FINWIRES · TerminalLIVE
FINWIRES

Major U.S. Rate Rethink Has Been Primary Driver of Government of Canada Bond-U.S. Treasury Outperformance, Says National Bank

By

Canada's economy has suffered one disappointment after another, blunting the threat of Bank of Canada rate hikes, said National Bank of Canada.

So, when it comes to economic performance and related cross-market re-pricing, it's perhaps better to be lucky than smart, writes the bank in a note. Put another way, a major U.S. rate rethink has been the primary driver of the Government of Canada (GoC)-U.S. Treasury outperformance during this seasonal sweet spot, as Canada isn't the only market making gains.

Still, the anticipated cash influx may have contributed at the margin, as longer-end GoC performance has been more pronounced than most developed markets, stated National Bank.

Now, with so much performance in hand, it might be appropriate to consider taking profit on a long Canada-short U.S. position, added the bank.

For what it's worth, the post-Monday track record "isn't great," according to National Bank. As for Canada's seasonal curve 'flattener', results so far have been underwhelming -- both in isolation and when 'boxed' against the UST curve.

Again, that looks to be down to revised BoC expectations. But National Bank is inclined to stay in a 10s-30s flattener here, with the historic record and current location both somewhat "soothing."

Related Articles

Treasury

Poor Q1 GDP Data Implications for The Bank of Canada, Notes Scotiabank

Friday's Q1 gross domestic product figures in Canada, including revisions, stunned everyone in consensus and at the Bank of Canada, said Scotiabank.Consensus had forecast about 1.5% quarter-over-quarter seasonally adjusted annual rate (SAAR) growth with a trimmed range between about 1% to 2% and the BoC's projection in the April Monetary Policy Report was 1.5%, noted the bank. Instead, GDP was basically unchanged at 0.1% quarter-over-quarter SAAR decline. There were also negative revisions.Markets reacted to the readings by edging cumulative pricing for rate adjustments this year to just a 25bps hike by year-end, with much of a hike starting to be priced in September and October BoC meetings, stated Scotiabank. Markets foresee about 50bps of cumulative hikes into 2027.The BoC will likely lean on the argument that GDP figures point to somewhat more slack than anticipated by the central bank and everyone else, as growth underperforms potential GDP growth that is likely around 1%, added Scotiabank. This will give the BoC more room to assess forward-looking developments like the impact of the broadly based surge in commodities upon growth and inflation, plus ongoing additions to fiscal policy contributions to growth.Scotiabank is still of the view that the BoC will hike this year. The bank previously had a Q3 tightening of 50bps and then +25bps in Q4 before stopping at 3%. Scotiabank leans toward reversing that pattern with hikes no earlier than September into Q4. The BoC's job is inflation control and that has a multitude of drivers.Regardless, Scotiabank stands by its record versus consensus since the bank shifted to projected hikes by late 2026 in last November's forecast, while everyone else was talking cuts.Judging by the inflation-adjusted policy rate, the BoC has been passively taking out stimulus by looking through expected inflation resulting from pre-war and wartime influences on inflation risk. The real policy rate has dropped sharply, according to the bank. It would be policy error to add to this by cutting the nominal policy rate.

$$CXY
Treasury

Canadian Q1 GDP Is "Just Bad," Preliminary April GDP Gives Some Hope, Says Rosenberg Research

Canada's Q1 gross domestic product didn't just underperform expectations as it was "outright terrible," falling by 0.1% quarter-over-quarter annualized, said Rosenberg Research after Friday's GDP data.The consensus expectation was for a gain of 1.5%, due largely to an expected rebound in inventories after a large drawdown in Q4. In fact, inventories did bounce, adding a full 4.3 percentage points to GDP growth in the quarter.Yet, GDP still fell, noted Rosenberg Research. Piling on the bad news, Q4 GDP growth was revised to a 1.0% contraction from a 0.6% decline.In the quarter, the biggest headwind was net trade, which carved 3.8 percentage points off growth. On the plus side, the only one worth mentioning is the small positive contribution from household consumption, up 0.8 percentage points.Though it was mostly bad, the report was not all bad, stated Rosenberg. Within the business investment category, there were positive contributions from machinery and equipment and intellectual property products. Given Canada's lackluster productivity performance and years of underinvestment in machinery and equipment and intellectual property products, these are hopeful signs. They were among the few bright spots.On a year-over-year basis, GDP slipped into negative territory. The first reading below the water line since late 2020. Last year at this time, GDP was running an annual growth rate of over 3.0%. A testament to the headwinds the Canadian economy has been facing.Rosenberg thinks it's important to dig into the performance of the household sector here. In the quarter, household consumption rose by +1.5% annualized, while posting a +3.5% annualized gain in nominal terms. It isn't the inflationary part of the story that is really important, though. It is how Canadians even managed to consume at the pace they did in the quarter.To do so, households had to turn away from savings. The household saving rate fell to 3.5% of personal disposable income, from 3.7% in Q4. The household savings rate was 5.9% in Q3 2024. Since then, it has been downhill as Canadians have attempted to offset a slowdown in the job market and a series of shocks, including abrupt shifts in United States trade policy and the more recent energy price shock, by shunning savings.Canadians are now essentially spending all of their disposable income as they face a significant squeeze. That can only go so far, added Rosenberg.Basically, Friday's data suggest that Q1 was a "mess" for the Canadian economy. There are signs, however, that things might improve from here, according to Rosenberg. Statistics Canada's preliminary estimate for April GDP is for a gain of 0.4% month over month, led by mining, manufacturing, and transportation.Based on this April estimate, Rosenberg's initial estimate for Q2 GDP is 1.5% quarter-over-over annualized. It might be only a modest rebound in economic activity, but it does suggest that the "bleeding" will stop.

$$CXY
Treasury

Canada's Manufacturing Growth Is "Somewhat Illusionary," Has Downside Risks, Says S&P Global Economist

Canada's manufacturing sector registered a solid expansion during May, underpinned by rises in both output and new orders, plus the best increase in employment since October 2024, said Paul Smith, Economics Director at S&P Global Market Intelligence.Earlier Monday, the seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers' Index (PMI) remained in positive territory during May for a second successive month. Although falling to 52.9, from 53.3 in April, the rate of growth remained "solid" and above its historical average.Firms reported a general upturn in demand and success in securing new customers, despite ongoing anecdotal evidence that tariffs and the uncertainty caused by the war in Iran were weighing on product markets, noted Smith.The uplift in sector performance is likely on balance to have been driven by client efforts to secure goods, given worries over price increases and product availability, he added. These were certainly noted as reasons for manufacturers' own efforts to build buffer stocks in May: respondents anticipated elevated inflation and supply chain fragility in the months ahead, which will build on the already steep rises in operating expenses and lengthening lead times highlighted by May's survey."This leads to the rather somber conclusion that current growth is somewhat illusory and laced with downsiderisks, a sentiment that manufacturers themselves have also reached as confidence in the outlook eased back inMay and remained well below par," stated Smith.

$$CXY