As this is being written, Canada’s labour data has just been released and showed unexpected strength. The unemployment rate fell from 6.3% to 5.9% as job creation was robust and, perhaps more importantly, annual wage growth surged to 2.7% from 2.4% a month earlier. Notwithstanding this good economic news, we do not expect it will prompt the Bank of Canada to raise its administered rates in the near term, for a couple of reasons. First, the labour data is somewhat volatile and relying on a single month’s release would not be prudent. Second, we believe that the Bank wants to avoid causing the exchange rate to strengthen significantly, so it will be slow to follow rate increases by the Fed.

We anticipate that the Fed will raise rates 25 basis points following its December 12th-13th meeting. The move is widely expected, so should have little impact on U.S. bond yields. The negotiations on tax reform between the U.S. Senate and the House have greater potential to roil markets due to the potential increases in the U.S. fiscal deficit and the perceived stimulus to corporate profits.

Strategically, we have portfolio durations slightly shorter than benchmarks, but we have reduced the differentials because of the potential for increased volatility as yearend liquidity declines. We remain overweight the corporate sector as creditworthiness remains good. However, we note that corporate yield spreads are not particularly attractive, and caution may be warranted in the next few months.

 

 

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