Category: Market Action

The American jobs report yielded signs that the labour market has reached an inflection point:

The jobs report came in below expectations, but wasn’t a major headline grabber, even as unemployment dropped to its lowest rate since 1969, as the strong labor market is well known at this point.

The most notable aspect of the report was the strong sequential wage trends “that put wage growth on track to cross 3% in October, supported by broadening wage pressures across sectors,” writes Morgan Stanley ’s Robert Rosener.

… which had an effect on Treasuries:

Treasury yields hit fresh multiyear peaks on Friday, extending their weeklong ascent, after a key jobs report showed tightening labor markets were leading to wage gains—a bearish development for bond bulls.

The Bureau of Labor Statistics reported the U.S. had added 134,000 jobs in September, below the 168,000 jobs expected from economists polled by MarketWatch. July’s and August’s numbers were increased. The unemployment rate fell to 3.7%, its lowest level since 1969. While, the average hourly earnings rose 0.3%, after a stellar 0.4% gain the previous month.

The 10-year Treasury note yield … rose 3 basis points to a seven-year high of 3.227%, contributing to a weeklong climb of 17.1 basis points, its largest such rise since February. The 30-year bond yield … rose 4.2 basis points to 3.396%, extending its weeklong rise to 20 basis points, its biggest such climb since the week of President Donald Trump’s election.

The shorter-end of the bond market showed a more modest rise. The 2-year note yield … rose 0.8 basis point to 2.888%, its highest since 2008. The short-dated maturity posted a weeklong yield gain of 7 basis points. Bond prices move in the opposite direction of yields.

In Canada we’re still grinding away at unemployment:

Canada’s job market gained 63,000 positions in September, edging the unemployment rate lower to 5.9 per cent, and offsetting job losses in August, Statistics Canada reported Friday.

September’s increase in employment was largely driven by gains in part-time work, with part-time jobs up by around 80,000, the agency said in its monthly labour force survey.

And Five-year Canadas popped up to 2.49% to close the week.

The increase in yields must have been good for FixedResets, eh? Well … um … profit-taking! FixedResets were hit by profit-taking! Unless it was something else. Manulife issues got whacked … perhaps by those pesky short-sellers. No wonder Elon Musk hates them so much!

PerpetualDiscounts now yield 5.58%, equivalent to 7.25% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.15%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread” is now about 310bp, a slight (and perhaps spurious) narrowing from the 315bp reported September 26.

Well, that was quick:

The Securities and Exchange Commission announced today that Elon Musk, CEO and Chairman of Silicon Valley-based Tesla, Inc., has agreed to settle the securities fraud charge brought by the SEC against him last week. The SEC also today charged Tesla with failing to have required disclosure controls and procedures relating to Musk’s tweets, a charge that Tesla has agreed to settle. The settlements, which are subject to court approval, will result in comprehensive corporate governance and other reforms at Tesla—including Musk’s removal as Chairman of the Tesla board—and the payment by Musk and Tesla of financial penalties.
…
Musk and Tesla have agreed to settle the charges against them without admitting or denying the SEC’s allegations. Among other relief, the settlements require that:
•Musk will step down as Tesla’s Chairman and be replaced by an independent Chairman. Musk will be ineligible to be re-elected Chairman for three years;
•Tesla will appoint a total of two new independent directors to its board;
•Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications;
•Musk and Tesla will each pay a separate $20 million penalty. The $40 million in penalties will be distributed to harmed investors under a court-approved process.

Visionary? Bullshit artist? Both?:

The Securities and Exchange Commission today charged Elon Musk, CEO and Chairman of Silicon Valley-based Tesla Inc., with securities fraud for a series of false and misleading tweets about a potential transaction to take Tesla private.

On August 7, 2018, Musk tweeted to his 22 million Twitter followers that he could take Tesla private at $420 per share (a substantial premium to its trading price at the time), that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote. The SEC’s complaint alleges that, in truth, Musk had not discussed specific deal terms with any potential financing partners, and he allegedly knew that the potential transaction was uncertain and subject to numerous contingencies. According to the SEC’s complaint, Musk’s tweets caused Tesla’s stock price to jump by over six percent on August 7, and led to significant market disruption.

The Fed hiked policy rates today:

Information received since the Federal Open Market Committee met in August indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2 to 2-1/4 percent.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Richard H. Clarida; Esther L. George; Loretta J. Mester; and Randal K. Quarles.

No dissenters!

Well … maybe one guy:

The Fed stressed repeatedly that the U.S. economy is “strong” across the board and no longer needs the heavy stimulus the central bank put into place during the Great Recession, but the president is concerned that higher rates will harm the economy.

“I am not happy about [the rate hike]. I’d rather pay down debt,” Trump said Wednesday at a news conference after his U.N. meetings. “I’m worried about the fact that they seem to like rising interest rates. We can do other things with the money.”
…
Trump has urged Powell, his own appointee, not to raise rates further, but the central bank is an independent agency that shows no sign of bowing to presidential pressure. Twelve of the Fed’s 16 leaders now anticipate another rate hike by the end of the year.
…
It’s an ongoing question how high the Fed will take interest rates. Fed leaders released new projections Wednesday showing the neutral level for interest rates is 3 percent, a level they are likely to hit within the next year. If they go beyond that, business leaders are likely to read that as a sign the Fed is concerned that the economy is overheating, inflation is picking up too much and the central bank wants to rein that in.

The Fed doesn’t foresee interest rates going much above 3.25 to 3.5 percent in the coming years, although central bankers stress they will adjust policy depending upon what happens with the economy.

Trump’s doing his usual thing … setting up an excuse for future failure. If the economy tanks – or even if it simply doesn’t meet his promised 3% p.a. growth every single year … he’s got to blame somebody. And if he blames the Fed, there are a lot of gold-standard wingnuts and international-cabal conspiracy theorists who will cheer him on.

I love the bit where he says he’d “rather pay down debt”. Coming from the guy who’s pumping fiscal stimulus into the economy as fast as he can … well, what can one do but sigh?

PerpetualDiscounts now yield 5.59%, equivalent to 7.27% at the standard equivalency factor of 1.3x. Long corporates now yield about 4.10%, so the pre-tax interest-equivalent spread is now about 315bp, unchanged from September 19.

The Fed’s action today appeared to boost hopes of great big fat dividend increases on reset as time passes …

Royal Bank issued bail-in debt today:

Royal Bank of Canada has set the bar for bail-in debt, issuing the first in a new class of bonds intended to keep taxpayers from having to bail out distressed banks in the event of a crisis.

On Monday, RBC began selling $2-billion of five-year bonds, priced at 95 basis points above government bonds, maturing in 2023. The sale comes one day after new rules came into force, and creates an early benchmark for the premium other large banks can expect to pay as they begin to issue their own bail-in notes.

This step has been discussed extensively on PrefBlog, most recently in the post DBRS: Canadian Banks’ Trends Now Stable on Bail-In Approval.