Dave Larock in Monday Interest Rate Update, Mortgages and Finances, Home Buying
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It must be tough to teach economics in the bizarre world we find ourselves in today.
To wit: Last week Statistics Canada reported that our gross domestic product (GDP) grew by 2.8% on a year-over-year basis in the third quarter, well above the consensus forecast of 2.1%. This positive momentum dovetails nicely with our improving employment picture, which saw more than 100,000 jobs added to our economy over the same period. As one would intuitively expect in such an environment, our overall inflation levels also trended higher during the third quarter, with our consumer price index (CPI) coming in at 2.4% in October and remaining above the Bank of Canada’s mid-range inflation target of 2.0% over that entire three-month period.
Using these key indicators, a student of traditional economics would be correct in assuming that bond yields should typically rise against this backdrop but instead, over that period five-year Government of Canada (GoC) bond yields have traded at their lowest levels since 2012, and fell again last week in spite of the GDP upside surprise.
Meanwhile, the U.S. Commerce Department revised its initial third quarter year-over-year estimate of U.S. GDP growth from 3.4% to 3.9% last week. That impressive result means that the U.S. economy has just experienced its strongest back-to-back quarters of GDP growth since 2003. U.S. employment has also shown steady improvement in momentum for some time now, with average monthly job creation increasing from 186,000 in 2012 to 194,000 in 2013 and to 225,000 in the first nine months of 2014 (as recently reported by The Economist). And while U.S. CPI inflation has held steady at 1.7% of late, there are many Americans who would argue that there has been much more inflation than has been captured in that official measurement (the recent drop in gasoline prices being the exception).
Here again, the high-level indicators of U.S. GDP, employment, and inflation would be expected to correspond with rising bond yields, yet five-year U.S. treasury yields have followed the same downward trend recently.