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Global bonds rallied in June as investors worried that economic growth was slowing as a result of increasing trade tensions. The U.S. central bank, the Federal Reserve, indicated that it too was concerned about future growth and that it was considering an interest rate reduction in the near future. While the U.S. bond market had been anticipating some rate cuts, the Fed’s comments following its June 19th meeting led to further gains in bond prices and lower yields. Other global central banks were also concerned about slowing growth: the Reserve Bank of Australia cut its interest rates by 25 basis points in June (and again as this is being written) and the European Central Bank extended its forward guidance that rates would stay lower for longer. (The G-20 summit, which saw a truce announced in the U.S./China trade war, had no impact on the market in the month, because it occurred after the market close on Friday, June 28th.) The global bond rally was supportive for Canadian bonds, but they failed to keep pace with other bond markets because the Bank of Canada was thought less likely to lower rates in the near future. The FTSE Canada Universe Bond index returned 0.91% in June.
Canadian economic data received in June was, on balance, positive. Unemployment fell to 5.4%, the lowest level in records dating back to 1976. The decline in the rate was due to a combination of strong job creation and a drop in the participation rate. Economic growth continued to rebound from the weakness of last October to February. Canada’s GDP grew 0.3% in April following the robust 0.5% growth experienced in March. In addition, the trade deficit shrank as exports increased and imports declined. Of note, CPI inflation was stronger than expected, rising to 2.4% from 2.0% the previous month. With economic growth improving, the rise in inflation above 2.0% made it unlikely the Bank of Canada would lower interest rates in the near term, even if the Fed chose to cut American rates. As a result, short term bond yields in Canada trended slightly higher over the balance of the month.
U.S. economic data was mixed in June. Unemployment remained very low at 3.6%, but job creation slowed sharply following two strong months. It remains to be seen whether the slower job creation was a one-off occurrence or the start of a trend, but the market reaction (to lower yields and increased expectations of Fed interest rate cuts) suggested investors expected the latter. Other positive indicators included better than expected retail sales and industrial production, as well as strong personal income and spending. On the negative side, consumer confidence experienced a sharp drop and factory orders were weaker than forecasts. CPI inflation declined to 1.8% from 2.0%, although the core inflation measure declined only to the Fed’s 2.0% target. The Fed left interest rates unchanged at its June rate-setting meeting but indicated that it was considering lowering them in the near future to protect the current economic expansion. While there was a lack of consensus within the Fed, a number of its members anticipated two rate reductions before the end of the year. U.S. bonds rallied in reaction and Canadian bonds followed albeit at a slower pace.