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Canada’s job numbers surprise – is a rate hike far behind?

Also: Neil Irwin's take on the minutes from the latest Federal Reserve meeting, and the case against bonds

Jan 4, 2013

by Max Fawcett

The biggest news of the day is the surprisingly positive Canadian job numbers for December, which came in at 40,000 new jobs created – well ahead of the expectations, which ranged from a decline of 10,000 to an increase of just 5,000. Better yet, most of those jobs created were full-time positions. The strong numbers make a rate hike from the Bank of Canada and its incoming governor more likely, which helps explain why the Canadian dollar has rallied so strongly today on an otherwise quiet day on the markets.

Since it’s so quiet we’ll focus on some interesting reads from the last few days. First, there’s Washington Post economics editor Neil Irwin’s take on the release of the minutes from the U.S. Federal Reserve’s most recent meeting, which sent the price of gold, silver and other precious metals down sharply yesterday. Why did they tank? Because just as the Fed was announcing an expansion of its quantitative easing program, there were discussions about how quickly it could – or should – be wrapped up. “The Fed elected to continue its purchases of $85 billion in bonds every month, known as quantitative easing, to try to push down already super low interest rates and pump money into the ailing economy,” Irwin writes. “But there was disagreement among committee members over how long those purchases should last. ‘A few members’ argued that the policy would likely be needed through 2013, while ‘several others’ thought it would make sense to slow or stop the purchases ‘well before’ the end of the year.”

And over in the U.K., Ian Cowie, one of the country’s top financial journalists has decided to cash in his bonds and put all the proceeds into the stock market in what he calls “the biggest bet of my life.” Risky? Maybe not as risky as it sounds. “Robin Geffen, chief executive of Neptune Investment Management, predicts that bondholders could lose up to 40 per cent of their money when interest rates and inflation rise. He said: ‘The inevitable consequence of quantitative easing is that at some stage we are going to get high inflation, as central banks cannot print money forever to stimulate growth. When the cycle turns and we move from where we are now to interest rates rising, the long end of the bond market will go down by 30 per cent to 40 per cent. There are risks in both bond and equity markets, of course, but the risks in equity markets are well known. We believe that at some point a wave of money will flood out of bonds and into equities. If you are invested in the wrong part of the market, you will incur big losses.’”

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