Continuing the up-down-up monthly pattern that has occurred since mid-year, the Canadian bond market rebounded from the decline of September and enjoyed its best monthly performance of the year during October. Weaker economic data and a more dovish outlook for the Bank of Canada allowed investors to ignore higher U.S. bond yields. As well, concerns about the NAFTA renegotiations and tighter mortgage lending rules made investors more pessimistic about Canada’s economic outlook, which encouraged buying of safe-haven bonds. The FTSE TMX Canada Universe Bond index gained 1.64% in October.

Canadian economic data received during October was mixed but, on balance, reinforced the consensus view that the economy was growing more slowly than the torrid pace of the first half of the year. Of particular note, retail sales in August showed an unexpected drop instead of increasing and, late in the month, GDP was shown to have declined slightly in August following no growth the previous month. The somewhat weaker news did not mean that the Canadian economy was in serious trouble, though. Unemployment held steady at 6.2% (the lowest rate in nine years), housing starts remained robust and manufacturing sales were stronger than expected. The Bank of Canada left interest rates unchanged at its October meeting. However, the Bank’s accompanying statement hinted that further rate increases would occur very gradually, and that contributed to the 3.2% decline in the Canadian dollar versus its U.S. counterpart during October.

U.S. economic data, while still somewhat jumbled by the hurricanes, was quite positive. Indeed, U.S. GDP growth during the third quarter, at 3.0%, was stronger than expected and little changed from the second quarter pace of 3.1%. The unemployment rate fell to 4.2%, the lowest rate in 17 years. As a result, consumer confidence was the highest in 17 years. Businesses were also optimistic, as capital spending increased faster than expected. Overall inflation accelerated to 2.2% from 1.9%, although core inflation held steady at 1.7%. As expected, the U.S. Federal Reserve left interest rates unchanged at its October meeting. (more…)