Category: Market Action

Moody’s downgraded Japan:

Moody’s Investors Service on Monday downgraded Japan’s sovereign debt rating by one notch to A1, citing rising uncertainty over the country’s ability to hit its debt-reduction goal.

The announcement briefly sent the yen to a seven-year low against the dollar and pushed 10-year Japanese government bond (JGB) futures down by 10 ticks.
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The U.S. rating agency said the outlook was stable.

Tom Byrne, regional credit officer of Moody’s, said the downgrade was closely linked to [Japanese Prime Minister] Mr. [Shinzo] Abe’s decision to delay next year’s scheduled sales tax hike, which made it more challenging for Japan to achieve its target of reducing the primary budget deficit in fiscal 2020.

“There is concern that fiscal policy in its current state will not achieve the long-term fiscal goals,” he said.

Hours before Moody’s announcement, Mr. Abe had stressed in a televised public debate that Japan remained committed to fiscal reform, and that the Bank of Japan’s ultraloose policy was not aimed at monetizing public debt.

But Moody’s warned that the BOJ’s efforts to achieve its 2-per-cent inflation target through aggressive money printing may push up bond yields and raise government borrowing costs.

Remember that US recovery that would save the world?

U.S. stocks fell for a second day as weaker data on Black Friday sales and China manufacturing overshadowed a rebound in oil and expansion in American factories.

Retailers in the Standard & Poor’s 500 Index (SPX) fell the most in a month as post-Thanksgiving holiday sales came in below forecasts. Apple Inc. fell as much as 6.4 percent in early trading before paring the loss in half. Chevron Corp. and Exxon Mobil Corp. gained at least 2 percent as crude oil ended a four-day skid.

The S&P 500 fell 0.7 percent to 2,053.44 at 4 p.m. in New York. The Dow Jones Industrial Average slumped 51.44 points, or 0.3 percent, to 17,776.8. The technology-heavy Nasdaq 100 Index lost 1.2 percent. About 7.6 billion listed shares changed hands in the U.S., 13 percent higher than the three-month daily average.

Black Friday, as noted above, was a fizzle:

Spending tumbled an estimated 11 percent over the weekend from a year earlier, the Washington-based National Retail Federation said yesterday. And more than 6 million shoppers who had been expected to hit stores never showed up.

Consumers were unmoved by retailers’ aggressive discounts and longer Thanksgiving hours, raising concern that signs of recovery in recent months won’t endure. Retailers also were targeted by protesters, who called on consumers to boycott Black Friday to make a statement about police violence. Still, the NRF cast the decline in a positive light, saying it showed shoppers were confident enough to skip the initial rush for discounts.

There may be relatively little effect on Canada, though, as Roy Osing reminds us that our main product is mewling sycophancy:

… I was less than impressed with the organization structure he proposed. It was a structure I had “lived with” in my previous life and could see the pluses and minuses.

When asked whether I could support the proposed structure, I asked for time to consider it before declaring my position.

One of my peers virtually condemned it and with his “outside voice” declared his non-support; he left the company soon thereafter.

A previous president once told me “Roy, if your boss puts forward what you consider to be a ‘dumb idea’, you only have two choices: one, support it and try to make it work; or two, leave.”

And there’s the usual amount of rate punditry:

Poloz will keep his benchmark overnight rate at 1 percent Dec. 3 according to all 22 economists surveyed by Bloomberg News through Nov. 28, stretching the pause that began with Mark Carney in 2010. That would make it the longest since February 1944 to September 1950, exceeding the October 1950 to January 1955 hiatus.
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While Fed policy makers debate the language they might use to flag potential policy-rate increases, their Canadian counterparts say they remain focused on providing stimulus to bring the world’s 11th-largest economy back to full output over the next two years.

Canada’s economic growth slowed to a 2.8 percent annualized pace in the third quarter from 3.6 percent the prior three months, Statistics Canada reported Nov. 28. In contrast, U.S. growth came in at 3.9 percent.
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Poloz won’t raise rates until the fourth quarter of next year, according to a Bloomberg economist survey. The quarter-point increase forecast for Canada compares with an estimated Fed move to 1 percent from 0.25 percent over that time.

The anticipation of rising Fed rates has is already helping keep Canadian bond yields lower than Treasuries. Canada’s five-year bonds had a 1.35 percent yield at 9:25 a.m. Toronto time today, while similar Treasuries yielded 1.46 percent.

In honour of Cyber Monday, the Canadian preferred share market was on sale today, with PerpetualDiscounts down 12bp, FixedResets losing 18bp and DeemedRetractibles off 11bp. Volatility was high and comprised almost entirely of losers. Volume was below average.

Update, 2014-11-30: A large portion of the material previously published in this post has been given its own dedicated post, Prof. Jeffrey MacIntosh on the National Securities Regulator

European inflation is still elusive:

Consumer prices rose 0.3 percent from a year earlier, the European Union’s statistics office in Luxembourg said today. That was in line with the median forecast of 41 economists in a Bloomberg News survey. Unemployment (UMRTEMU) held at 11.5 percent in October, Eurostat said in a separate report.
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The Eurostat report showed that energy prices fell 2.5 percent in November from a year earlier. Crude oil has plunged more than 30 percent in the past three months. Food, alcohol and tobacco prices increased 0.5 percent.

Core inflation, which strips out volatile items such as energy, food, tobacco and alcohol, stayed at 0.7 percent in November, according to Eurostat.

“The only crumb of comfort for the ECB –- and it is not much -– is that November’s renewed drop in inflation was entirely due to an increased year-on-year drop in energy prices,” said Howard Archer, chief European economist at IHS Global Insight in London.

