Category: Market Action

David Berman penned a piece in Saturday’s Globe titled Bonds are in the dumps. Here’s why this investor is buying:

Hanif Mamdani, the lead manager of Royal Bank of Canada’s giant PH&N High Yield Bond Fund, offers a high-profile example of an investor looking to take advantage of eye-popping bond yields.

He’s now prowling for corporate bonds he believes could deliver double-digit annualized returns – breathtaking gains in the normally staid world of bonds – within a couple of years.
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Now, he believes that one of the most promising areas of the market is Canadian corporate bonds with investment grade ratings that are now trading at unusually high yields.

He pointed to a couple of examples.

He bought CIBC’s limited recourse capital notes – or LRCN, a subordinated debt instrument with a five-year term – with yields as high as 7.4 per cent.

The trouble is, of course, that LRCNs are not bonds and are not even genuine subordinated debt, despite OSFI’s best efforts to pull the wool over the eyes of unwary investors. They are preferred shares dressed up as bonds to allow portfolio managers and investment companies to gull the naive. Another problem, of course, is that the term is not, in fact, five years.

TXPR closed at 599.96, down 0.73% on the day. Volume today was 3.07-million, by far the highest of the past 21 trading days. The day was again enlivened by late-day movement, some of it in the Extended Session:

CPD closed at 12.02, down 0.41% on the day. Volume was 51,310, slightly below the median of the past 21 trading days.

ZPR closed at 10.03 down 0.20% on the day. Volume of 94,850 was well below the median of the past 21 trading days.

Five-year Canada yields were down to 3.10% today.

How ’bout that US inflation number, eh?

The Consumer Price Index rose 9.1 percent from a year ago, a 40-year high that defied expectations of moderating price pressures. Food, rent and gasoline were among the categories that recorded the biggest increases, further squeezing Americans’ budgets.
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The report contained unwelcome news beyond the headline number. A core inflation index that strips out food and fuel prices — giving a sense of underlying inflation trends — remains high and came in faster than economists expected. The core index climbed 5.9 percent the year through June, barely a slowdown from 6 percent in the previous report. The core measure actually climbed 0.7 percent from May to June, more than the previous monthly increase and bad news for central bankers.

Underlying inflation, as estimated by the New York Fed, a little less severe:

• The UIG “full data set” measure for June is currently estimated at 4.8%, a 0.1 percentage point decrease from the current estimate of the previous month.
• The “prices-only” measure for June is currently estimated at 6.0%, a 0.1 percentage point increase from the current estimate for the previous month.
• The twelve-month change in the June CPI was +9.1%, a 0.5 percentage point increase from the previous month.
  • -For June 2022, trend CPI inflation is estimated to be in the 4.8% to 6.0% range, a slightly wider range than May, with its lower bound 0.1 percentage point lower and its upper bound 0.1 percentage point higher.

The day was enlivened by a ‘shock and awe’ BoC policy rate hike of 100bp, which didn’t affect the market so much as 75bp has been considered a certainty for some time. The preferred share market decided it was shocked by the news, but got used to it as the day wore on:

The net result was a loss of 33bp on the day.

PerpetualDiscounts now yield 6.09%, equivalent to 7.92% interest at the standard equivalency factor of 1.3x. Long corporates now yield 5.23%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) remains at 270bp, the same as reported July 6.

The CMHC is predicting a decline in house prices:

Canada Mortgage and Housing Corp., which was criticized in 2020 for sticking to a pessimistic outlook for housing prices early in the pandemic, is revising its forecast because the Bank of Canada will likely continue to hike its benchmark interest rate aggressively to slow runaway inflation, which makes it harder for residents to afford a mortgage.

The federal agency revised down the percentage gain it expects from 2021 to 2022, with the average price now forecast to climb 11 per cent instead of 13.7 per cent. The forecast is for the full year and it includes the first quarter when home prices peaked.

The agency also expects the average home price in Canada to decline as much as 5 per cent from the first quarter of this year to the second quarter of next, hitting a low of $742,970, according to a blog on CMHC’s website.

Although home prices have plummeted since the central bank started raising interest rates in March, CMHC chief economist Bob Dugan said he was “leery” of forecasting a steeper price decline when the housing shortage is so severe.

“I have trouble believing in a very big price correction,” Mr. Dugan said. “I don’t want to say that it can’t happen. It is possible for a 10-per-cent price correction like some people are saying. But I’m just leery of that because of the supply shortage,” he said.

It was a wild day for the TXPR as all the cowboys placed their bets on what the BoC is going to do tomorrow and how the market will react:

This chart does not do justice to the strength of the rally that began at about 3pm, since values after 4pm are cut off – the Exchange doesn’t seem to have a coherent policy about when their reporting should end! TXPR is shown as ending the day – after the Extended Trading Session – at 607.97, as opposed to its 4pm value of 605.39 (and its close yesterday at 610.21). The low for the day was 603.17, which I understand from other sources is a new 52-week low.

