Category: Market Action

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.

TXPR closed at 531.75, down 0.93% on the day. Volume today was 2.71-million, third-highest of the past 21 trading days.

CPD closed at 10.58, down 0.94% on the day. Volume was 207,270, highest of the past 21 trading days.

ZPR closed at 8.995, down 0.61% on the day. Volume was 89,610, third-lowest of the past 21 trading days.

Five-year Canada yields were down to 3.43%.

Given the volume and the direction, this might be due to tax-loss selling. 2022 was, of course, an awful year and prices are still down a tick from year-end 2022.

The BoC stood pat on the policy rate:

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.

The global economy continues to slow and inflation has eased further. In the United States, growth has been stronger than expected, led by robust consumer spending, but is likely to weaken in the months ahead as past policy rate increases work their way through the economy. Growth in the euro area has weakened and, combined with lower energy prices, this has reduced inflationary pressures. Oil prices are about $10-per-barrel lower than was assumed in the October Monetary Policy Report (MPR). Financial conditions have also eased, with long-term interest rates unwinding some of the sharp increases seen earlier in the autumn. The US dollar has weakened against most currencies, including Canada’s.

In Canada, economic growth stalled through the middle quarters of 2023. Real GDP contracted at a rate of 1.1% in the third quarter, following growth of 1.4% in the second quarter. Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year. Exports and inventory adjustment subtracted from GDP growth in the third quarter, while government spending and new home construction provided a boost. The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly. Even so, wages are still rising by 4-5%. Overall, these data and indicators for the fourth quarter suggest the economy is no longer in excess demand.

The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices. Combined with the drop in gasoline prices, this contributed to the easing of CPI inflation to 3.1% in October. However, shelter price inflation has picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs. In recent months, the Bank’s preferred measures of core inflation have been around 3½-4%, with the October data coming in towards the lower end of this range.

With further signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed. 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.

At 3.42% the five year Canada rate has now retreated to the high-end of what I think should be a stable range of 3.00-3.50%.

PerpetualDiscounts now yield 6.92%, equivalent to 9.00% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.40% on 2023-11-24 and since then the closing price has changed from 14.58 to 15.30, an increase of 493bp in price, with a Duration (BMO doesn’t specify Modified or Macaulay – I will assume the former) of 12.15 implying a decrease of 41bp in yield to 4.99%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 400bp from the 375bp reported November 29.