… and at least one pundit is muttering that the oil price graph will not be V-shaped:

But Andy Xie, the often-contrarian former top Asia-Pacific economist for Morgan Stanley, warned that the massive investment overhang in China, valued at more than $6-trillion, will dramatically affect its energy demand growth, and will, as a result, rein in oil prices for a long time to come.

“China’s energy demand, the only source of growth for a decade, has fallen sharply,” he said in an interview. “There are several conspiracy theories out there. None can affect demand supply balance, which determines prices.”

In mid-September, more than a month before Goldman Sachs rocked markets with its prediction that oil prices would fall to $70 a barrel, Mr. Xie told a conference in Kuwait that he expected oil prices to nosedive to $60. The audience laughed. Now, he’s being invited back to speak again.

BMO Capital Trust is redeeming a big slug of Innovative Tier 1 Capital (or AT1, as the cool guys call it):

BMO Capital Trust (the “Trust”), a subsidiary of Bank of Montreal, today announced its intention to redeem at par all of its Trust Capital Securities – Series D (“BMO BOaTS – Series D”), on December 31, 2014. The BMO BOaTS – Series D are redeemable at the Trust’s option from December 31, 2014, at a redemption amount equal to $1,000 plus unpaid indicated distributions. Notice will be delivered to BMO BOaTS – Series D holders in accordance with the terms outlined in the BMO BOaTS – Series D prospectus.

After December 31, 2014, holders of BMO BOaTS – Series D will be entitled only to receiving the redemption price and will no longer be entitled to indicated distributions and exercising any other rights.

According to the 2013 Annual Report:

After December 31, 2014, the distribution [on BOaTS Series D] will be at the Bankers’ Acceptance Rate plus 1.5%.
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The BMO BOaTS Series D and E and BMO T1Ns – Series A will each be automatically exchanged for 40 Class B non-cumulative preferred shares of the bank, Series 11, 12 and 20, respectively, without the consent of the holders on the occurrence of specific events, such as a wind-up of the bank, a regulatory requirement to increase capital or violations of regulatory capital requirements.

LBS.PR.A was confirmed at Pfd-3(low) by DBRS:

The performance of the Portfolio has experienced some volatility over the past few months, with the downside protection fluctuating between 46.4% and 52.0% from July to October. As of October 31, 2014, the downside protection available to the Preferred Shares is approximately 49.2% and the dividend coverage ratio is about 1.1 times. The Pfd-3 (low) rating of the Preferred Shares is based primarily on the downside protection available and the additional protection provided by an asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.

The main constraints to the rating are (1) the Company’s dependence on the value and dividend policies of the securities in the Portfolio and (2) the reliance on the manager to generate a high yield on the Portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

The Asset Coverage Ratio for this issue was 2.1-:1 as of November 27.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 26bp, FixedResets off 9bp and DeemedRetractibles gaining 4bp. Volatility was high, with the winners being exclusively BAM PerpetualDiscounts. Volume was quite low.

And that’s it for November!

It’s a tangled web we weave when attempting to control the flow of capital:

Foreigners who illegally buy homes in Australia should face higher fines, a parliamentary committee said, calling on authorities to better police existing rules.

The current A$85,000 ($72,769) fine for foreigners breaching the rules, “seen by many as simply the cost of doing business,” should be replaced with penalties tied to the property’s value, the House Economics Committee said in a report that made 12 recommendations. Third parties who help foreigners break the rules should be fined, and gains from illegally purchased homes should be forfeited to the government, it said.
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The committee started the inquiry in March on concerns that foreign, particularly Chinese, buyers were pricing Australians out of the home market. Sydney’s median asking price for detached houses topped a record A$1 million this month, while prices across the nation’s major cities jumped 9 percent in the 12 months through October to the highest ever.
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To fund better policing, the committee recommended a “modest” administration fee. An A$1,500 fee would generate revenue of A$158.7 million over four years, yet amount to less than 0.3 percent of the purchase price of a home in Sydney or Melbourne, according to the report.

How’s that for good news for sellers? There will be a tax on the sale of a house so the government can ensure that high bidders with deep pockets are disqualified.

Structural subordination is becoming important for European bank bonds:

Senior bonds sold by Barclays Plc and Royal Bank of Scotland Group Plc yield as much as 38 basis points more than equivalent securities issued by the units they use to make loans. There was little difference in yields before this month.

The divergence underscores growing investor concern that senior bonds sold by parent holding companies could suffer losses if a bank fails, while debt of the operating companies will remain intact — a scenario regulators endorse. Investors are also anticipating a surge in issuance of senior debt that can be written down as lenders prepare for the biggest overhaul of financial debt in a generation.
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S&P this week told investors it will probably remove any assumption of government support when assigning senior ratings to bank holding companies, meaning these bonds may be downgraded because of the risk of being bailed in.

It’s a red letter day! The Canadian Securities Administrators are proposing something sensible!

The Canadian Securities Administrators (CSA) today published for comment proposed amendments that would create a streamlined prospectus exemption for rights offerings by reporting issuers.

“Although rights offerings can be one of the fairest ways for issuers to raise capital, in that they allow all existing investors to participate on a pro rata basis, they are seldom used because of the time and costs associated with them,” said Bill Rice, Chair of the CSA and Chair and Chief Executive Officer of the Alberta Securities Commission. “The proposed exemption is designed to make rights offerings more attractive to reporting issuers by decreasing both the time and costs involved.”

