For most of October financial markets ignored worsening infection rates in the pandemic’s second wave. Equity markets enjoyed good gains in the first half of the month, with the S&P/TSX up over 2%, while the tech-heavy S&P 500 and NASDAQ gained more than 5% and 7%, respectively. In the bond market, corporate yield spreads narrowed in the risk-on atmosphere. In the final week of the month, however, record infection rates in the United States and Europe, combined with the impending U.S. election to cause a selloff in equities and a widening of corporate risk premiums. The deterioration in sentiment did not lead to a flight to bonds, however. Instead, government bond yields rose on concerns that fiscal stimulus needs would be prolonged and bond issuance would stay elevated as a consequence. The FTSE Canada Universe Bond index returned -0.76% in the month.

Canadian economic data was generally better than expected but tended to not influence the bond market because it referred to activity before the onset of the second wave of the pandemic. The labour market data was quite strong with unemployment falling to 9.0% from 10.2% the previous month as job creation was much stronger than expected. The participation rate rose to 65.0% from 64.6%, making the drop in the unemployment rate even more impressive. Notwithstanding the good result, Canada’s total employment was 685,000 below the year ago level. In other good news, Canada’s GDP grew a better than expected 1.2% in August and was expected to increase by another 0.7% in September. That still meant that Canadian GDP was 3.8% smaller than a year ago. Inflation remained subdued, with CPI rising to 0.5% from 0.1% as price declines a year ago fell out the calculation. Core inflation measures were little changed at 1.7%.

The Bank of Canada left its administered interest rates unchanged at its October rate setting. However, the Bank made a number of adjustments to its various bond purchases programmes known as quantitative easing (QE).The adjustments included a decision to gradually reduce its weekly purchases of Government of Canada bonds from $5 billion to $4 billion, and focus more on bonds with maturities of 3 to 15 years. Prior to this, the Bank’s purchases had been heavily focussed on bonds with less than 2 years to maturity and it said it believed the future purchases of longer term bonds would offset the reduced quantity resulting in no overall diminution in monetary stimulus. The announcement initially led to a flattening of the yield curve, but that was soon reversed as investors realised that the Bank did not intend to increase its purchases of 20 and 30-year Canada bonds.

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