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Daily Market Commentary

It doesn't look like a rally is gaining any traction here.  Every time the bonds try to move up, the gains are quick and then we resume a grinding flat to lower market.  There is plenty of data this week, the most important of which is the employment numbers out of the US tomorrow.  This morning's productivity was up and Labor cost was down (it's a US number - thus the spelling - I'll talk about Canadian Labour next week).  Mixed reactions in the bond market on these numbers.  Productivity indicates strength in the economy, but Labor costs show a lack of inflation pressure on wages.


ISM non-manufacturing is due at 10am. It will be interesting to see if it follows the manufacturing sector (reported Tuesday) and shows similar strength.  We are seeing some steepening of the yield curve at this point (Canada 2yr-30yr at 5 bps).  Interestingly in Canada, BAX futures are showing short term rates rising by 25bps over the next year.  This certainly is not enough to be conclusive, but it is interesting to see market participants not expecting overnight rates to decline.  In fact, RBC has revised their forecasts for O/N rates 25bps in Q4 and thrice in '08.  The inversion out to five years has also slimmed to 10 bps.


  US outperformance continues as the 10yr spread has narrowed to 45 bps.  Look for a pause in the CAD$ rally to give this trade more validity.



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