Financial markets experienced considerable volatility in October. The bond market rally that began in mid-September continued in the first half of the month. Risky assets, such as equities, fell sharply as investors worried about slowing economic growth and potential over-valuations, while less risky assets, including bonds, rallied significantly as investors sought to protect their capital. Indications of stronger economic growth, including good news regarding Canadian and U.S. labour markets, were generally ignored. On October 15th, however, following substantial intraday volatility, the markets reversed course, with equities rallying over the balance of the month and bond prices falling. The S&P 500 U.S. equity index initially fell 7.7% from the previous month’s close and then surged to an all-time record by the end of October. Canadian stocks did not fare as well; the S&P/TSX initially fell 7.2%, but was unable to recover the losses by the end of the month. The FTSE TMX Canada Universe Bond index earned 0.57% in October, having been up as much as 1.46% earlier in the period.

For several months, we have been projecting Canadian economic growth to be tepid, in other words, positive but uninspiring. Economic data received during October confirmed that outlook. Unemployment fell to 6.8%, the lowest level since December 2008, on robust but suspiciously volatile job creation. Less positively, manufacturing and retail sales were both weaker than expected and Canada’s trade balance swung into deficit as exports faltered. Canadian GDP in the most recent month (August) was also weaker than forecast at -0.1%. Inflation held steady at 2.0%. The Bank of Canada released its quarterly Monetary Policy Report and acknowledged higher than expected inflation, but indicated concern about the pace of Canadian economic growth and the potential impact of weaker energy prices. The Bank also dropped its reference to being neutral and, in doing so, became the first major central bank to move away from providing forward guidance regarding rates.

U.S. economic activity was somewhat stronger than that in Canada. Unemployment fell to 5.9% from 6.1% on good job creation. In addition, higher numbers of unfilled job openings suggests that the labour market will continue to be favourable. Third quarter GDP grew faster than expected at +3.5% and industrial production grew robustly on a surge in utility production as well as a rebound in manufacturing. Less positively, even though consumer confidence surveys indicated increased optimism, that did not translate into actual spending as consumers actually reduced their expenditures. The U.S. Federal Reserve as expected ended its bond purchase programme known as quantitative easing. In its accompanying statement, the Fed avoided mentioning global growth as a concern, which encouraged some observers to conclude that the Fed would raise interest rates next year even if European growth remained problematic.

October 15th was one of those remarkable days that occur every few years in which markets experience extraordinary volatility and observers struggle for explanations. The catalyst for the volatility appeared to be some moderately weaker U.S. economic data that caused a sharp selloff in equity markets. As well, concerns about the Ebola virus and European economies possibly falling back into recessions helped produce a flight to safety bid for bonds. Rumours also circulated that continued large withdrawals from PIMCO were causing unwinds of their positions in illiquid market conditions. The US Treasury market experienced what appeared to be panic type buying in the morning. A very sharp run up in prices saw 30-year Treasuries trade 5 points higher than the previous day’s close. The trading pattern suggested one very large investor had to get out of a losing position, whatever the cost. Much of the buying occurred through the futures market, as dealers reported relatively light trades in the cash market. The jump in Treasury prices, though, caused global government bond prices, including those of Canada, to move sharply higher too. Over the balance of the day, bond prices retreated, giving up most of the mornings gains.

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