Since mid-August, Canadian bond market participants have dramatically reduced their expectations for interest rate cuts, and along with that, we’ve witnessed a deflating inverted yield curve. Just in the last week, Canadian benchmark yields have risen by about 30 bps across most maturities. With little news coming out of central banks, it’s worth looking at the various rumours, facts and fads to find an explanation.
Facts: Solid job creation in Canada with hourly wages at 4.30% and housing starts over 220k for the fifth time in the last six months; U.S. CPI is at 2.40% and the September unemployment rate there dropped to a half-century low of 3.50%; the University of Michigan Consumer Sentiment Index is on the rise at 96%.
Rumours: Fresh trade talks between the U.S. and China and a positive tone from Mr. Trump’s twitter account; Brexit talks which indicate that we may end up with a Soft Brexit, a Hard Brexit or potentially no Brexit at all.
Fads: Continuously rising global equity markets despite decreasing expectations for growth (the IMF just reduced its forecast to 3%, the slowest since the financial crisis) and disappointing manufacturing numbers.
The rapid adjustment of prices to new information – whether rumours, facts or fads – is exhibited in the markets in the form of volatility. I had a discussion last week with a client who was trying to reconcile the upbeat equity market with the increasing red flags coming out of the bond market, particularly among corporates. “Don’t traditionally bond markets get it right?” she asked.
I told her to examine the facts, question the rumours and be suspect of anyone riding the fads. But also to accept that as long as all three exist, it’s best to prepare for more volatility ahead.
Vice President and Portfolio Manager
Active and Strategic Fixed Income Team
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