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Daily Market Commentary

Canada saw a rally in bonds yesterday, with a bull steepening of the yield curve.  The short end of the curve was on fire as traders start pricing out the possibility of a Bank of Canada rate hike in September, as they had previously alluded to.  Recent market turmoil and central banks around the world doing the exact opposite of tightening has the market thinking the BoC won't be a renegade and hike in the face of his easing buddies.

 

3 month Canada treasury bills have rallied 20 bps in the last 4 trading sessions, and BAX futures also rallied 20 cents, all but eliminating the market's prediction of a rate hike.  Surprisingly, the CAD$ has held in quite firm, even rallying somewhat yesterday before easing this morning.

 

 

The data parade started this morning with a very hot headline PPI number coming in at 4.0% YoY, from last month's 3.3%.  While the core was tamer at 2.3%, that's still a tick up from June's 1.8% print.  Almost all the surprise upside was in energy - Gasoline, Nat gas and energy goods.  We will have a clearer picture of the full economy tomorrow when CPI is released.  Throw in the profit warning from WalMart this morning, and you might find the market shrugging off this inflation print unless the CPI tomorrow confirms the spike upwards. 

 

The Treasury market does not like this number, and the ten years are being sold down to yield 4.80%.  Canada bonds have largely ignored this data and are still slightly higher on the day, most of the action and the liquidity once again taking place in the short end of the yield curve.  Have a look at the chart in the Daily FI snapshot of the 3 month BAX Futures, as the market adjusted to BoC hikes over the spring, only to quickly turn around recently and all but wipe out the chances of a second hike.

 

 



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