Volume 22, Issue 25 June 18, 2018.

 

Source: Globe & Mail.

Back Where We Started
Benjamin Reitzes
Canadian Rates & Macro Strategist

Well, that was quite the eventful week. It started with U.S. headline inflation clocking in at a six-year high of 2.8%. The Fed followed that up with a rate hike and higher dots for both 2018 and 2019. The policy statement was notably upbeat and plainly spoken, clearly reflecting Chair Powell’s direction. The Fed’s upbeat stance was further justified by the very strong May retail sales report. Consumer spending appears to have rebounded with gusto in Q2, which looks to drive GDP growth north of 3%. The ECB outlined its tapering plans, an end to QE, and a potential timeline to raise rates. The latter may have been a bit dovish (given the pledge to stand pat at least through next summer), but winding down QE and looking toward hikes is not. And, the U.S. confirmed tariffs on China, sparking a flight-to-quality bid on Friday.

Despite all of those seemingly positive (or bond bearish) factors, 10-year U.S. Treasury yields ended Thursday little changed. I guess market expectations were just that much higher. Notably the front end of the Treasury curve sold off, pushing 2-year yields to test their cycle highs, but the strength in the longer-end of the curve speaks to the market’s scepticism about the outlook and the Fed’s ability to push rates sustainably higher.

Interestingly, Canada’s bond market outperformed Treasuries broadly, despite having exactly no notable domestic data until Friday morning. Worries about NAFTA, tariff wars, and housing continue to put a premium in the Canadian market. While we share those concerns, we aren’t likely to get any concrete results on any of these fronts ahead of the July 11 monetary policy meeting, keeping our call for a July rate hike intact.

Fears of protectionism have changed the market dynamic, and the unpredictability of the Trump Administration suggests those fears could persist. We’ll see how China reacts, and don’t forget Canada’s retaliatory tariffs are set to start July 1st, and who
knows how the U.S. will react. This is a risk to our forecast.

Where does that leave us? BMO’s call for four Fed hikes in 2018 (total, which leaves two more) looks like a decent bet at this point. We continue to look for the BoC to follow suit in July, but tariffs/protectionism could change the backdrop with the meeting still about a month away. With respect to the broader rates outlook, the first four days of this week suggest interest rates will continue to head higher, while Friday’s trade-fear spasm highlights that there are meaningful risks to the outlook.
Strong growth, rising inflation, winding down QE and higher policy rates all suggest there’s room for longer-term yields to rise further in coming months… assuming they aren’t trumped by a trade war.

Have a great week.

Frank & Mark.

Source: Globe & Mail, BMO Capital Markets, Bank of Canada. The Canada-U.S. tariff discussions coming out of the G7 summit, seemed to increase risks to NAFTA negotiations, putting pressure on the Canadian dollar. The Loonie slipped further as oil prices fell and Italy threatened not to ratify the Comprehensive Economic and Trade Agreement (CETA). The S&P/TSX Composite Index advanced despite the rising trade concerns.  Year-to-date, the TSX is up 0.6% and the benchmark 10-year yield was lower ending the week to yield 2.21%. Trade tensions held the S&P 500 essentially unchanged. As retail sales exceeded forecasts by a large margin and small business confidence climbed to its second highest reading in 45 years, investors began looking forward to blowout earnings in the second quarter. The historic meeting between U.S. President Donald Trump and North Korean leader Kim Jong Un marked a significant reduction in near-term geopolitical risk. Even the mildly hawkish Fed statement, after it raised its target range for federal funds by 0.25%, highlighted a robust economy. Year-to-date, the S&P 500 is up 3.9%, the Dow Jones Industrials are up 1.5%, and the Nasdaq is up 12.2%. The yield on the 10 year Treasury closed at 2.93%.

Source: BMO Capital Markets.

The Good: Household Debt-to-Disposable Income -1.7 ppts to 168% (Q1)—2-yr low; Global Investors bought a net $9.1 bln in Canadian securities (Apr.). The Bad: Manufacturing Sales Volumes -1.9% (Apr.); Manufacturing New Orders -1.6% (Apr.); Existing Home Sales -0.1% (May); MLS Home Price Index +1.0% y/y (May)—weakest since 2009; New Housing Price Index slowed to +1.6% y/y (Apr.); New Motor Vehicle Sales -2.2% y/y (Apr.); Manpower Survey—Net Outlook -1 ppt to +13% (Q3)—but still high.

 

The Good:  Retail Sales +0.8% (May); Business Inventories +0.3% (Apr.); NFIB Small Business Optimism Index +3 pts to 107.8 (May)—34-yr high; U of M Consumer Sentiment +1.3 pts 99.3 (June P); Manpower Survey—Net Outlook steady at +18% (Q3); Initial Claims -4k to 218k (June 9 week). The Bad: Industrial Production -0.1% (May)—and Capacity Utilization -0.2 ppts to 77.9%; Consumer Prices +2.8% y/y (May)—6-yr high; Producer Prices +3.1% y/y; Import Prices +4.3% y/y (May); Budget Deficit widened to $146.8 bln (May).

GATOR ON VACAY? Reptile crosses tarmac at Orlando airport
Source: cnews.canoe.com

 

ORLANDO, Fla. — Most times it’s bad weather or bird strikes that delay flights. This time it was an alligator.
 

Anthony Velardi says his plane had just landed at the Orlando International Airport on Monday when he spotted the large reptile casually lumbering across the tarmac toward a pond. He posted a 10-second video on Facebook.

Velardi says the Spirit Airlines flight had to wait about five minutes before it could taxi to the gate. He says an airport truck arrived at the pond to make sure the alligator didn’t return to the taxiway.

Airport spokeswoman Carolyn Fennell told The Associated Press that such sightings are infrequent, even though 280 acres (110 hectares) of the airport’s land are covered in water.

Fennell says the alligator’s presence didn’t impact any other airport operations.