The TSX has lost 3.6% since August 26 while the S&P 500 has gained 3.3% for a Canadian holding it in Canadian dollars, and the payrolls miss on Friday did nothing to narrow the yield gap that explains the difference.
The Payrolls Miss Rallied Stocks and Left Yields Higher
U.S. employers added 29,000 jobs in September against a forecast of 84,000, and the unemployment rate came in at 4.2% against an expected 4.1%, TheStreet reported. Equities read it as relief. The S&P/TSX Composite gained 0.99% to 35,502.65, ending a four-session slide that had taken it to a one-month low of 35,154.76 on Thursday, and the VIX fell to 15.31 from 16.39.
The Treasury market did not follow. Treasury Department data show the 2-year yield closed at 4.83%, up 5 basis points from Thursday, and the 10-year closed at 5.28%, up 4 basis points and one basis point below the 5.29% reached on September 30, the highest close in the period charted. Bill Adams of Fifth Third Commercial Bank argued that a mediocre jobs report is not weak enough to pull the Fed away from its focus on inflation.
Treasury yields closed higher after the payrolls release, with the 2-year finishing 83 basis points above the top of the federal funds range.
The Federal Reserve raised the federal funds target range to 3.75% to 4.00% on September 16. Treasury par yields are end-of-day readings, so the October 2 values already reflect the payrolls release.
The Fed raised that range to 3.75% to 4.00% on September 16, and 16 of 18 committee participants projected another hike this year, according to a Chase summary of the meeting. A single weak payrolls print did not close an 83 basis point gap between the 2-year yield and the top of the range.
The Currency Carried the Return the TSX Did Not
USD/CAD closed near 1.4252 on Friday, per Investing.com, which is 2.7% above its 1.3875 close on August 26. That move alone turned a 0.6% gain in the S&P 500 in U.S. dollars into a 3.3% gain in Canadian dollars. Over the same window the TSX lost 3.6%.
The S&P 500 has gained 3.3% in Canadian dollars since August 26 while the TSX has lost 3.6%, and the currency accounts for 2.7 points of that 6.9 point gap.
The S&P 500 in Canadian dollars is its daily close multiplied by the USD/CAD close, with all three series rebased to August 26. Both equity series are price returns, and September 7 is omitted because U.S. and Canadian equity markets were closed.
Soft U.S. data did not lift the loonie. Investing.com reported that the Canadian dollar failed to gain after the payrolls release as WTI fell 3.7% to $89.34, on signs of improving supply and European discussion of releasing diesel stockpiles. Oil has been trading supply rather than diplomacy, and on Friday its decline coincided with a weaker loonie rather than a stronger one.
What the Gap Means Heading Into October 28
The Bank of Canada and the Fed both decide on October 28. The Canadian 2-year yield closed Thursday at 3.27%, 102 basis points above the 2.25% policy rate, so the Canadian bond market is already positioned for hikes. The U.S. curve has moved further: the U.S. 2-year is up 64 basis points since August 26, from 4.19% to 4.83%, while the Canadian 2-year was up 34 basis points through Thursday, from 2.93% to 3.27%. The gap between the two stood at 151 basis points on Thursday, against 126 basis points on August 26.
Friday data left that gap intact, and the Bank of Canada had not yet published Canadian yields for the session at the time of writing. Until the U.S. leg stops repricing, the clearest sign that the differential is narrowing would be a USD/CAD close below the Thursday level of 1.4220 together with a Canadian 2-year yield rising faster than the U.S. 2-year. Absent that, Canadian portfolios will keep being separated less by what the TSX does than by how much U.S. dollar exposure they carry.