Category: Market Action

Jobs, jobs, jobs!

Canada added 245,800 jobs in August, a weaker pace than in previous months and a sign that hiring plans are shifting into a new phase.

The unemployment rate declined to 10.2 per cent from July’s 10.9 per cent, Statistics Canada said on Friday. With August’s gains, the labour market has now recouped about 64 per cent of the three million positions that were lost between February and April, when the COVID-19 pandemic forced widespread shutdowns to slow virus transmission.

The labour market added 953,000 jobs in June and 419,000 in July.
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The August report continued to highlight disparities. Employment for low-wage employees (those who earned less than $16.03 an hour, or two-thirds of the 2019 median wage) stands at 87.4 per cent of pre-COVID levels. For all other employees, the recovery is nearly complete, with employment at 99.1 per cent of where it stood before the pandemic.

Statscan noted that nearly one-third of Southeast Asian and one-quarter of Black Canadians were in the low-wage bracket, compared with 15.9 per cent for the white population.
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For a third consecutive month, employment rose by more for women (150,000) than men (96,000). That said, women suffered deeper job losses as the pandemic hit. As a result, employment for women aged 25 to 54 is down 4.4 per cent since February, compared to a 3.4-per-cent drop among men in the same age group.

So we have a new letter to worry about:

Worries of a K-shaped recovery are growing in the alphabet-obsessed economics profession. That would entail continued growth, but split sharply between industries and economic groups.

It’s a scenario where big-box retail and Wall Street banks benefit and mom-and-pop shops and restaurants and other service profession workers lag. Though not readily visible in GDP numbers for the next several quarters that will look gaudy in historical terms, the uneven benefits of the recovery pose longer-term risks for the national economic health.

Uh-huh. And guess which group makes the decisions about stimulus spending!

Meanwhile down south:

Employers continued to bring back furloughed workers last month, but at a far slower pace than in the spring, and millions of Americans remain out of work.

The U.S. economy added 1.4 million jobs in August, the Labor Department said Friday, down from 1.7 million in July and down sharply from the 4.8 million added in June. Payrolls are still more than 11 million jobs below their pre-pandemic level.

The unemployment rate fell to 8.4 percent, down significantly from 14.7 percent in April and 10.2 percent in July.

National Bank of Canada is issuing LRCNs:

it has entered into an agreement with a group of agents led by National Bank Financial Inc. for the issuance of $500 million of Limited Recourse Capital Notes, Series 1 (Non-viability Contingent Capital (NVCC)) (Subordinated Indebtedness) (the “Notes”).

The Notes will bear interest at a rate of 4.300% annually, payable semi-annually, for the initial period ending on but excluding November 15, 2025. Thereafter, the interest rate on the Notes will reset every five years at a rate equal to the prevailing 5-year Government of Canada Yield plus 3.943%. The Notes will mature on November 15, 2080.

Concurrently with the issuance of the Notes, National Bank will issue Non-Cumulative 5-Year Fixed Rate Reset First Preferred Shares, Series 44 (non-viability contingent capital (NVCC)) (the “Series 44 Preferred Shares”) to be held by Computershare Trust Company of Canada as trustee for a newly-formed trust (the “Limited Recourse Trust”). In case of non-payment of interest on or principal of the Notes when due, the recourse of each Note holder will be limited to that holder’s proportionate share of the Limited Recourse Trust’s assets, which will consist of Series 44 Preferred Shares except in limited circumstances.

National Bank may redeem the Notes during the period from October 15 to and including November 15, commencing in 2025 and every five years thereafter, only upon the redemption by National Bank of the Series 44 Preferred Shares held in the Limited Recourse Trust, in accordance with the terms of such shares and with the prior written approval of the Superintendent of Financial Institutions (Canada) (the “Superintendent”), in whole on not less than 15 nor more than 60 days’ prior notice.

The purpose of the sale of the Notes is to enlarge National Bank’s Tier 1 capital base with a view to optimizing National Bank’s capital structure within the parameters prescribed by the Superintendent for bank capital requirements. The net proceeds from the sale of the Notes will be added to National Bank’s general funds and will be utilized for general banking purposes. The expected closing date is on or about September 9, 2020. National Bank intends to file in Canada a prospectus supplement to its August 17, 2020 base shelf prospectus in respect of this issue.

