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Market Commentary - April 8, 2016

Apr 8, 2016

Good morning,

Canadian employment data for March was released this morning.  Net change in employment came in at +40.6k, well ahead of the +10.0k expected.  The unemployment rate dropped two ticks to 7.1%.  Underlying details like full time vs part time hiring was also robust.  Bonds sold off sharply after the data pushing 5 and 10yr yields 6-7 basis points higher.  Why?  This is a very complicated case.  You now, a ‘lotta ins, a ‘lotta outs, a ‘lotta what-have-yous.  No…not really.  Strong employment data is one of the things that make a central bank ‘hawkish’ which means a propensity to worry about inflation.  A hawkish bank will have less accommodative monetary policy…ergo, higher yields.  See?  Bond trading is easy!  The Bank of Canada next meets on April 13th and the probability of a 0.25% cut is less than 5%...down from about 15% two weeks ago.

Bonds had rallied earlier in the week on renewed concern that global economic growth is slowing but the sell-off this morning has taken yields back to virtually unchanged from last week.  5’s are trading at 0.70% (0.69% 1 week ago and 0.69% 1 month ago).  10’s are trading at 1.23% (1.23% 1 week ago and 1.25% 1 month ago).

Investment grade credit spreads including Canada Mortgage Bonds and Provincials gave back a few basis points this week, but overall, the move in credit spreads since February has been very positive.  Senior bank deposit notes have tightened as much 30 basis points since then and as a result, posted mortgage rates at some of the Sched 1 banks are coming down just in time for the busy and important spring residential market.  

Finally, a request to my tens of readers.  If you have questions, comments or even a good joke, please feel free to drop me a note at treasury@firstnational.ca .  We could do a ‘Treasury Mailbag’ kind of thing. 

Anyway, spring really is in the air this weekend.  The temperature in Toronto may be below zero, but the Masters is on and the Blue Jays home opener is tonight.  Let’s make the most of it.

Have a good weekend,

Treasury Guy.

Jason Ellis, Managing Director, Capital Markets