PrefBlog

On the day before Hallowe’en, equities got spooked:

A sell-off in artificial intelligence stocks accelerated on Friday, as investors fretted about whether the industry’s debt-fueled spending spree still justified such high share prices.

The tech-heavy Nasdaq Composite index dropped 2.9 percent on the last trading session of the month, while the broader S&P 500 index shed 1.8 percent, the worst one-day showing since June for both.

The makers of computer chips were particularly hard hit. Intel plunged 29.2 percent after the chipmaker reported financial results that fell short of Wall Street’s expectations. The Philadelphia Semiconductor Index, a benchmark for the industry, fell 7.2 percent.

The shares of Amazon, Nvidia and other tech giants also fell.
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Alphabet this week reported earnings that fell short of investors’ expectations, especially in light of the vast sums it is spending. Google’s parent company suffered its worst day in the stock market on Thursday, with its share price falling 12.6 percent and into negative territory for the year. Alphabet has slid roughly 30 percent since its peak in May, putting the company into a bear market, defined as a loss of 20 percent or more from a recent high. It shed another 1.4 percent on Friday.

Alphabet is one of five “hyperscalers” driving the A.I infrastructure build-out. Two of the others — Oracle and Meta — are also in a bear market. Amazon’s earnings report on Thursday sent its shares falling, leaving it up just 4.1 percent for the year. Microsoft is 7.9 percent higher, close to its high for the year.
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As investors have reduced their growth expectations, Treasury yields, which are sensitive to such expectations, have also fallen. The 10-year Treasury yield dipped back below 5 percent this week, having peaked at 5.3 percent earlier in October.

The Great White North was not immune:

The S&P/TSX Composite Index ended down 629 points, or 1.74%, at 35,620.03, the lowest closing level since October ​14. For the month, the index was up ‌1.09% after falling 2.85% in September.

The TSX technology sector Friday fell 3%, with shares of e-commerce company Shopify down 5.7%.

The materials sector was down 4.8% as the price of ⁠gold fell 3.5%, hitting a one-year low. The precious metal typically comes under pressure when it appears U.S. interest rates are going to rise, sending investors to yield-paying securities instead of bullion.

Heavily weighted financials shed 1.6% and industrials ended 1.2% lower. Shares of TFI International tumbled 17.2% after the transportation and logistics company’s quarterly results missed estimates.

Just two of the 10 major TSX sectors ended higher, ​including energy. It rose 1.7% as US crude oil futures settled 2.1% higher at US$104.12 a barrel on the potential for escalation in the Iran war after the US midterm elections.

The five year Canada yield (GOC-5) was down about 2bp today to 3.52%

The US Personal Consumption Expenditures index picked up in September:

Prices, as measured by the Personal Consumption Expenditures index, increased 0.5 percent in September from a month earlier and 3.6 percent compared with the same time last year, according to a report released on Thursday by the Bureau of Economic Analysis.
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“Core” prices, which exclude more volatile categories like food and energy, jumped 3.1 percent in September annually and rose 0.3 percent from a month earlier. That month-over-month increase was also 0.3 percent in August.
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The data also showed that Americans’ personal income grew more slowly last month. Thursday’s release showed personal income increased 0.2 percent, less than the 0.3 percent increase reported in August.

The Fed stood pat today:

The Federal Open Market Committee approved the following statement for release by a 10 – 2 vote:

The Committee decided to maintain the target range for the federal funds rate at 3-3/4 to 4 percent, in support of the Federal Reserve’s dual mandate. The Committee is continuing its policy of maintaining ample reserves in the banking system.

Economic activity is expanding at a strong pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little.

Inflation remains elevated. The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee’s 2 percent goal. The Committee will deliver price stability.

Voting against the monetary policy action were Lisa D. Cook and Beth M. Hammack, who preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting.

I am pleasantly surprised to learn that there are whispers about Social Security during the mid-terms in that southern place:

Republican senators rarely endorse raising taxes, especially from under the lights of a debate stage. But Senator Roger Marshall, the Kansas incumbent seeking re-election, said he supported the idea to strengthen Social Security.

“I would eliminate the cap altogether,” Mr. Marshall said in a debate last Wednesday, referring to the $184,500 income ceiling on payroll taxes, the dedicated tax that finances the social insurance program. That means higher earners would be subject to taxes on a larger share of their income. His Democratic opponent, Adam Hamilton, supported raising the cap — though he wasn’t yet sure by how much.
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Many Senate candidates in battleground states have clung to expected party lines and broad pledges to protect the program. But a growing number of Republican candidates, including Mr. Marshall, have said they’re open to the idea of subjecting more earned income to Social Security taxes. They join sitting Republican lawmakers including Senator Bernie Moreno of Ohio and Representatives Tom Cole of Oklahoma and Lloyd Smucker of Pennsylvania.
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Social Security is financed through workers’ payroll taxes, a dedicated tax of 6.2 percent of earnings paid by both employees and employers (for a total of 12.4 percent). It’s applied to the first $184,500 of earnings in 2026 — that’s known as the taxable maximum, which rises with average wages.
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In a recent analysis of 41 Senate candidates in competitive races (there are 35 races total), 20 candidates have endorsed raising or eliminating the cap, according to Jon Schwabish, an economist who focuses on retirement and tax policy issues and the founder of PolicyViz, a data analysis firm.
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Eliminating the payroll cap altogether — without providing any corresponding rise in benefits to individuals paying more in taxes — would close about 58 percent of the financing gap over the next 75 years, according to Social Security’s projections, though other estimates vary. (Providing higher benefits to people who pay more in tax wouldn’t go quite as far in narrowing the gap.)
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Raising taxes is not the only way to bolster the program: benefit reductions, slowing the cost-of-living adjustments, raising the retirement age or collecting other taxes are other options, some of which were also mentioned in recent political ads, debates or on candidates’ websites.