One of the key proposals is to remove the current regulatory review process prior to use of the rights offering circular. The CSA anticipates this will significantly decrease the amount of time it takes to conduct an offering. The CSA also proposes increased investor protection through the addition of civil liability for secondary market disclosure, and the introduction of a more user-friendly form of rights offering circular document.

The proposed amendments would also update other rights offering requirements and repeal the prospectus exemption for rights offerings by non-reporting issuers.

The CSA notice and proposed amendments are available on CSA members’ websites. The comment period is open until February 25, 2015.

The price of oil is catching up to the real economy:

West Texas Intermediate oil tumbled 6.3 percent to $69.05 a barrel in electronic trading, as Brent crude fell to its lowest level since 2010. Canadian energy companies sank the most since 2011, dragging the Standard & Poor’s/TSX Composite Index down 0.8 percent by 4:30 p.m. in Toronto.
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The Organization of Petroleum Exporting Countries maintained its collective production ceiling of 30 million barrels a day at a meeting in Vienna, resisting calls from Venezuela that a supply cut was needed to stem the rout that has sent oil prices into a bear market this year. Global energy stocks are down 25 percent in 2014, while fixed-income assets have rallied as the drop in crude damps inflation. German price growth climbed the least since 2010, data today showed, and most U.S. markets were closed for Thanksgiving.
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The ruble weakened to an all-time low of 48.6550 per dollar in Moscow, while Norway’s krone, the second-worst performer against the dollar this year among 16 major currencies, lost 1.4 percent to 6.9272 per dollar. Norway is the biggest oil producer in Western Europe.

And what with one thing and another, the Great Game is making a comeback!

Russian President Vladimir Putin will seek to bolster energy ties with India on a visit next month, his latest move to expand trade links with Asian nations to counter sanctions from the U.S. and its allies.
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Gas exporter OAO Gazprom (OGZD) reached a $400 billion deal with China in May to build a pipeline and start supplies after more than a decade of talks. In September, Putin offered to sell a stake in Vankor, the country’s second-biggest oil project, to “Chinese friends.” OAO Russian Railways is seeking to build a 2.8 trillion-ruble, high-speed line linking Moscow and Beijing.

“India is looking very closely at that — it’ll want to get in on the action,” said Sinderpal Singh, a senior research fellow at the Singapore-based Institute of South Asian Studies. “The Russians want to diversify, India wants hydrocarbons. Trade imperatives bind all these countries.”

India, which spent $143 billion to import crude last year, may look to diversify suppliers by buying more oil from Russia and Latin America to guard against geopolitical risks, Oil Minister Dharmendra Pradhan said in an October interview.

Economic ties between India and Russia are largely limited to arms transfers, and those have decreased over the past few decades. While the Soviet Union was India’s largest trading partner in 1981, Russia wasn’t among its top 15 commercial partners last year, according to data compiled by Bloomberg.

Russia and the Soviet Union have been India’s biggest weapons suppliers, accounting for about 70 percent of its arms imports since 1950, according to data compiled by the Stockholm International Peace Research Institute. The U.S. surpassed Russia as India’s top supplier of defense equipment in the three years to March, according to Indian government data.

US consumers aren’t spending:

The U.S. Commerce Department reported Wednesday that personal consumption spending increased a slim 0.2 per cent in October from September, less than economists had expected after September’s flat reading. The U.S. economy is accelerating, but consumer spending isn’t. For the past 12 months, real (i.e. inflation-adjusted) disposable personal income has risen 2.5 per cent, the fastest pace in nearly two years; but personal consumption expenditures are up 2.2 per cent, the lowest in eight months.

The U.S. Conference Board’s latest consumer confidence index reading, released this week, was at a five-month low. Somehow, the combination of third-quarter economic growth of nearly 4 per cent annualized, strong employment growth and tumbling gasoline prices isn’t enough to impress our grumpy old Uncle Spender.

I don’t quote Willem Buiter much any more, which is a shame. But he has favoured us with his golden wisdom:

The initiative requiring the Swiss National Bank to hold a fixed portion of its assets in gold makes no sense, according to Citigroup Inc., which said the metal was the equivalent of the virtual currency bitcoin.

“There is no economic or financial case for a central bank to hold any single commodity, even if this commodity had intrinsic value,” Willem Buiter, the bank’s chief economist and a former Bank of England policy maker, wrote in a report dated yesterday. “Forbidding a central bank from ever selling any gold it owns reduces the value of those gold holdings to zero.”
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Like bitcoin, gold has no intrinsic value and is costly to produce and store, Buiter wrote. “If the central bank is to invest in commodities, better to have a balanced portfolio of commodities or, more conveniently, a balanced portfolio of commodity ETFs or other derivatives,” he said.

And I have to admit, Japanese bond yields are more amusing than usual:

The Bank of Japan’s record bond buying is crowding out individual buyers, narrowing the investor base on which the world’s second-largest bond market stands.

The government last month canceled sales of sovereign notes maturing in 2016 through financial companies to households because buyers would have to pay more in broker fees than they would get in interest, according to the Ministry of Finance. The BOJ’s 80 trillion yen ($681 billion) a year in debt purchases has cut yields, with the latest two-year securities offering a 0.038 percent coupon, less than half the rate in June last year, and compared with about 0.02 percent interest on bank deposits.
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The ratio of government bonds held by individuals was 2 percent at the end of June, compared with 21.2 percent for the BOJ and 57.7 percent for banks, life insurers and mutual funds, according to central bank data.

But despite these efforts…:

Japan’s consumer price gains slowed for a third straight month, challenging Bank of Japan Governor Haruhiko Kuroda’s effort to stoke faster inflation.

