Category: Market Action

The Crown Speech was today:

As is common with most Throne Speeches, no dollar figures were announced alongside the promises of new spending. The speech notes that financial details will be released later this year in a fiscal update.
…
“Climate action will be a cornerstone of our plan to support and create a million jobs across the country,” the speech states. “This is where the world is going. Global consumers and investors are demanding and rewarding climate action. … We can create good jobs today and a globally competitive economy not just next year, but in 2030, 2040, and beyond.”

Wednesday’s speech does signal plans to raise tax revenue, stating that the government will “identify additional ways to tax extreme wealth inequality.” It says this will include limiting the stock-option deduction “for wealthy individuals at large, established corporations, and addressing corporate tax avoidance by digital giants.”
…
“Web giants are taking Canadians’ money while imposing their own priorities. Things must change, and will change,” it states. “The government will act to ensure their revenue is shared more fairly with our creators and media, and will also require them to contribute to the creation, production and distribution of our stories, on screen, in lyrics, in music and in writing.”
…
In recent weeks, several economists and policy experts have expressed concern that the federal government has not outlined a plan for dealing with the rapidly expanding federal debt resulting from this year’s emergency spending.

Wednesday’s Throne Speech pushed back at those concerns.

“This is not the time for austerity,” it states. “This COVID-19 emergency has had huge costs. But Canada would have had a deeper recession and a bigger long-term deficit if the government had done less.” The speech says the government will “do whatever it takes, using whatever fiscal firepower is needed to support people and businesses during the pandemic.”

It states that this borrowed spending can be managed by locking in the current historically low interest rates.

“This government will preserve Canada’s fiscal advantage and continue to be guided by values of sustainability and prudence,” it states.

The big problem is that there’s still no plan to pay back the current tidal wave of spending. With respect to ‘taxing the web giants’, I don’t see how this is such a big problem for things like advertising: simple legislation could be introduced such that if Company X is not taxable in Canada, then payments to Company X are not tax deductible by the Canadian paying company. This made a big difference in magazine publishing in days gone by and would be relatively easy to administer to boot. There would still be exceptions to look at – companies like Netflix, that sell services directly – but this would be a much more sharply focussed pool of companies than presently.

The ‘million jobs’ pledge seems to be attracting a lot of attention, but it’s worthwhile pointing out that a million new jobs created tomorrow will only take us back to employment levels of a year ago.

PerpetualDiscounts now yield 5.30%, equivalent to 6.89% interest at the standard equivalency factor of 1.3x. Long corporates now yield 2.85%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to 405bp from the 400bp reported September 16.

CU Inc has announced:

that it will issue $150,000,000 of 2.609% Debentures maturing on September 28, 2050, at a price of $100.00 to yield 2.609%. This issue was sold by BMO Nesbitt Burns Inc., RBC Dominion Securities Inc., TD Securities Inc., Scotia Capital Inc., CIBC World Markets Inc. and MUFG Securities (Canada), Ltd. Proceeds from the issue will be used to finance capital expenditures, to repay existing indebtedness, and for other general corporate purposes.

At the close of 2020-9-21, CIU.PR.A (a Straight Perpetual) was quoted at 22.80-00 to yield 5.08-02%. At the standard equivalency factor of 1.3x, the bid-yield was equivalent to 6.60% interest; the Seniority Spread for this issue pair is therefore 399bp, compared to the 400bp measured on an index-to-index basis on September 16.

Click for Big

TXPR closed at 577.70, down 0.61% on the day. Volume today was 1.92-million, below the median of the past thirty days.

CPD closed at 11.53, down 0.77% on the day. Volume was 72,709, above the median of the past 30 trading days.

ZPR closed at 9.07, down 0.87% on the day. Volume of 145,118 was well below the median of the past 30 trading days.

Five-year Canada yields were down 1bp to 0.36% today.

Canadian inflation is quiescent:

Statistics Canada reported Wednesday that the consumer price index (CPI) 12-month inflation rate was just 0.1 per cent in August, the second straight month at that low level, amid slumping prices for air travel and at the gas pumps. On a month-over-month basis, the index actually fell 0.1 per cent in August from July.
…
However, the central bank’s three measures of “core” inflation – aimed at filtering out transitory price swings in segments of the CPI – look healthier than the pandemic-distorted CPI number, averaging 1.7 per cent, up from 1.6 per cent in July.
…
The pandemic’s impacts on the inflation picture were most evident in prices for two key consumer products that typically rise in the summer due to high demand: Airline tickets were down 16 per cent in August compared with a year earlier, while gasoline was down 11 per cent.

Statscan said that excluding gasoline – a major component of the CPI – year-over-year inflation was 0.6 per cent in August, down from 0.7 per cent in July.

And the FOMC issued a statement after its meeting:

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 picked up in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, 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, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster 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; Loretta J. Mester; and Randal K. Quarles.

Voting against the action were Robert S. Kaplan, who expects that it will be appropriate to maintain the current target range until the Committee is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals as articulated in its new policy strategy statement, but prefers that the Committee retain greater policy rate flexibility beyond that point; and Neel Kashkari, who prefers that the Committee to indicate that it expects to maintain the current target range until core inflation has reached 2 percent on a sustained basis.

So, not much change in Fed monetary policy, as expected; and as usual the most interesting part of the release is the list of dissenters and their rationale.

PerpetualDiscounts now yield 5.31%, equivalent to 6.90% interest at the standard equivalency factor of 1.3x. Long corporates now yield 2.88%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to 400bp from the 395bp reported September 9.

There’s a couple of preferred share lawsuits brewing:

Both client groups allege that throughout 2017 and the first half of 2018, Mr. Liu recommended a new investment strategy that “assured safety” of their principal and provided “reasonable” investment returns.

Shortly after, clients allege they were instead placed in a high-risk strategy that involved short-selling bonds – particularly Canadian government bonds – to purchase long positions in preferred shares, many of which had variable rates or rates that reset based on interest rate movement.

According to court documents, Mr. Liu further advised the clients to begin trading on margin – investing using borrowed money – in order to purchase a larger amount of preferred shares. In some instances, clients allege Mr. Liu engaged in this strategy without informing them or seeking their permission.

None of the clients were told it was “a high-risk, speculative strategy” that was inconsistent with their low-risk investment objectives, the suit alleges.

Shorting governments is similar in investment characteristics to taking a mortgage … see this comment and my answer which refers back to this old comment and my answer. One of the risks I didn’t mention was price risk – the risk that the market values of the two sides of the position could move against you. Unless something else goes wrong, this shouldn’t hurt a long-term investor … but what were the investors in this strategy told?

Eventually, we get down to the same old question: just what the hell does “risk” mean, anyway?

A bit more on the pandemic recovery:

One of the biggest, and perhaps unsurprising, divides is that of income. Lower-paid workers lost more jobs and more hours of work than those with higher pay, partly a reflection of the lockdown of the lower-wage services sector and the ability of higher paid professionals to work from home.

But the magnitude of that divide is revealing. For workers earning around minimum wage, paid $14 an hour or less, 23 per cent either lost their job by August or saw their hours cut by more than half. Workers in the middle of the wage scale, with an hourly rate between $25 and $28, fared better, with just 7 per cent unemployed or losing more than half of their hours.

But for the highest paid workers, the recession had come and gone by August. The top two income categories, those earning between $40 and $48 an hour, and more than $48, did experience a loss of jobs and hours worked in the early days of the pandemic. But they quickly rebounded from those relatively small losses, as the chart below indicates. For those earning $48 an hour or more, 4 per cent more were employed or worked more than in February, before the pandemic shut down the economy.