Following the robust gains enjoyed the previous month, it was not surprising to see bond investors exercise a little caution during April. Initially, yields rose and bond prices declined as investors wondered whether they had been too pessimistic about future economic growth and whether their expectations for central bank rate reductions had been too aggressive. However, as the month progressed, the bond market reversed course and yields began falling back toward their starting levels. It seemed bond investors preferred a wait-and-see approach regarding economic activity and changes to central bank policy. The cautious attitude of bond investors stood in stark contrast with the ebullience of equity investors. Both the S&P/TSX Canadian index and the S&P 500 U.S. index completed their recoveries from their late-2018 corrections, each rising more than 3% in April and hitting all-time record highs. The FTSE Canada Universe Bond index, in contrast, returned -0.10% in April.

Canadian economic data received in April was a combination of positive and negative. Unemployment held steady at 5.8%, as a small drop in the number of jobs was offset by a slightly lower participation rate. Housing starts in March rebounded from weather-depressed levels the previous month. The poor weather in February appeared to also impact many other segments of the economy, as Canadian GDP shrank -0.1% that month. Compared with year ago levels, the pace of economic growth declined to only 1.1%. The annual rate of inflation rose to 1.9% from 1.5%, with the second consecutive monthly increase of 0.7%.

The Bank of Canada left its interest rates unchanged at its April meeting, but it lowered its forecast for growth in 2019 and removed references to future rate hikes in its announcement. The Bank said that it believed Canada’s relatively weak growth currently warranted an accommodative monetary stance. By acknowledging that monetary policy is accommodative the Bank was indicating that it was not yet at a neutral rate, but the bond market interpreted the Bank’s shift to mean the next move would likely be a rate reduction.

U.S. economic data was mostly positive in April. Unemployment held steady at the very low rate of 3.8% and first quarter growth in American GDP was estimated to have accelerated to an annual rate of 3.2%. Details of the GDP release were less optimistic, however, because some of the upside surprise was due to growth in inventories and net trade, which were thought to be more volatile factors. Retail sales in March were much stronger than expected and the housing sector was stable. CPI inflation increased to 1.9% from 1.5% a month ago, but the increase was not thought to be the start of a trend higher.

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