The Canadian bond market focussed on domestic considerations in May, rather than foreign ones. Weak economic data and lower expectations for future growth prompted a rally in Canadian bond prices and a decline in yields. Canadian bonds often take their lead from U.S. bonds, but in May Canadian bonds ignored higher U.S. yields brought on by speculation of an imminent interest rate increase by the U.S. central bank, the Federal Reserve. The FTSE TMX Canada Universe Bond index earned 0.91% in May.

Canadian economic news in May was disappointing. Canadian GDP for March shrank for the second consecutive month and growth over the whole first quarter was weaker than expected. Retail sales were weaker than forecasts and manufacturing sales declined for the second consecutive month. The Canadian trade balance was much worse than expected, posting the largest deficit on record as exports plunged more rapidly than imports. Unemployment held steady, but only because the participation rate declined. Even though economic activity was slower than expected, inflation rose to 1.7% from 1.3% a month earlier.

Adding to the gloom were the Fort McMurray wildfires that caused the evacuation of more than 80,000 residents and the reduction of more than one million barrels a day of oil production. The impact of the wildfires will be felt in second quarter economic data and many economists have revised their expectations for Canadian GDP during that period to declines of 1.0% to 1.5%. The cutbacks in Canadian oil production contributed to higher oil prices in May. The West Texas Intermediate standard briefly traded above US$50 per barrel before settling back, but finished the month with a 6.9% gain. The higher oil price did not benefit the Canadian exchange rate, however, because of the lower domestic production. The Loonie declined from U.S. 79.6₵ to 76.4₵ in May.

In contrast with Canada, most U.S. economic data in May was stronger than forecasts. Retail sales were better than expected, as were housing starts and sales of new and existing homes. Industrial production was ahead of forecasts; manufacturing increased modestly and a strong rebound in utilities more than offset weakness in oil and gas production. Personal income met expectations and spending surged. The unemployment rate held steady at 5.0%, but the number of job openings increased to the second highest on record. There were relatively few disappointing economic releases that included weak business investment spending and inflation at 1.1%, well below the Fed’s 2% target.

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