Category: Market Action

TXPR closed at 547.53, up 0.58% on the day. Volume today was 748,240, second-lowest of the past 21 trading days.

CPD closed at 10.795, up 0.42% on the day. Volume was 85,560, second-lowest of the past 21 trading days.

ZPR closed at 9.02, down 0.22% on the day. Volume was 117,180, second-lowest of the past 21 trading days.

Five-year Canada yields were down to 3.33% today.

Equities were mostly boring:

Wall Street’s main indexes closed lower on the first trading day of 2023 with big drags from Tesla and Apple, while investors worried about the Federal Reserve’s interest-rate hiking path as they awaited minutes from its December meeting. The Canadian benchmark index ended the session with a modest gain, thanks partly to a rally in the gold sector.
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The S&P/TSX Composite Index closed up 58.85 points, or 0.30%, to 19,443.77. Despite Wall Street’s losses, the Toronto market saw most sectors gain – with the notable exception of energy, which lost 5.8%. Oil prices settled 4.1% lower at US$76.93 a barrel, pressured by weak demand data from China, a gloomy economic outlook and a stronger U.S. dollar.

But there was one area of excitement:

Tesla Inc. TSLA-Q -12.24%decrease
shares kicked off 2023 with a thud, plunging more than 12 per cent on Tuesday on growing worries about weakening demand and logistical problems that have hampered deliveries for the world’s most valuable automaker.

Once worth more than $1 trillion, Tesla lost more than 65 per cent in market value in a tumultuous 2022 that saw it increasingly challenged by other automakers and face production issues stemming from COVID lockdowns in China.

Tuesday’s slide knocked off nearly $50 billion in market value, roughly equal to the valuation of rival Ford Motor Co, which last year sold three times as many cars as Tesla.

The sell-off came after Tesla missed market expectations for fourth-quarter deliveries despite shipping a record number of vehicles.
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At a value of about $341 billion, Tesla is still the world’s most valuable automaker, even though its production is a fraction of rivals such as Toyota Motor Corp.

I bet Bill Gates is happy!

Bill Gates’ $500 million Tesla short position is a bit awkward in terms of his own pledges to help with climate change. Tesla is a trillion-dollar company with a focus on accelerating the transition to sustainability. It’s also the only company that has had massive success beating the odds stacked against it while pushing electric vehicles and making them more commonplace. Tesla is essentially the loudest advocate for sustainability and has shaken up the automotive industry.

Yet, the author of How To Avoid A Climate Disaster put his money on the failure of a company that is aligned with that book’s message, according to screenshots of a message between Gates and Tesla CEO Elon Musk.

The quoted argument is infantile, obviously. Whether or not you like a company’s products has very little to do with whether or not you own the stock – that decision is determined by whatever gap you might deduce between price and value. Tesla’s a great company and I hope it does well. Do I think it ever deserved to be worth half of the entire global auto industry? No.

German inflation news was indecisive:

German inflation eased for a second month in a row in December due to falling energy prices and the government’s one-off payment of household energy bills, coming in below expectations even as analysts warn that a continued slowdown is not a given.

German consumer prices, harmonised to compare with other European Union countries, rose by 9.6% on the year in December, preliminary data from the Federal Statistics Office showed on Tuesday. Analysts polled by Reuters predicted prices would rise by 10.7% year-on year in December.

October saw the highest reading since comparable data going back to 1996, with harmonized price index up 11.6% on the year. November saw a slight easing, with an increase of 11.3%.

A one-off payment for household energy bills in December, part of government efforts to shield consumers, had a downward effect on prices, according to the statistics office.

Compared with November, December prices fell by 1.2%. Analysts had expected a drop of 0.5% on the previous month.

But 2022 was good for pension plans!

Soaring interest rates helped push more pension plans into surplus in 2022, offsetting market losses as pensions brace for another volatile year in 2023, according to two reports that measure the funding status of Canadian plans.

Consulting company Mercer Canada Ltd. said its quarterly pension health pulse, which tracks the median solvency ratio of nearly 500 Canadian defined benefit (DB) pension plans that are Mercer clients, increased to 113 per cent as of Dec. 31, up from 103 per cent at the start of the year.

