GDP, jobless claims and an FOMC rate decision. No, I am not naming my favourite economic indicators - I am naming just a few of the economic releases that were announced over the last week. Typically, these announcements would pop up on headlines within minutes, however, I don’t think anyone could be blamed for only skimming the results this time around. The recent short squeeze in certain equities is truly remarkable and the ongoing battle between Wall Street hedge funds and the Reddit retail traders is one for the ages.
Fortunately for you, my brokerage blocked the stocks that I want to buy so instead I am available to give you all of the relevant details of the past weeks events so you can quickly go back to monitoring your own positions.
Rates and Curves
Rates seem to have found a bit of a range recently. The 5-year Government of Canada bond has been trading between 0.41% and 0.45% for the last couple of weeks. 10-year bonds have been similarly range bound between 0.80% and 0.87%.
The 5-year Canada Mortgage Bond is currently yielding 0.70% and the 10-year is at 1.24%. Spreads are generally unchanged over the last couple of weeks which is a welcome break from the volatility in spreads that we had been seeing earlier in January.
Bank of Canada Rate Announcement
We saw the Bank of Canada holding the benchmark rate at the effective lower bound of twenty-five basis points in the meeting on January 20th. Although a “micro-cut” (10 basis point change in rate or less) was rumored during the week running up to the meeting, it turned out that it was just chatter. Governor Macklem did suggest in the press conference that a micro-cut is possible, but additional QE measures such as increasing bond purchases would be the preferred option.
The announcement struck a more optimistic tone with investors causing a rally in the Canadian dollar and bonds selling off. The stronger Canadian dollar could have future implications on exports and inflation and if this level is sustained, the Bank of Canada may need to reassess some of their economic projections.
In case you missed it
- Some good news announced this morning! Canada GDP rose 0.7% month over month in November beating expectations by about 0.2%. 14 of the 20 measured sectors rose with natural resources and manufacturing leading the charge. December’s preliminary estimate is also pointing to a positive increase even with the renewed lockdowns in some provinces.
- The Bank of Canada announced last Friday that it was raising the rate on its repo program in order to address the Canadian Overnight Repo Rate Average (CORRA) trading at an unusually low level. The new floor on this facility increased from 0.10% to 0.15% meaning participants of the program can now earn 5 basis points more on their overnight repurchase agreements. The impact of this decision has been well received in the short-term funding market.
- There was an FOMC rate announcement on Wednesday January 27th and it was clear that the Fed is nowhere near ending their massive monetary policy support until the path of the virus and distributions of the vaccine are well under control. This includes maintaining the benchmark rate near zero and maintaining the pace of its bond purchases. The markets hardly reacted to the announcement although they may have been a little distracted…the first question asked in the post announcement press-conference was not about monetary policy but instead about the surging asset prices of some small-cap equities. Definitely not something that chairman Powell is accustomed to.
- The US economy made some slight progress towards recovering in the final quarter of 2020. The 4.0% annualized growth in GDP over the quarter was slightly below the consensus forecast. This leaves the level of GDP still 2.5% below its pre-pandemic point.
Thanks for reading and have a good weekend.
Neil