Category: Market Action

PerpetualDiscounts now yield 6.48%, equivalent to 8.42% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.12% on 2024-6-30 (sic! That was a Sunday. I am assuming 2024-6-28) and since then the closing price of ZLC has changed from 14.82 to 15.10, an increase of 189bp in price, implying a decrease of yields of 15bp (BMO reports a duration of 12.33, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 4.97%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained steady at the 345bp reported July 10.

Canadian inflation came in low:

The Consumer Price Index rose 2.7 per cent in June on an annual basis, down from 2.9 per cent in May, Statistics Canada said Tuesday in a report. Financial analysts were expecting the inflation rate to ease to 2.8 per cent.

This is the sixth consecutive month that inflation has fallen within the Bank of Canada’s target range of 1 per cent to 3 per cent. Moreover, it’s the fifth out of six months this year that headline inflation has proven soft, relative to expectations on Bay Street.

On a month-to-month basis, consumer prices fell 0.1 per cent in June, without adjustments for seasonality.

There were several contributors to the weaker reading. For example, gasoline prices fell 3.1 per cent in June from May, while prices for travel tours tumbled by 11.1 per cent.

… this had an immediate effect on the money market:

Pre-announcement

Post-announcement

But the IMF warns us not to expect too much:

The International Monetary Fund has warned that stubborn inflation could keep interest rates higher for longer than expected, increasing fiscal and financial risks around the world.

Persistently high prices for services — which include haircuts, hotels and restaurants — as well as escalating trade tensions are propping up inflation and raising the prospect that interest rates will stay high for a while yet, the IMF cautioned Tuesday in its latest World Economic Outlook.

The warning highlights that the global economy is not yet in the clear when it comes to inflation, which explains the caution on the part of central banks in cutting interest rates. High borrowing costs, in turn, are prolonging the squeeze on household and business finances.
…
The agency blamed sticky services price inflation for “holding up progress” on reducing overall inflation. “Risks of persistent inflation in the services sector are tied to both wage- and price-setting, given that labor accounts for a high share of the costs in that sector,” it noted.

“The escalation of trade tensions could further raise near-term risks to inflation by increasing the cost of imported goods.”

So: when in doubt – shop!

Wall Street is cheering after fresh data showed American consumers aren’t tapping out quite yet, despite a disappointing few months for retailers.

US retail spending has been mostly flat since the beginning of the year, holding steady in June, the Commerce Department reported Tuesday. Consumer spending is American’s main economic engine, powering two-thirds of the US economy. Retail sales, which capture spending on goods and food services, make up a big chunk of overall spending.

June’s reading was better than the outright decline economists projected in a FactSet poll — a shift from prior months when retail sales consistently came in worse than expected. The figures are adjusted for seasonal swings but not inflation.

US consumers’ surprising show of resilience helped send stocks higher on Tuesday, with the Dow reaching a new record.

Sales at gas stations declined the most last month, dropping 3% from May. Spending at car dealerships and on automotive parts also fell markedly in June, reflecting the cyberattack on CDK Global, a software provider for dealerships. Excluding spending at gas stations and on cars, sales were up a solid 0.8% in June.

Meanwhile, online sales were up a healthy 1.9% in June. The strength from that category could persist in July due to Amazon’s annual deal event known as Prime Day. Sales at home improvement stores were also robust last month, rising 1.4%

So, there was good inflation news from the US:

Inflation in the United States cooled in June for a third straight month, a sign the worst price spike in four decades is steadily fading and may soon usher in interest-rate cuts by the Federal Reserve.

In a better-than-expected report, consumer prices declined 0.1 per cent from May to June after having remained flat the previous month, the Labour Department said Thursday. It was the first monthly decline in overall inflation since May, 2020, when the economy was paralyzed by the pandemic.

And measured from one year earlier, prices were up 3 per cent in June, cooler than the 3.3-per-cent annual rate in May.
…
Also on Thursday, Mary Daly, a key Fed official, suggested the central bank should cut rates soon. Ms. Daly, president of the Fed’s San Francisco branch, said she believed slowing inflation and a cooling job market justify a reduction in interest rates. She did not address the specific timing of any rate cut.

“I see it as likely that some policy adjustments will be warranted,” Ms. Daly said on a conference call with reporters.

