Market commentary - June 10, 2016

Jun 10, 2016


Headline news this morning was Canadian Employment data.  Net change was better than expected at +13.8k vs +1.8k.  The details were good, with large gains in full-time and salaried employment driving the increase at the expense of those reporting to be self-employed.  The unemployment rate was expected to creep up from 7.1% to 7.2%, but actually fell to 6.9%, partially due to a lower participation rate. 

Bond prices fell back modestly from earlier levels following the data, but the “risk-off” theme for this week continues this morning.  Yields are 3-4bps lower this morning despite the better than expected employment data and CMB/Provincial spreads ended another several basis points wider on the week.  Next week’s new five year CMB deal ($5 billion re-opening of the 1.25% Jun 2021) and rumors of additional provincial supply have weighed on the market.

5 year GoC yields are now below 0.60% and as impressive as the rally has been (30bps since the end of April) the flattening of the yield curve has been equally impressive.  The 2’s-5’s spread is now just 10 basis points (0.49% vs 0.59%) compared to 24 basis points at the end of April (0.69% vs 0.93%).  What does it mean?  The market expects a neutral monetary policy for the foreseeable future.  Interest rate futures confirm this conclusion for now with virtually no chance of a move by the BoC at the July 13th meeting priced into Overnight Index Swaps.

The disappointing May US Non-Farm payroll report and the relatively balanced comments by Fed Chair Yellen this week should also keep US rates in check in the near term.  The employment report doesn’t take a 2016 rate hike off the table, but recent volatility in the data points to a cautious and gradual approach.  The Fed meets next week on June 15th.  Fed Fund futures suggest a 0% chance of a hike.

Yesterday, the BoC released its Financial System Review in which they viewed overall risk to the financial system as roughly unchanged, but did highlight that household vulnerabilities had moved higher and warned borrowers not to extrapolate recent housing price growth rates in Toronto and Vancouver when making decisions. D’uh.

Speaking of price growth rates, a lot of people have been asking me about First National’s stock price.  For context, FN closed at another all-time high yesterday at $32.39.  That’s up 40% YTD.  A good first quarter and a $0.15 increase to the dividend have definitely contributed to the bid.  Other than that, all I can tell you is that there appears to be more buyers than sellers.  At this pace, Stephen might buy the Royal Bank and Moray might buy France.

Speaking of Stephen and Moray, here’s my fun fact for today. The odds of winning the Lotto 6-49 is about 1 in 14 million, but don’t worry if you don’t win, the odds of becoming a billionaire are actually 1 in 7 million.  So you got that going for you.

Have a great weekend,

Treasury Guy

Jason Ellis, Managing Director of Capital Markets