Category: Market Action

Two articles I saw in succession have triggered a urge to rant about low interest rates.

The first was about the effect of AirBNB on Canada’s rental market:

More than 31,000 homes across the country were rented out so often on Airbnb in 2018 that they were likely removed from the long-term rental supply, according to a groundbreaking study by McGill University researchers.
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Those 31,000 homes are equal to about 1.5 per cent of residences across the country that have been built for the rental market.
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In New York, for instance, Airbnb directly accounted for a US$380 increase in median annual rent costs, according to a separate report from Prof. Wachsmuth last year that was funded, in part, by a hotel-industry organization. “The more Airbnb activity you see in a city, the higher housing prices and the higher rents are going to get,” he said. “There’s no question that [Canadian] cities are now past that point.”

Within Canada, short-term rental activity is highly concentrated in a few cities. The Montreal, Toronto and Vancouver areas accounted for close to half of Canada’s average daily listings in 2018, and hosts there brought in $710-million, up 27 per cent from 2017. They’re also where the most rental supply is under threat: Forty per cent of the roughly 31,000 homes that were frequently rented last year were found in those cities, amounting to more than 12,000 “lost” housing units. Hosts of those units brought in $374-million, up 30 per cent from 2017.
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Nearly half of all Canadian Airbnb revenue in 2018 was generated by commercial operators, or those who manage multiple listings, the McGill report said. Their share of sales increased from 2017 in nearly all metro areas. Among this group, there are some hosts that vastly eclipse the competition: Fifteen managed at least 100 active listings apiece in the past year, the report said, and nearly 60 hosts earned more than $1-million in 2018.

And a NYT article about the US housing market:

A confluence of factors — rising construction costs, restrictive zoning rules and shifting consumer preferences, among others — has already led to a scarcity of affordably priced housing in many big cities. Investors, fueled by Wall Street capital, are snapping up much of what remains.
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For decades, single-family homes were an investment primarily for people who wanted to live in them. Real estate investors were around, but they were mostly individuals or small partnerships. That changed with the Great Recession and its aftermath, when investors bought at least two million homes, and almost certainly far more than that, with prices depressed. Large-scale institutional investors bought tens of thousands of homes for less than they cost to build.

At first, the flood of capital seemed like a one-time opportunity arising from the collapse of the residential real estate market. Once the bargains dried up, the investors were expected to stop buying.

Except they didn’t stop. Last year, investors bought about one in five starter homes in the United States (defined as priced in the bottom third of the local market), according to CoreLogic. That was even higher than in the early years after the Great Recession and about double the level of two decades ago. In the most frenzied markets, investors bought close to half of the most affordable homes sold last year, and as much as a quarter of all single-family homes.
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What is happening in Atlanta is partly a familiar story of gentrification pushing up prices and driving out longtime residents. But those trends are being spurred by a fast-growing industry that promotes investment in single-family homes: lenders who provide the capital, brokers who handle transactions, wholesalers who buy homes by the dozens and sell them before they even take possession.
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Ms. Caban is a real estate agent. But she avoids working with the big investors who she says are tearing neighborhoods apart — like the ones who evict existing tenants so they can raise rents, or who leave homes vacant, sometimes for years, while waiting for values to appreciate. Driving through one neighborhood recently, she pointed to a number of boarded-up homes — all, she said, with corporate owners.

All these problems with housing prices may be attributed to low interest rates; the current low rate environment is causing a lot of distortion in asset prices and the reckoning will be paid eventually – the only question is whether this will happen quickly or slowly.

Low interest rates are supposed to stimulate investment in productive assets and the fact that so many people are instead taking advantage of the low cost of carry to invest in non-productive assets such as enormous houses and empty apartments is causing policy-makers a lot of headaches, which they are attempting to resolve via special taxes and intrusive regulations; this represents another distortion of the free market and is also accumulating a reckoning that will be paid eventually.

It would make a lot more sense to hike property taxes across the board.

The FOMC statement was of interest:

Information received since the Federal Open Market Committee met in May indicates that the labor market remains strong and that economic activity is rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending appears to have picked up from earlier in the year, indicators of business fixed investment have been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.
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The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased.
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Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren. Voting against the action was James Bullard, who preferred at this meeting to lower the target range for the federal funds rate by 25 basis points.

In an implementation note they stated:

The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $15 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable.

This represents a change from the previous implementation note:

The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $30 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable.

