Category: Market Action

So, US inflation was announced today:

Overall inflation cooled: The Consumer Price Index for May was up 3.3 percent from a year earlier, lower than the 3.4 percent economists had forecast and down from the April reading. And if you compared May prices just to the previous month, they did not climb at all.

“Core” inflation also slowed: A closely watched measure that strips out volatile food and fuel prices to give a sense of the underlying trend climbed 3.4 percent from a year earlier, down from 3.6 percent the previous month and slower than economists had forecast. That was the slowest pace of increase since April 2021.
…
One piece of bad news in a mostly good-news report: The cost of shelter continued to rise fairly quickly, particularly for homeowners. That has been one of the most stubborn categories of inflation, which is unfortunate because it is also the single largest component of the Consumer Price Index.
…
As investors dial down expectations for interest rates, the two-year Treasury yield has fallen 0.15 percentage points, on course for its biggest move lower this year.

But the FOMC was wary:

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller.

Five year Canadas closed at 3.43%, down a fair bit.

PerpetualDiscounts now yield 6.58%, equivalent to 8.55% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.18% on 2024-5-31 and since then the closing price of ZLC has changed from 14.73 to 15.10, an increase of 251bp in price, implying a decrease of yields of 20bp (BMO reports a duration of 12.31, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 4.98%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained constant at the 355bp reported June 5.

Sorry this is late – I was out for dinner again last night. Social Butterfly, that’s me!

TXPR closed at 586.45, down 0.89% on the day. Volume today was 1.60-million, near the median of the past 21 trading days.

CPD closed at 11.64, down 0.77% on the day. Volume was 46,850, below the median of the past 21 trading days.

ZPR closed at 9.94, down 1.19% on the day. Volume was 555,690, highest by far of the past 21 trading days.

Five-year Canada yields were up to 3.53%.

Jobs, jobs, jobs!

• Services powered the gains: Overall, U.S. employers added 272,000 jobs last month, with health care again accounting for the most growth, adding 68,000 jobs. Government hiring rebounded from April, with 43,000 additional jobs, as did leisure and hospitality work, with 42,000.
• Wages were strong: Average hourly earnings rose 0.4 percent, or 4.1 percent from a year earlier. That was also stronger than expected, since wage increases have been easing since early 2022. Wage growth isn’t the primary reason that inflation has been high, but economists worry that it will be difficult to bring inflation fully under control if pay keeps rising at its recent pace.
• But the unemployment rate rose: The jobless rate hit 4 percent for the first time since January 2022, ending one of the longest streaks of sub-4 percent unemployment on record.

Things were a bit different in the Frozen North:

Statistics Canada’s latest labour force survey showed the economy added 27,000 jobs last month – too modest of a gain to keep the unemployment rate from rising by a tenth of a percentage point.
…
“It didn’t take much digging to unearth the fact that this report is considerably softer than the headline, as all of the gains were in part-time jobs, in one province (Ontario), and the unemployment rate ticked up to 6.2 per cent, as expected,” wrote BMO chief economist Douglas Porter in a client note.
…
Statistics Canada says the involuntary part-time rate, which refers to the proportion of part-time workers who could not find full-time work or worked part-time because of weak business conditions – was 18.2 per cent in May. That’s up from 15.4 per cent a year prior.
…
Wage growth remained strong in May as average hourly wages rose 5.1 per cent from a year ago, reaching $34.94.

… and all in all:

Canada’s main stock index fell 1% on Friday as a jump in the U.S. dollar following the release of stronger-than-expected U.S. jobs data pressured metal mining stocks, while investors braced for increased volatility in the months ahead. Wall Street stocks ended slightly lower.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 222.10 points at 22,007.00. For the week, the index lost 1.2%, its third consecutive weekly decline.
…
The benchmark S&P 500 slipped immediately after the report while U.S Treasury yields climbed as traders slashed bets on a September rate reduction. The index recovered and briefly hit a fresh intraday record high as investors noted the data pointed to underlying economic health.
…
Traders now see a 56% chance of a September rate reduction, according to the CME’s FedWatch tool.
…
GameStop slumped 39% in volatile trading just as stock influencer “Roaring Kitty” kicked off his first livestream in three years. The gaming retailer had announced a potential stock offering and a drop in quarterly sales.

TXPR closed at 591.74, down 0.90% on the day. Volume today was 1.76-million, near the median of the past 21 trading days.

