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But fixed income is not limited to govies. We have for some time, and still do,
favour high-grade corporates regardless of what Treasuries do — at least this is a
market where, in classic ‘Fisherian’ fashion, supply is creating its own demand —
the amount of global issuance in the last year has tripled and spreads have
continued on a narrowing path. Look for that to continue.
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June 5, 2009 – BREAKFAST WITH DAVE
As for commodities, oil is bid around $69/bbl — up 5.0% for the week — as is
copper (also up around 5.0% for the week). Gold is consolidating. The U.S.
dollar is stable today but with the 50-day crossing below the 200-day moving
average the bear market is entrenched, which is a net positive for the
commodity complex. (Though why the Euro should strengthen on an ongoing
basis given the region’s deep problems is a bit of a mystery — for one example,
turn to Baltic Storm Threatens Euro Banks on page C12 of the WSJ).
On the data front, all we saw were some benign inflation data across the pond —
UK input prices +0.4% MoM in April and -9.4% on a YoY basis (steepest deflation
rate in seven years) while core output prices edged up 0.2%; and the ECRI
leading inflation index for the EMU hit a historic low in April — down to 82.4 from
84.1.
ADP recorded a 532,000 decline; the Monster employment index also dipped
two points last month; non-manufacturing ISM employment is a lowly 39; and
jobless claims have remained above 600,000 now for 18 straight weeks — the
longest stretch ever. Not until they fall below 500,000 will it be safe to call the
recession as being over.
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June 5, 2009 – BREAKFAST WITH DAVE
Bottom Line: This is bullish for GoC bonds and rather bearish for the Canadian
dollar; the slide in manufacturing jobs attests to the high degree of CAD
overvaluation even with the commodity price backdrop. I still maintain it should
be closer to 83 cents right now and I am pretty sure the BoC would agree.
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June 5, 2009 – BREAKFAST WITH DAVE
The Bank of Canada indeed referenced the surge in the Canadian dollar in
yesterday’s press statement; it did not mention the loonie at all in the April The BoC talks down
statement. The bottom line is that the loonie is on the BoC’s radar screen and the loonie … without
as such I think the currency has put in a near-term top, notwithstanding my much success
secular bullish stance. With policy rates where they are — the Bank’s options
are limited insofar as it could intervene in the FX market or embark on more
forceful quantitative easing — the June statement is either bearish for the CAD,
bullish for bonds, or both. In a nutshell, the BoC recognized that the loonie has
overshot the recent upturn in commodity prices. That it verbalized its concern in
the press statement is significant insofar as the Bank does not generally make it
a habit to openly discuss the currency market.
The Bank also had this to say over the outlook — how one can make a bearish
call for the fixed-income market based on these comments, not to mention the
continued pledge to provide investors with a huge positive carry trade well into
next year:
“The already significant output gap will continue to widen through the third
quarter, putting downward pressure on inflation. The Bank continues to expect
that the global and Canadian recoveries will be more muted than usual … the
overall risks to its inflation projection remain tilted slightly to the downside.
Conditional on the outlook for inflation, the target overnight rate can be
expected to remain at its current level until the end of the second quarter of
2010 in order to achieve the inflation target.”
Second, MBA mortgage applications index fell 16.2% during the week ending
May 29 — the level is at its lowest in 13 weeks. This was on top of the 14.2%
decline seen last week. Since its recent peak, which was back just eight weeks
ago, mortgage applications have plunged nearly 50.0%. The refinancing index
(refi) is down 24.1% for the latest week, on top of the 19% fall seen last week.
The level on the refi index is at its lowest in 16 weeks and from its recent peak,
which also happened eight weeks ago, the index has shed nearly 60.0% (-57.0%
to be exact).
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June 5, 2009 – BREAKFAST WITH DAVE
This halt in activity was due to the massive rise in mortgage rates. The 30-year
mortgage rate zoomed 44bps to 5.25%, the highest level since the end of
January, and in the last two weeks mortgage rates have risen by 56bps. The
1-year ARM rate has also been gradually rising – up in five of out of the last six
weeks — and is currently at 6.61% — highest since the week of December 5.
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June 5, 2009 – BREAKFAST WITH DAVE
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June 5, 2009 – BREAKFAST WITH DAVE
ABOUT US
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June 5, 2009 – BREAKFAST WITH DAVE
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