Category: Market Action

Jobs, jobs, jobs!:

The United States produced an unexpectedly sizable batch of jobs last month, a boon for American workers that shows the labor market retains remarkable strength after three years of expansion.

Employers added 353,000 jobs in January on a seasonally adjusted basis, the Labor Department reported on Friday, and the unemployment rate remained at 3.7 percent.

The report also put an even shinier gloss on job growth for 2023, including revisions that added more than 100,000 to the figure previously tallied for December. All told, employers added 3.1 million jobs last year, more than the 2.7 million initially reported.

So bonds got hammered:

The U.S. added 353,000 jobs in January, blasting past analysts’ estimates, while wage growth unexpectedly heated up, the Labor Department reported.

The added signs of economic vigor made it more likely that the U.S. central bank will delay cutting its key policy rate until much later than many had hoped. Fed Chair Jerome Powell on Wednesday pushed back against the notion of a March rate cut.

Financial markets are pricing in a 20.5% likelihood of a 25 basis point rate cut at the Fed’s March meeting, down from 69.6% a month ago, according to CME’s FedWatch tool.
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U.S. Treasury yields surged, with the 10-year Treasury yield marking its largest one-day advance since Sept. 2022.
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The 10-year Treasury note yield was up 16.3 basis points to 4.026%, one day after reaching a new 2024 low. On the week, however, the 10-year was still down 29.7 basis points, the largest weekly decline since the week of Dec. 11.

Canadian bond yields were also sharply higher, with the closely watched five-year bond yield up 15 basis points.
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Implied interest rate probabilities in the swaps market, which capture bets for future monetary policy moves, now suggest only about a 25 per cent chance of a Bank of Canada rate cut at its April 10 meeting, down from 36 per cent prior the 0830 am ET jobs report. Earlier this week, prior to Canada releasing an unexpectedly strong gross domestic product reading, those odds were pegged at near 50-50.

A 69 per cent chance of a quarter-point interest rate cut is now priced in for the June 5 policy meeting, down from 82 per cent. The market is putting near-zero odds on a cut at the bank’s next meeting in March.

The market is still pricing in BoC cuts totaling nearly a full percentage point by year-end.

TXPR closed at 573.33, up 0.86% on the day. Volume today was 3.40-million, second-highest of the past 21 trading days.

CPD closed at 11.46, up 1.33% on the day. Volume was 113,640, highest of the past 21 trading days.

ZPR closed at 9.72, up 0.41% on the day. Volume was 117,890, near the median of the past 21 trading days.

Five-year Canada yields were down to 3.38%.

The G&M comments:

A raft of economic data showed rising productivity helping to cap U.S. labour costs, while an increase in announced layoffs and weekly U.S. jobless claims provided further evidence of softening in the labour market, which is viewed by the Fed as a precondition to assuring a sustainable downward path for inflation. U.S. manufacturing stabilized in January amid a rebound in new orders, while Canadian manufacturing data also offered encouragement. It showed a slowdown in the pace of contraction in the sector as inflation pressures eased and firms grew more confident about the outlook.

There were no surprises from the Fed:

Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have moderated since early last year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.

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 are moving into better balance. 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, 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; 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.

PerpetualDiscounts now yield 6.56%, equivalent to 8.53% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.21% on 2024-1-30 and since then the closing price has changed from 14.97 to 15.10, an increase of 87bp in price, with a Duration (BMO doesn’t specify Modified or Macaulay – I will assume the former) of 12.24 implying a decrease of 7bp in yield to 5.14%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 340bp from the 350bp reported January 24.

TXPR closed at 569.54, up 0.51% on the day. Volume today was 1.69-million, above the median of the past 21 trading days.

CPD closed at 11.25, unchanged on the day. Volume was 84,000, above the median of the past 21 trading days.

ZPR closed at 9.64, down 0.31% on the day. Volume was 113,450, near the median of the past 21 trading days.

Five-year Canada yields were down to 3.54%.

TXPR closed at 566.66, up 0.52% on the day. Volume today was 1.32-million, below the median of the past 21 trading days.

CPD closed at 11.25, up 0.36% on the day. Volume was 41,910, fourth-lowest of the past 21 trading days.

ZPR closed at 9.67, up 0.52% on the day. Volume was 116,710, near the median of the past 21 trading days.

Five-year Canada yields were up to 3.60%.

The Globe comments:

Despite the fresh data showing progress on the inflation front, U.S. Treasury yields rose on Friday on concerns about the growing supply of government debt.

The U.S. Treasury Department is likely to announce next week one more round of increases in auction sizes when it details the government’s borrowing needs for the coming quarter.

The Treasury faces higher spending needs due in part to higher social security and interest rate costs.

By late afternoon, the U.S. two-year yield was up 4 basis points and the Canadian equivalent bond yield was up about 8 basis points.

