Bond yields climbed steadily through much of September as investors were cautiously optimistic that the NAFTA negotiations would be successfully concluded and that North American central banks would continue to gradually raise short term interest rates. In the end, the optimism was well founded as an agreement to revise the trade agreement was made on the final weekend of the month. The only interruption to the upward trend in yields came in the final week of the month as a modest flight-to-safety bid for bonds emerged from Europe. Bond yields dipped for the final three days of September, ignoring a rate increase by the U.S. Federal Reserve during that time. For the month as a whole, however, bond yields finished higher and prices lower. The FTSE Canada Universe Bond index returned -0.97% in September.

Canadian economic data received during September was mixed but, on balance, positive. Growth in Canadian GDP during July was stronger than expected, while the year-over-year pace remained at a healthy 2.4%. Unemployment rose to 6.0% from 5.8% the previous month as a massive number of part time jobs disappeared. We caution that the labour data has been volatile in recent months and the increase in the unemployment rate is more likely statistical noise than the start of a trend. The trade deficit was much smaller than forecasts, but the improvement was due to export price increases rather than volumes. The headline inflation rate eased from 3.0% to 2.8%, but the core measures followed by the Bank of Canada accelerated to an average of 2.1%. At its September meeting, the Bank did the expected and left its interest rates unchanged, but the rise in the core rates of inflation increased the likelihood of a rate increase at the Bank’s October meeting.

In the United States, economic activity continued to be quite strong. Unemployment remained very low at 3.9%, while growth in average hourly earnings accelerated to 2.9%, the fastest pace in nine years. Consumer and business sentiment remained very optimistic and business investment spending was robust. Inflation declined to 2.7% from 2.9% the prior month, but the U.S. Federal Reserve continued its quarterly pace of interest rate hikes, raising rates 25 basis points on September 26th. On the trade front, notwithstanding U.S. president Trump’s focus on the trade balance, the U.S. trade deficit deteriorated because exports dropped following a surge the previous month when companies tried to beat the imposition of retaliatory tariffs by China and other trading partners.

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