In contrast with the volatility of the previous three months, Canadian bonds traded in a narrow range during May. Optimism that the worst of the pandemic is past led to many jurisdictions easing physical distancing restrictions and a rally in riskier assets. Canadian equities gained 3.0% while the U.S. S&P500 rose 4.5% and strong demand for corporate bonds led to yield spreads narrowing despite record amounts of new issues. Government bonds, however, took a more cautious wait-and-see approach. With economic data on the impact of the pandemic lockdowns only just becoming available, government bond yields remained at record low levels suggesting the economic rebound may not occur as quickly as hoped for by equity investors. The FTSE Canada Universe Bond index returned 0.31% in May.

During May, we finally began to get economic data that gave a sense of the severity of the recession. In April, more than 2 million jobs were lost in Canada and the unemployment rate climbed to 13.0%. The unemployment rate would have been even higher, but many Canadians were discouraged about the poor employment prospects and simply dropped out of the labour force, which caused the participation rate to drop to 59.8% from 63.5% the previous month. The Labour Force statistics also indicated that average hourly earnings increased by 10% in the month, as lower paid employees suffered proportionately greater job losses. Late in May, it was revealed that Canadian GDP during the first quarter shrank at an annualised pace of 8.2%, which was somewhat better than expectations. Statistics Canada also provided a preliminary estimate that GDP plummeted 11% (not annualised) in April, which led some economists to forecast a 40% annualised contraction in the second quarter. If the estimate of the decline in April is correct, Canada’s GDP during March and April will have declined three and a half times the contraction experienced in the entire 2008-09 financial crisis. In other news, the sharp plunge in gasoline prices during April caused Canadian annual inflation to drop to -0.2% down from +0.9% the previous month. Core measures of inflation, though, were only slightly lower.

In the United States, the economic statistics were also bleak. The unemployment rate surged to 14.7% from 4.4% the previous month, as a staggering 20.5 million jobs were lost. As in Canada, the unemployment rate would have been higher but for a decline in the participation rate. Retail sales plunged 16.4% in April and factory output fell 13.7%, the largest monthly decline in records going back to 1919. U.S. inflation declined to 0.3% from 1.5%, while core prices slowed to 1.4% from 2.1%. Notwithstanding over 1.8 million confirmed COVID-19 cases and more than 106,000 deaths in the United States so far, most states started to tentatively relax their respective physical distancing measures