Category: Market Action

The Bank of Canada is worrying about how to measure inflation:

While the official CPI data indicated potentially worrisome declines in consumer prices in the peak lockdown months – a 0.2-per-cent drop year over year in April, and an even deeper 0.4-per-cent decline in May – the newly developed “analytical price index,” as Statscan is calling it, showed a flat reading for April and a slim 0.1-per-cent decline for May. Still in deflationary territory, but just barely.

Deflation is a potentially catastrophic threat to any economy, so the CPI trend had definitely raised some antennae. It’s an especially big deal for the Bank of Canada, which relies on an inflation target of 2 per cent as its guide to applying monetary policy to help steer the economy to health.
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But during the lockdowns, some items in the usual basket have been unavailable or at least very difficult to buy (e.g. theatre tickets, flights abroad, sit-down restaurant meals, haircuts), while other items became a higher priority on households’ shopping lists (e.g. store-bought food, baking supplies, hand sanitizer). The normal CPI basket didn’t seem to apply; Statscan has been measuring the prices for goods that no one is buying, while under-weighting things that have dominated consumer spending.

The analytical price index – which essentially reweights the CPI to reflect the sudden and sweeping changes in spending patterns – does, indeed, reveal these distortions. While Statscan cautioned that the findings are “experimental,” and shouldn’t be considered a replacement for the official inflation statistics, they do support the views expressed by Bank of Canada Governor Tiff Macklem in a speech and press conference three weeks ago: that prices probably haven’t slid as deeply as the CPI suggests, but the reality is only modestly better.

The comments a few weeks ago were full of yield curve control … and the BoC is buying long bonds:

The BoC on Monday purchased $600-million of 30-year bonds in a reverse auction. The maximum amount had previously been $400-million, according to strategists.
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The 30-year yield jumped by more than 10 basis points – its largest increase since mid-March – last week when the government released its new deficit forecast.

The BoC appears “to be changing the composition” of its balance sheet to more closely match Ottawa’s preference for longer-term borrowing, said Andrew Kelvin, chief Canada strategist at TD Securities.

Investors will on Wednesday eye the BoC’s interest rate announcement, as well as the central bank’s Monetary Policy Report, the first since Tiff Macklem took the reins as governor, for changes to the bond-buying program.

I understand that Enbridge Inc. has issued US$1 bil 5.75% hybrid ser 2020-A due 07/15/2080; the prospectus is available on EDGAR. It will be noted that I am permitted to link directly to this prospectus, as the SEC promotes investor understanding of their investments, unlike the situation in Canada.

The Notes, including accrued and unpaid interest thereon, will be converted automatically (an “Automatic Conversion”), without the consent of the holders thereof (the “Noteholders”), into shares of a newly-issued series of our preference shares, designated as Preference Shares, Series 2020-A (the “Conversion Preference Shares”) upon the occurrence of an Automatic Conversion Event (as defined herein). As the events that give rise to an Automatic Conversion are bankruptcy and related events, it is in our interest to ensure that an Automatic Conversion does not occur, although the events that could give rise to an Automatic Conversion may be beyond our control. We are under no obligation to, and do not intend to, list the Conversion Preference Shares on any stock exchange or other market. We may, at our option, redeem the Notes, in whole at any time or in part from time to time, on any day in the period commencing on (and including) April 15, 2030 (being the date falling three months prior to the Initial Interest Reset Date (as defined herein)) and ending on (and including) the Initial Interest Reset Date, and thereafter on any day in the period commencing on the date falling three months prior to any Interest Reset Date and ending on (and including) any Interest Reset Date at a redemption price equal to 100% of the principal amount thereof, together with accrued and unpaid interest to, but excluding, the date fixed for redemption. Within 90 days following the occurrence of a Tax Event (as defined herein), we may, at our option, redeem all (but not less than all) of the Notes at a redemption price equal to 100% of the principal amount thereof, together with accrued and unpaid interest to, but excluding, the date fixed for redemption. Within 90 days following the occurrence of a Rating Event (as defined herein), we may, at our option, redeem all (but not less than all) of the Notes at a redemption price equal to 102% of the principal amount thereof, together with accrued and unpaid interest to, but excluding, the date fixed for redemption.

