at 0.5% last month suggesting that the rapid depreciation in the currency could lead to higher inflation and today’s report would seem to support that view. Year over year core CPI is 2.0% and slightly exceeded forecasts of 1.9%.  Don’t let that inflation rate fool you though…Canadian retail sales fell at the fastest pace in more than 5 years in December.  Sales decreased 2.2% and exceeded all 20 forecasts in a Bloomberg survey of economists.  Sigh.

The next BoC meeting is scheduled for March 9th.  The implied probability of a 25bp cut in rates is around 18%.  The Fed next meets on March 16th and the implied probability of a hike is only 6%.

In new issue news, yesterday featured the 10yr Fixed Rate and 5yr Floating Rate Canada Mortgage Bond issues.  The 10yr was the third and final opening of the December 2025 maturity date.  It priced 9 basis points wider than the previous issue in November.  The next issue in May will feature a new September 2026 maturity date.  The FRN was also a re-opening and was similarly priced 10 basis points wider than November.

In other news, the Toonie turns twenty today!  (That is a rarely seen naturally occurring alliteration).  Anyway, almost 885 million toonies have been circulated since 1996 but according to the Royal Canadian Mint, most of those have been lost in sock drawers.   Despite this, the toonie is still only worth a $1.45ie on this milestone anniversary.  

Finally, the motorcycle show opens at the Exhibition Place in Toronto today.  If anything can melt away the winter blues and the fear and loathing of this market, buying a new motorcycle will do it.

Later,

Jason Ellis
Managing Director, Capital Markets