So ‘Quantitative Tightening’ has been loosened! The NYT notes:

The decision to hold rates steady came despite ongoing pressure from President Trump, who on Monday suggested he might demote Mr. Powell if the central bank did not move toward easing rates.

Investors seemed to find little new information in the Fed’s policy statement at 2 p.m. Shortly after the central bank announced its decision to leave rates unchanged, the S&P 500 was up 0.3 percent. Yields on government bonds — which are closely tied to monetary policy — declined, with the yield on the 10-year Treasury note falling to 2.04 percent.
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The central bank is independent of the White House and Mr. Trump appointed Mr. Powell as its head, but the president regularly criticizes the central bank for lifting rates too many times last year. Mr. Trump ramped up those attacks this week, saying that Fed policy was putting the United States on an uneven playing field and hinting that he could consider the unprecedented move of attempting to demote Mr. Powell.

“They’re going to be making an announcement pretty soon, so we’ll see what happens,” Mr. Trump said, when asked by a reporter whether he would try to strip Mr. Powell of his chairmanship. “I want to be given a level playing field, and so far I haven’t been.”

A Fed spokesperson noted that the chairman can only be removed “for cause.” Mr. Powell said in a “60 Minutes” interview earlier this year that “the law is clear that I have a four-year term. And I fully intend to serve it.”

Canadian headline inflation jumped:

Canadians may be feeling a price pinch as inflation rose to 2.4 per cent in May from the same month one year ago, led by higher prices for food.

That compares to a rise of two per cent in April, according to Statistics Canada’s consumer price index (CPI) released Wednesday.

Year-over-year prices rose in all eight categories of the index, with notable increases in food prices, up four per cent in the 12 months leading up to May 2019 after increasing three per cent in April.
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But that headline inflation number is notoriously volatile, easily skewed by individual factors. So the data agency also comes up with a so-called “core” inflation rate by tabulating the average of three other sub-rates with a lot of sectors stripped out.

The core inflation rate came in at 2.1 per cent, the highest on record since 2012.

Despite this, the Five-Year Canada Yield was down 1bp to 1.31%; but preferreds had a good day. Fergal Smith writes in the Globe:

At 4:07 p.m., the Canadian dollar was trading 0.7 per cent higher at 1.3281 to the greenback, or 75.30 U.S. cents.

The currency, which was boosted on Tuesday by the revival of trade talks between the United States and China, touched its strongest level since June 12 at 1.3282.

The price of oil, one of Canada’s major exports, fell despite a larger-than-expected decline in U.S. crude inventories. U.S. crude oil futures settled 0.3 per cent lower at $53.76 a barrel.

Canadian government bond prices were lower across a steeper yield curve, with the two-year down 1 cent to yield 1.408 per cent and the 10-year falling 11 cents to yield 1.435 per cent.

PerpetualDiscounts now yield 5.65%, equivalent to 7.34% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.44%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now an incredible 390bp, a widening from the 380bp reported June 12.

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TXPR closed at 593.02, down 0.50% on the day. Volume was 1.59-million, about average in the context of the past thirty days.

CPD closed at 11.87, down 0.50% on the day. Volume of 59,896 was on the low side in the context of the past thirty days.

ZPR closed at 9.50, down 0.73% on the day. Volume of 224,350 was high, but not exceptional in the context of the past thirty days.

Five-year Canada yields were up 1bp to 1.34% today.

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It was a wild day, with new 52-week lows all over the place, but the cavalry arrived at 3:40pm to stave off disaster.

TXPR closed at 596.46, down 0.34% on the day after touching a new 52-week low of 593.67 (down 80bp). Volume was 3.12-million, the highest of the past thirty days.

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CPD closed at 11.915, down 0.46% on the day, after hitting a new 52-week low of 11.85. Volume of 231,500 was the second-highest of the past thirty days – eclipsed only by yesterday.

ZPR closed at 9.565, down 0.16% on the day, after hitting a new 52-week low of 9.47. Volume of 254,264 was the third-highest of the past thirty days, eclipsed only by yesterday and (just barely) May 31.

Five-year Canada yields were down 4bp to 1.30% today.

Bond strength (lowering yields) has been attributed to a poor US jobs outlook:

U.S. private employers added 27,000 jobs in May, well below economists’ expectations and the smallest monthly gain in more than nine years, a report by a payrolls processor showed on Wednesday.

Economists surveyed by Reuters had forecast the ADP National Employment Report would show a gain of 180,000 jobs, with estimates ranging from 123,000 to 230,000.
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May’s increase was the smallest since March 2010.