I haven’t checked, but I assume the terms – other than coupon and term – are similar to the currently extant ENBA.

PerpetualDiscounts now yield 5.76%, equivalent to 7.49% interest at the standard equivalency factor of 1.3x. Long corporates now yield 2.98%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 450bp from the 440bp reported June 24. We are now back above the pre-2020 record of 445bp briefly touched in 2008.

Great-West Lifeco Inc. has announced:

that it has entered into an agreement with a syndicate of agents co-led by RBC Capital Markets, BMO Capital Markets and Scotiabank for the sale on an agency basis of $250 million aggregate principal amount of debentures maturing July 8, 2050 (the Debentures).

The Debentures will be dated July 8, 2020, will be issued at par and will mature on July 8, 2050. Interest on the Debentures at the rate of 2.981% per annum will be payable semi-annually in arrears on January 8 and July 8 in each year, commencing January 8, 2021, until the date on which the Debentures are repaid. The Debentures are redeemable at any time prior to January 8, 2050 in whole or in part at the greater of the Canada Yield Price and par, and on or after January 8, 2050 in whole or in part at par, together in each case with accrued and unpaid interest.

The Debenture offering is expected to close on or about July 8, 2020. The net proceeds will be used by Lifeco for general corporate purposes.

GWO PerpetualDiscounts are trading to yield about 5.65% today, equivalent to 7.34% interest at the standard equivalency factor of 1.3x, so the Seniority Spread for GWO is about 435bp, comparable to the overall figure reported June 24.

I missed this earlier, but Scotiabank issued US$1,250,000,000 of 4.900% Fixed Rate Resetting Perpetual Subordinated Additional Tier 1 Capital Notes (Non-Viability Contingent Capital (NVCC)) closing on 2020-6-4:

The US$1,250,000,000 aggregate principal amount of 4.900% Fixed Rate Resetting Perpetual Subordinated Additional Tier 1 Capital Notes (Non-Viability Contingent Capital (NVCC)) (subordinated indebtedness) (the “Notes”) offered by this prospectus supplement (this “Prospectus Supplement”) have no scheduled maturity or scheduled redemption date. From and including June 4, 2020 (the “Issue Date”) to, but excluding, June 4, 2025 (such date and each fifth (5th) anniversary date thereafter, a “Reset Date”), interest will accrue on the Notes at an initial rate equal to 4.900% per annum. From and including each Reset Date to, but excluding, the next following Reset Date, interest will accrue on the Notes at a rate per annum equal to the sum, as determined by the Calculation Agent (as defined herein), of (i) the then-prevailing U.S. Treasury Rate (as defined herein) on the relevant Reset Rate Determination Date (as defined herein) and (ii) 4.551%. Subject to the cancellation rights described below, The Bank of Nova Scotia (the “Bank”) will pay interest on the Notes quarterly in arrears on March 4, June 4, September 4 and December 4 of each year, commencing on September 4, 2020 (each, an “Interest Payment Date”).

So that’s pretty close to the initial coupon and spread to five-years as you’d see on a Canadian dollar preferred shares … but the bank can deduct the interest from income for tax purposes. Who needs preferred shares?

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TXPR closed at 531.65, down 0.54% on the day. Volume today was 738,545, the lowest of the past thirty days and far less than second-lowest June 30.

CPD closed at 10.67, up 0.19% on the day. Volume was 37,317, the lowest of the past 30 trading days and less than second-lowest June 30.

ZPR closed at 8.31, down 0.12% on the day. Volume of 539,852 was very high in the context of the past 30 trading days.

Five-year Canada yields were unchanged at 0.38% today.

Marc Jones notes in the Globe:

Canada’s main stock index gave back a small part of this week’s rally on Friday, as a record surge in COVID-19 cases in the United States raised fears of another round of lockdowns.

The United States reported more than 55,000 new COVID-19 cases on Thursday, a new daily global record for the pandemic.

The Toronto Stock Exchange’s S&P/TSX composite index closed down 0.2% at 15,596.75. With U.S. stock markets closed for a public holiday, trading volumes were lower than usual.

