July Outlook
July 15, 2019  |  By Hank Cunningham

Yields fell at all maturities in the U.S. in June. Three month treasury bills, two year treasurys and ten year notes fell 25, 17 and 7 basis points respectively, producing a modestly steeper yield curve. Contrast this with Canadian yields, which were mixed but with little change.

This divergent performance was a result of conspicuous slowing in economic growth in the U.S. while Canada continued to produce positive results in a number of important sectors.

A weak employment report at the beginning of June launched the market call for the Fed to loosen the monetary reins. Analysts cut growth forecasts and inflation, and U.S. exports remained weak. While the U.S. administration relented on the tariffs on Mexico, bond yields fell further; the market began to price in two rate cuts by the Fed.

Powell, in fact, signalled at least one rate cut was coming. This was in response to a series of weak data such as manufacturing, durable goods and capital goods.

This served to add further strength to the loonie, as Canada reported a trade surplus, oil prices were firm, GDP prints were positive and our CPI exceeded not only estimates but the Bank of Canada’s target as inflation rose above 2%.

This led to no change by the Bank of Canada, signalling that it was moving to the sidelines. Some analysts favour a hike in the Bank Rate.

Since month end, the U.S. ten-year note touched 1.95%, but the yield has since risen to 2.10% on this bellwether. Contributing to this turnaround was the surprise increase in both wholesale and retail inflation, along with a strong employment report.

The high yield market was healthy, with an active new issue calendar and spreads over Treasurys tightening modestly.

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