Consumer prices excluding fresh food increased 2.9 percent in October from a year earlier, the statistics bureau said today in Tokyo, matching the median projection in a Bloomberg News survey (JNCPIXFF) of economists. Stripped of the effect of April’s sales-tax increase, core inflation — the BOJ’s key measure — was 0.9 percent.

Tumbling oil prices are complicating the task of stoking inflation in an economy that slid into recession last quarter. The inflation number is the last key data point on consumer price changes before an election next month, with Prime Minister Shinzo Abe seeking a renewed mandate for his economic growth strategy.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 4bp, FixedResets down 8bp and DeemedRetractibles gaining 3bp. Volatility was average. Volume was very low.

There was an article on Bloomberg about tech worker visas in the US:

Along with temporary deportation relief for millions, President Obama’s executive action will increase the number of U.S. college graduates from abroad who can temporarily be hired by U.S. corporations. That hasn’t satisfied tech companies and trade groups, which contend more green cards or guest worker visas are needed to keep tech industries growing because of a shortage of qualified American workers. But scholars say there’s a problem with that argument: The tech worker shortage doesn’t actually exist.

The argument against the tech worker shortage is presented in a paper by Hal Salzman, Daniel Kuehn, and B. Lindsay Lowell titled Guestworkers in the high-skill U.S. labor market:

This paper reviews and analyzes the science, technology, engineering, and mathematics (STEM) labor market and workforce and the supply of high-skill temporary foreign workers, who serve as “guestworkers.” It addresses three central issues in the ongoing discussion about the need for high-skill guestworkers in the United States:
Is there a problem producing enough STEM-educated students at sufficient performance levels to supply the labor market?
How large is the flow of guestworkers into the STEM workforce and into the information technology (IT) workforce in particular? And what are the characteristics of these workers?

What are the dynamics of the STEM labor market, and what are the employment and wage trends in the IT labor market?

Analysis of these issues provides the basis for assessing the extent of demand for STEM workers and the impact of guestworker flows on the STEM and IT workforces.
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The IT industry was able to attract increasing numbers of domestic graduates during periods of rising wages and employment, leading to a peak in wages and numbers of computer science graduates in the early 2000s. Since that time, the IT industry appears to be functioning with two distinct market patterns: a domestic supply (of workers and students) that responds to wage signals (and other aspects of working conditions such as future career prospects), and a guestworker supply that appears to be abundantly available even in times of relatively weak demand and even when wages decline or are stagnant.

Workers from countries with low wages and limited career opportunities will find the U.S. IT labor market attractive even when wages are too low and career opportunities too limited to increase the IT supply from domestic students and workers. In other words, the data suggest that current U.S. immigration policies that facilitate large flows of guestworkers appear to provide firms with access to labor that will be in plentiful supply at wages that are too low to induce a significantly increased supply from the domestic workforce.

Very interesting, but there are some policy questions left unaddressed. The first is a question of equilibrium – one would hope, from economic theory, that supply and demand for professionals of a given type will result in an equilibrium, as high wages increase supply (of people entering undergraduate studies in the field) and decrease demand (as projects become less profitable due to higher wages.

So question #1 is: given that programming is a well-paid sector (average salary in excess of $80,000, according to Figure K of the paper), and given that the end-product is so easily transported, does it not make sense to grant visas in order to increase the global market share of the US? This isn’t a “TFWs at Timmy’s” issue, these are services that are exported and have major spin-off benefits.

Question #2 (which is actually more relevant to the paper as written) is: is the population of IT guest-workers equivalent in any rough kind o way to the population of domestic workers? There is a huge variation of skill among professional programmers, with what I call ‘teeny-bopper programmers’ at the low end … they can do a competent job of coding as long as you give them their assignments in small chunks … but if they design a large project, you end up with spaghetti code that after a few iterations becomes undebuggable and unimprovable (it is my understanding that that is what happened to dBase). Designing a programme, determining how it will be broken down into modules, which talk to each other this way and rely on these common underlying functions … that’s a very highly skilled job.

So what’s the salary distribution of guest-workers compared to the salary distribution of domestic workers? If guest-workers are all in – say – the top tercile of domestic salaries, then the paper’s argument loses a lot of its validity.

Speaking of equilibrium labour markets, it’s good times for retailers:

Workers are facing the most favorable job market for seasonal work since the 18-month recession that started in December 2007, getting hired with fewer interviews and in some cases with higher pay.

About 821,000 workers will be hired for retail seasonal jobs this year, up 11 percent from a year ago and the highest since records were started in 1990, estimates Michael Niemira, former director of research for the International Council of Shopping Centers Inc. and now founder of economic forecasting firm The Retail Economist LLC in Tucson, Arizona.
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“I don’t want to say there is pressure on wages but there is an alignment of wages with demand,” said Jack Kleinhenz, chief economist with the National Retail Federation in Washington, who is estimating as many as 800,000 workers will be added. “There is some tightening” in the job market.

The unemployment rate for the retail and wholesale trade sector fell to 5.1 percent in October, the lowest since early 2008 in the initial months of the recession, Labor Department figures show. Wages and salaries for retail workers rose 2.5 percent in the third quarter from the same period in 2013, the biggest increase in more than four years, according to the Bureau of Labor Statistics data.

Seasonal job seekers using the website Snagajob.com are finding work in an average of 28 days this year compared with 45 days last year, company Chief Executive Officer Peter Harrison said. The Richmond, Virginia-based online matching service focuses on part-time and hourly positions.

Investment grade new issues have set a new record:

Investment-grade corporate debt sales have surged to a record $1.15 trillion this year as the most creditworthy borrowers flocked to the U.S. bond market to take advantage of historically low interest rates.