PerpetualDiscounts now yield 5.59%, equivalent to 7.27% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.60%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 365bp, a sharp widening from the 345bp reported May 29.

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TXPR closed at 598.47, down 0.63% on the day. Volume was 2.39-million, high but nothing special in the context of the past thirty days.

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A mid-afternoon wave of selling changed a sub-par day into a bad one. Note that TXPR’s 52-week low is 596.56 – that’s not too far off!

CPD closed at 11.97, down 0.25% on the day. Volume of 351,301 was by far the highest of the past thirty days – second place belongs to May 13 with 168,630.

ZPR closed at 9.58, down 0.62% on the day, hitting a new 52-week low. Volume of 261,689 was the highest of the past thirty days, edging May 31 and its volume of 254,910

Five-year Canada yields were up 5bp to 1.34% today, but the increase didn’t help the Canadian preferred share market! Where are the GIC refugees?

Meanwhile, Powell suggested policy rates might ease:

The Federal Reserve chairman, Jerome H. Powell, said on Tuesday that the central bank was prepared to act to sustain the economic expansion if President Trump’s trade war weakened the economy. His remarks sent stocks soaring as investors predicted a cut in interest rates.

“We do not know how or when these issues will be resolved,” Mr. Powell said of the United States’ trade disputes with Mexico, China and other nations. “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”

Mr. Powell did not explicitly say that the Fed would cut interest rates, but his comments sent a signal that the central bank was watching Mr. Trump’s trade wars warily, ready to fend off any economic damage. While the Fed has been closely monitoring the effects of Mr. Trump’s trade war on the economy, Mr. Powell’s comments were his first since the president escalated his dispute by threatening tariffs on all Mexican goods.
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The rebound in stock markets coaxed some investors out of the safety of government bonds, pushing prices down and yields — which move in the opposite direction — up. The rise in yields reversed some of a sharp decline in recent days that had reflected growing investor concern about the outlook for economic growth and inflation. The yield on the 10-year Treasury note was 2.12 percent at 3 p.m., according to Bloomberg data.

But in signaling that it is prepared to limit economic damage from the trade war, the Fed could perpetuate the feedback loop that has developed among financial markets, the central bank and Mr. Trump — and could embolden the president to continue his fight.

Bullard of the St. Louis Fed said much the same thing yesterday.

However, Senate Republicans took up a collection today and were able to scrape together a pair of balls:

Mr. Trump’s latest threat — 5 percent tariffs on all goods imported from Mexico, rising to as high as 25 percent until the Mexican government stems the flow of migrants — has riled Republican senators who fear its impact on the economy and their home states. They emerged from a closed-door lunch in the Capitol angered by the briefing they received from a deputy White House counsel, Patrick F. Philbin, and Assistant Attorney General Steven A. Engel on the legal basis for imposing new tariffs by declaring a national emergency.
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Senator Ron Johnson, Republican of Wisconsin, said he warned the lawyers that the Senate could muster an overwhelming majority to beat back the tariffs, even if Mr. Trump were to veto a resolution disapproving them. Republicans may be broadly supportive of Mr. Trump’s push to build a wall and secure the border, he said, but they are almost uniformly opposed to the imposition of tariffs on Mexico.

There was some good drone news today:

Shares of Drone Delivery Canada Corp. surged as much as 18 per cent in trading Tuesday after the company announced a 10-year contract with Air Canada that sees the cargo division of the country’s largest airline market and sell the Toronto-based company’s drone delivery services in Canada.

Analysts and investors say the agreement adds credibility to the pre-revenue startup company, known as DDC, which has developed a system for autonomous cargo delivery through unmanned aerial vehicles, known as drones.

I want to order pizza at 4am and I want to do it yesterday!

James Bullard of the St. Louis Fed gave an exciting presentation today:

KEY THEMES

• • Global trade disputes may be more protracted and more difficult to resolve than previously envisioned.
• • The U.S. economy is expected to grow more slowly in 2019.
• • Inflation expectations appear to be too low to be consistent with the inflation target of the Federal Open Market Committee (FOMC).
• • The Treasury yield curve has moved more decisively toward inversion.
• • These considerations suggest a downward adjustment in the policy rate—the federal funds rate target range—may be warranted soon.

