Category: Market Action

Click for Big

The FOMC Statement was released on schedule:

Information received since the Federal Open Market Committee met in November 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 remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. 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 judges that some 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. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

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 2-1/4 to 2‑1/2 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; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles.

No dissenters! The market was quick to note:

In previous statements, the Fed had said it planned “further gradual increases” in its benchmark rate, conveying to investors that additional hikes were expected. Wednesday’s statement slightly calibrated those expectations by adding the word “some” to the beginning of that phrase, suggesting that the pace of rate increases is likely to slow.

A majority of Fed officials on Wednesday predicted the central bank would raise rates no more than twice next year. In September, most Fed officials had predicted at least three rate increases.

The S&P 500-stock index, which had been up more than 1 percent early in the day whipsawed wildly after the 2 p.m. announcement from the central bank, paring gains and at times slipping into negative territory. But the sell-off worsened during the news conference that accompanied the announcement, with stocks falling below 2 percent at moments.

A separate economic outlook from the Fed showed 2019 growth tapering slightly from September’s projections, with the central bank now expecting gross domestic product of 2.3 percent for the year, down from its previous projections of 2.5 percent.

Treasury yields declined on the day, while the five-year Canada rate, important in FixedReset pricing, was down 4bp to 1.89%.

I’m pleased to see guaranteed minimum income getting some political support:

Prime Minister Justin Trudeau and Social Development Minister Jean-Yves Duclos have argued that the Liberal-created Canada Child Benefit, among other measures, amounts to a guaranteed minimum income already.

But in an interview this week with The Canadian Press, Duclos said the current suite of federal programs could one day be enhanced to provide a minimum income of sorts to all Canadians, particularly those without children who aren’t eligible for federal benefits for families, seniors or the working poor.

“Whether this is going to be enhanced eventually to a broader guaranteed minimum income for all Canadians, including those without children that are not currently covered by a guaranteed minimum income at the federal level, I believe the answer is yes,” Duclos said. “At some point, there will be a universal guaranteed minimum income in Canada for all Canadians.”

As for implementation, just make it a refundable (and taxable!) tax credit. Start it off small and increase it.

PerpetualDiscounts now yield 5.98%, equivalent to 7.77% interest at the standard conversion factor of 1.3x. Long corporates now yield a little over 4.05%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 370bp, a significant increase 360bp reported December 12. I find this spread level to be incredible, particularly since it doesn’t make much sense for a declining yield environment. We seem to have entered a Twilight Zone in which PerpetualDiscounts are priced off FixedResets, rather than independently.

Click for Big

The Five-Year Canada closed yielding 1.94% today, which probably didn’t help the market much.

And tomorrow we’ll see what the Fed says, which could make the afternoon interesting!

A number of big names from the Fed – Kenechukwu Anadu, Mathias Kruttli, Patrick E. McCabe, Emilio Osambela and Chaehee Shin – have published a working paper titled The Shift From Active to Passive Investing: Potential Risks to Financial Stability?:

The past couple of decades have seen a significant shift in assets from active to passive investment strategies. We examine the potential effects of this shift on financial stability through four different channels: (1) effects on investment funds’ liquidity transformation and redemption risks; (2) passive strategies that amplify market volatility; (3) increases in asset-management industry concentration; and (4) the effects on valuations, volatility, and co-movement of assets that are included in indexes. Overall, the shift from active to passive investment strategies appears to be increasing some types of risk while diminishing others: The shift has probably reduced liquidity transformation risks, although some passive strategies amplify market volatility, and passive-fund growth is increasing asset-management industry concentration. We find mixed evidence that passive investing is contributing to the co-movement of assets. Finally, we use our framework to assess how financial stability risks are likely to evolve if the shift to passive investing continues, noting that some of the repercussions of passive investing ultimately may slow its growth.

The Harvard Law School Forum on Corporate Governance and Financial Regulation has published a summary of the work.

Speaking of the Fed, I learned today that the New York Fed has a webpage titled Measuring the Natural Rate of Interest, which estimates the Natural Rate of Interest in the US as about 0.75% and 0.5% for ‘Advanced Economies’. Canada is estimated at 1.43%.

So much for the rally! The market’s back to normal …

Click for Big

The market turnaround is being ascribed to dovish hopes for the Fed:

Comments by U.S. Federal Reserve Chair Jerome Powell that interest rates were “just below” neutral propelled Wall Street higher on Wednesday, easing investor worries about the pace of interest rate hikes next year.

Hopes that the United States and China could call a trade war ceasefire at the upcoming G20 summit also helped stocks.

Meanwhile, the U.S. dollar retreated with potentially fewer rate increases on the horizon, and sterling rose after the Bank of England said the economy could shrink by as much as 8 per cent in about a year after a no-deal Brexit.

