Canadian bonds gain on weak CPI, retail sales

The Canadian government bonds gained Friday after recent economic data showed that the country’s September consumer inflation rose lower than market expectations. Also, weaker-than-expected retail sales drove investors towards safe-haven buying.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 4 basis points to 1.137 percent, the yield on long-term 30-year note fell 3 basis points to 1.803 percent and the yield on short-term 2-year bond slid 3-1/2 basis points to 0.517 percent by 12:50 GMT.

The Canada consumer inflation report revealed a +0.1 percent m/m reading for September, below market expectations for a +0.2 percent m/m reading, as compared to the unrevised -0.2 percent m/m result seen in August. On an annual basis, it increased 1.3 percent y/y, lower than the market expectations of 1.4 percent y/y, from previous 1.1 percent y/y.

Additionally, the Canada retail sales report revealed an overall decrease of -0.1 percent m/m for August, below expectations for a +0.3 percent m/m result, as compared to the -0.2 percent m/m reading seen for July.

Moreover, the Bank of Canada kept its key policy rate on hold at 0.50 percent during its meeting held on Wednesday, as widely expected. Meanwhile, the central bank revised down its economic growth outlook again citing subdued exports outlook and the effect of recent government changes to mortgage markets. 

The BoC now expects the economy to expand just 1.1 percent this year, as compared with its earlier forecast of 1.3 percent. For the next year, it projects the economy to grow 2 percent, downwardly revised from its previous estimate of 2.2 percent. The central bank kept the 2018 economic growth outlook unchanged at 2.1 percent.

The biggest revision was made to housing, which is now anticipated to weigh on the economy next year and negatively contribute 0.2 percentage points to the GDP growth. Earlier, the BoC expected the sector contributing 0.1 percentage points to the growth in 2017. 

According to the central bank, the new measures to ease the housing markets would negatively contribute 0.3 percentage points to the GDP by the end of 2018 as resale activity decelerates and construction shifts to smaller units.

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. Crude oil prices fell further on a stronger U.S. dollar and profit taking by the investors after relishing long rally. The International benchmark Brent futures fell 0.16 percent to $51.30 by 12:50 GMT.

Lastly, Canadian stocks may struggle to continue its winning track Friday morning amid sluggish commodities. The S&P/TSX Composite Index rose 0.05 percent at the close of the trading session to 14,848.27 on Thursday.