The New York Times reported:

The broader S&P 500 index was down slightly, but investors remained watchful of developments on the trade front, after stocks suffered their sharpest monthly decline this year in May with a 6.6 percent drop. That nervousness lingered in the bond market Monday, with the yield on 10-year Treasury bonds falling, suggesting that investors increasingly believe trade tensions could hinder world economic growth.
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But stocks were bolstered in part by rising expectations that the Federal Reserve could start cutting interest rates in response to the rising trade tensions. In a prepared statement, St. Louis Federal Reserve President James Bullard on Monday said lower Fed rates “may be warranted soon.”

The five-year Canada yield dropped 7bp to 1.29%, which caused some late-afternoon weakness in the Canadian preferred share market.

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TXPR closed at 604.01, down 0.72% on the day. Volume was 2.29-million, on the high side but nothing special in the context of the past thirty days. The low for the day was 601.96, down 1.06%, but the market commenced a slow (and feeble!) recovery just before 2pm.

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Note that TXPR’s 52-week low is 596.56 – that’s not too far off!

CPD closed at 12.10, down 0.74% on the day. Volume of 78,406 was slightly above average in the context of the past thirty days.

ZPR closed at 9.73, down 1.02% on the day, after hitting a new 52-week low of 9.65. Volume of 254,914 was the highest of the past thirty days.

Five-year Canada yields were down 9bp to 1.36% today, enough to be considered a glib explanation for the preferred market carnage … although I confess that it still doesn’t make any sense to me why spreads should widen as yields decline! Where are the GIC refugees?

The shambles included the equity markets:

Then the tweets on trade began. In early May, President Trump threatened new tariffs on Chinese products, shattering the calm as markets began a tailspin that was capped with a 1.3 percent drop for the S&P 500 on Friday.

The benchmark index ended May down 6.6 percent, its first monthly decline of the year and its worst drop since an ugly sell-off at the end of 2018.

The decline on Friday came after President Trump tweeted that he would impose a new tariff on all imports from Mexico — a tax that could rise to as high as 25 percent — unless the country’s government took steps to address the flow of migrants across the United States’ border, and Beijing announced plans to unveil a blacklist of foreign companies and people. China’s move was seen as a retaliation against the Trump administration’s efforts to deny American technology to Chinese companies.

Earlier this month, the White House issued an order effectively barring sales by Huawei, China’s leading networking company, broadening the conflict away from trade deficits and toward the difficult-to-resolve issues of technological dominance.
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Investors worldwide responded by pricing in the growing economic cost to the fight. Stock markets in trade-dependent economies such as Japan, South Korea and Germany also saw steep losses in May.

On Friday, the drop in American stocks was sweeping: Investors dumped industrial and machinery stocks, shares of consumer products companies, and those of giant tech companies.
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To a certain extent, those low yields are pricing in growing expectations that the Federal Reserve will cut interest rates. According to the market for Fed Funds futures, traders are putting roughly 90 percent odds on the Fed cutting interest rates by the end of the year, up from about 38 percent in the middle of April.

Some might consider it strange hubris for Trump to continue shaking his fist at logical allies while locked in a trade war with China – but I don’t consider it out of character at all. By me, he doesn’t care if it’s good policy; he doesn’t care if he can credibly claim a win after the dust has settled; he doesn’t care about the risks to the US economy. His base is convinced that the rest of the world is engaged in constant plotting to take away what is rightfully theirs, and they want a guy who will fight. So he fights. And, if he gets it right, the 29.1% of the voters who select him will outnumber the 28.9% of voters who don’t. That’s all that matters – and he’s proved himself to be a very astute counter of votes in the past.

That’s the dark side of the matter for those poseurs who proclaim their cynicism by not voting. Campaigns cease to be about swinging the undecided and become solely a matter of motivating your base.

There was a great big stack of new 52-week lows set for individual issues today, so the ‘new lows’ section of the newspaper should make for interesting reading!

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TXPR closed at 608.40, down 0.88% on the day. Volume was 2.38-million, on the high side but nothing special in the context of the past thirty days.

CPD closed at 12.19, down 0.45% on the day. Volume of 85,182 was slightly above average in the context of the past thirty days.

ZPR closed at 9.83, down 0.41% on the day. Volume of 142,697 was above average in the context of the past thirty days.

Five-year Canada yields were up, down 2bp to 1.45% today, but that’s not sufficient to be considered a glib explanation. Wait … it’s near month end! Window-dressing! That’s glib! Window-dressing!

The BoC continued to hold today:

The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.

Recent Canadian economic data are in line with the projections in the Bank’s April Monetary Policy Report (MPR), with accumulating evidence that the slowdown in late 2018 and early 2019 is being followed by a pickup starting in the second quarter. The oil sector is beginning to recover as production increases and prices remain above recent lows. Meanwhile, housing market indicators point to a more stable national market, albeit with continued weakness in some regions.

