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Market Commentary - March 18, 2016

Mar 18, 2016

Good Morning,

5 and 10 year GoC yields are around 0.72% and 1.30% as I type this…about 8bps lower than last Friday morning.  Let’s see what happened this week, shall we?

Canada Housing Trust (“CHT”) priced the new 1.25% June 2021 Canada Mortgage Bond on Tuesday.  After launching the deal at +50 on Monday, the actual print came at +52.  meh.  Deal went fine and spreads should resume their slow grind tighter.  CMB’s are still ‘cheap’ and investors should pick away at them.  Generally, high grade credit spreads continue to improve.

Speaking of spreads, Allied Properties REIT and H&R REIT both announced unsecured 5 year term bank facilitates this week with pricing well through unsecured bonds.  Fixed income investors will have to be better bid or they will be seeing less issuance in the future. 

Also on Tuesday, manufacturing sales climbed 2.3% for January to top $53 billion marking the highest level on record according to Statistics Canada.  The report exceeded economists’ expectations.  Auto parts drove (no pun) the strong showing.  In up to the moment news, Canadian retail sales released this morning rose at the fastest pace in almost six years.  Sales for January rose 2.1% month over month vs. 0.6% expected.  Bond yields jumped a few basis points higher following the announcement.  (Remember…strong retail sales can lead to inflation which makes central bankers … anyone … anyone … ”Hawkish”, which means an inclination towards…anyone...Higher rates).

Of course, the big event this week was the FOMC meeting and announcement on Wednesday.  FOMC (aka ‘the Fed’) is the Federal Open Market Committee.  The FOMC left rates unchanged (at 0.25%-0.50%), as expected, and remains concerned about global economic developments eliciting a more cautious course in the months ahead.  The Summary of Economic Projections (aka the “Dot Plot”) revealed lower medians for future policy rates.  It now shows only 50bps of tightening in 2016, down from 100bps in December.  Median projections for GDP growth for 2016 and 2017 were also trimmed.  Policy is likely on hold until at least June.  Reduced uncertainty about the global economy and/or gains in employment and core inflation seem necessary for the next hike.

The Canadian dollar rose over 2 cents after the announcement with USD/CAD falling from 1.335 to 1.3125.  Canadian stocks also rose as commodities producers gained with crude and gold as the prospect for lower US rates sank the US dollar and in turn boosted the prices of resources.  Oil is now trading over $40/barrel.  For context, maple syrup is $2,250/barrel.  Seriously.  The S&P TSX has jumped 14% from a two and a half year low in January making it one of the best performing markets in the world this year.

Finally, economists are expecting a spectacular fall in productivity over the next two weeks as millions of slackers focus their attention on the annual NCAA basketball tournament known as March Madness.  Here’s a fun fact…the odds of filling out a perfect bracket are 1 in 9,223,372,036,854,854,775,808…basically one in a quintillion.  I’ve done it twice.  I also invented the question mark.

Have a great weekend and may the upsets be ever in your favour,

Jason Ellis
Managing Director, Capital Markets