Category: Market Action

PerpetualDiscounts now yield 7.04%, equivalent to 9.15% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.56% on 2023-11-10 and since then the closing price has changed from 14.20 to 14.40, an increase of 141bp in price, with a Duration (BMO doesn’t specify Modified or Macaulay – I will assume the former) of 12.03 implying a decrease of 12bp in yield to 5.44%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is has narrowed slightly (and perhaps spuriously) to 370bp from the 375bp reported November 8.

TXPR closed at 517.48, up 0.92% on the day. Volume today was 1.78-million, above the median of the past 21 trading days.

CPD closed at 10.25, up 0.89% on the day. Volume was 181,970, highest of the past 21 trading days.

ZPR closed at 8.73, up 1.39% on the day. Volume was 369,420, highest of the past 21 trading days.

Five-year Canada yields were down to 3.81%.

Equities and bonds also had a good day:

Global stock markets soared and bond yields plunged on Tuesday as cooler-than-expected U.S. inflation data boosted expectations that the Federal Reserve was done raising interest rates and was on the path to cutting them next year.

The S&P 500 closed up 1.9%, its best day since April, with the rate-sensitive real estate and utilities sectors posting their biggest daily percentage gains since November 2022. The TSX gained 1.6% to a near eight-week high in a broad-based advance that also was led by the real estate and utilities sectors.

In the 12 months through October, the consumer price index climbed 3.2% after rising 3.7% in September. Economists were expecting a 3.3% gain. Core prices, which exclude the volatile food and energy components, rose 4.0% compared with economists’ estimate of a 4.1% increase. Consumer prices were unchanged on a monthly basis, the first such reading in more than a year.
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Following the data, traders erased bets the Fed will raise borrowing costs any further and piled into bets on rate cuts starting by May. They are currently pricing in a 100% chance the Fed will hold rates next month, as per CME Group’s Fedwatch tool. U.S. rate futures priced in a more than 60% chance of a rate cut by the Fed in May next year.

Bond yields were down sharply across the curve. By late afternoon, both the U.S. two-year and 10-year bonds were down about 20 basis points, or one-fifth of a percentage point. The moves in Canadian bond yields, which take much of their direction from the U.S. treasury market, was a little less dramatic but were still large for a single day. The Canada five-year bond was yielding 3.804% by late afternoon, down 15 basis points, while the 10-year bond had retreated back to the lows of this past September.

Money markets also continue to increase bets that monetary easing is coming next year to Canada, where the economy has recently been more sluggish than in the U.S. and has been seeing similar downward trends in inflation. Implied probabilities in the swaps market on Tuesday showed just over a 50% chance of a quarter-point rate cut in the Bank of Canada’s overnight rate by April, with 75 basis points of cuts expected by the end of next year.
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Tuesday’s report from the Labor Department showed that prices either fell or rose more slowly across a broad range of goods and services, including gas, new and used cars, hotel rooms and housing. Gas prices fell 5 per cent from September to October and are down 5.3 per cent from a year earlier. They have continued to fall into November, suggesting that cheaper energy could hold down inflation this month as well.

Moody’s has put the US on Outlook-Negative:

Moody’s Investors Service (Moody’s) has today changed the outlook on Government of United States of America’s (US) ratings to negative from stable and affirmed the long-term issuer and senior unsecured ratings at Aaa.

The key driver of the outlook change to negative is Moody’s assessment that the downside risks to the US’ fiscal strength have increased and may no longer be fully offset by the sovereign’s unique credit strengths. In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the US’ fiscal deficits will remain very large, significantly weakening debt affordability. Continued political polarization within US Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.

Bonds were front and centre today:

U.S. stocks closed lower on Thursday, snapping the longest winning streaks for the Nasdaq and S&P 500 in two years, as Treasury yields climbed after a disappointing auction of 30-year bonds and comments from Federal Reserve Chair Jerome Powell. But as it has every day this week, the Canadian stock market diverged in performance, with the S&P/TSX Composite Index ending with gains as commodity prices rebounded and investors cheered upbeat corporate earnings.

Powell said central bank officials “are not confident” interest rates are high enough to tame inflation, and may not get much more help from improvements in the supply of goods, services and labour.

U.S. stocks had moved slightly lower prior to Powell’s comments as yields climbed after a weak auction of US$24 billion in 30-year Treasuries with demand for the debt at 2.24 times the bonds on sale.

