Canada Says a Pause is Not a Pivot

Canadian rate hike drives Fed hiking odds and yields up. The Bank of Canada announced a 25bp hike today, ending a 4-month pause and communicating to U.S. markets that a central bank pause is not necessarily the same as a pivot. Fed hiking odds increased following the announcement, with treasury markets briefly fully pricing in a July hike during the day, and rates on swap contracts linked to the July meeting reaching an intraday peak of 5.33%, 25 bps above the current Fed Funds effective rate of 5.08%. June contracts continued to price in a hiking pause. The 10-year yield rose ~14bps ending the day at ~3.80%, and the 2-year rose ~8bps ending at ~4.56%. Meanwhile, equities were down overall today driven by a drop in tech shares. Bank stocks rose, however, with the KBW Regional Bank Index climbing 3.40%, and the overall P/TBV of its constituents increasing from 1.38x yesterday to 1.42x today. 

Home purchases fell for the fourth week despite declining mortgage rates. The MBA Purchase Index fell 2% on the week even as average mortgage rates dropped across the board. The fixed-rate on 30-year conforming mortgages decreased to 6.81% from 6.91%, and 30-year fixed-rate jumbo mortgages decreased to 6.74% from 6.78%. MBA Vice President and Deputy Chief Economist Joel Kan explained the purchase decline by saying, “purchase activity is constrained by reduced purchasing power from higher rates and the ongoing lack of for-sale inventory in the market, while there continues to be very little rate incentive for refinance borrowers.”

Day ahead. Tomorrow’s data includes initial jobless claims at 8:30 AM, followed by Wholesale Inventories at 10:00 AM.

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