CPD closed at 11.73, down 0.93% on the day. Volume was 54,310, above the median of the past 21 trading days.

ZPR closed at 10.06, down 1.18% on the day. Volume was 429,190, highest by far of the past 21 trading days.

Five-year Canada yields were down to 3.46%.

So it looks like there were a few people who resolved to hold on to their FixedResets until the very first BoC policy loosening, reasoning that this was just the first step towards negative rates. Or maybe they were raising cash to invest in Gamestop – it nearly doubled today, if you count after-hours trading.

Update, 2024-06-07: After-hours trading prices are a little hard to find once the day is done: here’s proof:

Another private debt fund bites the dust:

Private debt manager Next Edge Capital is gating its flagship credit fund after a surge in redemption requests, meaning clients are unable to get their money out and the portfolio will be wound down over the next two years.

The decision, announced last week, marks Next Edge’s second wind-down of a private debt fund. Since 2020, the Toronto-based asset manager has also been winding down the Next Edge RCM Private Yield Fund, whose credit adviser is R.C. Morris Capital Management Ltd. The fund reported a 25-per-cent loss in the month of March and an 18-per-cent loss in 2023, as it becomes more concentrated and subject to wider performance fluctuations.

Based in Vancouver, R.C. Morris is a private lender and has participated in a number of Canadian wealth management deals in recent years. The company lent money to Bridging Finance Inc., the private debt manager that was put in receivership in 2021, and it also backed Gary Ng’s acquisition spree of independent wealth management companies between 2018 and 2020, including PI Financial.
…
With so much uncertainty in the sector, a large number of Next Edge’s investors tried to cash out, and the Private Debt Fund dealt with redemption requests worth $145-million in 2023 – close to half of the fund’s $298-million in total assets under management – according to an investor memo sent last week.

Redemption requests have continued this year and currently sit at 20 per cent of total assets. Next Edge believes the best option is to wind down the portfolio and roll its investors into a different fund in the future. In doing so, management has capped the existing fund’s monthly payouts at a 6-per-cent annual yield – only 1-per-cent higher than some guaranteed investment certificates – and halted redemptions.

A quick search didn’t tell me anything about their investment in Bridging Finance or Gary Ng’s adventure … I was hoping to learn when these had been disposed of (at a loss, presumably) or written down.

The BoC cut the policy rate today as widely expected; GOC-5 was down a bit to 3.45%.

PerpetualDiscounts now yield 6.53%, equivalent to 8.49% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.13% on 2024-5-24 and since then the closing price of ZLC has changed from 14.88 to 15.15, an increase of 181bp in price, implying a decrease of yields of 15bp (BMO reports a duration of 12.35, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 4.98%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened substantially to 355bp from the 315bp reported May 29.

Canadian GDP was uninspiring:

Canada’s economic growth picked up at the start of the year, but the results fell short of expectations and follow an extended period of stagnation as the country struggles with higher interest rates.

Real gross domestic product rose at an annualized rate of 1.7 per cent in the first quarter, Statistics Canada said Friday in a report, undershooting analyst expectations of 2.2 per cent and Bank of Canada estimates of 2.8 per cent. Statscan also revised fourth-quarter growth down to 0.1 per cent annualized from 1 per cent.

Friday’s GDP report was the last major economic release before the Bank of Canada’s policy announcement on June 5, one of the most anticipated decisions in recent memory.

Investors are leaning toward an interest rate cut next week, which would mark the start of a policy easing cycle. To help it curb inflation, the Bank of Canada hiked its benchmark interest rate to 5 per cent from emergency lows of 0.25 per cent over a series of decisions in 2022 and 2023.
…
Interest rate swaps, which capture market expectations of monetary policy, were pricing in a near 80-per-cent chance that the central bank trims its policy interest rate by a quarter-percentage-point, according to Bloomberg data as of Friday morning.

Ninepoint Partners LP was mentioned here on December 23, 2023 due to its efforts to introduce Canadian Large Cap Leaders Split Corp., which has made a decent start in its life as a SplitShare Corporation. Now they’re being mentioned again for a less happy reason:

Ninepoint Partners LP will stop paying cash distributions on three private debt funds that collectively manage $2-billion in assets and will also skip the current redemption window on its flagship private debt fund, preventing investors from cashing out in the second quarter.
…
“After reviewing our various liquidity options, Ninepoint Partners and our subadvisors have determined that the best path forward to preserve liquidity and balance the long-term goals of these three affected funds is to redirect future distribution into additional units rather than cash distributions starting July 1, 2024,” Ninepoint said in a statement to The Globe.

