Inflate This!!!

Canadian inflation was released this morning, and it came in lower than expected at 3.80% when the estimate was 4.0%. Inflation was down .10% month over month. Was Septembers increase in inflation a blip? Time will tell. Inflation had been trending lower, with a sudden jump up in September. Flash in the pan? Maybe.

Bond yields however are not reacting the way you would think with the Canadian 5 year bond UP!! Why? USA retail spending came in hot, and it appears that spending is not slowing down in the South like it is in the North. For now the Canadian bond will take its que from the US I guess. US Bonds, specifically the 10 year is up 11 bps right now after the hot reports that make it appear the Fed is likely to raise again.

While day to day may show some different reactions, at some point traders and the market will start to see that Canada and the US economy are on different trajectories. At some point the pricing will change on bonds based on the economics of individual countries. At some point I will be skinny and good looking – but that day ain’t today either.

For now though, lets wait and see what the end of trading brings for the Canada 5 year. The intra day swings and misses, zigs and zags with the bond market have been massive in the last few months, and we could close the day down on yield, or at least reverse some of the jump off of the numbers release this morning. Emotion rules the day in bond and equity markets, and we are seeing a lot of emotion baked into bonds right now.