PrefBlog

PerpetualDiscounts now yield 6.75%, equivalent to 8.78% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.18% on 2024-4-5 and since then the closing price of ZLC has changed from 14.79 to 14.62, a decrease of 115bp in price, implying an increase of yields of 9bp (BMO reports a duration of 12.33, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 5.27%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to 350bp from the 345bp reported April 10.

TXPR closed at 581.04, up 0.86% on the day. Volume today was 5.57-million, highest by far of the past 21 trading days.

CPD closed at 11.57, up 1.05% on the day. Volume was 163,230, second-highest of the past 21 trading days.

ZPR closed at 10.00, up 1.42% on the day. Volume was 611,560, highest by far of the past 21 trading days.

Five-year Canada yields were unchanged at 3.80%.

The day was enlivened by the unexpected call for redemption of RY.PR.Z, which ignited a furious repricing of bank issues.

TXPR closed at 576.10, down 0.87% on the day. Volume today was 2.22-million, above the median of the past 21 trading days.

CPD closed at 11.45, down 0.87% on the day. Volume was 67,520, second-highest of the past 21 trading days.

ZPR closed at 9.86, down 0.90% on the day. Volume was 135,870, fourth-highest of the past 21 trading days.

Five-year Canada yields were up to 3.80%.

The Globe managed to get some Canadian content into their commentary:

Canada’s main stock index fell to a five-week low on Monday as long-term borrowing costs climbed and investors worried that this week’s federal budget would propose raising taxes.
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U.S. stocks also fell as an early lift from a strong retail sales report gave way to a jump in Treasury yields and concerns about rising tensions in the Middle East.

I’m going to go with US retail sales, although that means the abject surrender of Canadian sovereignity and the demise of Canadian exceptionalism:

Treasuries showed a substantial move to the downside during trading on Monday, as strong U.S. retail sales data added to concerns about the outlook for interest rates.

Bond prices regained some ground after falling sharply in early trading but remained firmly negative. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, surged 12.9 basis points to 4.628 percent.

With the significant increase on the day, the ten-year yield ended the session at its highest closing level in five months.

The sell-off by treasuries came after the Commerce Department released a report showing much stronger than expected U.S. retail sales growth in the month of March.

The Commerce Department said retail sales climbed by 0.7 percent in March after advancing by an upwardly revised 0.9 percent in February.

TXPR closed at 581.18, down 0.60% on the day. Volume today was 1.67-million, below the median of the past 21 trading days.

CPD closed at 11.55, down 0.69% on the day. Volume was 97,270, second-highest of the past 21 trading days.

ZPR closed at 9.95, down 0.80% on the day. Volume was 189,380, second-highest of the past 21 trading days.

Five-year Canada yields were down to 3.73%.

No surprises from the BoC:

The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is continuing its policy of quantitative tightening.

The Bank expects the global economy to continue growing at a rate of about 3%, with inflation in most advanced economies easing gradually. The US economy has again proven stronger than anticipated, buoyed by resilient consumption and robust business and government spending. US GDP growth is expected to slow in the second half of this year, but remain stronger than forecast in January. The euro area is projected to gradually recover from current weak growth. Global oil prices have moved up, averaging about $5 higher than assumed in the January Monetary Policy Report (MPR). Since January, bond yields have increased but, with narrower corporate credit spreads and sharply higher equity markets, overall financial conditions have eased.

The Bank has revised up its forecast for global GDP growth to 2¾% in 2024 and about 3% in 2025 and 2026. Inflation continues to slow across most advanced economies, although progress will likely be bumpy. Inflation rates are projected to reach central bank targets in 2025.

In Canada, economic growth stalled in the second half of last year and the economy moved into excess supply. A broad range of indicators suggest that labour market conditions continue to ease. Employment has been growing more slowly than the working-age population and the unemployment rate has risen gradually, reaching 6.1% in March. There are some recent signs that wage pressures are moderating.

Economic growth is forecast to pick up in 2024. This largely reflects both strong population growth and a recovery in spending by households. Residential investment is strengthening, responding to continued robust demand for housing. The contribution to growth from spending by governments has also increased. Business investment is projected to recover gradually after considerable weakness in the second half of last year. The Bank expects exports to continue to grow solidly through 2024.

Overall, the Bank forecasts GDP growth of 1.5% in 2024, 2.2% in 2025, and 1.9% in 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026.

CPI inflation slowed to 2.8% in February, with easing in price pressures becoming more broad-based across goods and services. However, shelter price inflation is still very elevated, driven by growth in rent and mortgage interest costs. Core measures of inflation, which had been running around 3½%, slowed to just over 3% in February, and 3-month annualized rates are suggesting downward momentum. The Bank expects CPI inflation to be close to 3% during the first half of this year, move below 2½% in the second half, and reach the 2% inflation target in 2025.

Based on the outlook, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months. The Council will be looking for evidence that this downward momentum is sustained. Governing Council is particularly watching the evolution of core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

But this news was overshadowed by a hot US inflation number:

A closely watched measure of inflation remained stronger than expected in March, worrying news for Federal Reserve officials who have become increasingly concerned that their progress on lowering price increases might be stalling.