Apple Inc. (AAPL), Verizon Communications Inc. and Oracle Corp. were among borrowers that helped swell issuance this year. JPMorgan Chase & Co. was the the top underwriter for the fifth-straight year, grabbing 12.7 percent of the deals, according to data compiled by Bloomberg.

Alibaba Group Holdings Ltd., Asia’s biggest Internet company, led borrowings of more than $126 billion this month that helped sales breach last year’s record of $1.13 trillion. Companies have raced to the market to lock in borrowing costs that remain within 0.5 percentage point of the all-time low of 2.65 percent reached in 2013, Bank of America Merrill Lynch index data show.

Investors purchasing the debt have reaped 7.3 percent gains in 2014, overcoming the 1.5 percent loss last year, index data show. Investment-grade bonds are rated above Ba1 by Moody’s Investors Service and BB+ at Standard & Poor’s.

But it’s not good news all ’round:

Leveraged loan issuance plummeted in the U.S. this month as investors punished borrowers in an increasingly volatile market for high-yield, high-risk debt.

Borrowers including TransFirst Inc. and Norwegian Cruise Line Holdings Ltd. have sold $6.5 billion of U.S leveraged loans to institutional investors in what’s poised to be the slowest November since 2008, according to data compiled by Bloomberg. Volume was almost $30 billion in October. Fewer deals are getting done after loan prices plunged more than 3 percent last month from a July peak and yields rose to 6.2 percent, the highest in more than two years.
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The drop-off in issuance comes as regulators scrutinize Wall Street’s lending practices and demand for the speculative-grade debt fades. Leveraged loans are typically issued by companies that have ratings of less than Baa3 by Moody’s Investors Service and below BBB- by Standard & Poor’s.

Remember how the Competition Ha-Ha Board (the guys who made the discovery that not all on-line reviews are legitimate) gave the banks permission to extend their hegemony on financial services as long as they paid sufficient money to their regulatory buddies? Well, it’s going to get even better!

The chair of the Ontario Securities Commission has inked a new deal to co-operate on investigations with his former employer, the federal Competition Bureau, which he headed in the early 1990s.

While the two regulatory bodies have far different mandates, they say there are enough areas of mutual interest to work on fraud investigations, exchange “information and intelligence,” and undertake joint education initiatives.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 20bp, FixedResets off 9bp and DeemedRetractibles gaining 13bp. Volatility was good, with a preponderance of FixedReset losers. Volume was above average.

PerpetualDiscounts now yield 5.01%, equivalent to 6.51% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a little under 4.15%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 235bp, unchanged from the November 19 report.

The OECD has released its OECD Economic Outlook, November 2014:

25/11/2014-Modest global economic forecasts, continuing high unemployment, and downshifts in potential output should spur governments with a greater sense of urgency to fully employ monetary, fiscal and structural policy levers to support growth, notably in Europe, according to the Economic Outlook.

The Economic Outlook draws attention to a global economy stuck in low gear, with growth in trade and investment under-performing historic averages and diverging demand patterns across countries and regions, both in advanced and emerging economies.
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Global GDP growth is projected to reach a 3.3% rate in 2014 before accelerating to 3.7% in 2015 and 3.9% in 2016, according to the Outlook. This pace is modest compared with the pre-crisis period and somewhat below the long-term average

I must say, I don’t understand their pricing strategy at all. They want $105 (presumably USD) for an electronic version while posting an electronic version that can’t be copy-pasted. Given that this is a taxpayer-funded organization, this is ridiculous. So I’ll report on the Globe & Mail stories instead.

They’re anticipating policy hikes sooner than most:

In the OECD’s twice-annual Economic Outlook, released early Tuesday, the international economic policy and research body argued that Canada’s low and economically stimulative 1.0-per-cent central bank rate “will need to be gradually withdrawn to counter inflationary pressures,” as its economy grows toward reaching its full output capacity.

“It is assumed in this projection that the first policy rate increase occurs in late May of 2015, and that rates rise steadily thereafter,” the outlook report said.
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At the time [November 2013], the OECD’s concern looked misplaced, given that inflation was below 1 per cent. And, indeed, its call for rate increase to begin before the end of 2014 was, in retrospect, premature.

But 12 months later, Canada’s inflation picture may make the OECD’s argument more compelling. Last week, Statistics Canada reported that the country’s total Consumer Price Index inflation rate in October was 2.4 per cent, its highest since early 2012. The so-called “core” inflation rate, which excludes the most volatile components of CPI and is the Bank of Canada’s key guide to underlying inflation trends, was 2.3 per cent last month, its highest since the end of 2008.

The OECD said Canada’s improving growth next year will be driven by rising export demand, particularly from the United States, which accounts for three-quarters of Canada’s exports. The OECD expects the U.S. economy will grow 3.1 per cent next year, its strongest in a decade and the highest among major advanced countries.

US mortgage rules are getting very strict:

The Consumer Financial Protection Bureau introduced the Ability to Repay rule, or ATR, in January to prevent borrowers from getting mortgages they can’t afford. Part-time wages can be included by banks in determining the ability to repay a mortgage if an employer verifies that the borrower has worked at the job for two years and will continue to do so. Lenders may consider a period of less than two years if they have a reasonable explanation.

The issue isn’t the rule — it’s how lenders interpret it, said Pete Mills, senior vice president for residential policy for the Mortgage Bankers Association in Washington. Banks are concerned about “potentially draconian” penalties for violating ATR, so they are being conservative when evaluating applications, he said.

