The Canadian bond market moved in a see-saw pattern in July, with yields first rising and then declining as investors awaited the seemingly inevitable monetary easing by the U.S. Federal Reserve on July 31st. Favourable economic news was generally ignored as investors debated whether the Fed’s move would be 25 or 50 basis points and whether the central bank would indicate this was the beginning of a long term easing cycle. In the end, the Fed opted for the smaller rate reduction and was less dovish than many had hoped for. Also in the month, China and the United States tentatively restarted their trade negotiations that had broken off in May, which marginally reduced the pessimism regarding a tariff-induced global slowdown. The FTSE Canada Universe Bond index returned 0.17% in July.

During July, Canadian economic data was generally favourable and didn’t provide any impetus for the Bank of Canada to change its interest rates either up or down. Growth in GDP in May proved better than expected as strength in manufacturing, construction, and transportation more than offset weakness in retail sales and wholesale trade. The year-over-year increase in GDP was only 1.4%, due to the very slow pace late in 2018 and to start 2019. However, the subsequent rebound has led several forecasters to raise their forecasts of second quarter growth to a healthy 3.0% pace. Other good economic news included stronger than expected housing starts and a surprise trade surplus. Unemployment edged higher to 5.5% from 5.4% as job creation temporarily faltered. However, other details of the labour report were more optimistic with hourly wages accelerating to a 3.6% increase versus year ago levels from 2.6% the previous month, and total hours worked also rose more rapidly. Inflation declined to 2.0% from 2.4%, but with core measures of price increases holding steady also at 2.0%, there was no evidence that the Bank of Canada needed to adjust its monetary policy. Accordingly, the Bank surprised no one when it left rates unchanged at its July meeting.

In the United States, the data received during July continued to indicate the economy was operating at full speed. GDP grew at 2.1% during the second quarter, slower than the 3.1% pace of the first quarter, but better than economists’ forecasts and faster than its long term potential growth rate. Consumer confidence was much higher than expected and that translated into better than forecast retail sales. Unemployment edged up to 3.7% from 3.6% the previous month as robust job growth was offset by a rise in the participation rate. CPI inflation declined to 1.6% from 1.8%, although the core inflation measure increased to slightly above the Fed’s 2.0% target. The lack of significant inflationary pressures has been one of the reasons that the Fed has been considering easing monetary policy.