The protectionist trade policies of the U.S. administration were a major theme in financial markets during August. The resultant uncertainty, combined with slower summer market activity, resulted in bonds trading in a narrow range for most of the month. Indeed, bond yields were little changed from the start of the month until the second last day of August when concerns grew that the NAFTA renegotiations would fail. With U.S president Trump threatening Canada with punitive auto tariffs, bond yields declined as investors discounted potentially slower Canadian economic activity if the trade agreement was ended. The FTSE Canada Universe Bond index returned 0.75% in August and almost exactly reversed the decline experienced in July.

Canadian economic data received during August was somewhat mixed. The unemployment rate fell to 5.8% from 6.0% the previous month, but the underlying details were disappointing. In particular, the participation rate declined, and all of the job creation was in part-time positions as the number of full time jobs dropped. Inflation unexpectedly jumped to 3.0%, although the Bank of Canada’s three measures of core inflation averaged only 2.0%, which suggested the Bank wouldn’t rush to raise interest rates again. The impact of the recently-imposed U.S. tariffs on steel and aluminum had minimal impact on inflation. Growth in Canadian GDP in the second quarter at 2.9% per annum was slightly less than expected although the underlying details suggested that growth in the third quarter would be better than previously thought.

In the United States, economic growth continued to be robust, fuelled in part by the December 2017 tax cuts. Unemployment declined to 3.9% from 4.0% and initial claims for jobless benefits remained very low. The strong labour market helped buoy retail sales that were stronger than forecasts. However, inflation remained troublingly high at 2.9%, and that resulted in real average earnings declining slightly versus year ago levels. The U.S. Federal Reserve left interest rates unchanged in August but was widely expected to raise them at its next meeting on September 26th.