The bond market gave up some of the gains of the last two months, with the year-to-date returns of most bonds falling back into negative territory. In Canada, bond prices were little changed in the first half of the month but moved lower following stronger than expected economic and inflation data. Rising bond yields was a global theme in the month as investors anticipated reduced monetary stimulus from various central banks in coming months, including a reduction in stimulus by the Bank of Japan. The bond market mostly ignored increasing trade tensions, as well as U.S. president Trump’s attempts to influence the supposedly independent Federal Reserve. The FTSE Canada Universe Bond index returned -0.74% in July.

Canadian economic data received during July was generally favourable. GDP growth in May was better than expectations and the 2.6% year-over-year increase was not far behind the 2.8% pace of the fiscally boosted U.S. economy. Housing starts were stronger than forecasts and retail sales surged in the most recent month on better car sales and a rebound from inclement weather the previous month. While the unemployment rate rose to 6.0% from 5.8%, the increase was due to higher participation as job creation remained robust. Over the last 12 months total Canadian employment increased by 215,000 jobs, a very good result.

The Bank of Canada raised its overnight lending rate to 1.50% from 1.25% on July 11th. The move had little initial impact on bond yields, in part because it had been widely anticipated, but also because the Bank was not expected to raise interest rates again before early next year. However, an unexpected jump in the inflation rate to a six year high of 2.5% later in the month led many market participants to anticipate the Bank raising rates again this October, and bond yields moved higher in reaction.

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