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Daily Market Commentary

Negative news continues in the bond market.  Retail sales this morning was VERY strong and import prices were also higher than expected (mostly attributable to commodities, not consumer goods).  Bonds, however, have had enough.  The market is very oversold at these levels, and markets have quickly rallied after the data was absorbed.


A sustained rally will be hard to form from these levels given the swiftness of the rise in yields.  This morning's action, given the bond unfriendly sales data, could be considered a dead cat bounce.  The 5.25% level got taken out after the 10yr Treasury auction yesterday... not that the results were particularly bad, it's just that they weren't really good.  It's going to take some seriously bearish economic data or some very soft inflation numbers to convince traders to actually rally.  Expect some consolidation at these levels unless tomorrow's PPI comes in very soft.


  Yesterday's Canadian Unit Labour Costs number are a cause for concern.  As Merrill's David Wolfe has outlined, strong ULC is very inflationary and directly negative on corporate profit margins.  Basically, it's a pretty big negative across the board.  Interestingly, the data was lost in the fray yesterday and not much attention was paid to it.  This is further indication that Canadian yields should be narrowing to treasury yields.



The CAD$ has dropped across the board as it too was well overbought.  Once again, we'd expect some consolidation in this market, as jumpy markets around the world try to find a safer spot.


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