This issue is rated BBB by DBRS:

DBRS Limited (DBRS Morningstar) assigned a provisional rating of BBB with a Stable trend to the National Bank of Canada’s (National or the Bank) NVCC Additional Tier 1 (AT1) Limited Recourse Capital Notes (the Capital Notes). DBRS Morningstar assigned the rating equal to the Bank’s Intrinsic Assessment of A (high) less four rating notches, which is consistent with DBRS Morningstar’s standard notching for capital instruments with contingent risks and its ratings for the Bank’s NVCC Preferred Shares. The provisional rating for the Capital Notes is one notch below the rating of National’s NVCC Subordinated Debt.

DBRS Morningstar notes that the Office of the Superintendent of Financial Institutions granted Tier 1 capital treatment to the Capital Notes.

S&P has them at BB+:

The ‘BB+’ issue rating is four notches below NBC’s SACP, incorporating:

• A deduction of one notch, the minimum downward notching from the SACP under our criteria for subordinated debt, reflecting contractual subordination;
• A deduction of two additional notches, reflecting that the coupon payments are fully cancellable, at the issuer’s discretion; and
• A deduction of an additional notch to reflect that this subordinated note features a (mandatory) contingent conversion (non-viability contingent capital [NVCC]) trigger. Should a trigger event occur (as defined by the Office of the Superintendent of Financial Institutions’ [OSFI] guideline for Capital Adequacy Requirements), each preferred share held in the limited recourse trust will automatically and immediately be converted, without the holder’s consent, into a number of fully paid and freely tradable common shares of the bank, determined in accordance with a conversion formula.

This was probably the impetus behind yesterday’s market pop.

PerpetualDiscounts now yield 5.41%, equivalent to 7.03% interest at the standard equivalency factor of 1.3x. Long corporates now yield 2.89%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed slightly (and perhaps spuriously) to 415bp from the 420bp reported August 26.

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TXPR closed at 591.75, up 1.34% on the day. Volume today was 3.38-million, by far the second-highest of the past thirty days, behind only August 26.

CPD closed at 11.78, up 0.86% on the day. Volume was 147,303, very high in the context of the past 30 trading days.

ZPR closed at 9.32, up 1.08% on the day. Volume of 307,588 was the high in the context of the past 30 trading days.

Five-year Canada yields were down 3bp to 0.36% today.

Here’s what Britain is talking about by way of paying the coronavirus debt:

Treasury officials in Britain are pushing for tax hikes to plug holes blown in public finances by the coronavirus pandemic, two leading British newspapers said.

Such hikes will enable the Exchequer to raise at least £20-billion ($35-billion) a year, and some could be introduced in https://www.theglobeandmail.com/business/article-liberals-revised-covid-19-emergency-benefits-resemble-a-national/#commentsthe November budget, the Sunday Telegraph said.

The Sunday Times newspaper said officials were drawing up plans for a £30-billion “tax raid” on the wealthy, businesses, pensions and foreign aid.

In its budget, the government also plans to raise both capital gains tax and corporation tax, the Sunday Times added.

Finance Minister Rishi Sunak is considering a proposal to boost corporation tax to 24 per cent from 19 per cent, a move that would raise £12-billion next year, rising to £17-billion in 2023-24, the paper said.

I was infuriated by a recent article about the new coronavirus supports and their similarity to Guaranteed Annual Income:

According to the tenets of a guaranteed basic income program, all adults are eligible for government benefits that establish a floor for income, but those payments decline as earnings from wages rise. That gradual reduction, or clawback, means that the basic income benefit is eliminated entirely for higher earners.

Wrong, wrong, wrong!

A ‘clawback’ implies that there is a higher marginal rate on low earnings that is hidden from obvious view. This leads to such things as welfare recipients facing a marginal tax rate in excess of 50% on earnings which is often claimed to be a disincentive to work.

You want guaranteed basic income? Fine. Good. But it must work as follows:
i) Cut everybody a cheque for $X.
ii) This $X is included in taxable income
iii) Then tax the taxable income in the usual way.

The Bank of Canada has published its 2019 Cash Alternative Survey Results:

The role of cash in Canadians’ lives has been evolving, as innovations in digital payments have become more widely adopted over the past decade. The emergence of privately issued digital currencies has motivated many central banks to conduct research into central bank digital currencies (CBDCs). We contribute to the Bank of Canada’s research on CBDC by monitoring Canadians’ use of cash and their adoption of digital payment methods.

