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Market commentary - August 5, 2016

Aug 5, 2016

Good Morning Canadian mortgage enthusiasts,

Let’s start with a quick recap of the Canadian Employment and US Payroll reports released at 8:30 this morning.

The Net Change in Employment in Canada disappointed at -31k vs +10k expected.  The unemployment rate moved a tick higher to 6.9%.  The details were actually worse than the headline.  Full time employment was -71k while part time employment was +40k.  GoC bond yields are 2-3 basis points lower on the news.

The Change in Nonfarm Payrolls surprised to the upside at +255k vs +180k expected and the unemployment rate remained unchanged at 4.9%.  US Treasury bond prices have, predictably, moved in the opposite direction to GoC bonds and have fallen sharply and are now yielding bout 6bps higher on the day.

For context, 5 year GoC bond yields are currently at 0.59% vs 0.60% 1 week ago and 0.51% 4 weeks ago.  10yr GoC bond yields are currently at 1.04% vs 1.03% 1 week ago and 0.96% 4 weeks ago.

Oil prices have slipped back this morning after a brief two day rally.  US West Texas Intermediate (“WTI”) is currently trading around $41.60.  That’s compared to a 1 year low of $26.20 back in February and a 1 year high of $51.20 in June.  The recent downward pressure on price has been attributed to oversupply and a dip in Chinese imports.  The impact in oil country has been evident.  Downtown office vacancies in Calgary are approaching 20% including 3 million square feet of new space under construction.  Multi-family vacancies are at 3.5%.  During a quarterly earnings call on Wednesday, Genworth Financial predicted softer residential housing prices in Alberta (down 5-10%) and that job losses are expected to negatively impact delinquencies.  Meanwhile the good people of Fort McMurray are enduring biblical flooding.  Seriously, these people cannot catch a break.

Genworth also mentioned new capital requirements from OSFI for default insurance business in cities where the house price to income metric exceeds a prescribed threshold.  As a result, new home buyers can expect higher premiums in these cities soon. 

The big news in the market yesterday was from the Bank of England.  In what was described as “sledgehammer stimulus” the BoE cut its benchmark rate in half from 0.50% to 0.25% and introduced programs to buy both government and corporate bonds.  How does this impact the spread on your next commercial mortgage?  It probably doesn’t in any meaningful or measurable way, but I thought I should mention it.

Speaking of central banks, the US Fed met last Wednesday and as expected, left rates unchanged.  They next meet on September 21st with an 18% implied probability of a rate HIKE.  Back at home, the BoC will meet on September 7th with a 6% implied probability of a rate CUT.

In Canada Mortgage Bond news, CHT will be in the market later this month re-opening both the 10 year 1.90% September 2026 and the 5 year FRN (CDOR+17.5) maturing September 2021.  Expect pricing during the week of the 15th.  CMB spreads have moved modestly narrower this week.

Finally, if you ever want to watch that old Bar-Mitzvah or Wedding video again, you better get out to stores soon.  Japan’s Funai Electric, which claims to be the world’s last VCR manufacturer, says it will cease product of the machines this month.  At one point, Funai sold as many as 15 million units a year.  Alas, the clunky VCR has since been replaced by an array of new technologies.  In related news, Sony has sensed an opening and has announced that it will be re-introducing the Betamax.  Sony executives were quoted as saying “this is the chance we’ve been waiting for!”

As you head into the weekend, I would be remiss if I didn’t at least acknowledge the start of the 2016 Olympic Games in Rio.  I can’t really say I’m a fan, but the Olympics do offer a rare opportunity to enjoy some sports you might not usually see.  Solo synchronized swimming is a favourite and who doesn’t love Race Walking?  I’m sure the ancient Greeks are rolling in their graves.  Great sports from past Olympics that I’d like to see again?  How about Tug-of-War and live pigeon shooting?

Go Canada GO!

Treasury Guy,

Jason Ellis, Managing Director, Capital Markets