Category: Market Action

Inflation fell today, but not uniformly:

Canada’s inflation rate fell to 3.4 per cent in May – the lowest it’s been since June 2021.
…
Statistics Canada reported Tuesday the slowdown was largely due to lower gasoline prices compared to a year ago.

However, the long-awaited decline in food inflation has yet to come through in Canada. Grocery prices were up nine per cent on an annual basis, showing little improvement from April.

And so the markets were dovish:

The annual rate, which benefited from a comparison to last May’s strong price increases, is the slowest since June 2021 and broadly in line with the Bank of Canada’s expectation that inflation would cool to around 3% by mid-2023.

The average of two of the Bank of Canada’s core measures of underlying inflation, CPI-median and CPI-trim, came in at 3.9% compared with 4.3% in April.

The Canadian dollar and bond markets had minimal reaction to the 830 am ET inflation data, with the five-year government bond yield last quoted at 3.723%, well below the 15-year high of 3.896% last week. The five-year bond yield influences fixed mortgage rates as well as some guaranteed investment certificate terms. The Canadian dollar dipped slightly against its U.S. counterpart following the data but soon recovered.

Interest rate probabilities based on trading in swaps markets now show about a 57% chance that Bank of Canada will hike rates by another quarter of a percentage point at its next policy meeting on July 12. That’s down from about 64% prior to the data.

Pre-CPI

Post-CPI

After intensive calculations, the Toronto Exchange has determined the ex-Dividend date for BNS.PR.J:

So I guess they’ll be paying a lot of overtime:

TXPR closed at 528.29, down 0.56% on the day. Volume today was 1.20-million, near the median of the past 21 trading days.

CPD closed at 10.57, down 0.19% on the day. Volume was 29,500, below the median of the past 21 trading days.

ZPR closed at 8.85, up 0.11% on the day. Volume was 250,860, fourth-highest of the past 21 trading days.

Five-year Canada yields were up to 3.89%.

I’m going to go out on limb here and suggest that the recent updraft in the GOC-5 rate is due in part to Canadian retail sales:

Canadians have ramped up their retail spending in recent months, despite higher interest rates that are meant to slow their consumption and bring down the rate of inflation.

Retail sales rose by 1.1 per cent in April, after a 1.4-per-cent slide in March, Statistics Canada said in a report on Wednesday. The April result easily surpassed its previous estimate of a 0.2-per-cent gain. In volume terms, retail sales rose 0.3 per cent.

Further gains appear to be on the way: In its preliminary estimate on Wednesday, Statscan said retail sales rose an additional 0.5 per cent in May, although that number is subject to revision.
…
Statscan’s report showed a broad-based increase in retail spending. Sales rose 3.3 per cent at general merchandise retailers in April from March. Receipts were up 3.1 per cent at clothing retailers and by 1.5 per cent at food and beverage retailers.

There was, however, a decline at stores catering to the housing market. For instance, sales fell 1.3 per cent at electronics and appliance retailers in April.

… exacerbated by Powell’s June 21 remarks:

Jerome H. Powell, the chair of the Federal Reserve, told House lawmakers that the United States remains a “long way” away from low and stable inflation even 15 months into the central bank’s campaign to cool the economy and wrestle down rapid price increases.

Mr. Powell testified before the House Financial Services Committee on Wednesday. He told lawmakers that the labor market remained very tight and that inflation — while it has come down notably from its peak last summer — was still too fast. In light of that, the Fed could raise interest rates even higher than their current level of just above 5 percent.

“Inflation has moderated somewhat since the middle of last year,” Mr. Powell said. “Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go.”

… and reports of UK inflation:

Britain’s inflation rate held steady in May, frustrating expectations that price increases would slow down, according to data released Wednesday, the day before the country’s central bank is widely expected to raise interest rates again.

Consumer prices rose 8.7 percent from a year earlier, the same as in April, the Office for National Statistics said. Economists had forecast that prices would dip slightly. The data is likely to compound concerns that Britain’s cost-of-living crisis may intensify in the coming months as mortgage holders confront the burden of higher interest rates pushed through to tackle stubbornly strong inflation.

The Bank of England is expected to lift interest rates on Thursday for a 13th consecutive time, by a quarter-point to 4.75 percent, the highest since early 2008.

But the BoE went for a bigger hike:

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 21 June 2023, the MPC voted by a majority of 7–2 to increase Bank Rate by 0.5 percentage points, to 5%. Two members preferred to maintain Bank Rate at 4.5%.

At the time of the previous MPC meeting and May Monetary Policy Report, the market-implied path for Bank Rate averaged just over 4% over the next three years. Since then, gilt yields have risen materially, particularly at shorter maturities, now suggesting a path for Bank Rate that averages around 5½%. Mortgage rates have also risen notably. The sterling effective exchange rate has appreciated further.

PerpetualDiscounts now yield 6.73%, equivalent to 8.75% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.10% on 2023-6-16 and since then the closing price has changed from 15.09 to 15.01, a decrease of 53bp in price, with a Duration of 12.35 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 4bp since 6/16 to 5.14%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to about 360bp from the 350bp reported June 14.

TXPR closed at 532.23, down 0.51% on the day. Volume today was 1.15-million, near the median of the past 21 trading days.

CPD closed at 10.62, down 0.66% on the day. Volume was 65,390, above the median of the past 21 trading days.

ZPR closed at 8.88, down 0.67% on the day. Volume was 149,620, above the median of the past 21 trading days.

Five-year Canada yields were up a bit to 3.73%.

The New York Fed released its Underlying Inflation Gauge update today:

• The UIG “full data set” measure for May is currently estimated at 3.5%, a 0.5 percentage point decrease from the current estimate of the previous month.
• The “prices-only” measure for May is currently estimated at 3.0%, a 0.4 percentage point decrease from the current estimate of the previous month.
• The twelve-month change in the May CPI was +4.0%, a 0.9 percentage point decrease from the previous month.
  • -For May 2023, trend CPI inflation is estimated to be in the 3.0% to 3.5% range, a lower and slightly narrower range than April, with a 0.4 percentage point decrease on its lower bound and a 0.5 percentage point decrease on its upper bound.

The clown show at Canaccord is taking an intermission:

Executives at Canaccord Genuity Group Inc. have officially scrapped their all-cash $1.1-billion management buyout offer, ending a fight that turned into a hostile takeover from within and resulted in the resignations of multiple board directors.

The investment dealer’s management team announced early Wednesday that they have let their bid to take the company private expire – an outcome they had previously warned could happen after disclosing a vague “ongoing regulatory matter” in one of Canaccord Genuity’s foreign subsidiaries. The team also said they have agreed to a two-year standstill with the board.

The company’s shares closed Wednesday at $8 a piece, dropping to roughly where they were trading when the takeover saga began five months ago.

The FOMC Statement was ‘steady as she goes’:

Recent indicators suggest that economic activity has continued to expand at a modest pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.

The U.S. banking system is sound and resilient. Tighter 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 to 5-1/4 percent. Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy. In determining the extent of 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; Lorie K. Logan; and Christopher J. Waller.

PerpetualDiscounts now yield 6.68%, equivalent to 8.68% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.16% on 2023-6-9 and since then the closing price has changed from 14.94 to 14.87, a decrease of 47bp in price, with a Duration of 12.28 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 4bp since 6/9 to 5.20%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened sharply to about 350bp from the 325bp reported June 7.