Continued strong job growth suggests that businesses see the weakness in the past two quarters as temporary. Recent data support a pickup in both consumer spending and exports in the second quarter, and it appears that overall growth in business investment has firmed. That said, inventories rose sharply in the first quarter, which may dampen production growth in coming months.

The global economy is also evolving largely as expected since April, although the recent escalation of trade conflicts is heightening uncertainty about economic prospects. In addition, trade restrictions introduced by China are having direct effects on Canadian exports. In contrast, the removal of steel and aluminum tariffs and increasing prospects for the ratification of CUSMA will have positive implications for Canadian exports and investment.

Inflation has evolved in line with the Bank’s April projection. The Bank expects CPI inflation to remain around the 2 per cent target in the coming months. Core inflation measures all remain close to 2 per cent.

Overall, recent data have reinforced Governing Council’s view that the slowdown in late 2018 and early 2019 was temporary, although global trade risks have increased. In this context, the degree of accommodation being provided by the current policy interest rate remains appropriate. In taking future policy decisions, Governing Council will remain data dependent and especially attentive to developments in household spending, oil markets and the global trade environment.

It’s too bad that the names of those voting in favour of the hold were not released and neither were the names and summarized rationales for those voting against. Only confident Central Banks with committees comprised of stellar people who can make a living doing something else publish such information.

The “global trade risks” mentioned in the final paragraph were blamed for today’s horrible equity performance:

Fears that an escalating trade war between the United States and China will slash global economic growth pulled world stock markets down to near two-and-a-half-month lows on Wednesday and continued to feed a rally in safe-haven government bonds.

German bond yields fell deeper into negative territory and inched toward record lows of minus 0.2 per cent. Ten-year U.S. Treasury note yields dropped to 20-month lows, having fallen almost 30 basis points this month.

Chinese newspapers warned on Wednesday that Beijing could use rare earths to strike back at the United States after U.S. President Donald Trump remarked he was “not yet ready” to make a deal with China over trade. China was the source of 80 per cent of the rare earths imported by the United States between 2014 and 2017.

The prospect of a prolonged standoff between the world’s two biggest economies and the likelihood of Europe and Japan getting dragged in have raised investor concerns about global growth.
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Canada’s main stock index fell on Wednesday as the Bank of Canada held interest rates steady as expected.

The Toronto Stock Exchange’s S&P/TSX Composite index was unofficially down 165.99 points, or 1.02 per cent, at 16,131.47

On a brighter note, Candeal reported the 5-Year Canada yield unchanged at 1.47% today.

DBRS has been sold to Morningstar:

Canadian debt rating agency DBRS Ltd. is falling into the hands of U.S. investment research firm Morningstar Inc., marking its second ownership change in five years and the largest deal in Morningstar’s history.

Founded by Canadian Walter Schroeder and based in Toronto, DBRS was first sold in 2014 to two private equity firms, Carlyle Group and Warburg Pincus, for a reported US$500-million. Five years later, the private equity owners are selling DBRS to Morningstar for US$669-million.

Returns for the two private equity firms were not disclosed, and the sale price does not include any dividends that DBRS may have paid out over the past five years.

Carlyle and Warburg Pincus both declined to comment.

The Bank of Nova Scotia is redeeming some expensive Tier 1 Capital:

Scotiabank (BNS: TSX, NYSE) today announced that Scotiabank Tier 1 Trust, a closed-end trust wholly owned by The Bank of Nova Scotia, intends to redeem all outstanding 7.802% Scotiabank Tier 1 Securities – Series 2009-1 due June 30, 2108 (the “Scotia BaTS III Series 2009-1”) for 100% of their principal amount, together with accrued and unpaid interest to the redemption date. The redemption will occur on June 30, 2019. Formal notice will be delivered to Scotia BaTS III Series 2009-1 holders in accordance with the terms of the offering.

Scotia BaTS III Series 2009-1 constitute Additional Tier 1 capital of the Bank. The principal amount of Scotia BaTS III Series 2009-1 is currently $650,000,000. The redemption of the Scotia BaTS III Series 2009-1 will be financed out of the general funds of Scotiabank Tier 1 Trust.

PerpetualDiscounts now yield 5.48%, equivalent to 7.12% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.66%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 345bp, a slight (and perhaps spurious) widening from the 340bp reported May 22.