U.S. economic data during February was generally positive, but as in Canada was often ignored because it didn’t address the impact of the coronavirus. Unemployment rose to 3.6% from 3.5%, as a rise in the participation rate more than offset strong job creation. Business and consumer confidence surveys were stronger for both sectors and new home sales hit the highest level since July 2007. Inflation rose to 2.5% from 2.3% the previous month. On the final trading day of the month, Federal Reserve Chair, Jay Powell, indicated that the Fed stood ready to provide stimulus should the U.S. economy need it. As this is being written, the Fed has made an emergency rate cut of 50 basis points in its first inter-meeting move since 2008.

The Canadian yield curve steepened in February in the flight-to-safety environment and as investors anticipated interest rate cuts by the Bank of Canada. The yields of 2-year Canada bonds fell 29 basis points, while 30-year yields declined only 12 basis points. The yield moves in the U.S. bond market were much larger, likely the result of the U.S. being considered a safe haven by global investors as well as the sharp declines in the U.S. equity markets. The yields of 2 and 30-year Treasuries dropped 46 and 34 basis points, respectively, in the month. By the end of February, Treasury yields were lower than Canada bond yields for maturities shorter than 10 years, while long term Treasury yields were still higher. Other than a very brief period in late 2017, Canada bond yields have not been above U.S. levels since late 2013.

Federal bonds earned 1.05% in February as lower yields resulted in price gains. The returns of provincial bonds, at 0.61%, trailed federal issues because their yield spreads widened an average of 7 basis points in the month, which meant reduced price gains. The yield spreads on investment grade corporate bonds widened an average of 11 basis points in the month, resulting in a sector return of only 0.42% in the period. New issue supply was good at $8.3 billion, but tailed off in the final, volatile week of the month. The only significant issue that week was a three-tranche deal from Hydro One that featured the lowest ever coupon for a long term corporate bond at 2.71%. High yield bonds returned 0.30% in February, once again underperforming higher quality issues in the more cautious environment. Real Return Bonds returned 1.06%, as expectations for growth to slow reduced demand for inflation protection notwithstanding the upside surprise in the January data. Preferred shares rose slightly in value during the first three weeks of February but fell sharply in the final week as common stocks plummeted and bonds yields fell. On the month, preferred shares declined -3.38%.

In the last month, the coronavirus epidemic has spread to every continent except Antarctica. The number of new cases reported daily has fallen in China, but there has been an upsurge in countries as diverse as South Korea, Iran, and Italy. To date, there have been approximately 92,200 confirmed cases globally, and 3,100 deaths. As tragic as the human toll is, the economic impact is likely to be larger. Already, travel and tourism companies have seen sharp declines in business and manufacturers dependent on the Chinese supply chain are at risk of supply shortages. In addition, commodity prices have fallen as China’s demand dropped while it temporarily shut down much of its economy to deal with the epidemic. Should the virus become more prevalent domestically, we would expect to see retail sales contract as shoppers choose to stay home. Global economic activity, including that in Canada, is likely to be slow in the first half of this year.

1 2 3