Canada's 10-year government bond yield rose to 3.67 percent Monday, its highest level since May, as the bond market tried to reconcile two contradictory stories in the same week. Canadian data has been unambiguously strong. US data has been unambiguously weak. The yield's climb reflects a market that has not yet decided which story matters more for the Bank of Canada's next move.
Canadian employment rose by 75,100 in July, nearly five times the 15,000 economists expected, and the unemployment rate fell to 6.4 percent, a two-year low. Second quarter GDP grew at an annualized 3.4 percent, well above the Bank of Canada's own 2.5 percent forecast. On the same Friday, the US economy shed 23,000 jobs against a forecast gain of 85,000, with sharp downward revisions to prior months.
Why the Two Data Sets Point the BoC and the Fed in Opposite Directions
A domestic labour market this strong, paired with growth running nearly a full point above the Bank of Canada's own projection, is the kind of data that ordinarily builds a case for tightening rather than holding. The Bank held its policy rate at 2.25 percent for a sixth consecutive meeting on July 15, citing energy-driven inflation pressures it judged to be easing. July's data has made that judgment harder to sustain.
The Federal Reserve under Chair Kevin Warsh faces close to the opposite problem. A weak July jobs report, with material downward revisions on top of it, is the kind of data that ordinarily strengthens the case for a rate cut. Markets have moved to price a Fed cut at the September meeting as close to consensus.
The 10-year yield's rise since the July 15 Bank of Canada decision traces both threads at once.
The yield gained roughly 14 basis points between the Bank of Canada's July 15 hold and Friday's weak US payrolls report, even as the two data points pointed toward opposite policy directions.
What Wednesday's US CPI Print Does to This Picture
The US Consumer Price Index for July releases Wednesday at 8:30 a.m. Eastern, and it is the single data point most likely to firm up or unsettle the case for a September Fed cut. A soft print supports the case Friday's jobs data built. A hot print, arriving on top of oil prices that have been rising on Strait of Hormuz uncertainty, complicates a Fed already navigating a weak labour market and elevated energy costs simultaneously.
For Canadian portfolios, the read-through runs through the exchange rate as much as through domestic policy. USD/CAD fell to 1.3929 Monday, an eight-week high for the Canadian dollar, driven almost entirely by the gap between Canada's strong data and the US's weak data rather than by anything the Bank of Canada has done.
The September 2 Decision Is Still Priced as a Hold
Despite the strength in Canadian data, bond markets are pricing only a 1 percent probability of a Bank of Canada hike at the September 2 decision, rising to 31 percent by the October 28 meeting according to overnight index swap pricing. The Bank's own framing in July, that energy-driven inflation pressures were easing even as some policymakers questioned the durability of that view, suggests the Governing Council is more likely to hold and wait for confirmation across multiple data points than to react to one strong jobs report and one upside GDP surprise in isolation.
The risk to that read sits with oil. If elevated crude prices tied to the unresolved Hormuz standoff keep feeding through to headline inflation at the same time domestic data stays this strong, the case for the Bank to move earlier than October builds with each data release between now and September 2.