Equity investors reacted favorably to the comments by Powell, who indicated there may not be as many future interest rate hikes from the central bank as was initially anticipated.

The meaty section of Powell’s actual speech was:

Outlook and Monetary Policy

Congress assigned the Federal Reserve the job of promoting maximum employment and price stability. I am pleased to say that our economy is now close to both of those objectives. The unemployment rate is 3.7 percent, a 49-year low, and many other measures of labor market strength are at or near historic bests. Inflation is near our 2 percent target. The economy is growing at an annual rate of about 3 percent, well above most estimates of its longer-run trend.

For seven years during the crisis and its painful aftermath, the Federal Open Market Committee (FOMC) kept our policy interest rate unprecedentedly low–in fact, near zero–to support the economy as it struggled to recover. The health of the economy gradually but steadily improved, and about three years ago the FOMC judged that the interests of households and businesses, of savers and borrowers, were no longer best served by such extraordinarily low rates. We therefore began to raise our policy rate gradually toward levels that are more normal in a healthy economy. Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth. My FOMC colleagues and I, as well as many private-sector economists, are forecasting continued solid growth, low unemployment, and inflation near 2 percent.

There is a great deal to like about this outlook. But we know that things often turn out to be quite different from even the most careful forecasts. For this reason, sound policymaking is as much about managing risks as it is about responding to the baseline forecast. Our gradual pace of raising interest rates has been an exercise in balancing risks. We know that moving too fast would risk shortening the expansion. We also know that moving too slowly–keeping interest rates too low for too long–could risk other distortions in the form of higher inflation or destabilizing financial imbalances. Our path of gradual increases has been designed to balance these two risks, both of which we must take seriously.

We also know that the economic effects of our gradual rate increases are uncertain, and may take a year or more to be fully realized. While FOMC participants’ projections are based on our best assessments of the outlook, there is no preset policy path. We will be paying very close attention to what incoming economic and financial data are telling us. As always, our decisions on monetary policy will be designed to keep the economy on track in light of the changing outlook for jobs and inflation.

Under the dual mandate, jobs and inflation are the Fed’s meat and potatoes. In the rest of my comments, I will focus on financial stability–a topic that has always been on the menu, but that, since the crisis, has become a more integral part of the meal.

It doesn’t seem all that dovish to me, but then I’m not trying to convince my clients that these are turbulent times in which Skilled Fed Watchers examine the entrails of Powell’s chickens between naps.

The Canadian preferred share market was on wheels today.

TXPR closed 647.04, up 0.96% (on a price basis). Volume was on the high side in the context of the last thirty days, but nothing special.

CPD closed at 12.93, up 0.47%. Volume was about average in the context of the last thirty days.

ZPR closed at 10.59, up 0.67%. Volume was the fourth-highest of the past thirty days, exceeded only by November 27, November 16 and October 29.

PerpetualDiscounts now yield 5.94% (!), equivalent to 7.72% at the standard equivalency factor of 1.3x. Long corporates now yield about 4.20%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 350bp (!), a significant widening from the 340bp reported November 21.

Click for Big

Today we learned that the recent – ongoing – market collapse is all the Fed’s fault:

President Trump placed responsibility for recent stock market declines and this week’s General Motors plant closures and layoffs on the Federal Reserve during an interview Tuesday, shirking any personal responsibility for cracks in the economy and declaring that he is “not even a little bit happy” with his hand-selected central bank chairman.

In a wide-ranging and sometimes discordant 20-minute interview with The Washington Post, Trump complained at length about Federal Reserve Chairman Jerome H. “Jay” Powell, whom he nominated earlier this year. He argued that rising interest rates and other Fed policies were damaging the economy — as evidenced by GM’s announcement this week that it was laying off 15 percent of its workforce — though he insisted that he is not worried about a recession.

“I’m doing deals, and I’m not being accommodated by the Fed,” Trump said. “They’re making a mistake because I have a gut, and my gut tells me more sometimes than anybody else’s brain can ever tell me.”

Well, I said on October 29:

Trump trying to pick a fight with the Fed (I think this is probably because he wants some political cover in case a US slowdown does occur to a noticeable degree)

Not the most astute prediction I’ve ever made, but it’s nice to have a winner nevertheless! And, of course, Trump’s huffing and puffing with his version of crony capitalism:

U.S. President Donald Trump said Tuesday that he was “very disappointed” that General Motors was closing plants in the United States and warned that the White House was “now looking at cutting all GM subsidies,” including for its electric cars program.

Trump unleashed on Twitter a day after GM announced it would shutter five plants and slash 14,000 jobs in North America, with many of the job cuts coming from the U.S.Midwest, where the president has promised a manufacturing rebirth.

