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Daily Market Commentary

A strong print in Canadian CPI this morning has the yield curve flattening quickly in Canada.  Headline CPI @ 1.7% and core at 1.5%, both higher than last month and expectations, also have the loonie lit up with a strong bid.

With US CPI running @ 3.9% headline, you can easily see the price dampening effects of a strong currency.

We've been lonely in this position recently, but persistently strong data out of Canada could actually have the market rethinking its bet on further rate cuts in Canada.  2 years still trade 15 bps under the overnight rate here (as opposed to US 2's @ 36 bps over Fed Funds).  We'd still expect more flattening to come... contingent on more strong data.

Canadian Leading Indicators came in as expected, and slightly stronger than last month at 0.1%.  This follows the US Leading Indicators and has some, such as BCA Research, speculating that Leading indicators have troughed (see the chart in Daily FI Snapshot).  LEI reached about the same depths in January of this year as it had in Jan 2001, and July 1995, but was far deeper into the red in 1981 and 1990.

BCE bonds, which we would have expected to see some action in yesterday, were surprisingly quiet.  While we saw some marginally better levels being posted, we did not see any significant trading in the credit.  Quebec court of appeal is slated to rule on the previously denied bondholder movement to block the deal tomorrow afternoon.  While we're not expecting anything bond-positive out of this, it will be interesting to watch.  Quebec courts have surprised before.  As far as a re-pricing of the deal goes, the most likely scenario still points to a reduction in the stock offer price, rather than any change in terms to the bondholders (which would actually serve to make the deal more expensive to the consortium).  The true test still lies in trying to float billions in junk in what is clearly a buyers market.

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