Highlights
- We believe conditions are in place for the U.S. economy to improve faster than expected. Stabilization of the labour market south of the border will bring a reassessment of the Fed’s current zero-rate policy stance. This will go far to relieve pressure on the Canadian dollar. In that environment, the loonie will not be the drag the BoC is currently expecting.
- Our scenario suggests that the front end of the yield curve will normalize faster than is generally expected. In this light our inclination is to keep duration slightly short and to take market opportunities to build a barbell position.
Another look at the Taylor rule
Economic indicators came in somewhat disappointing in the days following our last issue. Not only were manufacturers’ shipments of non-defence capital goods and inventories weaker than expected in August, but the payrolls report for September showed employment still shrinking. The Citigroup Economic Surprise Index fell in sympathy with the flow of weakerthan- expected data, from 52.7 on September 18 to 25.3 on October 7. The 10-year Treasury yield fell from 3.46% to 3.18% over the same period. But the signals since then have been more encouraging. Industrial production is up more than expected and jobless claims are down. Although retail sales fell 1.5% in September, the decline in auto sales was not as large as expected and core retail sales were up 0.5% on the heels of a 0.7% gain in August. Overall, recent indicators have been stronger than expected. The Surprise Index recovered to 43.7 and the 10-year yield was back to 3.46% on October 15.
