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The Canadian bond market enjoyed modest gains in February, as geopolitical concerns in the Middle East and northern Africa in the second half of the month offset significant new issue supply and generally favourable economic news. For much of the month, bond prices were lower and yields higher, but events in northern Africa and the resultant spike in energy prices raised concerns about slower economic growth and that led to a rebound in the bond market. The DEX Universe Bond index rose 0.23% in the month.
Canadian economic news was relatively robust during February. While the unemployment rate rose to 7.8% from 7.6% the previous month, 69,200 new jobs were created. That restored Canada’s status as having regained all the jobs lost in the recession after a recent census revision reduced the estimate of employment. In addition, Canadian GDP was revealed to have grown at a 3.3% pace in the final quarter. That pace was faster than expected by both market participants and the Bank of Canada, which had predicted a 2.3% pace. It was also greater than the rate of growth in the United States economy over the same period. Significant areas of strength in the Canadian economy included faster consumer spending and better net exports. International trade experienced a dramatic improvement in December as the trade balance swung from a deficit of $100 million to a surplus of $3 billion. A large jump in exports of metals and energy was responsible for the turnaround. On the less positive side, retail sales unexpectedly declined due to a drop in auto sales that is expected to be only temporary. As well, factory sales rose in the most recent period, but by less than expected. To put the state of the manufacturing sector in perspective, sales peaked at $53.2 billion in July 2008, fell to $38.3 billion in May 2009, and have since rebounded to $45.4 billion. Thus the sector still has ground to make up in its recovery, and it faces headwinds from the disappointing pace of U.S. economic growth and the strength in the Canadian exchange rate.
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