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Daily Market Commentary

Worldwide bonds are ticking lower this morning as the Bank of England governor Mervyn King reported that inflation will accelerate and exceed their target if they lower their overnight rate.  Recall last week the BoE kept rates unchanged, despite serious issues in their housing market.

Remember these numbers, and recall that investors have to hurdle them to make positive real returns:

CPI and two year risk free yields

?          UK CPI @ 3.0% YoY - 2 year @ 4.625%


?          German (EU) CPI @ 2.6%   2 year @ 3.91%


?          Canadian CPI @ 1.4%  - 2 year @ 2.84%


?          USA CPI @ 3.9% as reported this morning - 2 year @ 2.54%


?          Australia CPI @ 4.2% -  2 year @ 6.43%


Notice that only strong currency countries are posting decent real returns (as weak currencies lead to inflated CPI).  It sure makes US two year treasuries look expensive - a sentiment shared by none other than Bill Gross of PIMCO.  The market is currently pricing in a large probability that Fed Funds remain unchanged through the summer, where the murky outlook is for rates to rise again.

 Loonies are the winner this morning, trading through par this morning, where they briefly reached yesterday.  As we've mentioned before, since peaking around 0.92 in November, our dollar has traded in a narrower and narrower range and volatility is creeping its way out of the market.  This morning, with Natural Gas trading sharply higher, the CAD$ has been given a bid.  Gas is still a far bigger contributor to loonie strength than Oil in our exports.

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