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The bond market rally that began in May extended through June as increasing risk of a global trade war threatened economic growth and political developments in Italy heightened concerns about Eurozone stability. Bond prices rose, and yields declined, even as some major central banks took steps to reduce monetary stimulus they have employed. The FTSE TMX Canada Universe Bond index returned 0.57% in the month.
At the beginning of June, the United States imposed tariffs on steel and aluminum imports from most countries, including Canada and members of the European Union. While retaliatory tariffs were promised by the affected countries, the bond market mostly ignored the potential for a resulting trade war until June 10th when U.S. president Trump angrily reversed his acceptance of a G-7 communique and disparaged Canadian Prime Minister Trudeau. (Many observers interpreted Trump’s tirade as an attempt to influence the NAFTA renegotiation that has been dragging on for months.) However, Trump also threatened to impose 25% tariffs on automobile imports and stepped up tariff threats specifically against China. As a consequence, investors became increasingly concerned that the U.S. moves increased the risk of a full-blown trade war that would result in significantly slower global economic growth. Bond yields fell sharply over the balance of the month as a result.
Canadian economic data received during June was somewhat less reliable than normal because much of it pertained to April, when ice and wind storms deterred activity. Unemployment, though, held steady at a multi-decade low of 5.8%, as a lower participation rate offset a small decline in the number of jobs. Perhaps the most surprising aspect of the monthly Labour Force Survey was a 3.9% year over year jump in the average hourly earnings of permanent employees, the fastest pace in 10 years. Late in June, Bank of Canada Governor Stephen Poloz indicated that its July 11th interest rate decision would be very dependent on data received ahead of the meeting. Subsequent to Poloz’s comments, Canadian GDP growth in April was shown to have been better than expected notwithstanding the poor weather. In addition, the Bank’s Business Outlook Survey showed widespread business optimism, although almost all of the interviews occurred before the imposition of U.S. tariffs on steel and aluminum. Shorter term bond yields moved higher in the final days of June as investors’ expectations for a Bank of Canada rate hike increased.