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Daily Market Commentary

Yields are clearly heading higher in the market, as Friday's strong jobs numbers show no let-up in the economy.  As we previously mentioned, the key to holding this economy together in the face of a major housing slump was jobs.  As long as people are employed, they will continue to pay their mortgages.  This will keep the pain experienced in that sector contained.  The other effect of persistently strong employment is stubborn inflation numbers.  While trending downward, they are very sticky and have the bond market (and more importantly the central banks) worried.  Normally, a yield curve will go from inverted to normally sloped as the central banks lower the short term rates in response to a slowing economy.  Now, however, most central banks are either on hold or tightening, making our usual escape route unlikely.  Normalization may come from steepening out the long end of the curve rather than significant lowering of the short end.  It is worth noting, however, that even though Fed Funds futures (and their options) are predicting a very slight chance of one rate cut this calendar year, US treasury bills are all trading well below the Fed Funds rates.  Usually the two are more closely linked.  This either indicates a flight to quality or a market disconnect.



Don't get in the way of the CAD$.  Blockbuster employment had the Loonie soaring Friday, and the strength is holding today.  A rate hike is a done deal tomorrow from the Bank and traders are looking to more now.  When will the manufacturers yell mercy?  More importantly, when will the strong currency's effect show up in our economic numbers?


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