Politicians are afraid to say it: highly paid manufacturing jobs will all disappear in the near future. Anything repetitive and finicky can be done better by a robot – it’s just a matter of time and money and not too much of those. But in the meantime, there are real people experiencing real pain, so they have to huff and puff.

But the market – according to the chatteratti – is so desperate for good news it will take anything!

The S&P 500 and Dow edged higher on Tuesday after White House economic adviser Larry Kudlow said a meeting between President Donald Trump and his Chinese counterpart on Saturday was an opportunity to “turn the page” on a trade war.
…
All three major U.S. indexes turned positive after spending much of the session in negative territory, after Kudlow’s comments days ahead of the high-stakes dinner between the two leaders after the G20 summit in Buenos Aires.

But Kudlow also said the White House has been disappointed so far in China’s response to trade issues with the United States. On Monday, Trump threatened to move ahead with additional tariffs on Chinese goods, due to take effect on Jan. 1.

But what a day it was!

TXPR touched a new 52-week low of 632.64 (1.02% down from yesterday‘s close) before closing at 640.91, up 0.28%. Volume was enormous at 4.21-million (shares in the underlying issues, I thing), easily the highest of the last thirty days.

CPD touched a new 52-week low of 12.63 (down 1.48% from yesterday’s close) before closing at 12.87, up 0.39%. Volume was the second-highest of the last thirty days (far ahead of yesterday’s), exceeded only by November 20.

ZPR touched a new 52-week low of 10.34 (down 1.43% from yesterday’s close) before closing at 10.52, up 0.29%. Volume was the third highest of the past thirty days, exceeded only by November 16 and October 29.

Click for Big

Grim news from Government Motors didn’t help the mood:

General Motors said Monday that it planned to idle five factories in North America and cut more than 14,000 blue-collar and salaried jobs in a bid to trim costs.

The action follows similar job-cutting moves by Ford Motor in the face of slowing sales and a shift in consumer tastes, driven in part by low gasoline prices.

The five G.M. plants will halt production next year, resulting in the layoff of 3,300 production workers in the United States and about 3,000 in Canada. The company also aims to trim its salaried staff by 8,000.

Why do we subsidize them? Because they’re good jobs. Why are they good jobs? Because they’re subsidized.

TXPR closed at a new 52-week low of 639.14, down 0.94%. Volume was about average in the context of the last thirty days.

CPD touched a new 52-week low of 12.81 before closing at 12.82, down 1.08%. Volume was the second-highest of the last thirty days, exceeded only by November 20.

ZPR touched a new 52-week low of 10.47 before closing at 10.49, down 1.13%. Volume was high side in the context of the last thirty days, but not extraordinarily so. The high-volume days were at the end of October.

The Canadian jobs report was ho-hum:

The Canadian economy added 11,200 jobs in October on higher full-time hiring, and the unemployment rate dipped to 5.8 per cent, although wage growth was sluggish, Statistics Canada data indicated on Friday.
…
Although full-time jobs rose by 33,900 compared to a loss of 22,600 part-time positions, the labour participation rate dropped to 65.2 per cent, its lowest since October, 1998.

And the average year-over-year wage growth of permanent employees – a figure closely watched by the Bank of Canada – fell to just 1.9 per cent, the lowest since the 1.7 per cent recorded in August 2017.

Meanwhile, in the States:

• ■ 250,000 jobs were added last month.
• ■ The unemployment rate was unchanged at 3.7 percent, a nearly 50-year low.
• ■ Average earnings rose by 0.2 percent and are up 3.1 percent over the past year.
• ■ The number of people working or looking for a job increased by 711,000, nudging the labor force participation rate up to 62.9 percent, from 62.7 percent in September.

But so much for the rally!

A steep decline in shares of Apple Inc. further weighed on sentiment in the U.S. stock market after the iPhone maker warned that sales during the crucial holiday quarter would likely miss expectations.

White House economic adviser Larry Kudlow told CNBC that while President Donald Trump plans to meet China President Xi Jinping later this month, he has not asked U.S. officials to draw up a proposed trade plan, contradicting a report earlier in the day that had buoyed hopes of a trade dispute resolution.

That erased early gains in U.S. stocks and curtailed a rally in global markets that had lifted emerging market stocks by their largest daily gain since 2016.
…
The Dow Jones Industrial Average fell 111.34 points, or 0.44 per cent, to 25,269.4, the S&P 500 lost 17.6 points, or 0.64 per cent, to 2,722.77 and the Nasdaq Composite dropped 77.06 points, or 1.04 per cent, to 7,356.99.

Apple’s shares tumbled nearly 7 per cent, taking its market value below $1-trillion, after the company said sales for the final quarter would likely miss expectations.

In Toronto, Canada’s main stock index also erased early gains on Friday.

The Toronto Stock Exchange’s S&P/TSX composite index unofficially closed down 0.2 per cent, or 30.87 points, at 15,119.28.