And professional services firm Aon PLC said the aggregate solvency of DB pension plans of companies in the S&P/TSX Composite Index, as measured by its pension risk tracker, increased to 100.8 per cent at the end of 2022, up from 96.9 per cent a year earlier.
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At the end of the fourth quarter, 79 per cent of plans tracked by Mercer were estimated to be in surplus on a solvency basis, and another 12 per cent had ratios between 90 per cent and 100 per cent. Four per cent of plans had solvency ratios between 80 per cent and 90 per cent, and 5 per cent were below 80 per cent, according to Mercer’s data.
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The main factor that helped boost solvency levels for many Canadian pension plans in 2022 was the rapid rise in interest rates as central banks tried to beat back surging inflation. The Bank of Canada raised its benchmark rate seven times in 2022, from 0.25 per cent to 4.25 per cent.
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With more plans in surplus and continuing headwinds in markets, some pension fund managers could take steps to reduce risk in their portfolios, shifting more assets to fixed income – which now offers higher yields – or contracting with insurance companies to buy annuities to pay future benefits.

TXPR closed at 544.36, up 0.52% on the day. Volume today was 556,320, lowest of the past 21 trading days.

CPD closed at 10.75, up 0.19% on the day. Volume was 90,700, second-lowest of the past 21 trading days.

ZPR closed at 9.04, up 0.22% on the day. Volume was 111,880, lowest of the past 21 trading days.

Five-year Canada yields were up a bit to 3.43% today.

Equities were down a bit today, but the annual figures got more attention:

U.S. and Canadian stocks ended the final trading session of 2022 lower on Friday, capping a year of sharp losses driven by aggressive interest rate hikes to curb inflation, recession fears, the Russia-Ukraine war and rising concerns over COVID cases in China.

Wall Street’s three main indexes booked their first yearly drop since 2018 as an era of loose monetary policy ended with the Federal Reserve’s fastest pace of rate hikes since the 1980s.

This also marked their biggest yearly declines since the 2008 financial crisis, largely driven by growth shares as the Fed’s rate hikes boosted U.S. Treasury yields and made stocks less attractive.

The TSX’s 2022 losses were less sharp, but the Canadian index still lost more than 8% this year, also its first annual decline since 2018.

Bond yields popped up today:

The yield on the benchmark U.S. 10-year Treasury rose for a third straight day on Wednesday, reversing an earlier decline, as investors attempted to navigate the impact of China’s reopening policy on the path of interest rate hikes by the U.S. Federal Reserve.

While China has quickly reversed course on its previous “zero-COVID” policy this month, which is likely to benefit the global economy, the change has come with a surge in cases that could hamper the economy in the short-term.

The yield on 10-year Treasury notes was up 2.5 basis points to 3.883% after hitting a six-week high of 3.89%. On Tuesday, the 10-year jumped 11.1 basis points, its biggest one-day rise since Oct. 19.

Five year Canadas are now at 3.40%.

An op-ed in the Globe looked at Marginal Effective Tax Rates:

Parents across the country may be thinking about taking on an extra shift or an extra job to pay off bills from the holiday season or keep up with the rising costs of day-to-day items. What these hard working parents pocket from extra work not only depends on the taxes they pay on that additional income, but also on how much their income-tested government benefits such as the Canada Child Benefit or the Canada Workers Benefit will be reduced or “clawed back.”

In a recent C.D. Howe Institute study, we calculate the total impact of taxes and benefit clawbacks on families with children, giving us what we call “effective” tax rates. We found that parents in low-income families in particular face high effective tax rates. For instance, more than one-in-three face the prospect of bringing home less than 50 cents of every dollar they earn from extra work. High effective rates reduce the incentive to take on more work and get ahead.

