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%.
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