Category: Market Action

The FOMC hiked the US policy rate:

Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 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 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

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; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.

This had a minor effect on markets, unless it didn’t (there are always cross-currents!):

Benchmark 10-year U.S. Treasury notes last fell 9/32 in price to yield 2.9903 per cent, from 2.957 per cent late on Tuesday.

The 30-year bond last fell 11/32 in price to yield 3.1096 per cent, from 3.092 per cent Tuesday.

The dollar index, which measures the greenback against a basket of currencies, rose 0.09 per cent, with the euro up 0.06 per cent to $1.175.
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The Dow Jones Industrial Average fell 117.74 points, or 0.46 per cent, to 25,202.99, the S&P 500 lost 11.19 points, or 0.40 per cent, to 2,775.66 and the Nasdaq Composite dropped 8.10 points, or 0.11 per cent, to 7,695.70

PerpetualDiscounts now yield 5.57%, equivalent to 7.24% interest at the standard conversion factor of 1.3x. Long corporates now yield about 3.95%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread” is now about 330bp, a slight (and perhaps spurious) widening from the 325bp reported June 6.

PerpetualDiscounts now yield 5.52%, equivalent to 7.18% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 3.90%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 325bp, a slight (and perhaps spurious) narrowing from the 330bp reported May 30.

The regulators’ campaign to eliminate competition in the Canadian financial services industry continues to bear fruit:

Bank of Nova Scotia is extending a string of acquisitions with a $2.6-billion deal to buy MD Financial Management, a leading wealth-management company catering to doctors.

Headquartered in Ottawa with more then $49-billion in assets under management, MD Financial specializes in providing financial products, services and investment counselling to physicians and their families.

As part of the deal, Scotiabank has also struck a 10-year agreement with the Canadian Medical Association (CMA), which owns MD Financial, to promote the bank as its “preferred provider” of financial services to Canadian doctors.
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The acquisition builds on a pledge Scotiabank has made to invest in its wealth-management arm, which currently contributes about 12 per cent of the bank’s total earnings. In February, Scotiabank announced a deal to acquire investment firm Jarislowsky Fraser Ltd. for $950-million, bolstering its asset-management offerings for institutional investors.
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MD has about 250 financial consultants, 80 portfolio managers and 40 estate, trust and insurance advisors.

The Bank of Canada has announced:

The Bank of Canada today maintained its target for the overnight rate at 1¼ per cent. The Bank Rate is correspondingly 1½ per cent and the deposit rate is 1 per cent.

Global economic activity remains broadly on track with the Bank’s April Monetary Policy Report (MPR) forecast. Recent data point to some upside to the outlook for the US economy. At the same time, ongoing uncertainty about trade policies is dampening global business investment and stresses are developing in some emerging market economies. Global oil prices have been higher than assumed in April, in part reflecting geopolitical developments.

Inflation in Canada has been close to the 2 per cent target and will likely be a bit higher in the near term than forecast in April, largely because of recent increases in gasoline prices. Core measures of inflation remain near 2 per cent, consistent with an economy operating close to potential. As usual, the Bank will look through the transitory impact of fluctuations in gasoline prices.

In Canada, economic data since the April MPR have, on balance, supported the Bank’s outlook for growth around 2 per cent in the first half of 2018. Activity in the first quarter appears to have been a little stronger than projected. Exports of goods were more robust than forecast, and data on imports of machinery and equipment suggest continued recovery in investment. Housing resale activity has remained soft into the second quarter, as the housing market continues to adjust to new mortgage guidelines and higher borrowing rates. Going forward, solid labour income growth supports the expectation that housing activity will pick up and consumption will continue to contribute importantly to growth in 2018.

Overall, developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target. Governing Council will take a gradual approach to policy adjustments, guided by incoming data. In particular, the Bank will continue to assess the economy’s sensitivity to interest rate movements and the evolution of economic capacity.

Barry McKenna of the Globe & Mail comments:

Bank of Canada Governor Stephen Poloz generally does not broadcast future rate moves with explicit forward guidance. But on Wednesday, it’s was what Mr. Poloz and members of the bank’s governing council didn’t say that shifted expectations. The statement accompanying the rate decision dropped two key phrases that have been a staple of the bank’s communication for months. Gone is the reference to being “cautious” about future policy changes. Also absent is the qualifier that higher rates will be needed “over time.”

Instead, the bank is offering new, more assertive language about where rates are headed now that the economy is running near full capacity.

“Developments since April further reinforce the governing council’s view that higher interest rates will be warranted to keep inflation near target,” the statement said. “Governing council will take a gradual approach to policy adjustments, guided by incoming data.”

The odds of a July rate hike is now just shy of 80 per cent, up from slightly more than 50 per cent on Tuesday, according to Bloomberg’s interest rate probability tracker.

Global investors decided Italy was no longer a problem:

Global stocks staged a recovery on Wednesday, buoyed by optimism that Italy may avoid a potentially damaging general election.

MSCI’s gauge of stocks across the globe gained 0.67 percent, lifted by a rebound in both Europe and the United States.

The recovery was partly driven by news that Italy’s two anti-establishment parties were renewing efforts to form a government, rather than force the country to the polls for the second time this year.

The prospect that no government would be formed, leading to elections that could be a referendum on Italy’s euro membership, had sent short-term Italian bond yields up by the most in nearly 26 years.

The loonie did well:

The Canadian dollar strengthened against its U.S. counterpart by the most in more than two months on Wednesday after the Bank of Canada left interest rates on hold but boosted expectations for a hike at its next policy meeting in July.
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At 4 p.m. EDT (2000 GMT), the Canadian dollar was trading 1.1 percent higher at C$1.2876 to the greenback, or 77.66 U.S. cents, its biggest gain since March 21.

The currency, which on Tuesday touched a more than two-month low at C$1.3047, notched its strongest since May 24 at C$1.2837.

… and the five-year Canada yield spiked up to 2.13%.

So it was a good day for preferreds.

PerpetualDiscounts now yield 5.48%, equivalent to 7.12% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.85%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 330bp, a whopping increase from the 310bp reported May 23.

It used to be that bond yields were headed straight up. Not any more:

U.S. benchmark 10-year Treasury yields posted their largest one-day drop on Tuesday since Britain voted to exit the European Union nearly two years ago, as a political crisis in Italy, the third-largest euro zone economy, fueled a flight to safe-haven assets.

The steep rally in Treasury prices on Tuesday could be a blip in what has been a relentless sell-off since early September. Interest rates have been supported by the Federal Reserve’s tightening policy with 10-year Treasury yields rising to a high of 3.12 percent earlier this month.
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In afternoon trading, U.S. 10-year yields dropped to seven-week lows of 2.759 percent and were last at 2.788 percent. Yields fell 14.6 basis points, the largest decline since June 24, 2016.

U.S. 10-year Treasury futures were on track to record their highest single-day volume ever, according to a CME Group spokeswoman said. As of late Tuesday, a combined 8.58 million 10-year T-note futures changed hands with roughly 5.31 million contracts for June delivery transacted TYM8, according to CME data.

The vital-for-FixedResets-and-mortgages Canada 5-year rate dropped to 2.03% … there will be some who will think that’s a typo given recent history:

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And so, of course, preferreds got whacked, with TXPR down 62bp on the day.