Canadian GDP for August increased by 0.1%

Posted: Wednesday, October 31, 2018 - 09:57 EDT

Canadian GDP for August increased by 0.1%, which was above expectations of a flat month.  On a year over year basis, GDP growth increased by 2.5% which was 0.2% higher than the revised figure in the previous month.  The positive growth was driven by crude oil extraction rising 3.2%, while financial services also helped boost GDP.  Overall Q3 GDP in Canada is tracking at 2.3% with the full year growth expected to increase at 2.1%.  Bank of Canada Governor Poloz, along with Deputy Governor Wilkins, spoke to the Finance Committee yesterday and reiterated that rates will need to increase to a range of 2.5%-3.5% before the inflation target is met. 

The overnight rate currently stands at 1.75%.  The central bank does not believe that growth in the second half of 2018 will run above potential although their forecast assumes that wages will increase based on surveys from company expectations.  Further rate hikes will be data dependent, although there has been positive sentiment from the USMCA deal being reached.  The central bank of Japan also wrapped up its monetary policy meeting that left its target 10-year JGB at 0%.  However, the BOJ downgraded its core inflation expectations to rise at 0.9% this year from 1.1% previously.  Inflation is expected to still hit its 2% target by March 2021, with Governor Kuroda expected to maintain its interest rate policy at zero percent in order to achieve this goal.

The new issue Canadian corporate credit market was again active yesterday although market sentiment improved from last week.  Shaw launched a two-tranche deal that saw $500mil 5-year bonds at +143bps over the curve, and $500mil 10-year bonds at +200bps over the curve.  Shaw has a $1.25bil maturity late next year, so the bonds issued today will be used to repay debt along with funding the 600Mhz spectrum auction next year.  Despite North American equity markets increasing by over 1%, the corporate credit market continued to feel heavy. The additional new issuance supply from Shaw also exacerbated the weakness leading to spreads ending the day approximately 1-2bps wider.

Equity Markets:

 

  Index Level % Change QTD YTD Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018
S&P 500 2,682.63 1.57% -7.84% 1.90% 3.09% 4.48% 6.64% -0.76% 3.43% 7.71%
TSX

14,894.50

1.17%

-7.14%

-5.87%

-1.64% 3.68% 4.44% -4.52% 6.77% -0.56%

Rates:

 

Today

% Change

QTD change

YTD change

Q2 2017

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Canada 5 Year

2.42%

0.08% 0.08% 0.56% 1.39% 1.75% 1.87% 1.97% 2.07% 2.34%
Canada 10 Year 2.48% 0.09% 0.06% 0.44% 1.76% 2.10% 2.05% 2.09% 2.17% 2.43%
Canada 30 Year 2.52% 0.09% 0.10% 0.26% 2.15% 2.47% 2.27% 2.23% 2.21% 2.42%
30yr Generic Corporate A rated Spread 1.30% 0.02% 0.00% 0.02% 1.21% 1.24% 1.21% 1.24% 1.28% 1.30%
30yr All-in Corporate A rated Yield

3.82%

0.11% 0.10% 0.28% 3.36% 3.71% 3.48% 3.47% 3.45% 3.72%
US 10 Year 3.14% 0.02% 0.08% 0.74% 2.31% 2.33% 2.41% 2.74% 2.86% 3.06%
CDX IG 67.848 -1.359                

The information contained herein is intended for advisors for general information only and is compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made as to its accuracy. All opinions contained in the commentary and expressed by the portfolio manager are subject to change without notice and are provided in good faith without legal responsibility. All market data is sourced from Bloomberg.