Canadian Bonds Slump on Firm Consumer Price, FED June Rate Hike Bets

Canadian Bonds Slump on Firm Consumer Price, FED June Rate Hike Bets

20 May 2016, 15:59
Roberto Jacobs
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Canadian Bonds Slump on Firm Consumer Price, FED June Rate Hike Bets

The Canadian bonds slumped on Friday as investors cooled on safe-haven assets after reading strong April consumer prices figure. Also, FOMC April meeting minutes from the U.S. Federal Reserve’s strengthened bets of an interest rate hike in June supported the cause. The yield on the benchmark 10-year bonds, which moves inversely to its price rose 4bps to 1.380 pct and the yield on the short-term 2-year bonds jumped 1bp to 0.633 pct by 1230 GMT.

The Canadian April Canadian consumer price index (CPI) rose 1.7 pct y/y, coming in the line of expectations of 1.7 pct y/y, from 1.3 pct in March. Similarly, core CPI increased 2.2 pct y/y, higher than the market consensus of 2.0 pct exp y/y, as compared to prior 2.1 pct. The Bank of Canada (BoC) may be sitting on their hands policy wise but they may not be able to ignore the core gradually ticking up. The BOC aims to keep inflation at 2 pct, which is the midpoint of their 1-3 pct target range, so if we see the headline creep above 2 pct we might start getting some hawkish noises. On the other hand, investors did not react to the weak March retail sales figure, which declined 0.3 pct m/m in March, against market consensus of 0.4 pct m/m fall, from 0.6 pct m/m in February.

Moreover, the U.S bonds plunged after minute release from the April FOMC meeting that indicated policymakers were in support of a move to raise rates in June if the economy supported it. The FOMC in its April 26-27 meeting minutes showed quite a hawkish view of Fed officials. This indicates that several participants believed in April that it is appropriate to raise rates in June if the incoming data indicated a rebound in the economy.

On balance, these minutes go a long way in uncovering sentiment not very much reflected in the April FOMC statement. On balance, this release should go a long way in making the June meeting a live event, something that was seen as less likely in the wake of the April meeting. However, given the need for data to cooperate as the meeting approaches, nothing is certain. Nevertheless, we continue to expect only 50bps worth of tightening from the FOMC in 2016, regardless of whether or not they choose to act in June.

Canada's main stock index was set to open higher on Friday ahead of inflation and retail sales data. June futures on the S&P TSX index were up 0.36 percent at 1130 GMT.

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