Category: Market Action

Today’s FOMC Statement contained no surprises:

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

The New York Times reports:

[Jerome H. Powell, Chair,] used his post-meeting remarks to paint a picture of a bifurcated economy, one in which many businesses and households face acute economic pain in the near-term, coupled with the expectation that the economy would snap back once vaccines were widely available — a development that he guessed could come about as soon as midyear.

The United States could then see a long period of unbroken growth, Mr. Powell predicted, signaling that he and his colleagues were prepared to leave rates low for years on end as they try to return the labor market and broader economy to full strength.
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Despite that upgrade [in projected 2021 economic growth], the median Fed official continued to project interest rates near-zero through the end of 2023, demonstrating the central bank’s plan to move glacially coming out of the crisis.

PerpetualDiscounts now yield 5.04%, equivalent to 6.55% interest at the standard equivalency factor of 1.3x. Long corporates now yield 2.80%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained steady at the 375bp reported December 9.

And now it’s time to prepare PrefLetter!

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TXPR closed at 619.68, up 1.03% on the day. Volume today was 3.86-million, behind only December 9 in the past 20 trading days.

CPD closed at 12.34, up 0.74% on the day. Volume was 74,856, on the low side of the median of the past 20 trading days.

ZPR closed at 9.83, up 0.82% on the day. Volume of 160,824 was near the median of the past 20 trading days.

Five-year Canada yields were down 1bp to 0.46% today.

The year’s final scheduled BoC rate decision was announced today:

The Bank of Canada today maintained its target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. The Bank is maintaining its extraordinary forward guidance, reinforced and supplemented by its quantitative easing (QE) program, which continues at its current pace of at least $4 billion per week.

The rebound in the global and Canadian economies has unfolded largely as the Bank had anticipated in its October Monetary Policy Report (MPR). More recently, news on the development of effective vaccines is providing reassurance that the pandemic will end and more normal activities will resume, although the pace and breadth of the global rollout of vaccinations remain uncertain. Near term, new waves of infections are expected to set back recoveries in many parts of the world. Accommodative policy and financial conditions are continuing to provide support across most regions. Stronger demand is pushing up prices for most commodities, including oil. A broad-based decline in the US exchange rate has contributed to a further appreciation of the Canadian dollar.

In Canada, national accounts data for the third quarter were consistent with the Bank’s expectations of a sharp economic rebound following the precipitous decline in the second quarter. The labour market continues to recoup the jobs that were lost at the start of the pandemic, albeit at a slower pace. However, activity remains highly uneven across different sectors and groups of workers. Economic momentum heading into the fourth quarter appears to be stronger than was expected in October but, in recent weeks, record high cases of COVID-19 in many parts of Canada are forcing re-imposition of restrictions. This can be expected to weigh on growth in the first quarter of 2021 and contribute to a choppy trajectory until a vaccine is widely available. The federal government’s recently announced measures should help maintain business and household incomes during this second wave of the pandemic and support the recovery.

CPI inflation in October picked up to 0.7 percent, largely reflecting higher prices for fresh fruits and vegetables. While this suggests a slightly firmer track for inflation in the fourth quarter, the outlook for inflation remains in line with the October MPR projection. Measures of core inflation are all below 2 percent, and considerable economic slack is expected to continue to weigh on inflation for some time.

Canada’s economic recovery will continue to require extraordinary monetary policy support. The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In our October projection, this does not happen until into 2023. To reinforce this commitment and keep interest rates low across the yield curve, the Bank will continue its QE program until the recovery is well underway and will adjust it as required to help bring inflation back to target on a sustainable basis. We remain committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective.

It strikes me that their objective to “keep interest rates low across the yield curve” is not particularly compatible with the government’s objective to extend the average maturity of its debt, which is not going all that well:

Through to mid-November, 61 per cent of gross issuances were treasury bills, higher than the government’s goal of 47 per cent for the year as a whole. Conversely, long-term debt issues, with a maturity of 10 years or more, are running behind plan. Just 9 per cent of debt issued so far this fiscal year is long term; the debt-management plan calls for 15 per cent of gross debt issued this year (including treasury bills) to be long term.
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“Market participants indicated that the Bank of Canada’s Government Bond Purchase Program (GBPP) was the key factor in raising the unprecedented amount of long-term federal government debt in an orderly manner, since the GBPP absorbed a significant portion of the extra issuance,” the summary said.

Translated from the deliberately bland language of central banking, that statement hints that the central bank’s interventions have been needed to allow the government to issue as many long-term bonds as it had.

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Meanwhile, Fitch Ratings is making sounds of disapproval:

Canada’s recently released medium-term financial roadmap reinforces the likelihood of a rising public debt burden and expansionary fiscal policy without precise details of a return to a fiscal anchor and consolidation, says Fitch Ratings. Canada’s public financial profile would weaken relative to its ‘AA’ category peers if the federal budgets for fiscal years 2021-22 and 2022-23 adhere to the government’s medium-term operational forecasts and stimulus plans as outlined in the Fall Economic Statement (FES) without new revenue-raising measures.
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Large general government deficits will translate into a significant spike in consolidated general government debt to 117% of GDP for 2020, slightly higher than the 115% estimate when Canada was downgraded to ‘AA+’ in June. We continue to expect the debt level to rise to 125% in 2022. The government did note that ‘fiscal guardrails’ would be applied to guide an eventual winddown of stimulus upon hitting certain data-driven triggers. However, the precise nature of any long-term fiscal anchor has not yet been disclosed.

PerpetualDiscounts now yield 5.04%, equivalent to 6.55% interest at the standard equivalency factor of 1.3x. Long corporates now yield 2.80%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained steady at the 375bp reported December 2.

Quadravest has announced:

Financial 15 Split Corp. (“Financial 15”) is pleased to announce it has reinstated Class A share dividends at a monthly distribution rate of $0.1257 for each post-consolidation FTN Class A share ($1.5084 annually) and declares $0.05625 for each FTN.PR.A Preferred share ($0.675 annually). The current rate for the Class A shares of $1.5084 is a post-consolidation yield of 17% based on Friday’s pre-consolidation closing price of $3.65. This is an increase in the dividend for the Class A shares from previous guidance. Distributions are payable January 8, 2021 to shareholders on record as at December 31, 2020.

Note that FTN will be trading on a pre-consolidation basis until ‘on or about December 17’.