The Canadian bond market was remarkably stable in March as a federal budget, a U.S. rate increase and legislative turmoil in that country, and the United Kingdom’s decision to exit the European Union were taken in stride by investors, with each event having minimal impact on the market. Bond yields in Canada and the United States remained within their respective trading ranges that began in early December. The FTSE TMX Canada Universe Bond index returned 0.41% in March.

Some observers, including the Bank of Canada, continued to be worried about the pace of Canadian economic growth. However, the economic data in recent months has been, in actuality, quite favourable. For example, following annualised growth rates of 3.8% and 2.6% in the third and fourth quarters of last year, Canadian GDP surged 0.6% this past January, thereby suggesting acceleration in the first quarter of 2017. The unemployment rate dropped to 6.6% from 6.8% and full time job creation was quite strong, although some other labour market details were less robust. Retail sales, wholesale trade, and manufacturing sales were all stronger than expectations and Canada enjoyed a trade surplus for the third consecutive month. The federal government appeared to recognize the improvement in the Canadian economy as its budget avoided significant new stimulus measures. The Bank of Canada, in contrast, continued to express concerns that the Canadian economy was underperforming, leaving its trendsetting interest rates unchanged at extraordinarily low levels.

The situation in the United States is the mirror image of Canada: everyone is optimistic about the U.S. economy, but the data is less supportive. In particular, consumer spending, which accounts for over 60% of U.S. economic activity, was weaker than expected. Indeed, after allowing for inflation, personal spending actually declined in the most recent month. Inflation, though, increased to 2.7% from 2.5% a month earlier. That leant support to the Federal Reserve Board’s mid-month decision to raise its administered rates again. The Fed’s rate increase was completely expected by the markets, but the accompanying statement was somewhat more dovish regarding future moves. That led to bond yields easing lower over the balance of the month. Also supportive of lower bond yields was the high-profile failure by President Trump and House Republican leaders to repeal Obamacare. Inasmuch as this had been a major campaign promise of Trump and the Republican Party, their inability to agree on the required legislation suggested that other parts of Trump’s electoral platform such as tax cuts and infrastructure spending might also come to naught. In that event, the bond market selloff that followed the election might be reversed.

Late in the month, the U.K. government made the formal announcement to exit the European Union, initiating a 2-year negotiating period for its departure. The decision follows the surprise referendum result last June and has the potential to cause significant changes in the British and European economies. While the U.K. government hopes that it will be able to maintain its free trade relationship with the EU, the Europeans may not be accommodating. The direct impact on the Canadian economy of Brexit should be minimal, but if the negotiations do not go well, there could develop a flight-to-safety bid for bonds that would benefit the Canadian bond market.

Elsewhere in Europe, the closely-watched Dutch election saw the governing prime minister handily defeat the far right nationalist challenger who had promised to pull the Netherlands out of the European Union. In contrast with the Brexit referendum and the election of Donald Trump, the Dutch result was a defeat for the so-called populist trend in politics. The next major test will be the two stage French presidential election in late April and early May.

The price of oil fell sharply in March as U.S. inventories were higher than expected and U.S. shale producers appeared to have increased production to offset OPEC’s supply reductions. From $54 per barrel at the end of February, the WTI price plunged to $47 per barrel in mid March, before staging a partial recovery to just over $50 per barrel by the end of the month. The weaker oil price, if it lasts, would mean lower inflation and thus reduce pressure on central banks to raise interest rates. It would also slow the recovery in Canada’s energy sector.

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