Category: Market Action

There was a decent little pop in the market today, as the end of tax-loss selling season reduced a certain amount of selling pressure. I think. You can never be sure!

PerpetualDiscounts now yield 6.96%, equivalent to 9.05% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.72% on 2023-12-15 and since then the closing price has changed from 15.88 to 15.70, a decline of 69bp in price, with a Duration (BMO doesn’t specify Modified or Macaulay – I will assume the former) of 12.60 implying an increase of 5bp in yield to 4.77%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 430bp from the 440bp reported December 20.

A bit of good news on US inflation:

The Federal Reserve’s preferred measure of prices fell last month, another sign that inflation is easing and that Americans should benefit from reduced interest rates and get relief from painful price shocks in 2024.

Friday’s report from the Commerce Department showed that U.S. consumer prices slid 0.1 per cent last month from October and rose 2.6 per cent from November, 2022. The month-over-month drop was the largest since April, 2020, when the economy was reeling from the COVID-19 pandemic.

Excluding volatile food and energy prices, so-called core inflation last month rose 0.1 per cent from October and 3.2 per cent from a year earlier.

The numbers show somewhat more progress against inflation than economists had expected. Inflation is steadily moving down to the Fed’s year-over-year target of 2 per cent and appears to be clearing the way for Fed rate cuts in 2024. That, in turn, could translate into lower rates on everything from mortgages to credit cards.

… and Merry Christmas, everyone!

We might be getting a new SplitShare fund:

Ninepoint Partners LP (“Ninepoint”) is pleased to announce that Canadian Large Cap Leaders Split Corp. (the “Company”) has filed a preliminary prospectus dated December 19, 2023 in connection with an initial public offering of preferred shares (“Preferred Shares”) and class A shares (“Class A Shares”). A receipt for the preliminary prospectus has been issued by the securities regulatory authorities in each of the provinces and territories of Canada.

The Company will invest in an initially equally-weighted portfolio comprised primarily of equity securities of Canadian Dividend Growth Companies (as defined below), selected by the portfolio manager, that at the time of investment and immediately following each periodic reconstitution and rebalancing: (i) are listed on a Canadian exchange; (ii) pay a dividend; (iii) generally have a market capitalization of at least $10 billion; (iv) have options in respect of its equity securities that, in the opinion of the portfolio manager, are sufficiently liquid to permit the portfolio manager to write options in respect of such securities; and (v) have a history of dividend growth or, in the portfolio manager’s view have high potential for future dividend growth (“Canadian Dividend Growth Companies”).

The preferreds have been provisionally rated Pfd-3(high) by DBRS

PerpetualDiscounts now yield 6.97%, equivalent to 9.06% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.03% on 2023-12-8 and since then the closing price has changed from 15.18 to 15.86, an increase of 448bp in price, with a Duration (BMO doesn’t specify Modified or Macaulay – I will assume the former) of 12.41 implying a decrease of 36bp in yield to 4.67%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 440bp from the 430bp reported December 13.

It seems inflation isn’t quite dead yet:

Canada’s inflation rate unexpectedly held steady in November as the services sector put upward pressure on consumer prices, a slight hiccup as the Bank of Canada looks to tame inflation.

The Consumer Price Index rose 3.1 per cent in November from a year earlier, matching October’s increase, Statistics Canada said Tuesday in a report. Analysts on Bay Street were expecting the inflation rate to ease to 2.9 per cent.

On a monthly basis, the CPI rose 0.1 per cent in November, whereas analysts were expecting a slim decline.

Beneath the surface, however, there were signs of progress. Various core measures of inflation – which remove volatile price movements from the CPI – continued to slow.
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The services side of the economy is a major source of inflationary pressure. Over all, prices for services rose 4.6 per cent in November from a year earlier, matching the increase in October.

Rents climbed by 7.4 per cent over the past year, down from 8.1 per cent in October, but still well above typical levels. Mortgage interest costs are still rising by around 30 per cent, year over year.

Grocery prices rose 4.7 per cent on an annual basis – the first reading below 5 per cent since November, 2021. This moderation was foreshadowed by pricing at earlier stages of the supply chain.
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One of the more promising signs in Tuesday’s report is that some measures of core inflation are simmering down. The Bank of Canada’s preferred measures – CPI-median and CPI-trim – rose at three-month annualized rates of 2.3 per cent and 2.6 per cent, respectively. They were in the 3.5-per-cent range in recent months.

TXPR closed at 535.39, up 0.72% on the day, taking us all the way back to December 6 levels. Volume today was 2.14-million, above the median of the past 21 trading days.