Coronavirus? Well, in Arizona:

As known virus cases reached above 91,000 statewide, [Governor] Mr. Ducey this week activated crisis protocols that could permit overwhelmed hospitals to deny care to patients whose age or health history make them poor candidates for recovery. When Vice President Mike Pence visited Phoenix on Wednesday, Mr. Ducey asked him to send another 500 medical workers to the state to help hospital teams depleted by exhaustion and illness.

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TXPR closed at 534.55, up 0.77% on the day. Volume today was 1.82-million, about the median of the past thirty days.

CPD closed at 10.65, up 0.95% on the day. Volume was 65,080, near the lows of the past 30 trading days.

ZPR closed at 8.32, up 1.09% on the day. Volume of 584,299 was second-highest of the past 30 trading days, behind only June 30.

Five-year Canada yields were up 1bp at 0.38% today.

Jobs, jobs, jobs!

Employers brought back millions more workers in June as businesses began to reopen across the country. But the recent surge in coronavirus cases is threatening to stall the economic recovery long before it has reached most of the people who lost their jobs.

U.S. payrolls grew by 4.8 million in June, the Labor Department said Thursday. It was the second month of strong gains after April’s huge losses, when businesses laid off or furloughed tens of millions of workers as the pandemic put a large swath of economic activity on ice.
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But the thaw is far from complete. There were still nearly 15 million fewer jobs in June than in February, before the pandemic forced businesses to close. The unemployment rate fell to 11.1 percent in June, down from a peak of 14.7 percent in April but still higher than in any previous period since World War II. The rate would have been about one percentage point higher, the Labor Department said, had it not been for persistent data-collection problems.

There was another American figure of interest:

More than 50,000 new coronavirus infections were reported across the United States on Thursday, according to a New York Times database, as the country set a new daily case record for the sixth time in nine days. The alarming new milestone came as some of the country’s most populous states reported major surges, and as public health officials scrambled to limit the damage. At least seven states reported single-day case records on Thursday: Alaska, Arkansas, Florida, Georgia, Montana, South Carolina and Tennessee.

Thursday’s reported total was an 87 percent increase in daily cases from two weeks ago, when states were reopening after extensive lockdowns eased the outbreak, particularly in the hard-hit Northeast.

But the market appeared to consider the former more important than the latter:

Wall Street closed higher and the Nasdaq reached an all-time closing high on Thursday as investors headed into their long holiday weekend buoyed by a record surge in payrolls, which provided assurance that the U.S. economic recovery was well under way.

All three major U.S. stock averages advanced, with the benchmark S&P 500 posting its fourth straight daily gain. The TSX also rose Thursday, for its third straight trading day of gains. U.S. markets are closed Friday for the Fourth of July holiday.
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The Dow Jones Industrial Average rose 92.39 points, or 0.36%, to 25,827.36, the S&P 500 gained 14.15 points, or 0.45%, to 3,130.01 and the Nasdaq Composite added 53.00 points, or 0.52%, to 10,207.63.

The S&P/TSX Composite Index rose 107.18 points, or 0.69%, at 15,622.40. Sector performance was mixed, with the Canadian Real Estate Index gaining 2.84%, and tech rising 3.67% thanks to a 8.36% jump in shares of Shopify to a new record high. Materials and industrials were lower.

Fitch downgraded Alberta:

Alberta’s credit rating was downgraded Tuesday, hours after the province released a multibillion-dollar economic recovery plan in an attempt to climb out of the economic wreckage caused by the COVID-19 pandemic and a collapse in world oil prices.

Fitch Ratings downgraded Alberta to a double-A-minus from double-A, citing higher provincial borrowing during the pandemic-driven economic crisis and a debt burden relative to GDP that is “incompatible” with a double-A rating.

The New York-based agency also pointed to the lack of details from the government about the extent of damage to Alberta’s bottom line, and the fact the province has no planned path toward economic recovery.

Tuesday’s downgrade is the third for Alberta since December, when Moody’s Investors Service changed the province’s rating to Aa2 from Aa1, citing continued weakness in the provincial economy and its reliance on non-renewable resources. In March, DBRS Morningstar downgraded Alberta to double-A (low) from double-A.