The front end priced the soft print and the long end did not
The August PCE report cut the October Fed hike from a likely outcome to a minority one, and the yield that has weighed on the TSX all month moved the other way. Core PCE rose 3.0 per cent from a year earlier against a 3.3 per cent consensus. Schwab, citing the CME FedWatch tool, put October hike odds at 37 per cent on Wednesday morning, against 71.2 per cent on the Investing.com Fed Rate Monitor in the September 29 Thread.
Between Monday and Wednesday the 3-month Treasury par yield fell 8 basis points to 4.20 per cent. The 10-year rose 5 basis points to 5.29 per cent, higher than the 5.25 per cent level the Behaviour desk flagged as a 2007 high, and the 30-year rose 8 basis points to 5.64 per cent.
The 10-year minus 2-year slope shows what that did to the curve. The 10-year yield is up 56 basis points since August 28 and the 2-year is up 54, yet the slope fell from 43 basis points on September 3 to 20 on September 21 after the September 16 hike, and it is back to 41. The flattening that followed the hike has reversed before the next decision.
Daily Treasury par yields. The 10-year minus 2-year slope was 43 basis points on September 3, 20 on September 21 and 41 on September 30.
The Market desk tied the TSX gap to rising US yields, and the September 29 Thread found gold falling an average 0.75 per cent on the 13 sessions the 10-year rose. Both mechanisms run through the long end. The October 28 decision sets an overnight rate, so a soft print can remove a hike from the front end without lowering the yield that prices duration, and Wednesday showed both happening in one session.
The Canadian dollar has followed the long-end spread, not the hike odds
USD/CAD rose on 15 consecutive daily observations through Tuesday, from 1.3784 on September 8 to 1.4188 on September 29 by the Bank of Canada daily average, a 2.2 per cent gain since August 28. The US minus Canada 10-year spread widened from 100 to 128 basis points between August 28 and September 28, and 19 of those 28 basis points arrived after the September 16 hike.
The Canadian 10-year closed Monday at 3.96 per cent, up 23 basis points since August 28, while the 2-year rose 36 basis points to 3.37 per cent. The Economy desk put October 28 Bank of Canada hike odds at 59 per cent on core inflation near 2.0 per cent and headline inflation of 3.0 per cent on gasoline up 22.8 per cent, and the Geopolitical desk had Brent at US$102.59 on Tuesday. The energy inflation behind that headline figure does not depend on the Fed calendar, and neither does the currency move it has accompanied.
The spread is the Treasury par 10-year yield less the Bank of Canada benchmark 10-year yield for the same date. USD/CAD is the Bank of Canada daily average rate, which reached 1.4188 on September 29.
What the October 28 decisions can and cannot move
The CRA prescribed rate holds at 3 per cent from Thursday, and the Tax desk reported that the first quarter 2027 rate comes from October Treasury bill auctions, where the September 22 auction averaged 2.39 per cent. That rate follows the Canadian front end. The yields pressing on the TSX, gold and the Canadian dollar follow US duration pricing, and Wednesday separated the two.
US payrolls on Friday, Canadian September CPI on October 19 and the October 28 decisions test which curve leads. On Thursday morning the number to read is the 30-year Treasury yield against 5.64 per cent, since the October hike odds no longer track it.