PrefBlog

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.
…
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.
…
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.
…
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.
…
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.)
…
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.

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.
…
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.
…
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.
…
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.

Canadian inflation rose:

The annual pace of inflation rose to 3.1 per cent in September as war in the Middle East continued to drive up gas prices, Statistics Canada said Monday.

The agency said the acceleration was led by a 27.8-per-cent spike in gasoline prices last month compared with a year earlier, despite the switch to the less expensive winter gas blend.

Excluding gasoline, consumer prices increased 2.2 per cent year-over-year in September.
…
Meanwhile, grocery prices increased 1.7 per cent last month, the smallest yearly increase since May 2024, according to Statistics Canada.

Driving the slowdown was a 2.9-per-cent drop in prices for fresh vegetables, while sugar and confectionary items fell 2.7 per cent.

Beef prices, meanwhile, rose at a slower pace in September, up 8.7 per cent compared with an 11 per cent increase in August.

Despite the year-over-year slowdown, the agency said prices for groceries have increased 33 per cent since September 2020.
…
During a media roundtable from Thailand on Saturday, Macklem warned that persistently high energy prices were increasing the risk of broader inflation and that the central bank was prepared to raise rates if necessary.

He said the prevailing message from his peers at the International Monetary Fund meetings in Bangkok was that the global economy has been performing better than expected in the face of ongoing wars in Iran and Ukraine, sweeping trade disruptions and higher borrowing costs from rising bond yields.

But Macklem also said that resilience is increasingly “under strain” as shocks like the Middle East conflict persist and drive up energy prices.

Some of those sources of resilience – like releasing global oil reserves – are being depleted, he said.

“You can only release strategic energy, oil reserves so many times, but that has helped contain this energy price shock,” Macklem said.

So it was an active day…:

Money markets are pricing in strong odds that the Bank of Canada will hike its key lending rate next week, in a major rethink of interest rate probabilities ignited mostly by governor Tiff Macklem’s hawkish comments on the weekend. The repricing weighed on Canada’s equity market Monday while sending domestic bond yields sharply higher.

Implied interest rate probabilities in overnight index swaps markets suggest a 75 per cent chance there will be a quarter point rate hike by the bank on Oct. 28, according to Bloomberg data. The market is positioned for an overnight rate of 2.455 per cent at the conclusion of next week’s policy decision, rising to 2.614 per cent by the Dec. 9 decision. The current overnight rate is 2.25 per cent.

That’s a considerable swing from just last week, when markets were pricing in less than 50 per cent odds of a rate hike this coming week, even though they were putting strong odds on a hike by the December meeting.
…
Canadian bond yields today are reflecting the reassessment of interest rate move odds. The 2-year yield, sensitive to central bank policy, is up 14 basis points in afternoon trading. That’s four times the move higher today in the equivalent U.S. Treasury, and a large move in one day for bond markets.

The five-year yield – closely watched for its impact on fixed mortgage rates – is up by the same amount, now back to where it started this month after trending lower over the last couple of weeks.
…
For its part, the TSX underperformed U.S. indexes, with the interest rate sensitive utilities sector among the worst performers, losing 1.4 per cent. Real estate lost 1.3 per cent.
…
The ⁠S&P/TSX Composite ​Index ended down 247.92 points, or 0.7%, at 35,928.63, after posting its highest closing level in more than three weeks on Friday.

The Canada five-year bond closed at 3.68%, up 15bp on the day.