Global bond markets staged a remarkable rally in August with strong price gains and lower yields as trade tensions dominated investors’ attention. The trade war between the United States and China appeared to shift into a dangerous new phase, with new rounds of retaliatory tariffs and a demand from U.S. president Trump that U.S. companies stop doing business in China. Growth in some major economies has already slowed and the increased uncertainty led some central banks to ease their respective monetary policies during the month. The central banks’ moves combined with economic concerns caused global bond yields to fall to historic lows. The Canadian bond market participated in the rally but failed to hit record low yields which several markets experienced. The FTSE Canada Universe Bond index returned 1.88% in August.

Canadian economic news during August was generally positive. Of particular note, Canadian GDP was estimated to have grown in the second quarter at a robust rate of 3.7%, well above the 3.0% consensus and the 2.3% pace forecast by the Bank of Canada. However, the details of the GDP release showed that most of the growth came from a rebound in exports that is not expected to be repeated and domestic consumption was fairly weak. Other positive data included housing starts, wholesale trade, and retail sales which all exceeded expectations. The only significant negative news in the month was the labour report which saw unemployment rise to 5.7% from 5.5% and the loss of 24,200 jobs. The one bright spot in that report was that hourly wage growth accelerated to 4.5% above year ago levels. Consumer price inflation on a monthly basis was much stronger than expected, which left the annual rate unchanged at 2.0%. On balance, the Canadian data did not support the Bank of Canada easing monetary policy in the near term.

In the United States, the economic data was somewhat mixed, with the consumer optimistic but businesses becoming more cautious about the trade uncertainty. Unemployment remained very low and the number of job openings continued to exceed the number of unemployed people. The favourable labour situation made consumers confident and consequently personal spending remained strong. As well, the consumer retains significant firepower because the savings rate is close to its highest levels in the last 25 years. However, business sentiment surveys indicated growing concern about the trade situation and slowing global growth. The manufacturing sector, in particular, has shown little to no growth in the last several months as supply chains have been disrupted, investment spending curtailed, and export opportunities diminished.

The U.S. economic data in August was overshadowed by a deterioration in the trade dispute with China. Less than 24 hours after the U.S. Federal Reserve reduced its interest rates on July 31st, U.S. president Trump announced sweeping new tariffs on Chinese imports. The Chinese government eventually responded with retaliatory tariffs on some U.S. goods, prompting further tariff increases by the United States. Little progress was made in resolving the trade dispute during the month. Formal negotiations broke off in May and have not restarted. Even setting a date for a potential resumption of the talks in September proved elusive.

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