“We don’t have a long enough track record to see how ATR is going to be enforced, so lenders are staying well inside the credit lines,” Mills said. “When you have an application based on multiple jobs — those are hard to evaluate from a stability of income standpoint.”

Sam Gilford, a CFPB spokesman, declined to comment.
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Without part-time income, some borrowers no longer meet the debt-to-income ratio used to measure the ability to repay, disqualifying them for a mortgage. Fannie Mae and Freddie Mac, the government-run companies that buy and back most U.S. mortgages, cap the ratio at 45 percent. For loans insured by the Federal Housing Administration, the maximum is 43 percent.

Clever regulation – allow exceptions on the basis of “reasonable explanations” so the regulators can’t be criticized, but refuse to give a reasonable explanation of just what exactly a reasonable explanation is, to make use of the loophole extraordinarily risky.

Note that because regulation writers are morons, the term Debt-To-Income (as defined by Fannie Mae) is a misnomer. It’s actually Debt-Service-To-Income:

The DTI ratio consists of two components:

• •total monthly obligations, which includes the qualifying payment for the subject mortgage loan and other long-term and significant short-term monthly debts (see Calculating Total Monthly Obligation below); and
• •total monthly income (see Chapter B3–3, Income Assessment).

The question of bankers’ pay is getting more entertaining by the minute:

Osborne said on Nov. 20 that he would consider ways to put bankers’ salaries at risk to ensure employees pay the price for misconduct and failure. At the same time, he dropped a court challenge against EU rules that cap bankers’ bonuses at twice fixed pay.

The U.K. maintains that the EU bonus rule gives banks a perverse incentive to boost fixed pay, breaking the link between compensation and performance. To restore that link through salaries, Osborne must resolve the problem that if fixed pay can be taken back, EU rules could classify it as a bonus that would be subject to the limit — and banks would still be able to raise salaries.

Meanwhile, universities are the new sweatshops:

Vandita Sharma writes code for a company that turns old radiators into high-tech heating devices. Gaurav Chhabra develops software that lets computers identify objects on camera. Paul Dariye is designing an app for a startup that helps nonprofits raise money.

The three engineers are paid $11 an hour or less by New York University’s Polytechnic School of Engineering, which has placed them in internships at small companies. Their work is at the center of a battle between NYU’s administration and the graduate student union, which is demanding higher wages for interns at the university’s startup incubators.

Engineers who do jobs comparable to those of Polytechnic’s interns make roughly $43 per hour, according to Glassdoor, a website that tracks salaries.

There’s no conflict of interest there. Nope, not one bit. Not with all the administrators employed by universities to watch over the incubation programme to make sure they’re run fairly.

It was an off day for the Canadian preferred share market, with PerpetualDiscounts off 7bp, FixedResets losing 15bp and DeemedRetractibles down 11bp. Volatility was average, but comprised entirely of losers. Volume was high.

These are strange times for bond markets:

The Bank for International Settlements estimates the amount of bonds outstanding has surged more than 40 percent since 2007 as countries such as the U.S. increased deficits to pull their economies out of recession and companies locked in low-cost financing as central banks dropped interest rates.

Even so, a shortfall emerged. At a time when investors scarred by the worst economic crisis since the Great Depression were seeking out the safest assets, central banks in the U.S., U.K. and Japan sapped new supply by purchasing trillions of dollars of bonds in unprecedented stimulus programs.

Global banking regulations designed to limit risk-taking and prevent a repeat of the crisis also boosted buying by requiring that financial firms stockpile highly rated assets.

All that extra demand has helped push down borrowing costs and upended forecasts by economists and strategists who foresaw higher bond yields this year.
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ECB President Mario Draghi fueled speculation that the bank will start buying government bonds after saying last week officials would broaden debt purchases if the inflation outlook weakens. Analysts estimate consumer prices in the euro area will rise 0.5 percent this year, the least since 2009.

The BOJ, the largest holder of Japan’s government bonds with 20 percent, may end up owning half that market by as early as 2018 as it tries to spur an economy that’s contracted at least five times in the past decade, according to Takuji Okubo, a chief economist at Japan Macro Advisors in Tokyo.

Central banks in the U.S., Europe, Japan and the U.K., along with the major lenders and reserve managers in those regions, are on pace to amass $26 trillion of debt securities by the end of next year, according to JPMorgan.
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And it’s not only the central banks. Global bond funds will probably add $280 billion next year, while pensions and insurers in the U.S., Europe, Japan and the U.K. will buy an estimated $550 billion, according to JPMorgan.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 6bp, FixedResets gaining 5bp and DeemedRetractibles off 1bp. Volatility was average – but all the winners were FixedResets. Volume was slightly below average.

There is some thought that Canada’s inflation is normalizing:

Canada’s inflation rate accelerated faster than economists predicted in October, led by gasoline and clothing and suggesting the economy may be running hotter than the central bank had thought.

The consumer price index rose 2.4 percent compared with the same month a year earlier, Statistics Canada said from Ottawa. That’s faster than all 21 economists in a Bloomberg News survey predicted. The core rate that excludes eight volatile products accelerated to 2.3 percent, the strongest in almost three years.

Inflation has exceeded the Bank of Canada’s 2 percent target in five of the past six months, making it more difficult for Governor Stephen Poloz to argue temporary factors are driving price gains. Canada’s dollar rose the most in almost two months after today’s report as traders speculated the central bank may have to bring forward its timetable for raising borrowing costs.
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Canada’s dollar strengthened 0.7 percent to C$1.1229 per U.S. dollar at 10:40 a.m. Toronto time. Two-year federal government bond yields rose to 1.07 percent from 1.05 percent.