The surprisingly stubborn inflation reading raised doubts among economists about when — and even whether — the Fed will be able to start cutting interest rates this year.

The Consumer Price Index climbed 3.8 percent on an annual basis after stripping out food and fuel prices, which economists do in order to get a better sense of the underlying inflation trend. That “core” index was stronger than the 3.7 percent increase economists had expected, and unchanged from 3.8 percent in February. The monthly reading was also stronger than what economists had forecast.

Counting in food and fuel, the inflation measure climbed 3.5 percent in March from a year earlier, up from 3.2 percent in February and faster than what economists have anticipated. A rise in gas prices contributed to that inflation number.

The BoC’s Monetary Policy Report had some things to say:

Inflation is slowing as monetary policy works to reduce inflationary pressures.

CPI growth was 2.8% in February, and core measures of inflation are now close to 3%. Key indicators of underlying price pressures are improving, but most have not yet fully normalized.

After essentially no growth in the second half of 2023, GDP is estimated to rebound in early 2024. Quarterly GDP growth is likely to be volatile around 2%. On an annual average basis, growth is 1.5% in 2024, supported by strong population growth. It then averages about 2% in 2025 and 2026 (Table 2 and Table 3).

Growth in GDP per capita is expected to be negative in the first half of 2024, although it improves throughout the year and into early 2025. The pickup is driven by easing financial conditions, the fading effects of past increases in interest rates, and improving business and consumer confidence.

Potential output growth is robust in 2024. This reflects strong immigration, which more than offsets the ongoing weakness in productivity growth. Moderate excess supply in the Canadian economy is expected to remain through 2024.

It starts to diminish in early 2025 as demand growth remains solid and supply growth moderates. The economy is expected to return to balance in 2026.
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The nominal neutral interest rate in Canada is
estimated to be in the range of 2¼% to 3¼%, up 25 basis points from the January Report. The economic projection assumes that the neutral rate is at the midpoint of this range. Details about the Bank’s annual assessment are provided in the Appendix.
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The Bank estimates that the nominal neutral rate in Canada has risen to lie within a range of 2.25% to 3.25%, which is 25 basis points higher than in the April 2023 assessment. The midpoint estimate consists of a 2% inflation target and a 0.75% real neutral rate. This increase reflects the impacts of an upward revision to the US neutral rate and changes in key Canadian domestic factors.

Because Canada is a small open economy, its neutral rate of interest is influenced by global economic conditions. The Bank uses an estimate of the neutral rate for the United States as a proxy for the global neutral interest rate. The nominal US neutral rate is currently estimated to be within a range of 2.25% to 3.25%. The current estimate of the neutral rate is 25 basis points higher than in the April 2023 Report and is largely explained by the stronger US potential output growth driven by higher population and productivity growth. To a lesser extent, higher government debt has also contributed to the higher neutral rate.

For Canada, stronger average growth in trend labour input exerts upward pressure on the Canadian neutral rate. Population growth matters, not only because of its impact on growth in the labour force but also because of how it affects the composition of borrowers and savers. A fast-growing population increases the proportion of young borrowers relative to middle-aged and older savers, and this puts upward pressure on the neutral rate. However, offsetting this pressure is weaker growth in TLP.

Like potential output, the neutral rate is unobservable and can be inferred only by assessing the evolution of observed data. Considerable uncertainty surrounds its estimation. This reflects the uncertainty around the factors that drive it, such as potential output and the balance between savings and investment.

All in all, the market is assuming a more hawkish policy stance:

The central bank’s decision arrived shortly after the U.S. released higher-than-expected inflation figures at 830 am ET. The data sent the U.S. dollar spiking, pushing the Canadian currency down about half a cent US, and it slipped further later to a four-and-a-half month low to below 73 cents US. Bond yields in both Canada and the U.S. rose sharply after the U.S. data and at last check two-year yields were up about 18 basis points – a large one-day move. Canada’s five-year yield was up 14 basis points at 3.732%, nearing its high of February. All this suggests fixed mortgage rates will see some upward pressure in the days ahead.

Stock markets in both the U.S. and Canada immediately tumbled as the U.S. inflation numbers were released. Traders are now assigning only about 10 per cent odds that the Federal Reserve will start cutting rates in June.
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The following table details how swaps markets are pricing in future moves in the Bank of Canada overnight rate, according to Refinitiv Eikon data as of 1121 am ET. The current Bank of Canada overnight rate is 5 per cent. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.

Monday’s tote board:

Tote board after the BoC announcement (11:21 am):

PerpetualDiscounts now yield 6.66%, equivalent to 8.66% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.18% on 2024-4-5 and since then the closing price of ZLC has changed from 14.79 to 14.71, a decrease of 54bp in price, implying an increase of yields of 4bp (BMO reports a duration of 12.33, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 5.22%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to 345bp from the 340bp reported April 3.