The New York Fed has released its June 2022 Survey of Consumer Expectations:

Inflation

• Median one-year-ahead inflation expectations increased to 6.8%, from 6.6% in May, marking a new series high. In contrast, median three-year ahead inflation expectations decreased to 3.6% from 3.9%. The increase in short-term expectations was driven by respondents over age 60 and respondents with at least some college education. The decline in medium-term expectations was broad-based across education and income groups. Our measures of disagreement across respondents (the difference between the 75th and 25th percentiles of inflation expectations) increased at the one-year-ahead horizon and remained unchanged at the three-year-ahead horizon.
• Median five-year ahead inflation expectations, which have been elicited in the monthly SCE core survey on an ad-hoc basis since the beginning of this year, declined to 2.8% from 2.9%. After being stable at 3.0% during the first three months of the year, the series has trended down slightly. Disagreement across respondents in their five-year ahead inflation expectations has been trending up during this period and increased again in June.
• Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—increased at the one-year ahead horizon to a new series high, but remained unchanged at the three-year ahead horizon. Uncertainty at the five-year ahead horizon increased.
• The median expected change in home prices one year from now dropped sharply to 4.4% from 5.8%. This is the lowest reading of the series since February 2021. The decline, the second largest recorded in the survey’s series only to the sharp drop at the onset of the pandemic, was broad based across age, education, and income groups. The decline was largest in the West census region.
• Expectations about year-ahead price changes increased by 0.1 percentage point for gas (to 5.6%), rent (to 10.3%), medical care (to 9.5%), and college education (to 8.7%). The median one-year-ahead expected change in the price of food decreased by 0.1 percentage point to 9.2%.

There are also reports on expectations regarding the labour market and household finance.

Jobs, jobs … whoopsy!:

The Canadian economy posted a surprise loss of jobs in June, the first monthly decline that was not associated with tighter public-health restrictions since the outset of the pandemic.

Overall employment fell by 43,000 last month, fully retracing the increase of 40,000 in May, Statistics Canada said on Friday. Financial analysts were expecting a gain of 22,500 positions, based on the median estimate. The job losses were especially stark for the self-employed and those 55 and up.

Despite the decline, the unemployment rate fell to a new record low of 4.9 per cent (from 5.1 per cent) as fewer people searched for work.

Hiring conditions remain challenging in Canada. At last count, employers were recruiting for about one million positions – far greater than job-vacancy levels before the pandemic, impacting salaries.

Average hourly wages rose 5.2 per cent in June from a year earlier, up from 3.9 per cent in May. Wages have been accelerating as the labour shortage drags on, although pay hasn’t kept pace with inflation.

The US did better:

The economy added 372,000 jobs in June, a hotter-than-expected boost to the labor market that may ease worries of an impending recession, but that also complicates the job of the Federal Reserve as it seeks to quell inflation.

The unemployment rate was 3.6 percent, the same as a month earlier, the Labor Department reported Friday.

The number is in line with the average gain over the last few months, including 368,000 in April and 384,000 in May. Employers have continued to compete for workers in recent months, with initial unemployment claims rising only slightly from their low point in March.

The private sector has now regained its prepandemic number of jobs, while the public sector remains 664,000 jobs below February 2020. Other than the public sector, no industry lost jobs in June, on a seasonally adjusted basis.
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Wages continued to climb rapidly last month, offering little encouragement to the Federal Reserve as policymakers hope for a slowdown in pay gains that might allow inflation to moderate.

Average hourly earnings picked up by 5.1 percent in the year through June, moderating slightly from 5.3 percent in the year through May. Economists in a Bloomberg survey had expected a slightly bigger cool-down, to 5 percent.

So Musk is attempting to terminate the Twitter deal:

Less than three months ago, Elon Musk, the world’s richest man, struck a blockbuster $44 billion deal to buy Twitter. He proclaimed that the company had “tremendous potential.”
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In a regulatory filing prepared by his lawyers, Mr. Musk said he was terminating the Twitter deal because of a continuing disagreement over the number of spam accounts on the platform. He claimed that Twitter had not provided information necessary to calculate the number of those accounts — which the company has said is lower than 5 percent — and that it had appeared to make inaccurate statements.

The coming lawsuit should be immensely entertaining.

The New York Fed has updated its Global Supply Chain Pressure Index (GSCPI):

• Global supply chain pressures declined in June, continuing the decrease we observed for May.
• The June decline was mostly due to a large decrease in Chinese supply delivery times.
• The moves in the GSCPI over the past three months suggest that although global supply chain pressures have been decreasing, they remain at historically high levels.

PerpetualDiscounts now yield 6.10%, equivalent to 7.93% interest at the standard equivalency factor of 1.3x. Long corporates now yield 5.23%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 270bp from the 255bp reported June 29.