Treasury rates keep their downward trajectory, and inflation keeps cooling down

• The Canadian Consumer Price Index (CPI) showed a cooling in inflation to 3.1% year-over-year, attributed mainly to lower gasoline prices.
• U.S. jobless claims indicate a strong job market, but analysts warn of holiday season distortions; the U.S. Federal Reserve remains focused on inflation and payroll reports.
• The recovery in crude oil benchmarks was interrupted by a postponed OPEC+ meeting, expected to discuss deeper production cuts.

A bull-flattening trend continued in Treasuries, particularly following a well-received 20-year auction. This came as a relief after the less favorable 30-year offering. Demand for bonds is better than expected, which is reassuring, as that was a considerable concern earlier in the year. Concurrently, major stock indices gained strength, and the U.S. dollar weakened somewhat against most currencies (but again, not against the Canadian dollar).

The recovery in crude oil benchmarks was halted when an OPEC+ meeting, anticipated to discuss deeper production cuts, was unexpectedly postponed. Speculation arose over tensions within OPEC+, particularly with Saudi Arabia. As is often the case when OPEC+ issues orders to cut production, they’re not always followed by all participants.

The Canadian dollar showed minimal reaction to the Consumer Price Index (CPI) report, which indicated a cooling in headline inflation to 3.1% year-over-year (slightly better than expectations). The decrease was attributed mainly to lower gasoline prices and base-year effects. The Bank of Canada (BoC) is still expected to maintain its policy rate at 5% until mid-2024. As we’ve often mentioned here and in our podcast, rising mortgage interest costs, driven by the BoC's rate hikes, have themselves contributed to inflation. In fact, without the impact of rate hikes, inflation would have been close to the BoC’s target of 2%.

In corporate news, we’re nearing the end of the earnings season. The latest retailers to comment on consumer weakness were Best Buy and Nordstrom. They signalled declining consumer spending but also reported much lower inventory levels than usual (as their peers have done in recent weeks). Having low inventory heading into the holiday season reduces the risk for retailers of giving deep discounts. NVIDIA (NVDA) saw its stock fall post-earnings, affected by U.S. export restrictions to China and potential profit-taking after recent gains.

In the U.S., data releases were accelerated ahead of Thanksgiving, with jobless claims data standing out. Initial claims dropped significantly, and continued claims decreased for the first time since early September, indicating strength in the job market. However, analysts warned that these figures were potentially distorted, due to seasonal factors around the holidays.

Listen to this week’s podcast for further insights.