PerpetualDiscounts now yield 5.83%, equivalent to 7.58% interest at the standard conversion factor of 1.3x. Long corporates yielded 5.33% on 2026-10-21. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to 225bp from the 220bp reported October 21.

Interesting times for equities!

Stocks tumbled on Thursday and the Nasdaq posted its steepest daily drop since early June as a batch of high-profile earnings reports ignited fresh fears about the AI spending race, sending investors scurrying to the safety of the bond market. Yields on U.S. Treasuries, which move inversely to prices, saw some of their biggest one-day declines in years.
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Meta Platforms’ results beat analyst expectations, but its stock slid 7.0% as the Facebook parent posted its first cash outflow in more than a decade due to ​its AI-related expenditures and announced plans to issue non-voting shares in a two-for-one split to ‌raise capital to spend on the nascent technology.
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Domestically, markets are pricing in nearly 80% odds that the Bank of Canada will hike interest rates next week, in what would be its first move on rates in a year, as it fights off the inflationary impact of surging crude oil prices. Several economists, however, say the bank should stay on hold for now.

The yield on the benchmark US ⁠10-year Treasury note fell 19.3 basis points to 4.953%, its biggest daily drop since ​March 10, 2023. The yield had risen to 5.3645% on October 7, its highest since April 2002.
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The Dow Jones Industrial Average rose 11.89 points, or 0.02%, to 52,867.98, the S&P 500 lost 93.74 points, or 1.21%, to 7,663.43 and the Nasdaq Composite lost 694.00 points, or 2.60%, to 26,008.86.

The S&P/TSX Composite Index ended down 351.54 points, or 1%, at 35,973.45. It posted on Wednesday its highest closing level since September 22.

CIBC has announced an LRCN issue, 6.631%+297 (taxable to holders as interest):

CIBC (TSX: CM) (NYSE: CM) today announced a domestic public offering of $1.0 billion of 6.631% Limited Recourse Capital Notes Series 11 (Non-Viability Contingent Capital (“NVCC”)) (Subordinated Indebtedness) (the “LRCNs”). The LRCNs will be sold to certain institutional investors through a dealer syndicate led by CIBC Capital Markets.

The LRCNs will be issued at a price of $1,000 per note and will bear interest at a rate of 6.631% annually, payable semi-annually, for the initial period ending on, but excluding, November 28, 2031. Thereafter, the interest rate on the LRCNs will reset every five years at a rate equal to the prevailing 5-year Government of Canada Yield plus 2.970%. The LRCNs will mature on November 28, 2086. The expected closing date of the offering is October 28, 2026.

In connection with the issuance of the LRCNs, CIBC will issue Non-Cumulative 5-Year Fixed Rate Reset Class A Preferred Shares Series 66 (NVCC) (the “Series 66 Shares”) to be held by Computershare Trust Company of Canada as trustee of CIBC LRCN Limited Recourse Trust (the “Limited Recourse Trust”). In case of non-payment of interest on or principal of the LRCNs when due, the recourse of each LRCN holder will be limited to that holder’s proportionate share of the Limited Recourse Trust’s assets held in respect of the LRCNs, which will consist of Series 66 Shares except in limited circumstances.

CIBC may redeem the LRCNs during the period from October 28 to and including November 28, commencing on October 28, 2031 and every five years thereafter with the prior written approval of the Superintendent of Financial Institutions (Canada), in whole or in part on not less than 10 days’ nor more than 60 days’ prior notice.

The net proceeds to CIBC from the sale of the LRCNs will be used for general corporate purposes, which may include the redemption of outstanding capital securities of CIBC, and/or the repayment of other outstanding liabilities of CIBC.

The LRCNs will be offered by way of a prospectus supplement to the bank’s short form base shelf prospectus dated October 5, 2026, to be filed on or about October 20, 2026 with the securities commissions and other similar regulatory authorities in each of the provinces and territories of Canada.

PerpetualDiscounts now yield 5.76%, equivalent to 7.49% interest at the standard conversion factor of 1.3x. Long corporates yielded 5.31% on 2026-10-21. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 220bp from the 230bp reported October 14.