The Canadian government bonds plunged on Friday after reading strong consumer price. Also, rallying oil prices drove-out investors from safe assets. The yield on the benchmark 10-year bonds, which moves inversely to its price, moved higher 2.61 pct to 1.494 pct and the yield on the 2-year bonds climbed 4.41 pct to 0.663 pct by 1300 GMT.
The Canada’s March Consumer Price Index (CPI) rose 1.3 pct y/y, against market expectation of 1.2 pct y/y, from 1.4 pct y/y in February. On monthly basis, it rose 0.6 pct, against market expectation of 0.5 pct. Core CPI rose 2.1% y/y, higher than the market consensus 1.7 pct, prior core CPI 1.9 pct. On the other hand, investors did not react to the weak February retail sales figure, which rose 0.4 pct m/m, against market expectation of 0.8 pct m/m, from 2.0 pct in January.
The Canadian bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Canada's target. Today, Crude oil prices jumped to 5-month high as Energy Information Administration's (EIA) showed that crude stock rose lower than the market expectation last week. The crude inventories rose 2.1 million barrels, from prior build of +6.6 million barrels for the week ending 15 April. This came alongside a decreases seen in gasoline inventories of -0.1 million barrel, from prior -4.2 million barrel and distillate inventories of -3.6 million barrel, as compared to a build of +0.5 million barrel seen prior. Moreover, Market speculation that Petroleum Exporting Countries (OPEC) and Russia will meet in Moscow next month to again strike a deal on oil output freeze, boosted crude oil investors confidence. But, Russian Energy Minister Alexander Novak denied about any such meeting happening in Russia in May. On Sunday, the negotiations between Petroleum Exporting Countries (OPEC) and Russia failed to reach an agreement in the Doha round of talks to strike a deal on oil output freeze. The International benchmark for crude oil prices, Brent futures rose 0.61 pct to $44.80, while West Texas Intermediate crude oil jumped 0.53 pct to $43.41 by 1230 GMT.
Last week, the Bank of Canada announced no change in the overnight rate target of 0.50%, in line with market expectations. Overall, the risks to the profile for inflation are roughly balanced. Meanwhile, financial vulnerabilities continue to edge higher, in part due to regional shifts in activity associated with the structural adjustment underway in Canada’s economy.
“We do not think the BoC is about to cut interest rates further; instead we expect it to await further developments on the oil price and see what impact this has on the Canadian economy. We expect the BoC to increase interest rates for the first time in summer 2017.” notes Commerzbank in a report.
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