In contrast with the indifference shown in February, bond markets reacted to stock market volatility in March as global markets suffered several tape bombs. [A tape bomb is defined as a significant unexpected news event that moves markets.] Several of the tape bombs last month emanated from the bumptious U.S. president, Donald Trump, as he threatened to initiate a trade war, by potentially imposing tariffs first on steel and aluminum, and later on goods imported from China. A trade war would have unintended consequences including slower global growth and reduced corporate profitability, so the news led to selloffs in equity markets and a flight-to-safety bid for government bonds. The risk off mood also contributed to widening yield spreads for corporate bonds. The FTSE TMX Canada Universe Bond index returned 0.75% in March. As a result, the year-to-date returns climbed into positive territory for the first time on the final day of March, finishing up 0.10%.

Canadian economic news during the month was mixed. Unemployment declined from 5.9% to 5.8% and housing starts were robust. Less positively, the pace of GDP growth in the last quarter of 2017, at 1.7%, was only slightly faster than the tepid pace of the third quarter. In addition, retail sales were weaker than expected, although the shortfall was concentrated in a single sector, autos. Inflation surprised to the high side, coming in at 2.2%, up from 1.7% the previous month. In addition, inflation was expected to move even higher in the next few months as last April’s electricity rebates in Ontario will fall out of the calculation. The Bank of Canada, however, gave no indication that it was concerned about the rise in inflation at its regularly scheduled rate-setting meeting. Indeed, dovish remarks by various Bank officials during March led many observers to push back their forecast of the next rate increase by the Bank from April to July.

In the United States, the economic data was generally positive. Industrial production was well above expectations as manufacturing and mining output offset weakness in utilities caused by more temperate weather in February. Capacity utilization rose the highest level in three years and personal income was better than forecasts. The unemployment rate failed to fall only because very strong job creation was offset by an unusually large jump in the participation rate. Inflation edged higher to 2.2% from 2.1% the previous month. The U.S. Federal Reserve, as expected, increased its overnight target rate by 25 basis points, the sixth increase in this tightening cycle.

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