Clothing and footwear price gains accelerated to 3.1 percent, from September’s 2 percent pace, as retailers offered fewer discounts, Statistics Canada said today.

Gasoline prices rose 0.6 percent in October from a year earlier. On a monthly basis, gasoline fell 4 percent in October, the fourth consecutive decline.

The next few inflation reports may show the gains in gasoline and clothing prices receding, Ferley said, citing a recent fall in fuel prices and a slower depreciation of Canada’s dollar that had boosted the cost of imported apparel. Today’s inflation gain was still broad enough to suggest price gains faster than Poloz expects, he said.

Food prices rose 2.8 percent in October, including a 12.4 percent surge for meat purchased at stores.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts winning 15bp, FixedResets flat and DeemedRetractibles up 7bp. Volatility was good, comprised entirely of FixedResets. Volume was a little low.

I briefly mentioned subsidized gasoline in Saudi Arabia on November 11. Here’s a report on subsidized electricity in India:

The villagers of Dharnai in northern India had been living without electricity for more than 30 years when Greenpeace installed a microgrid to supply reliable, low-cost solar power.

Then, within weeks of the lights flickering on in Dharnai’s mud huts, the government utility hooked up the grid — flooding the community with cheap power that undercut the fledgling solar network. While Greenpeace had come to Dharnai at Bihar’s invitation, the unannounced arrival of the state’s utility threatened to put it out of business.
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It’s a scenario playing out at dozens of ventures across India’s hinterlands. Competition from state utilities, with their erratic yet unbeatably cheap subsidized power, is scuppering efforts to supply clean, modern energy in a country where more people die from inhaling soot produced by indoor fires than from smoking.

I mentioned a new round of bank-bashing yesterday, in connection with their commodities businesses. Could it be that this is related?:

Congressional scrutiny of Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS)’s commodities businesses is another strain for units that already saw revenue drop by two-thirds from peak years.

Goldman Sachs produced $1 billion of revenue from its commodities unit and investments in commodity businesses in 2012, down from $3.4 billion in 2009, according to a Senate Permanent Subcommittee on Investigations report released today on banks’ involvement in those markets. Morgan Stanley’s commodity revenue fell for four straight years, from $3 billion in 2008 to $912 million in 2012, according to the report.

It’s an ill wind that blows nobody any good:

Six years after Bernard Madoff’s fraud collapsed, the cost of liquidating his defunct investment advisory firm to repay thousands of victims has topped $1 billion, though the con man’s former customers aren’t footing the bill.

The fees, paid by the industry-backed Securities Investor Protection Corp., which is managing the case, have financed a team of lawyers who this week surpassed $10 billion in recoveries for victims, or almost 60 percent of the principal that vanished after Madoff’s arrest in December 2008.

Irving Picard, the bankruptcy lawyer who’s leading the effort as trustee for Madoff’s company, included the new fee total in an interim report posted today on his website. A bankruptcy judge in Manhattan regularly approves the fees, sometimes over the objections of victims’ groups.
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“It’s obscene,” Helen Davis Chaitman, a lawyer representing some victims in the case, said in an e-mail about the fees. Chaitman, who has frequently challenged Picard in courts, said federal prosecutors recovered most of the cash for victims and Picard should pay out more than just principal.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 29bp, FixedResets up 16bp and DeemedRetractibles gaining 15bp. Volatility was low. Volume was average.

Recent musings on an Ontario tax hike should focus attention on Japan’s woes:

Japanese Prime Minister Shinzo Abe is discovering that haste makes waste.

Trying to double his nation’s sales tax to 10 percent over an 18-month period has resulted in the fourth recession since 2008 and the need to postpone the increase’s second part planned for next October. With an election now pending, the levy may be on hold at 8 percent until 2017.

The lesson is that the increases proved too much, too soon, and baby steps may have been more prudent, with the initial 3 percentage-point boost equivalent to 60 percent of the original level. In contrast, the U.K.’s 2011 increase of 2.5 percentage points amounted to a much smaller 14 percent boost and didn’t generate a recession.

Coming up next …Greenspan’s Conundrum Redux!

When then-Federal Reserve Chairman Greenspan raised the benchmark overnight rate from 2004 to 2006, long-term borrowing costs failed to increase, thwarting his attempts to tighten credit and curb excesses that contributed to the worst financial crisis in 80 years.

“We wanted to control the federal funds rate, but ran into trouble because long-term rates did not, as they always had previously, respond to the rise in short-term rates,” Greenspan said in an interview last week. He called this a “conundrum” during congressional testimony in 2005.

The bond market is signaling that past may be prologue as Yellen’s Fed prepares to raise rates next year. The yield on the 10-year U.S. Treasury note has fallen 0.71 percentage point in 2014 even as the Fed wound down its bond-buying program and mapped out a strategy to raise the benchmark federal funds rate from near zero, where it has been since 2008.
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The Fed does have one tool that Greenspan didn’t: a $4.49 trillion portfolio accumulated in three rounds of asset purchases. Selling some of those assets might provide a way to lift long-term rates if necessary, said Michael Gapen, senior U.S. economist at Barclays Plc in New York.

The sanctions on Russia are having some effect, even if some of the effects were unforeseen:

A recession is imminent, inflation is getting out of hand and the ruble and oil are in freefall, Economy Minister Alexei Ulyukayev told Putin, according to people who attended the meeting at the presidential mansion near Moscow in mid-October. Clearly, Ulyukayev concluded, sanctions need to be lifted.

