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Daily Market Commentary

Yesterday's late day rally in Canadian bonds was just playing catch-up with the rise in treasuries.  The US market has steadily ticked higher over the past 5 sessions following the drubbing the market took in the second week of the month.  For now, it looks like the market was just oversold and is "filling in the gap" left by the swift decline.  However, persistently weak home sales (more to come Monday) have led yields lower.  The swift rise in yields, should it persist, will wreak havoc on the mortgage market and cause even more damage (though it won't be felt for some months).  Perhaps the treasury market is anticipating this.  The other side of the coin, of course, is persistently strong economic data.


Canada's leading indicators came in at 0.5% as expected this morning, remaining in a flat trend for the better part of two years now.  The more volatile US leading indicators, currently in negative territory, is coming out Tuesday.  It's possible the bond market is seeing through the end of this soft patch (or soft landing?) and onto stronger readings, which would send yields higher.  These are the two main forces playing out currently in the bond market.  The third - inflation - is locked in a battle of its own between those who watch the data and those who watch their wallets.  The former tell us inflation is ebbing (bullish for bonds) as CPI trends lower given this slowdown, the latter tell us inflationary times are back, not seen since Rick Springfield was atop the Billboard charts.



The CAD$ rallied yesterday, as traders had positioned themselves for a light CPI reading.  When it didn't come, the Bank's forecast of raising rates became even more real.  The buying started up in earnest and continued throughout the day.  This morning, the US$ is weak around the world, but not as weak as the CAD$, which is lower against everything, especially the very strong pound and euros.


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