Bank of Canada Hikes Rates Less Than Anticipated

Treasury yields and swap rates fall after Bank of Canada reveals smaller-than-expected rate hike. Treasury yields fell across a flattening curve today, the 2-year yield falling ~5 bps to 4.41% and the 10-year yield falling ~10 bps to 4.00%. The bond rally was fueled by a conservative 50 bp rate hike in Canada, lower than the forecast of a 75 bp move. Canada’s conservatism reflects the recession fear that is also prevalent in the U.S. and is leading many to think that the Fed may slow their aggression by December’s FOMC meeting. Markets are currently pricing in for a near 50/50 chance of a 50 bp move in December versus a 75 bp rate hike.

U.S. goods-trade deficit widens in September. For the first time since March, the U.S. merchandise-trade deficit widened by 5.7% or $92.2 billion last month, as exports declined by 1.5% while imports increased. This development can be partly attributed to recent dollar strengthening. Dollar strength lowers import costs, but it also makes U.S. produced goods less attractive to international buyers. In addition, a trade deficit has a negative effect on GDP growth. Despite this, mounting recession concerns and the potential for less hawkish Fed policy as a result is driving some re-evaluation of dollar strength by some participants, with the Bloomberg Dollar Spot Index falling by 0.9% to a three-week low..

Day ahead. Quarterly GDP growth rate data will be released at 8:30 AM ET. Durable goods orders data for the month of September will also be released.