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Well, I wouldn’t call today’s Bank of Canada press release upbeat, but the BoC seems to feel that ‘worst-case’ scenarios have been dodged:

The Bank of Canada today maintained its target for the overnight rate at the effective lower bound of ¼ percent. The Bank Rate is correspondingly ½ percent and the deposit rate is ¼ percent.

Incoming data confirm the severe impact of the COVID-19 pandemic on the global economy. This impact appears to have peaked, although uncertainty about how the recovery will unfold remains high. Massive policy responses in advanced economies have helped to replace lost income and cushion the effect of economic shutdowns. Financial conditions have improved, and commodity prices have risen in recent weeks after falling sharply earlier this year. Because different countries’ containment measures will be lifted at different times, the global recovery likely will be protracted and uneven.

In Canada, the pandemic has led to historic losses in output and jobs. Still, the Canadian economy appears to have avoided the most severe scenario presented in the Bank’s April Monetary Policy Report (MPR). The level of real GDP in the first quarter was 2.1 percent lower than in the fourth quarter of 2019. This GDP reading is in the middle of the Bank’s April monitoring range and reflects the combined impact of falling oil prices and widespread shutdowns. The level of real GDP in the second quarter will likely show a further decline of 10-20 percent, as continued shutdowns and sharply lower investment in the energy sector take a further toll on output. Decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown on disposable income and helping to lay the foundation for economic recovery. While the outlook for the second half of 2020 and beyond remains heavily clouded, the Bank expects the economy to resume growth in the third quarter.

CPI inflation has decreased to near zero, as anticipated in the April MPR, mainly due to lower prices for gasoline. The Bank expects temporary factors to keep CPI inflation below the target band in the near term. The Bank’s core measures of inflation have drifted down, although by much less than the CPI, and are now between 1.6 and 2 percent.

The Bank’s programs to improve market function are having their intended effect. After significant strains in March, short-term funding conditions have improved. Therefore, the Bank is reducing the frequency of its term repo operations to once per week, and its program to purchase bankers’ acceptances to bi-weekly operations. The Bank stands ready to adjust these programs if market conditions warrant. Meanwhile, its other programs to purchase federal, provincial, and corporate debt are continuing at their present frequency and scope.

As market function improves and containment restrictions ease, the Bank’s focus will shift to supporting the resumption of growth in output and employment. The Bank maintains its commitment to continue large-scale asset purchases until the economic recovery is well underway. Any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target.

The AIMCo controversy is heating up again:

The Alberta Investment Management Corp., known as AIMCo, took a 10.2 per cent loss in the first three months of the year on a $50-billion portfolio belonging to the largest of its 31 clients, a fund for health care and municipal workers called the Local Authorities Pension Plan, or LAPP. AIMCo also invests the Heritage Savings Trust Fund, a provincial war chest funded by royalties on oil and gas companies.

This was the first public release of overall performance at AIMCo. The loss came when industry data show the median return for Canadian pension plans in this period, which includes the COVID-19 induced market sell off in late March, was a 7 per cent decline.
…
AIMCo’s performance is a significant political issue for Alberta’s governing United Conservative Party, which announced plans last fall to move an $18-billion retirement fund for the province’s teachers under the AIMCo umbrella next year, a move the teachers’ unions opposes. In a press release on Tuesday, the Alberta Teachers’ Association said: “The Alberta teachers’ pension fund would be worth $1.3 billion less today if it had been managed by AIMCo rather than the Alberta Teachers’ Retirement Fund.”

The teachers’ union found their existing fund managers turned in better performance than AIMCo in each of the past seven years. Alberta Teachers’ Association president said the results “refutes the government’s ongoing claim that the management transfer to AIMCo will save money through reduced expenses. “

PerpetualDiscounts now yield 5.85%, equivalent to 7.60% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.31%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed significantly to 430bp from the 445bp reported May 20. We are now below the pre-2020 record of 445bp briefly touched in 2008.

This entry was posted on Wednesday, June 3rd, 2020 at 6:26 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.