The contraction in U.S. GDP in the first quarter is not the start of a recession, in our opinion, but rather it reflected the confluence of a number of negative factors including the West coast ports strike, severe winter weather, and re-tooling at some large auto plants. The labour market continues to tighten and the housing sector is showing improvement. While consumers have so far chosen to save rather than spend the benefits of the drop in gasoline prices over the last several months, this may prove temporary with consumption potentially strengthening in coming months. The GDP contraction did likely provide the Fed with additional breathing room before it starts to raise interest rates, with December looking more likely as the starting point.

The U.S. GDP contraction also meant that Canada did not get the hoped-for boost from our largest trading partner’s economic recovery. With the Bank of Canada looking for exports and business investment spending to lead Canadian economic growth, the U.S. soft patch increased the likelihood of another rate cut in Canada later this year. We hope that doesn’t occur because of the distortions it would cause, but another rate cut is a possibility.

Portfolio durations are currently close to benchmarks due to the uncertainty of the Greek debt negotiations, the index related demand for bonds at month end, and heightened volatility. Our longer term inclination is reduce durations to more defensive levels, but in the short term the bond market may be in a noisy trading range. Provincial yield spreads, which narrowed earlier this year, seem to have stabilized more recently. As a result of the spread narrowing, provincial bonds are looking somewhat expensive versus corporate issues and we are looking at shifting the sector allocation accordingly.

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