CPD closed at 10.75, up 0.94% on the day. Volume was 136,440, fourth-highest of the past 21 trading days.

ZPR closed at 9.13, up 0.77% on the day. Volume was 291,430, third-highest of the past 21 trading days.

Five-year Canada yields were down to 3.27%.

Other markets also did well:

U.S. and Canadian stocks ended firmer on Thursday, with the Dow Jones Industrial Average notching its second straight record high close, lifted by optimism that borrowing rates will decrease next year following a dovish pivot by the Federal Reserve.

Interest rate sensitive banking stocks rallied in Toronto on bets that an expected drop in borrowing costs next year would boost credit growth and revive the housing market.

Investors were closely watching U.S. 10-year Treasury yields, which broke below 4% for the first time since early August in the wake of the Fed statement. They fell further on Thursday, to 3.9%. Canadian bond yields were also lower across the curve, with the closely watched 5-year yield down 6 basis points to its lowest since May.

The U.S. Federal Reserve’s guidance on Wednesday that borrowing costs are expected to come down next year has turned the market sentiment globally, with investors piling into beaten down stocks.
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U.S. retail sales unexpectedly rose in November as the holiday shopping season got off to a brisk start, the Commerce Department reported on Thursday, further alleviating fears of a recession.
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Canada’s housing market slowed further in November, with higher interest rates denting demand, data from the Canadian Real Estate Association showed Thursday. But CREA also noted that expectations of lower interest rates are expected to make the spring market more active.

The Toronto Stock Exchange’s S&P/TSX composite index rose 149.35 points, or 0.72%, at 20,778.80, its highest close since June 8, 2022.
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The S&P 500 climbed 0.26% to end at 4,719.55 points. It remains down less than 2% from its record high close in January 2022.

The Nasdaq Composite Index gained 0.19% at 14,761.56 points, while the Dow Jones Industrial Average rose 0.43% to 37,248.35 points.

Volume on U.S. exchanges was unusually heavy, with 17.1 billion shares traded, compared to an average of 11.1 billion shares over the previous 20 sessions.

TXPR closed at 531.55, up 0.64% on the day. Volume today was 2.20-million, above the median of the past 21 trading days.

CPD closed at 10.65, up 0.85% on the day. Volume was 177,840, second-highest of the past 21 trading days.

ZPR closed at 9.06, up 1.00% on the day. Volume was 197,730, above the median of the past 21 trading days.

Five-year Canada yields were down to 3.36%.

Thank the Fed:

Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.

The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. 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; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Adriana D. Kugler; Lorie K. Logan; and Christopher J. Waller.

other markets did well:

U.S. and Canadian stocks surged to a sharply higher close on Wednesday and Treasury yields tumbled in both countries after the Federal Reserve signaled that its interest rate-hiking policy is at an end and that it sees lower borrowing costs in 2024.

The Dow Jones Industrial Average rose more than 500 points and notched a record closing high, confirming the blue-chip industrial average has been in a bull market since Sept. 30, 2022, by common definition.

Canada’s main stock index rose about 2% to a ten-month high in a broad-based rally. The U.S. 2-year Treasury yield, which is particularly sensitive to Fed policy moves, fell a hefty 30 basis points.

The Federal Open Markets Committee (FOMC) left its fed funds target rate unchanged at 5.25%-5.50%. In its accompanying statement, the Fed acknowledged that inflation has eased and implied that the rate tightening cycle might be over. Its dot plot, which forecasts the potential path forward for monetary policy, hinted that lower borrowing costs could be in the cards in 2024.
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Economic data showed U.S. producer prices (PPI) were unchanged in November, further evidence that inflation continues to meander down toward the Fed’s average annual 2% target.
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The small-cap Russell 2000 index shot up 3.5%.

The Dow Jones Industrial Average rose 512.3 points, or 1.4%, to 37,090.24, the S&P 500 gained 63.39 points, or 1.37%, to 4,707.09 and the Nasdaq Composite added 200.57 points, or 1.38%, to 14,733.96.

The S&P 500 and Nasdaq hit fresh closing highs for the year. The S&P 500 is now up 22.6% for the year to date, while the Nasdaq is up 40.7% in that period and the Dow is up 11.9%.

PerpetualDiscounts now yield 7.10%, equivalent to 9.21% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.03% on 2023-12-8 and since then the closing price has changed from 15.18 to 15.43, an increase of 165bp in price, with a Duration (BMO doesn’t specify Modified or Macaulay – I will assume the former) of 12.41 implying a decrease of 13bp in yield to 4.90%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 430bp from the 400bp reported December 6.