The benchmark 10-year Treasury note yield by late afternoon was up 12.8 basis points at 4.636%. The Canadian 10-year government bond yield, which takes much of its direction from its U.S. counterpart, was up an even steeper 18 basis points, to 3.890%. While a large one-day move, the yield is still below a 16-year high of 4.292% reached in early October.

… and Powell was talking tough:

U.S. Federal Reserve officials “are not confident” that interest rates are yet high enough to finish the battle with inflation, and may be nearing the end of how much help they can expect in lowering price pressures from improvements in the supply of goods, services and labour, Fed Chair Jerome Powell said on Thursday.

In comments more significant in flagging some of the Fed chair’s emerging views about structural economic changes following the pandemic, Powell said the Fed “is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 per cent over time; We are not confident that we have achieved such a stance.”

“If it becomes appropriate to tighten policy further, we will not hesitate to do so,” Powell said in remarks prepared for delivery to an International Monetary Fund research conference, while adding that further policy moves would be conducted “carefully … allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening. We are making decisions meeting by meeting.”

The fight to restore price stability “has a long way to go,” the Fed chair said.

PerpetualDiscounts now yield 7.08%, equivalent to 9.20% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.71% on 2023-10-27 and since then the closing price has changed from 13.90 to 14.37, an increase of 338bp in price, with a Duration (BMO doesn’t specify Modified or Macaulay – I will assume the former) of 11.96 implying a decrease of 28bp in yield to 5.43%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is unchanged at the 375bp reported November 1.

OK, the excitement’s over. For now.

TXPR closed at 516.05, up 1.86% on the day and taking us all the way back to where we were on August 22! Volume today was 1.81-million, fifth-highest of the past 21 trading days.

CPD closed at 10.33, up 1.97% on the day. Volume was 157,740, highest of the past 21 trading days.

ZPR closed at 8.68, up 2.12% on the day. Volume was 233,190, highest of the past 21 trading days.

Five-year Canada yields were down to 3.82%.

I’ve never minded being controversial, so I’m going to stick my neck out and suggest that one factor in the day’s excitement was jobs, jobs, jobs!

Employers added 150,000 jobs in October on a seasonally adjusted basis, the Labor Department said on Friday.

The increase was slightly below what economists had forecast, but not too different from the sort of monthly jobs growth the U.S. economy was experiencing prepandemic.

The unemployment rate, based on a survey of households, ticked up to 3.9 percent from 3.8 percent in September. It has been below 4 percent for nearly two years, a stretch not achieved since the late 1960s.

Figures for August and September were revised downward by a total of more than 100,000 from earlier reports. The surprisingly strong September gain, initially reported as 336,000, was restated as 297,000 and will be revised again next month.
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Average hourly earnings were up 0.2 percent from the previous month, slightly less than expected, and were 4.1 percent higher than a year earlier, slightly exceeding forecasts.

The October numbers may have been held down because the survey was taken during major work stoppages — notably the strikes by the United Automobile Workers and related layoffs. Since then, the U.A.W. has reached tentative contract agreements with the three major U.S. automakers and told striking members to return to their jobs.

Some 96,000 people reported being out of work because of a strike or labor dispute in October, the most since 1997.
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People are also taking on more than one job. Multiple job holders as a percentage of the total number employed climbed to 5.2 percent in October, the highest it’s been since 2019.
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Julia Pollak, chief economist at ZipRecruiter, said the “good news” is that the labor market slowdown has been “carefully orchestrated” by the Federal Reserve, rather than being driven by economic fundamentals.

“Businesses tell ZipRecruiter that they have many vacancies, they want to hire, and they want to expand. But high interest rates are holding them back. If rates start coming down next year, expect that pent-up demand for labor, transportation, building materials and a host of other inputs to be unleashed again,” she wrote in a note.

It was much the same in the frozen north:

The Canadian economy added a net 17,500 jobs in October, fewer than expected, while the jobless rate edged up to a 21-month high of 5.7 per cent, Statistics Canada data showed on Friday.

Analysts polled by Reuters had forecast a net gain of 22,500 jobs and for the unemployment rate to tick up to 5.6 per cent from 5.5 per cent in September.
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The average hourly wage for permanent employees – a figure closely watched by the central bank – rose 5.0 per cent from October 2022, down from the 5.3 per cent year-over-year increase in September.