In November, Canadian bond prices moved lower and yields rose. In large part, the Canadian market followed the lead of the U.S. bond market, which declined even as the Federal Reserve announced and initiated a second round of quantitative easing (QE2). Stronger economic data in the United States prompted an investor shift toward riskier assets such as stocks and away from bonds. In addition, negative foreign reaction to QE2 may have prompted some selling of U.S. bonds in the period. Late in the month, however, the European sovereign debt crisis flared up again with Ireland requiring European Union and International Monetary Fund support. Uncertainty about the widening circle of EU members requiring support led to a flight to safety bid returning to bonds, and U.S. and Canadian bond prices recovered most of their losses. As measured by the DEX Universe bond index, the Canadian bond market declined 1.09% over the month, having been down as much as 1.87% before recovering. Long term bonds experienced an even more dramatic swing, as they initially dropped 3.10% before recovering for a loss of only 1.37% in the month.

Canadian economic data was mixed in November, but on balance tended to show slowing growth in this country. The broadest measure, GDP, grew at a disappointing 1.0% pace in the third quarter, considerably slower than the 2.5% pace in the United States during the same period. A deteriorating trade balance was the primary factor behind the slower growth, as the change in net exports subtracted over 3% from GDP growth. In September alone, Canada’s trade deficit grew to $2.5 billion from $1.5 billion the month before. Exports fell 1.7% overall, led by a 3.6% decline in exports to the U.S. At the same time, imports grew by 1.2%. Other negative developments included a 9.2% decline in housing starts. In addition, the unemployment rate edged down to 7.9% from 8.0% a month earlier, but only due to a fall in the participation rate; only 3,000 net new jobs were created in the month. The inflation rate, however, jumped to 2.4% from 1.9% the previous month. On the positive side, Canadian retail sales were strong and international buying of Canadian bonds and stocks totalled a robust $12.3 billion in the most recent month.

As noted above, U.S. economic data showed noteworthy improvement. While the unemployment rate held steady at 9.6%, new job creation was stronger than expected and close to the pace necessary to reduce unemployment on a long term basis. As well, initial claims for state unemployment benefits fell to the lowest level in over two years, suggesting that layoffs were abating. In another sign that the labour market was strengthening, the average number of hours worked per week edged up, which was positive for consumer incomes. The better labour situation was a function of improving conditions in both the manufacturing and the service sectors. It also had the effect of boosting consumer confidence, and that translated into stronger than expected retail sales. Car and truck sales, in particular, were strong as consumers felt confident enough to spend on big-ticket items. As can be seen in the chart below, light vehicle sales have been steadily rising from the lows of early 2009, but remain well below pre-crisis levels. That suggests the potential for growing pent-up demand for new vehicles and continued improvement in sales as a result. A key aspect of the rising car sales was the renewed willingness of consumers to borrow; consumer credit unexpectedly increased by the most in two years. The only areas of concern in the U.S. economy were the housing sector, which struggled with the large overhang of foreclosures, and the inflation rate, which remained so low as to keep deflation fears alive.

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