The Bank conducted the 2019 Cash Alternative Survey (CAS) in August and September 2019. The 2019 CAS asked respondents to report their cash holdings, adoption of cryptocurrencies, and views regarding the potential impact of cash disappearing from the Canadian economy.

We find that Canadians’ cash holdings remain stable, and cryptocurrency adoption remains limited and concentrated among few demographics. Looking ahead, we find few Canadians plan to stop using cash and a significant share report they would find the disappearance of cash problematic. We plan to conduct further iterations of the Cash Alternative Study to further analyze Canadians’ cash use, including their withdrawal and spending behaviour.

Chair Jerome H. Powell of the Federal Reserve made an important speech today titled New Economic Challenges and the Fed’s Monetary Policy Review:

The persistent undershoot of inflation from our 2 percent longer-run objective is a cause for concern. Many find it counterintuitive that the Fed would want to push up inflation. After all, low and stable inflation is essential for a well-functioning economy. And we are certainly mindful that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes. However, inflation that is persistently too low can pose serious risks to the economy. Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.

This dynamic is a problem because expected inflation feeds directly into the general level of interest rates. Well-anchored inflation expectations are critical for giving the Fed the latitude to support employment when necessary without destabilizing inflation.18 But if inflation expectations fall below our 2 percent objective, interest rates would decline in tandem. In turn, we would have less scope to cut interest rates to boost employment during an economic downturn, further diminishing our capacity to stabilize the economy through cutting interest rates. We have seen this adverse dynamic play out in other major economies around the world and have learned that once it sets in, it can be very difficult to overcome. We want to do what we can to prevent such a dynamic from happening here.
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We continue to believe that specifying a numerical goal for employment is unwise, because the maximum level of employment is not directly measurable and changes over time for reasons unrelated to monetary policy. The significant shifts in estimates of the natural rate of unemployment over the past decade reinforce this point. In addition, we have not changed our view that a longer-run inflation rate of 2 percent is most consistent with our mandate to promote both maximum employment and price stability.
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Our longer-run goal continues to be an inflation rate of 2 percent. Our statement emphasizes that our actions to achieve both sides of our dual mandate will be most effective if longer-term inflation expectations remain well anchored at 2 percent. However, if inflation runs below 2 percent following economic downturns but never moves above 2 percent even when the economy is strong, then, over time, inflation will average less than 2 percent. Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down. To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.

Update, 2020-8-28: I should have noted that seeking to “achieve inflation moderately above 2 percent for some time” “inflation that averages 2 percent over time” is known as Price-Level Targetting

This had a moderate effect on the market:

The Fed’s new strategy sent Treasury yields higher, which gave a lift to interest rate-sensitive financials in the U.S.
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The financial sector provided the biggest boost to the S&P 500 and the Dow, pushing the former to its fifth straight record closing high and the latter within a hair’s breadth of reclaiming positive territory for the year so far.

The Dow remains more than 3.6% below its record high reached in February.

Stocks lost steam late in the session following House of Representatives Speaker Nancy Pelosi issued a statement saying Democrats and Republicans remain far apart over the next stimulus bill.

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TXPR closed at 583.50, up 1.62% on the day. Volume today was 3.87-million, by far the highest of the past thirty days, well ahead of second-place July 29.

CPD closed at 11.63, up 1.22% on the day. Volume was 111,115, highest of the past 30 trading days, ahead of second-place August 12.

ZPR closed at 9.35, up 2.13% on the day. Volume of 894,959 was the highest of the past 30 trading days, more than double that of second-place August 4.

Five-year Canada yields were up 1bp to 0.42% today.

Today’s market pop is probably related to the announcement of a mass redemption of RY DeemedRetractibles.

PerpetualDiscounts now yield 5.46%, equivalent to 7.10% interest at the standard equivalency factor of 1.3x. Long corporates now yield 2.89%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed dramatically to 420bp from the 455bp reported August 12. We are now well below the pre-2020 record of 445bp briefly touched in 2008.

FAIR Canada continues to fulfill its role as a a superannuation scheme for ex-OSC staff:

The Canadian Foundation for the Advancement of Investor Rights, known as FAIR Canada, says Jean-Paul Bureaud will assume its top job. A lawyer by training, Mr. Bureaud worked for the Ontario Securities Commission for 19 years before leaving in October, 2018. Most recently, he’s been a consultant for the World Bank.