September was an eventful month, marked by reduced trade tensions, a major terrorist attack, significant political developments and somewhat less pessimism about the global economy. Global bond yields moved sharply higher, and prices lower, in the first two weeks of the month, as news that the United States and China were restarting trade negotiations made investors more optimistic about economic growth prospects. The rise in yields was capped, however, when attacks on major oil facilities in Saudi Arabia caused a small flight-to-safety bid for bonds. Over the balance of the month, yields retraced roughly half of their earlier increases as evidence of slowing global growth accumulated. For the most part, political developments in Canada (the start of the federal election campaign), the United States (the initiation of presidential impeachment inquiries), and Great Britain (a series of defeats for Prime Minister Boris Johnson) had little impact on bond markets. The FTSE Canada Universe Bond index returned -0.84% in September.

Canadian economic news during September was generally positive. The unemployment rate held steady at 5.7% as a jump in the participation rate offset surprisingly strong job creation. Housing starts and building permits were higher than forecasts, and capacity utilization was better than expected in the second quarter. Retail sales were weaker but wholesale trade was much stronger than expected. Inflation edged lower to 1.9% from 2.0% the previous month. The Bank of Canada left its interest rates unchanged at its September 4th announcement.

In the United States, the economic data was mostly favourable, although the lack of growth in the manufacturing sector this year remained a concern. The unemployment rate held steady at the very low 3.7% level, and housing starts rose to the highest rate since June 2007 (i.e. before the financial crisis). Consumer credit jumped higher on a surge in credit card debt as consumers felt confident enough to borrow and spend. Headline CPI inflation edged lower to 1.7% from 1.8%, but core prices rose to 2.4% from 2.2% the previous month. The Federal Reserve again lowered its trendsetting interest rates by 25 basis points at its meeting on September 18th. As with its rate cut in July, the U.S. central bank was concerned that trade tensions and the resultant slowing global growth would negatively impact the American economy.

Internationally, several central banks eased monetary policy in September. The European Central Bank lowered some of its rates further into negative territory in response to weaker growth in the Euro-zone. However, there is increasing debate about the effectiveness of the ECB’s negative interest rate approach with several observers suggesting monetary policy there has reached its limit and fiscal measures will need to provide additional stimulus. Elsewhere, the ramifications of the U.S/China trade war were impacting emerging market economies as central banks in countries as diverse as Russia, Brazil, Vietnam, Mexico, Indonesia, and Turkey all lowered interest rates during September.

1 2