At that, Putin recoiled. Do you, Alexei Valentinovich, he asked, using a patronymic, know how to do that? No, Vladimir Vladimirovich, Ulyukayev was said to reply, we were hoping you did. Putin said he didn’t know either and demanded options for surviving a decade of even more onerous sanctions, leaving the group deflated, the people said.

Days later, they presented Putin with two variants. To their surprise, he chose an initiative dubbed “economic liberalization,” aimed at easing the financial burden of corruption on all enterprises in the country, the people said. It was something they had championed for several years without gaining traction.

The policy, which Putin plans to announce during his annual address to parliament next month, calls for a crackdown on inspections and other forms of bureaucratic bullying that cost businesses tens of billions of dollars a year in bribes and kickbacks, the people said. It entails an order from the president to end predatory behavior, with prosecution being the incentive for compliance, they said.

There will be another round of bank bashing:

The biggest Wall Street banks have used their ownership of metal warehouses, oil tankers and other commodities businesses to gain unfair trading advantages and dominate markets, according to a U.S. Senate investigation.

In a 400-page report focused on Goldman Sachs Group Inc., Morgan Stanley (MS) and JPMorgan Chase & Co., a Senate panel said the firms have eroded what was once a strict line separating banking from commodities to the detriment of consumers and the financial system. The activity gives banks access to non-public information that could move markets and increases the likelihood that industrial accidents will spur taxpayer bailouts, the Permanent Subcommittee on Investigations found.

“We simply cannot allow a large powerful Wall Street bank the power to influence the price of a commodity essential to our economy,” Senator Carl Levin, who chairs the panel, told reporters in Washington today. He added that his staff “found substantial evidence that these activities expose major banks to catastrophic risks that are poorly understood.”

The controversy over banks’ involvement with commodities has spurred the Federal Reserve to review regulations and prompted some Wall Street firms to try to shed assets. Levin’s new findings include details on clients who entered into controversial aluminum transactions with Goldman Sachs and reveal that an employee questioned whether market-moving information could be passed on to traders.
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In August [2013], a district judge dismissed a suit against the firm and others brought by aluminum consumers, saying that an increase in a price component of aluminum was “an unintended consequence of rational profit maximizing behavior rather than the product of conspiratorial design.”

It was a good day for the Canadian preferred share market, with PerpetualDiscounts gaining 3bp, FixedResets winning 14bp and DeemedRetractibles up 13bp. Volatility was nil. Volume was very low.

PerpetualDiscounts now yield 5.03%, equivalent to 6.54% interest at the standard equivalency factor of 1.3x. Long corporates yield about 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 235bp, unchanged from the November 5 report.

There are some interesting trends in bond markets:

The influence of high-frequency traders in the Treasury market is growing. About 60 percent of Treasury securities trades are expected to be transacted on electronic platforms by the end of next year, an increase from 40 percent in 2013, according to Tabb Group LLC, a New York-based research firm. Of those trades, 10 percent were executed by robots in 2010, a share that will probably grow to 20 percent next year, according to Tabb.
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New rules adopted after the 2008 credit crunch are also part of the new normal. Global guidelines called Basel III, instituted by the Bank for International Settlements in Basel, Switzerland, require banks to hold more cash in reserve for assets such as bonds they keep on their balance sheets.

Partly in compliance with the regulations, the 22 primary dealers authorized to trade directly with the Fed reduced their U.S. government debt holdings to $46.3 billion at the end of October from a record high $146 billion in October 2013, Fed data show. While they still hold inventory, they’re allocating less to opportunistically buying big clumps of bonds and then slowly selling them, a process known as market-making.
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Hedge funds have filled the vacuum created by the retreat of the big banks. On the morning of Oct. 15, the turmoil in Treasuries echoed in the trading of junk bonds. As $8 billion was being wiped out in that global market, Toronto hedge-fund manager Philip Mesman fielded e-mails from U.S. bankers clamoring for him to buy their customers’ holdings.

Investors were unloading the debt of the riskiest companies, forcing exchange-traded funds and mutual funds to sell. Before Basel III and the Volcker Rule, which limits the ability of U.S. banks to trade on their own accounts, dealers would’ve bought the bonds themselves and held them until finding someone to take them. Instead they were forwarding the “sell” messages to firms they knew had quick access to cash.
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The size of German bund futures that can go through the market at one time without moving the price has fallen 46 percent to 784 contracts as of Oct. 17, from this year’s peak of 1,450 contracts in April, according to JPMorgan. The average over the past four years was 920 contracts.

Yay! More regulation! The 2014 Ontario Economic Outlook and Fiscal Review states:

The government is also undertaking a review of the regulation of financial planning. An expert committee will be appointed to look at more tailored regulation of financial advisers and financial planners.

Only through increased regulation will Granny be able to get financial advice from a reliable and knowledgeable source: her friendly neighborhood bank teller, who will be pleased to sell her an index linked GIC.

There will be no fast-track for Keystone:

The U.S. Senate refused to approve TransCanada Corp. (TRP)’s $8 billion Keystone XL pipeline after years of a political fight over jobs, climate change and energy security.

The vote was 59-41 with 60 required for passage in the Democratic-led Senate. Republicans have said they will try again next year after their party takes control of the chamber. House Speaker John Boehner and Senate Republican leader Mitch McConnell say passage of a Keystone measure is a top priority.

President Barack Obama has opposed legislation approving the Keystone project, saying it would bypass a review being conducted by the State Department. He didn’t say whether he would sign or veto the bill if it reached his desk.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 27bp, FixedResets up 14bp and DeemedRetractibles gaining 8bp. Volatility was minimal. Volume was low.