The Canadian bond market enjoyed healthy gains in November as bond prices rose and yields fell. Good economic news in Canada and the United States, and there was a lot of it, was generally ignored; investors focused instead on disappointing economic growth in Europe and China. In Europe, speculation continued about potential quantitative easing by the European Central Bank to counter moribund growth and that prompted European bond yields to fall to record lows, with Canadian and U.S. bond yields following in sympathy. In China, the central bank cut interest rates as growth appeared to have slowed below the country’s +7.5% target growth rate. Canadian and U.S. bond prices were also pushed higher by speculators positioning for bond index durations lengthening in early December. The FTSE TMX Canada Bond Universe gained 1.55% in the month.

Canadian economic news in November was generally better than expected. For example, third quarter GDP grew at a +2.8% pace that beat expectations of +2.1%. The unemployment rate plunged to a 6-year low of 6.5% from 6.8% a month earlier, as job growth remained robust. Retail sales were stronger than forecasts, and wholesale sales grew by 1.8% in the month, more than double expectations. In addition, Canada’s trade balance unexpectedly moved back into surplus, as exports rose and imports declined. The only really negative news in November was that inflation surged to 2.4% from 2.0% a month earlier. Notwithstanding four consecutive months of dropping gasoline prices, higher prices for food and clothing, among other items, led overall prices higher.

In the United States, the economic news was also good, although not as uniformly so as in Canada. On the positive side, the estimated pace of U.S. GDP growth in the third quarter was revised up to +3.9% from an earlier estimate of +3.5%. Combined with the +4.6% pace of the second quarter, the two most recent quarters experienced the fastest growth since 2003. Unemployment declined to 5.8% from 5.9% even as the participation rate increased slightly. Manufacturing surveys improved and retail sales were slightly better than forecasts. Less positively, industrial production unexpectedly fell due to weaker utility and mining output. As well, personal income and spending were weaker than expectations. Inflation held steady at 1.7%, rather than falling as forecast, and core inflation accelerated slightly.

Perhaps the most important development in November was the plunge in the price of oil. Oil prices had been declining since they hit the year’s highs ($107.73 per barrel for WTI) in late June, but the decline accelerated in November. News late in the month that OPEC would not cut production to stem the decline resulted in a further sharp drop in prices. By month end, oil had fallen to $66.15 per barrel, down 18% in the month and more than 38% from the June high.

Determining the impact of the fall in the price of oil is like the question of whether a glass is half full or half empty; it depends on your perspective. For the Canadian energy sector, it is clearly a negative development, although with oil prices set in U.S. dollars, the drop in the Canadian exchange rate is offsetting some of the pain. As well, the differential between Canadian oil prices (Western Canadian Select) and U.S. oil prices (West Texas Intermediate) is currently fairly small, which is also beneficial for Canadian producers. If prices stay low for very long, though, there may be reduced spending on drilling and major capital projects such the oil sands. Outside of the energy sector, the drop in oil prices is like a large, broadly based tax cut. Consumers will have more money to spend on other things, and businesses that use a lot of oil, such as airlines, will have improved profitability. Governments, though, will have less royalty and tax revenue as a result of the lower oil price. The impact on inflation is positive, of course, but as we have seen in the Canadian data, it can be offset by other factors. Overall, the drop in oil prices should be stimulative for the global economy.

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