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Market Commentary - April 1, 2016

Apr 1, 2016

Good morning,

Rates bounced around a bit this this week.  Five year GoC’s opened at 0.75% on Monday, closed at 0.64% on Tuesday and are currently back to 0.70%.  Ten year GoC’s opened at 1.30% on Monday, closed at 1.17% on Tuesday and are currently back to 1.26%.

Let’s follow the bouncing ball and see what happened along the way:

Monday: US Personal Income and Spending data for February came in weak relative to expectations and prior month revisions wiped out most of the gains reported for January.  Inflation indicators in the report were also weaker than expected which suggests the Fed can take a pass on hiking rates at their April meeting.  Bonds rally (prices up and yields down) on the news.  The implied probability of a hike by the Fed on April 27th is 0%.

Tuesday: US Federal Reserve Chair Janet Yellen added fuel to the bond rally with her ‘dovish’ comments in a speech at the Economic Club of New York.  Specifically, she said that caution in raising rates is “especially warranted” and that the Fed has “considerable scope” for stimulus.  It’s the same old story of an uncertain global economy and its downside pressure on US growth.  Remember, ’dovish’ means less concerned with inflation and/or more concerned with economic growth.  A ‘dovish’ central bank is happy to maintain an accommodative monetary policy, which of course means lower rates and higher bond prices (aka bullish for bonds).  Dizzying logic. 

Wednesday: Bonds gave back most of their gains from yesterday as a report from the ADP Research Institute showed the US added more jobs in March than forecast.  This may have given some traders cold feet going into the always exciting Nonfarm payroll data on Friday.  In new issue spread news, BMO issued a two tranche senior deposit note deal including a $1.5 billion five year fixed rate note.  The deal was launched at GoC+125 and priced at GoC+123 with huge support.  Spreads are generally tighter this week. 

Thursday: January Real GDP in Canada increased by a strong 0.6% vs. 0.3% expected.  Some economists are now calling for Q1 growth of 2.5% to 3.0%.  That’s well ahead of the Bank of Canada forecast of 1.0% and bonds sold off (yields higher) as a result.  This should put the BoC on the sidelines for the time being.  The implied probability of a cut by the BoC on April 13th is just 5%. 

Friday: US Change in Nonfarm payrolls came in at 215k vs. 205k expected.  The unemployment rate ticked up to 5.0% from 4.9%, but largely due to an increase in participation.  Overall, no real surprises.  Bond prices are touch lower (yields higer) on the news. 

In one final piece of depressing news, with the mathematical elimination of Ottawa on Wednesday night, The Stanley Cup playoffs will go ahead without any of the seven Canadian teams.  I wish it were an April Fool’s joke, but alas, it isn’t.  In these difficult times, I often reflect on the teachings of the Zen philosopher Basha who once wrote, “A flute with no holes, is not a flute.  A donut with no hole, is a Danish.”  Think about that for a minute.

Gunga Galunga,

Treasury Guy

Jason Ellis
Managing Director, Capital Markets