As expected, the Bank of Canada left its interest rates unchanged on October 30th. However, the accompanying statement and subsequent comments by Governor Poloz downplayed the strength of the labour situation and the housing market, instead emphasizing the risks to trade and weak business investment spending. The dovish tilt of the Bank’s statements surprised the market and shorter term bond yields plunged 14 to 16 basis points that day.

In the United States, the economic data was also mixed, but the 38-day strike at General Motors likely distorted some of the economic data received in October. The unemployment rate fell to the remarkably low rate of 3.5% from 3.7%, but wage growth over the past year slowed to 2.9% from 3.2%. The lack of significant wage gains despite very low unemployment has been a puzzling feature of this economic cycle. Investment spending by businesses was weak, reflecting the uncertainty caused by the Trump-initiated trade disputes. Retail sales were also weaker than expected. Headline CPI inflation held steady at 1.7%, but core prices were also unchanged at the higher-than-desired level of 2.4%.

As expected, the Federal Reserve lowered its trendsetting interest rates by 25 basis points at its meeting on October 30th, the third consecutive reduction. The accompanying statement and press conference by Fed Chair Jerome Powell hinted that the Fed would now pause in its easing cycle and monitor the U.S. economy for a few months before adjusting monetary policy further. While both the rate reduction and the subsequent pause were exactly as the consensus expected, the U.S. bond market rallied over the remainder of the month and global bonds followed in sympathy.

The Canadian yield curve steepened slightly in October, with short term bond yields declining and longer term yields rising slightly. Specifically, the yield of 2-year Canada bonds finished 6 basis points lower while 10 and 30-year bond yields closed 5 basis points higher. The relatively small net changes belied the volatility during the month; 10-year Canada bond yields fluctuated in a 39 basis point range during October. Notwithstanding the different actions (or inactions) of the Bank of Canada and the Fed, the changes in the Canadian yield curve were quite similar to those of the U.S. yield curve which saw 2-year Treasury yields decline 9 basis points and 30-year yields rise 6 basis points.

Federal bonds returned -0.07% in October as higher yields resulted in lower bond prices. Provincial bonds fell -0.37%, with their longer average durations resulting in larger price declines. The yield spread between provincial and federal bonds was little changed in the month. Investment grade corporate bonds returned -0.04% in the month. Demand for corporate issues remained strong, as their yields spreads narrowed by a basis point notwithstanding good new issue supply of $9.5 billion fixed rate bonds. High yield bonds gained +0.54% in October because a dearth of new issues encouraged buying. Real Return Bonds returned  -1.23%, as demand for them weakened when monthly inflation was lower than forecasts. Preferred shares performed slightly better than bonds, gaining 0.19% in October. The preferred share rebound was due in part to the rise in 5-year Canada bond yields.

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