Bonds enjoyed a flight-to-safety bid in November as continued equity volatility, plunging oil prices, and diminished expectations for economic growth caused investors to become more cautious about risk. Bond yields rose modestly until November 8th as stock markets rallied following the sharp sell-offs in October. However, government bond yields declined over the balance of the month because of a reversal in the stock market trend, mixed economic data, ongoing trade tensions, and a growing consensus that both the Bank of Canada and the U.S. Federal Reserve would slow the pace of their future interest rate increases. Corporate bonds were not immune to the risk-off sentiment, as their yield spreads widened sharply during the month. The FTSE Canada Universe Bond index returned 1.02% in November.

Canadian economic data was mixed in the period. On the positive side, housing starts were stronger than expected and the unemployment rate declined to 5.8% from 5.9%. The details of the labour market report were less rosy, though, with the participation rate falling from 65.4% to 65.2% and disappointing growth in average hourly earnings. On the negative side, growth in Canadian GDP during September and over the last 12 months was weaker than expected and inflation ticked up to 2.4% from 2.2% the previous month. The historical data received during the month was of reduced interest, however, as investors tried to anticipate the impact on future growth as oil prices declined further from their early-October highs. The price of West Texas Intermediate (WTI) grade fell 14.6% in the month, while Western Canadian Select (WCS) plunged 40% partway through the month before partially recovering into month end. News late in the month that General Motors would be closing a major factory in Oshawa added to the gloomy sentiment.

U.S. economic data continued to point to that economy operating at full capacity, albeit with some sectors beginning to level off. Unemployment remained at 3.7%, the lowest rate since the 1960’s. In addition, the participation rate rose to 62.9% from 62.7% and growth in average hourly earnings rose to 3.1% from 2.8%. In the positive labour environment, it was not surprising to see retail sales grow strongly, however vehicle sales showed no growth versus year ago levels. The U.S. housing sector also appears to have stopped growing with both housing starts and existing home sales occurring at the same pace or less than two years ago. The Fed did the expected at its November 8th meeting and left its interest rates unchanged. However, late in the month, Fed Chair Jay Powell commented that the Fed might be closer than previously thought to a neutral interest rate. That suggested there would be fewer rate increases likely in 2019, prompting a further decline in bond yields.

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