Canada’s disinflation and a slight slowdown in its labour market allowed Canadian government bonds to de-couple from the October Treasury market sell-off. With the wide dispersion in growth and inflation continuing globally, the latest IMF growth forecasts reinforced these divergences and the risk of global economic fragmentation.
Tight labour market remains a risk
With G7 interest rates appearing close to a peak, with the Bank of Canada pausing policy again – in line with other G7 central banks – the tight labour market will remain a key risk for any second-round inflation effects. The IMF expects global growth rates to remain below its historical average, slowing from 3.5% in 2022, to 3.0% in 2023, and 2.9% in 2024. Specifically, in relation to Canada, its 2023 growth rate was revised lower in October to 1.3% year-on-year (a 0.4% drop from the July projections).
G7 inflation is gradually declining, or stabilising, with Canadian inflation softening to 3.8% year-on-year in September and core inflation dropping to 2.8% year-on-year. Food inflation eased from very high levels, with consumption starting to wane in response to higher interest rates. Even so, Canadian wages remained strong and are growing at around 4% to 5%.
Canadian yields stabilised in October after the Q3 sell-off
Treasuries, gilts, and Japanese Government Bonds (JGBs) were the weakest markets in October, as short Bunds, and Euros outperformed. Short- and medium-term government bonds outperformed long-term government bonds as G7 central banks paused policy again in October.
Canadian dollar weakness in October boosted returns in overseas credit markets, even though yields rose in the US and emerging markets. Canadian provis, munis and credits made modest gains. On a year-to-date basis, high yield credits have outperformed significantly, led by Euro and US high yield with gains of 7-9%. Canadian high yield outperformed other domestic markets, gaining 4%.
To view the latest FTSE Russell Canadian Fixed Income Insights report click here.
Sponsored by:
© 2023 London Stock Exchange Group plc (the “LSE Group”). All information is provided for information purposes only. Such information and data is provided “as is” without warranty of any kind. No member of the LSE Group make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance. No member of the LSE Group provide investment advice and nothing contained in this document or accessible through FTSE Russell products should be taken as constituting financial or investment advice or a financial promotion. Use and distribution of the LSE Group data requires a licence from an LSE Group company and/or their respective licensors.