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Bonds traded in a narrow range for much of December, with prices moving slightly lower from the end of November. Only in the illiquid trading following Christmas did the bond market finally generate positive returns for the month. The news of COVID-19 vaccinations commencing in Canada and other countries during December was offset by surging infections, rising hospitalizations, and increasingly stringent lockdown measures. Investors believed the economic damage from the current lockdowns, though, would be much less than occurred last spring, so they were willing to be patient and anticipate a recovery that was expected to commence mid-2021. The ongoing political struggles in the U.S. (e.g. unsubstantiated claims of election fraud, difficulties agreeing on more stimulus, et cetera) and the last minute Brexit deal (after four and a half years of negotiations!) were appropriately ignored by investors. The FTSE Canada Universe Bond index earned 0.37% in December.
Canadian economic data was generally not timely enough to capture the impact of the November pandemic lockdowns across much of the country. Canadian GDP growth in October was better than expected but remained 3.5% below than year ago levels. Strong job creation and a slight drop in the participation rate led to an unexpected decline in the unemployment rate to 8.5% from 8.9% a month earlier. Retail sales prior to the start of the lockdowns were also better than expected. The Bank of Canada made no changes at its December rate setting meeting.
The economic news in the United States was mostly about activity during November. As a result of the increasing lockdowns across the country to slow the pandemic’s second wave as well as less government stimulus, the data was generally disappointing. Unemployment declined to 6.7% from 6.9%, but the improvement reflected fewer people looking for work as the participation rate dropped to 61.5% from 61.7% the previous month. The weakening labour situation was also reflected in a rise in weekly claims for unemployment benefits. Personal income fell 1.1%, primarily because of expiring federal stimulus programmes, and personal spending fell for the first time since April. Also of note, the usually strong U.S. housing market experienced some softening with new home sales falling 11% in the month. The worsening job market and declining consumer spending led to renewed calls for another stimulus package that received bipartisan support from Congress. However, president Trump’s late suggestion to increase personal payments led to the package not being approved by year end. The Federal Reserve made few changes to its policies at its December meeting and, as a result, disappointed some observers by failing to announce an extension in the maturities of the bonds it was purchasing in its quantitative easing programme.