Market commentary

Jan 20, 2017

Good Morning.

Brace yourself.  According to Wikipedia (so it must be true), Monday January 23rd, known as “Blue Monday”, is scheduled to be the most depressing day of the year.  The date is calculated using a pseudo-scientific equation factoring in variables like weather, debt, time since Christmas, and the general feeling of malaise.  In fairness, Wikipedia also notes that the formula is widely derided by scientists as nonsensical.  Scientists can be such spoilsports.

Of course, the Donald’s inauguration today will surely add to any downward mood spiral we may have already been inclined to experience this weekend. 

Mortgage News
Default Mortgage Insurers led by CMHC raised premiums this week on new single family loan insurance. The increases are directly attributable to the new regulatory capital framework for insurers established by OSFI.  CMHC suggests that the changes will preserve competition in the mortgage loan insurance industry and contribute to financial stability.  Treasury Guy isn’t so sure.  Premiums on multi-family loan insurance are not affected.

Bank of Canada
The Bank of Canada met on Wednesday and left rates unchanged as was widely anticipated.  The statement and MPR suggest a cautiously optimistic BoC that is acutely aware of downside risks attributable to global uncertainty (Trump), economic slack in Canada (Trump), economic divergence from the US (Trump), and the backup in global bond yields (Trump).  In other words, a possible rate cut remains on the table and the bank has room to maneuver if downside risks materialize.  Following the announcement, the shorter end of the curve rallied (prices up yields down) and the curve steepened.  The next scheduled meeting is March 1st

Rates
Speaking of the curve steepening, have you noticed how much the curve has steepened?  At the end of August, the spread between the 5yr GoC and 10yr GoC bonds was just 35 basis points (0.60% vs 0.95%).  Today, the spread is 62 basis points (1.13% vs 1.75%).  Not surprising really.  The term structure of interest rates at any given time reflects the market’s current expectations of future short term interest rates.  In other words, unless rates don’t go up, they will go up.  But if they stay down, they likely won’t go up.  Unless they go up later, which will only happen if they don’t stay lower.  This should be right, eventually, and then, only temporarily. 

At the moment, 5’s and 10’s are trading around 1.13% and 1.75%, just a couple basis points higher than this time last week.

Economic News
Retail sales and inflation numbers came in weaker than expected this morning, suggesting Canada’s economic recovery still has a long way to go.  CPI was up 1.5% in December compared to a year ago (vs 1.7% expected) and Retail sales showed a 0.2% rise versus a forecast 0.5% gain.  Inflation hasn’t exceeded the Bank of Canada’s target of 2.0% for about two years.  Bond prices are up on the soft data and yields are down a few basis points from where we started the day.

Spreads
Generally, credit spreads are enjoying good momentum tighter.  Investors continue to meet new supply enthusiastically.  The CDX Investment Grade index which is a popular benchmark for credit spreads is currently trading around +66 compared to +80 in November.

Fake News
Finally, in the fake news department, the ‘first dogs’ Bo and Sunny will be moving out of the White House today, along with the rest of the Obama family.  When asked if he would have a pet while in office, Donald Trump said “Of course.  I have the best pets.  No one has better pets.  I’m bringing Napoleon, my pet Liger.  It’s pretty much my favourite animal.  It’s like a lion and a tiger mixed…bred for its skills in magic”.  When asked what he planned to do this weekend he said “Whatever I feel like I wanna do, gosh!”  

Keep Calm and Carry On,

Treasury Guy.
Jason Ellis, Managing Director, Capital Markets