In light of the whirlwind of activity in the past week, Edward Jong, Head of Fixed Income at TriDelta Investment Counsel offers us a special Canadian Investment Review: a concise summary and practical view of what went on in the world’s markets last week and what it might mean for Canada.
“There were many highlights, and low points to start of August. Weak economic releases; particularly the data released by the Institute for Supply Management (ISM) for manufacturers and GDP, overshadowed the debt ceiling resolution. Even the affirmation of the triple-A rating of U.S. Treasuries did nothing to allay the renewed concerns for the health of the U.S. economy. Putting this against the back-drop of the European financial situation, all worked against the equity market, and to the benefit of government bonds.
Both Canadian and U.S. 10-year yields ended last week roughly around 2.80% (and had been hovering around 2.95% for the most part of the summer), entered into a new range, closing out the week around 2.45%. Equity markets and European matters aside, the issues at heart today is the substantial increased concern for economic growth, lack of (esp. U.S.) government policy actions available, and no lack of investor complacency.
With the debt ceiling matter behind, the concern is the implications of the American austerity program, and how this would work against economic growth going forward. The inability to enact prudent fiscal policy measures during this soft-patch; coupled with Fed Funds at 0.50%, means the path of least resistance is for the yield curve to continue flattening (i.e. longer dated maturities outperforming the front-end of the yield curve), with a bias for yields to gradually shift lower over the intermediate term.
The release of the July Non-Farm Payroll report was bitter sweet. The immediate reaction was negative for interest rates (but positive for equities) as jobs were created, since market participants throughout the week were worked up into a possible contraction in payroll. The creation of 117,000 jobs in July along with upward revisions totally 50,000 positions for the past two months, will for a short time reduce some of the panic and fear built up during the beginning of the week. We believe this relief is short-lived as there are structural issues with American job creation. The participation rate dropped to a 27-year low; meaning that there are many discouraged job seekers. Should they be actively searching, the unemployment rate is sure to be much higher than the 9.1%.
In contrast, the Canadian employment release continues to portray a decent Canadian job situation. In light of the struggles State-side, we continue to argue that the Bank of Canada’s interest rate policy will remain on hold for longer than the market anticipates. We remain cautiously optimist for the prospects of the fixed income markets, and would continue to remain long duration, with a bias for the yield curve to flatten.”