Canadian bonds slump on Fed hike expectations

The Canadian bonds slumped on Wednesday, following U.S trend after reading strong U.S April consumer price index and hawkish comments from Federal Reserve officials. Moreover, bond prices are likely to be ruled by the movements in global crude oil. The yield on the benchmark 10-year bonds, which moves inversely to its price rose 1bp to 1.324 pct and the yield on the 2-year bonds jumped 2bps to 0.607 pct by 1330 GMT.

Yesterday, the Canadian March manufacturing sales declined 0.9 pct m/m, lower than the market consensus of 1.8 pct m/m fall, from prior down 3.3 pct (revised to -4.0 pct). Individually, ex-autos tumbled 0.7 pct, from down 2.2 pct (Revised to -2.9 pct), new orders fell 2.2 pct, as compared to -8.1 pct in February (Revised to -8.3 pct) and inventories dipped 0.4 pct, from down 0.7 pct in the previous month (Revised to -0.8 pct).

Moreover, the Canadian bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Canada's target. Today, crude oil prices tumbled on profit booking and surging dollar, but continue to hover at record high of $49 per barrel after the American Petroleum Institute reported that U.S. crude supplies fell by 1.1 million barrels for the week ended May 13. Reuters in its recent report said that supply disruptions from Nigeria, Venezuela, the United States and China triggered a U-turn in the oil outlook of Goldman Sachs, which long warned of overflowing storage and another looming crash in prices. Venezuela's oil production has already fallen by at least 188,000 barrel per day (bpd) since the start of the year as PDVSA struggles to make the investment needed to keep output steady. In the United States, crude production has fallen to 8.8 million bpd, 8.4 pct below 2015 peaks as the sector suffers a wave of bankruptcies. And in China, output fell 5.6 pct to 4.04 million bpd in April, compared with the same time last year. Meanwhile, the International benchmark Brent futures fell 0.47 pct to $49.04 by 1300 GMT.

The markets will now focus on this week’s April core CPI and March retail sales (1230 GMT) on Friday. Canadian stocks will look to extend a recent win streak Wednesday morning, but traders may choose to lock in profits as commodity prices eased a bit.