Five-year Canadas are now at 3.44%.

I’ve updated the EQB LRCN post again.

PerpetualDiscounts now yield 6.52%, equivalent to 8.48% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.12% on 2024-6-30 (sic! That was a Sunday. I am assuming 2024-6-28) and since then the closing price of ZLC has changed from 14.82 to 14.94, an increase of 81bp in price, implying a decrease of yields of 7bp (BMO reports a duration of 12.33, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 5.05%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slighly (and perhaps spuriously) to 345bp from the 340bp reported July 3.

The EQB LRCNs were issued today:

On July 9, 2024, EQB issued $150 million of Capital Notes that mature on October 31, 2084, and will have an initial five-year fixed rate of 8%.

See the update to the linked post for an explanation of how the underlying preferreds are permitted to be non-NVCC.

My generation’s epitaph will be “well, we didn’t raise taxes!“:

Set atop a hill on the Italian island of Sicily, Agrigento is a heritage tourist’s paradise. Beneath the archaeological structures and relics of its Valley of the Temples lies an ancient maze-like aqueduct system that still captures water today.

But the aqueduct, and others built in modern times, are running so dry that small hotels and guesthouses in the city and nearby coast are being forced to turn tourists away. They don’t have enough water to guarantee their guests a toilet that flushes or a shower after a day out in the summer heat.
…
Francesco Picarella, head of Agrigento’s Hotel Federation, who also owns a hotel in the city center, says years of ineffective governance have made things worse. There has been talk of rebuilding the water network since 2011, but little progress has been made, he said.

“Today’s problem is the result of a failed water management policy that has been going on for 20 years,” he said. “The hotels that have their own reserves somehow compensate; the B&Bs in the historic center are in extreme difficulty.”

He said that the reservoirs are drying up because of lack of rain but also leaks.

In response to CNN’s request for comment, the Sicilian regional government’s office pointed to a study that outlined government plans to drill new wells, build more pipelines and bring aging desalination plants back online. The report also says Sicily has not received enough funds from Rome to carry out its plans.

Jobs, jobs, jobs!

Employers delivered another solid month of hiring in June, the Labor Department reported on Friday, adding 206,000 jobs in the 42nd consecutive month of job growth.

At the same time, the unemployment rate ticked up one-tenth of a point to 4.1 percent, up from 4 percent and surpassing 4 percent for the first time since November 2021.
…
Wage gains have also been moderating. Average hourly earnings rose 0.3 percent in June from the previous month, and 3.9 percent from a year earlier, compared with a 4.1 percent year-over-year change in May. But in good news for workers, pay gains have been outpacing inflation for about a year.
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The market response to the report on Friday was muted, with stocks rising modestly. Yields on government bonds fell, however, reflecting traders’ increasing confidence that the Federal Reserve will begin cutting interest rates.
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Roughly three-quarters of the job gains in the June report came from health care, social assistance and government. A few other industries produced scant increases, and some, including manufacturing and retail, shed jobs overall.

… and in the frozen North:

Canada’s unemployment rate rose to a 29-month high of 6.4 per cent, data showed on Friday, highlighting that people might be losing jobs as the labour market struggles to absorb a rapidly swelling population.

The jobs report, which also showed that youth unemployment reached almost a decade high barring the pandemic years, prompted money markets to increase bets of a rate cut by the Bank of Canada this month to around 56 per cent from 40 per cent a day earlier.
…
Canada lost a net 1,400 jobs in June, Statistics Canada said, against analysts’ predictions of 22,500 job gains, in further indications of weakness in economic conditions.
…
Yields on the Canadian government’s two-year bonds dropped by 9.1 basis points to 3.961 per cent after the jobs report.
…
The average hourly wage growth of permanent employees accelerated to an annual rate of 5.6 per cent from 5.2 per cent in May. The pay growth rate – closely tracked by the Bank of Canada (BoC) because of its effect on inflation – was the fastest since 5.7 per cent in December.
…
In June, jobs were shed in full-time work, while part-time positions were added in the month.

Employment in the goods sector increased by a net 12,600 jobs, mostly in agriculture, while the services sector lost a net 14,100 jobs, led by transportation and warehousing and Information, culture and recreation.