Every month this year it seems the bond market has been dominated by the twists and turns of the ongoing U.S./China trade war, and November was no different. Optimism that a partial “Phase 1” deal between the two countries was imminent led to a sharp selloff in bonds at the start of November. Yields of 10-year Canada bonds and U.S. Treasuries jumped 20 and 25 basis points, respectively, in the first week of the month. However, the optimism quickly faded, and yields began falling back, ending the month only slightly higher than where they began. Economic data in Canada and the United States was satisfactory and did not provide any impetus for either the Bank of Canada or the Federal Reserve to change their respective monetary policies at their upcoming December meetings. The FTSE Canada Universe Bond index returned +0.52% in November.

Canadian economic news during November indicated that the economy was continuing to operate near full capacity. The unemployment rate was unchanged at the historically low 5.5% rate. All-items and core measures of inflation continued to straddle the Bank of Canada’s 2% target. Trade data showed a decline in exports, but retail sales and wholesale trade were better than expected. On the final business day of November, we learned that Canadian GDP had decelerated to a 1.3% pace in third quarter, down from the 3.5% rate in the second quarter. The slowdown was the result of a large drop in inventories and a small decline in exports. But other details were more positive, with an unexpected, but sharp, increase in business investment and final domestic demand growing by a robust 3.2% pace. As well, the decline in inventories suggests stronger future growth as they are rebuilt. In addition, revisions to previous quarters’ data left the year over year increase in GDP at 1.7% (near the long term potential growth rate) and increased the estimated savings rate to 3.2% from less than 2% previously. On balance, the data didn’t show any need for the Bank of Canada to change its monetary stance at its upcoming meeting.

In the United States, analysis of the economic data was complicated by the impact of the 40-day GM strike but, on balance, the economy remained healthy. Unemployment edged up to 3.6% from 3.5% the previous month, but job creation was much better than expected. The estimated pace of growth in U.S. GDP during the third quarter was revised higher to 2.1%, up from the initial 1.9% rate. Durable goods orders data early in the month were weaker than expected, although subsequent data showed business investment spending rebounding from two months of contraction. Headline CPI inflation rose slightly to 1.8%, but the core measure of inflation edged lower to 2.3%. Federal Reserve members gave a number of speeches during the month that suggested that, following three consecutive rate reductions, the U.S. central bank was on hold, waiting to see how the economy responded to the modest monetary easing.

The Canadian yield curve flattened in November as yields of short and mid term bonds rose between 4 and 7 basis points, while 30-year yields moved lower by 3 basis points. Demand for long term bonds, at least in part, reflected the December 2nd extension in index durations as a result of coupon payments and shorter bonds no longer qualifying for the index. In the United States the pattern was similar to the Canadian market as yields of all U.S. Treasuries rose, but the increase was smallest for 30-year bonds.

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