TXPR closed at 563.74, down 0.58% on the day. Volume today was 2.73-million, third-highest of the past 21 trading days.

CPD closed at 11.21, down 0.44% on the day. Volume was 54,110, well below the median of the past 21 trading days.

ZPR closed at 9.62, up 0.10% on the day. Volume was 111,100, near the median of the past 21 trading days.

Five-year Canada yields were down to 3.55%.

News of the day was that the US economy isn’t quite dead yet:

Real gross domestic product (GDP) increased at an annual rate of 3.3 percent in the fourth quarter of 2023 (table 1), according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 4.9 percent.

The GDP estimate released today is based on source data that are incomplete or subject to further revision by the source agency (refer to “Source Data for the Advance Estimate” on page 3). The “second” estimate for the fourth quarter, based on more complete data, will be released on February 28, 2024.

The increase in real GDP reflected increases in consumer spending, exports, state and local government spending, nonresidential fixed investment, federal government spending, private inventory investment, and residential fixed investment (table 2). Imports, which are a subtraction in the calculation of GDP, increased.
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Current‑dollar GDP increased 4.8 percent at an annual rate, or $328.7 billion, in the fourth quarter to a level of $27.94 trillion. In the third quarter, GDP increased 8.3 percent, or $547.1 billion (tables 1 and 3).

The price index for gross domestic purchases increased 1.9 percent in the fourth quarter, compared with an increase of 2.9 percent in the third quarter (table 4). The personal consumption expenditures (PCE) price index increased 1.7 percent, compared with an increase of 2.6 percent. Excluding food and energy prices, the PCE price index increased 2.0 percent, the same change as the third quarter.
Current-dollar personal income increased $224.8 billion in the fourth quarter, compared with an increase of $196.2 billion in the third quarter. The increase primarily reflected increases in compensation, personal income receipts on assets, and proprietors’ income that were partly offset by a decrease in personal current transfer receipts (table 8).

Disposable personal income increased $211.7 billion, or 4.2 percent, in the fourth quarter, compared with an increase of $143.5 billion, or 2.9 percent, in the third quarter. Real disposable personal income increased 2.5 percent, compared with an increase of 0.3 percent.

Personal saving was $818.9 billion in the fourth quarter, compared with $851.2 billion in the third quarter. The personal saving rate—personal saving as a percentage of disposable personal income—was 4.0 percent in the fourth quarter, compared with 4.2 percent in the third quarter.

No surprises from the BoC:

The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is continuing its policy of quantitative tightening.

Global economic growth continues to slow, with inflation easing gradually across most economies. While growth in the United States has been stronger than expected, it is anticipated to slow in 2024, with weakening consumer spending and business investment. In the euro area, the economy looks to be in a mild contraction. In China, low consumer confidence and policy uncertainty will likely restrain activity. Meanwhile, oil prices are about $10 per barrel lower than was assumed in the October Monetary Policy Report (MPR). Financial conditions have eased, largely reversing the tightening that occurred last autumn.

The Bank now forecasts global GDP growth of 2½% in 2024 and 2¾% in 2025, following 2023’s 3% pace. With softer growth this year, inflation rates in most advanced economies are expected to come down slowly, reaching central bank targets in 2025.

In Canada, the economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024. Consumers have pulled back their spending in response to higher prices and interest rates, and business investment has contracted. With weak growth, supply has caught up with demand and the economy now looks to be operating in modest excess supply. Labour market conditions have eased, with job vacancies returning to near pre-pandemic levels and new jobs being created at a slower rate than population growth. However, wages are still rising around 4% to 5%.

Economic growth is expected to strengthen gradually around the middle of 2024. In the second half of 2024, household spending will likely pick up and exports and business investment should get a boost from recovering foreign demand. Spending by governments contributes materially to growth through the year. Overall, the Bank forecasts GDP growth of 0.8% in 2024 and 2.4% in 2025, roughly unchanged from its October projection.

CPI inflation ended the year at 3.4%. Shelter costs remain the biggest contributor to above-target inflation. The Bank expects inflation to remain close to 3% during the first half of this year before gradually easing, returning to the 2% target in 2025. While the slowdown in demand is reducing price pressures in a broader number of CPI components and corporate pricing behaviour continues to normalize, core measures of inflation are not showing sustained declines.

Given the outlook, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation. Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

PerpetualDiscounts now yield 6.55%, equivalent to 8.52% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.99% on 2024-1-23 and since then the closing price has changed from 14.84 to 14.76, a decline of 54bp in price, with a Duration (BMO doesn’t specify Modified or Macaulay – I will assume the former) of 12.38 implying an increase of 4bp in yield to 5.03%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 350bp from the 340bp reported January 17.

Due to scheduled maintenance at the data centre where I rent my server, I am currently unable to produce the daily report. I’ll do it tomorrow morning, promise!

Update, the next morning: