Today’s hot news is the Bank of Canada statement:
In Canada, the quarterly pattern of growth has been uneven. Real GDP grew by 2.4 per cent in the first quarter but is estimated to have contracted by 1 per cent in the second quarter, pulled down by volatile trade flows, uneven consumer spending, and the Alberta wildfires. A pick-up to 3 1/2 per cent is expected in the third quarter as oil production resumes and rebuilding begins in Fort McMurray. Consumer spending will also get a boost from the Canada Child Benefit.
While the fundamental elements of the Bank’s projection are similar to those presented in April, the forecast has been revised down in light of a weaker outlook for business investment and a lower profile for exports, reflecting a downward adjustment to US investment spending. Real GDP is expected to grow by 1.3 per cent in 2016, 2.2 per cent in 2017, and 2.1 per cent in 2018.
…
The Bank forecasts that the output gap will close somewhat later than estimated in April, towards the end of 2017. Underlying this judgement is the downward revision to business investment, which lowers the profile for both real GDP and, to a lesser extent, potential output.While inflation has recently been a little higher than anticipated, largely due to higher consumer energy prices, it is still in the lower half of the Bank’s inflation-control range. Most measures of core inflation remain close to 2 per cent but would be lower without the impact of past exchange rate depreciation. The temporary effects of exchange-rate pass-through and past declines in consumer energy prices are expected to dissipate in late 2016, and the Bank projects that inflation will average close to 2 per cent throughout 2017 as the output gap narrows.
Overall, the risks to the profile for inflation are roughly balanced, although the implications of the Brexit vote are highly uncertain and difficult to forecast. At the same time, financial vulnerabilities are elevated and rising, particularly in the greater Vancouver and Toronto areas. The Bank’s Governing Council judges that the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 1/2 per cent.
In addition the July 2016 Monetary Policy Report was released:
In the housing market, new construction and resale activity remain robust in British Columbia and Ontario, supported by strong demand, in part attributable to population and employment growth. The same factors are fuelling house price increases in these regions, particularly the greater Vancouver and Toronto areas. Sharply rising prices in these markets over the past year raise the possibility that prices are also being driven by self-reinforcing expectations, making them more sensitive to an adverse shock to housing demand. In contrast, housing activity and house prices in the energy-producing provinces have declined; elsewhere in the country, housing growth has been modest, with most markets appearing balanced. Over the projection horizon, the contribution of residential investment to real GDP growth is anticipated to decrease and household sector vulnerabilities to stabilize.
Incompetent traders rejoice! The world got safer for complacent, incompetent traders today!
Michael Coscia, the first person convicted of spoofing after it was made a crime under the Dodd-Frank Act, was sentenced to less than half the prison time sought by federal prosecutors.
Coscia, 54, who had argued for probation, was sentenced Wednesday to three years in prison by U.S. District Judge Harry Leinenweber in Chicago. The only explanation for Coscia engaging in fraud while he was making $150,000 a month trading futures and had a net worth of $15 million was greed, the judge said.
“This is a serious crime with serious consequences,” Leinenweber said before handing down the sentence. He noted that spoofing has been going on for a long time.
Spoofing, which became illegal under the Dodd-Frank Act, carries a maximum of 10 years in prison. The practice typically consists of systematically placing orders without intending to execute them to trick the market into thinking there’s interest in buying or selling that doesn’t actually exist.
Today’s Wall Street Journal brings an attack on Universal Basic Income:
Jason Furman, chairman of the council, suggests that multiple forces, including globalization, automation, and incarceration (many jobs are closed to ex-convicts) has reduced demand for low-skilled workers. What employers will pay for unskilled labor is below what economists refer to as the “reservation wage”: Some workers simply won’t work for so little money.
What’s the solution? If outside forces are depressing low-skilled wages, that strengthens the case for subsidizing those wages so that they will work for what employers can pay. This can be done by expanding the earned-income tax credit, which tops up poor worker’s salaries, and wage insurance, which pays a laid-off worker to accept a lower-paying job. This can’t be done through UBI, which is paid regardless of whether the recipient works, and, according to some studies, encourages some recipients to quit.
Try as I might, I fail to see a problem here. We can agree, I think, that yes, a Universal Income will decrease the number of people willing to work as a Starbucks barista for $15/hour. Many will continue to do it because they just want to get out of the house, others will do it for the extra income, but for the sake of an argument, let’s assume that the require wage goes to $20/hour.
OK, fine. This is not a problem this is just a shift to a new equilibrium in accordance with first year economics. Starbucks will raise the price of their coffee, people will buy less coffee, fewer baristas will be hired and supply will equal demand. Big deal.
The big advantage, not mentioned in the article, is that this will have the same effect on the market as a rise in the minimum wage: low skill jobs will be increasingly automated. Starbucks coffee will go to $6/cup, but there’ll be a new place down the street, Supernovabucks, with fully automated ordering (via your own ‘phone or an in-store kiosk) and robotic coffee making you can see … everything made to order in front of your eyes, with precise settings available for the thickness of the foam on your latte (or whatever it is that is supposed to be so great about Starbucks. I don’t go there). Supernovabucks stores will have only one employee on site, filling up the supply hoppers and cleaning the counters.
And all this will be a Good Thing. Productivity has increased – and it is productivity that makes us rich, not redistribution.
The other problem the WSJ article had was increased taxes. Well, of course marginal tax rates will go up – it can’t be paid for entirely by elimination of suddenly redundant social programmes. Reginald Plutocrat III will be getting his annual cheque for $10,000 and including that in his annual income; if we assume that his current average tax rate is 50% and his income is $150,000, then his average tax rate will have to increase to a little over 53% to make the whole package revenue-neutral for him. And if it’s not revenue neutral – at best – for upper income earners, then the whole thing becomes a wealth transfer from the poor to the rich, which I suspect won’t fly politically.
PerpetualDiscounts now yield 5.21%, equivalent to 6.77% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.70%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 305bp, a sharp narrowing from the 330bp reported July 6.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.5814 % | 1,665.3 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.5814 % | 3,042.2 |
| Floater | 4.93 % | 4.72 % | 91,821 | 16.02 | 4 | 0.5814 % | 1,753.2 |
| OpRet | 4.84 % | 0.15 % | 42,304 | 0.13 | 1 | 0.1187 % | 2,848.1 |
| SplitShare | 5.12 % | 5.15 % | 96,964 | 2.34 | 5 | 0.3069 % | 3,360.4 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.3069 % | 2,621.9 |
| Perpetual-Premium | 5.49 % | -15.97 % | 82,895 | 0.09 | 12 | 0.1691 % | 2,677.6 |
| Perpetual-Discount | 5.26 % | 5.21 % | 99,863 | 15.07 | 26 | -0.0292 % | 2,814.5 |
| FixedReset | 5.10 % | 4.30 % | 148,030 | 7.20 | 88 | 0.2361 % | 1,988.9 |
| Deemed-Retractible | 5.01 % | 4.54 % | 128,108 | 4.86 | 33 | 0.0630 % | 2,763.5 |
| FloatingReset | 2.97 % | 4.82 % | 33,925 | 5.16 | 11 | 0.1504 % | 2,102.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| FTS.PR.H | FixedReset | -1.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-07-13 Maturity Price : 13.65 Evaluated at bid price : 13.65 Bid-YTW : 3.84 % |
| HSE.PR.G | FixedReset | -1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-07-13 Maturity Price : 19.55 Evaluated at bid price : 19.55 Bid-YTW : 5.38 % |
| BAM.PR.C | Floater | 1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-07-13 Maturity Price : 10.08 Evaluated at bid price : 10.08 Bid-YTW : 4.72 % |
| MFC.PR.I | FixedReset | 1.01 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.00 Bid-YTW : 6.72 % |
| TRP.PR.E | FixedReset | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-07-13 Maturity Price : 17.83 Evaluated at bid price : 17.83 Bid-YTW : 4.36 % |
| BAM.PF.B | FixedReset | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-07-13 Maturity Price : 17.76 Evaluated at bid price : 17.76 Bid-YTW : 4.71 % |
| SLF.PR.I | FixedReset | 1.11 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.25 Bid-YTW : 7.76 % |
| MFC.PR.K | FixedReset | 1.11 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.30 Bid-YTW : 8.21 % |
| TRP.PR.A | FixedReset | 1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-07-13 Maturity Price : 14.41 Evaluated at bid price : 14.41 Bid-YTW : 4.55 % |
| VNR.PR.A | FixedReset | 1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-07-13 Maturity Price : 17.51 Evaluated at bid price : 17.51 Bid-YTW : 4.88 % |
| CU.PR.C | FixedReset | 1.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-07-13 Maturity Price : 16.66 Evaluated at bid price : 16.66 Bid-YTW : 4.51 % |
| SLF.PR.G | FixedReset | 1.77 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 14.40 Bid-YTW : 9.51 % |
| SLF.PR.H | FixedReset | 1.86 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 15.88 Bid-YTW : 8.93 % |
| TRP.PR.G | FixedReset | 2.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-07-13 Maturity Price : 18.90 Evaluated at bid price : 18.90 Bid-YTW : 4.77 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.Q | FixedReset | 81,456 | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-05-24 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 4.14 % |
| TD.PF.C | FixedReset | 68,316 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-07-13 Maturity Price : 18.25 Evaluated at bid price : 18.25 Bid-YTW : 4.04 % |
| BNS.PR.M | Deemed-Retractible | 47,838 | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-08-26 Maturity Price : 25.00 Evaluated at bid price : 24.99 Bid-YTW : 3.01 % |
| RY.PR.G | Deemed-Retractible | 39,500 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.11 Bid-YTW : 4.56 % |
| BAM.PF.G | FixedReset | 36,800 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-07-13 Maturity Price : 19.80 Evaluated at bid price : 19.80 Bid-YTW : 4.58 % |
| RY.PR.R | FixedReset | 36,581 | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-08-24 Maturity Price : 25.00 Evaluated at bid price : 27.01 Bid-YTW : 4.19 % |
| There were 27 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BMO.PR.R | FloatingReset | Quote: 21.51 – 21.99 Spot Rate : 0.4800 Average : 0.3569 YTW SCENARIO |
| BAM.PF.G | FixedReset | Quote: 19.80 – 20.14 Spot Rate : 0.3400 Average : 0.2388 YTW SCENARIO |
| HSE.PR.G | FixedReset | Quote: 19.55 – 19.83 Spot Rate : 0.2800 Average : 0.1952 YTW SCENARIO |
| BNS.PR.B | FloatingReset | Quote: 21.57 – 21.85 Spot Rate : 0.2800 Average : 0.1978 YTW SCENARIO |
| TRP.PR.D | FixedReset | Quote: 17.51 – 17.78 Spot Rate : 0.2700 Average : 0.1925 YTW SCENARIO |
| HSE.PR.E | FixedReset | Quote: 19.52 – 19.81 Spot Rate : 0.2900 Average : 0.2142 YTW SCENARIO |
I found this fascinating.
Hungarian government bonds rose, sending the 10-year yield to a record low, after the central bank said it will spur lenders to keep more cash active in the economy as a way of driving down interest rates and stimulating growth
http://www.bloomberg.com/news/articles/2016-07-14/hungarian-bonds-soar-to-record-as-limits-placed-on-bank-deposits