In its memos to investment advisers, Ninepoint did not specify why it has halted cash distributions on the three funds. The asset manager wrote that it has been “reviewing various options with the aim of creating liquidity for the fund,” adding that, “at this time, liquidity generated will be used to honour ongoing commitments to portfolio companies, satisfy the fund’s redemption provisions, and meet operational requirements.”

Ninepoint is also changing some redemption protocols. Typically, its private debt investors are able to cash out once a quarter, up to a maximum of 5 per cent of total fund assets. This quarter, it is skipping redemptions altogether on the $1.2-billion fund it co-manages with Third Eye.

“Currently, the fund is unable to make redemption payments due to having insufficient net cash for this purpose,” Ninepoint wrote in a memo to advisers. “The fund must balance redemptions with its obligations to allocate sufficient resources to effectively execute its long-term strategy, ultimately benefiting all unitholders.”

Holy Smokes. Cutting off redemptions is bad enough, but they’ve cut off distributions too, which sounds much more serious. I’d like to get a look at their books … are they carrying a big proportion of defaulting bonds? Or a big proportion of Pay-In-Kind bonds, which are really zero-coupon bonds dressed up? Or do they, for some reason, sincerely believe that stopping distributions in order to fund redemptions is a good idea? Stay tuned! Thanks to Assiduous Reader pugwash for the heads-up!

Meanwhile, in US political news (no, I’m not going to write about what you think I’m going to write about):

Salem Media Group, the right-wing talk radio network owner, issued a public apology and said it would stop distributing a discredited 2020 election conspiracy theory film after a Georgia man wrongly accused of voter fraud sued the company for defamation.

The Georgia man, Mark Andrews, said in his 2022 lawsuit that “2000 Mules,” a film and book by far-right activist Dinesh D’Souza contained a string of bogus claims about the 2020 election, leading to threats of violence against him and his family.

Andrews said the film, which has been repeatedly promoted by Donald Trump and widely circulated in right-wing media as supposed proof that the 2020 election was stolen, had severely damaged his reputation.
…
In the “2000 Mules” film, Andrews was featured on video with his face blurred depositing his ballot, along with those belonging to his family, into a drop box in what the film purported was a so-called “mule” operation.

“What you are seeing is a crime,” a voiceover from D’Souza declared. “These are fraudulent votes.”

Salem said in its Friday statement that it “relied on representations” that D’Souza had made.

“We have learned that the Georgia Bureau of Investigation has cleared Mr. Andrews of illegal voting activity in connection with the event depicted in 2000 Mules,” the company said.

… and:

Donald Trump’s former lawyer Rudy Giuliani is one step closer to being disbarred.

The professional responsibility board in Washington, DC, recommended Friday that the ex-New York mayor and federal prosecutor lose his law license because of his involvement in a bogus 2020 election fraud lawsuit.

Giuliani’s law license had already been suspended due to his work boosting Trump’s false assertions about his electoral loss. It is up to the DC Court of Appeals to decide whether to permanently disbar Giuliani.

… and this is also a Good Thing. Though the mills of God grind slowly; yet they grind exceeding small!

DBRS has downgraded CI Financial Corp.; there are no preferreds outstanding, but I thought it was interesting:

DBRS Limited (Morningstar DBRS) downgraded the credit ratings of CI Financial Corp.’s (CI or the Company) Senior Unsecured Debentures and the Issuer Rating of CI’s principal subsidiary, CI Investments Inc. (CII), to BBB (low) from BBB. The trends on the credit ratings remain Negative.

KEY CREDIT RATING CONSIDERATIONS
The credit rating downgrades reflect the persistently high debt-to-EBITDA ratio and deteriorating fixed-charge coverage ratio, as the Company continues to prioritize buying back shares over deleveraging, a strategy that is expected to continue. The Negative trends also reflect deteriorating credit fundamentals, including weakened earnings with the revenue from the asset management business continuing to decline relative to prior years. Moreover, wealth management earnings growth has not been able to offset the very high level of expenses, including those related to deferred acquisition costs. Moreover, the planned structural debt reduction financed by U.S. dollars-denominated debt is considered in the context of future acquisition-related expenses, higher technology investments, and integration-related costs together with the shortened debt maturity profile.