They propose four different measures to address the issue:

• Avoid Very High Rates by Better Integrating New Benefit Programs
• Benefit Shields
• Income Averaging
• Childcare Subsidization

What’s a benefit shield? I’m glad you asked:

In 2016, the Quebec government, following through on a key recommendation from the 2015 Quebec Taxation Review Committee chaired by Luc Godbout, instituted a “benefit shield”11 partly compensating workers for the loss of certain income-tested tax credits – but only in the first year after they take on more work. On the assumption that work decisions are mostly influenced by short-term financial considerations, the shield approach enables governments to provide relief from high effective tax rates at a low fiscal cost (because relief is only offered for one year after taking on extra work) while maintaining the same level of generosity of targeted cash benefits.

More than 274,000 Quebecers took advantage of the shield in 2018, for a cost of only $49 million. Originally, the credit ceiling was set at $2,500 per worker, but has since been increased to $4,000 in successive budgets (CRFFP 2019).

However, I was disappointed by the absence of a Guaranteed Annual Income as a suggested policy measure.

PerpetualDiscounts now yield 6.60%, equivalent to 8.58% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.86% on 2022-12-16 and since then the closing price has changed from 15.46 to 14.67, a decline of 511bp in price, with a Duration of 12.42 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 41bp since 12/16 to 5.27%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 330bp from the 355bp reported December 21.

Yields popped up again:

U.S. Treasury yields rose on Friday after data showed that personal income rose more than expected in November while inflation data for October was revised upward, supporting the view that the Federal Reserve will continue to hike rates as it battles stubbornly high price pressures.

Personal income rose by 0.4% in the month, beating economists’ expectations for a 0.3% gain.

The personal consumption expenditures (PCE) price index rose 0.1% last month and its October gain was revised upward to 0.4%, from 0.3%. In the 12 months through November, the PCE price index increased 5.5% after advancing 6.1% in October.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, also edged up 0.1% in November, while data for October was revised upward to show spending surging 0.9% instead of 0.8% as previously reported.
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Other data on Friday showed that U.S. consumers expect price pressures to moderate notably in the next year, with a benchmark survey on Friday showing their one-year inflation outlook dropping to the lowest in 18 months in December.

Benchmark 10-year yields rose 9 basis points to 3.749%, and two-year yields gained 7 basis points to 4.330%.

Merry Christmas, everybody!

TXPR closed at 540.38, up 0.70% on the day. Volume today was 2.34-million, near the median of the past 21 trading days.

CPD closed at 10.77, up 0.37% on the day. Volume was 149,950, near the median of the past 21 trading days.

ZPR closed at 8.98, up 0.90% on the day. Volume was 215,060, below the median of the past 21 trading days.

Five-year Canada yields were up a bit to 3.10% today.

There was another Canadian inflation report today:

Canada’s inflation rate eased in November, as an acceleration in grocery and rent prices was offset by a decline at the gas pump.

The Consumer Price Index rose 6.8 per cent compared to the previous year, Statistics Canada reported Wednesday. That’s down from 6.9 per cent in October, although slightly ahead of economist expectations of 6.7 per cent.

On a monthly basis, CPI rose 0.1 per cent compared to a 0.7-per-cent gain in October.

While overall CPI inflation continued trending down from a peak of 8.1 per cent reached in June, core inflation measures that strip out volatile food and gasoline prices ticked up slightly in November. That could increase the odds that the Bank of Canada raises interest rates again in January.
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Canadians got a slight break at the gas pump, where prices fell 3.6 per cent compared to October. The price of gasoline was still 13.7 per cent higher than last November.

There was little relief at the grocery store, where prices were up 11.4 per cent compared to the previous year – a bigger annual jump than in October. The price of chicken was up 9.3 per cent, partly because of reduced global supply following an outbreak of avian influenza, Statscan noted. Coffee and tea prices were up 16.8 per cent, while cereal prices rose 15.7 per cent.

Canadians also paid more for shelter in November. Rent was up by 5.9 per cent year-over-year, compared to a 4.7 per cent increase in October. Meanwhile, mortgage interest costs rose 14.5 per over the previous year, the largest increase since 1983.
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Of the central bank’s two preferred core inflation measures, CPI-trim remained steady at 5.3 per cent, while CPI-median ticked up 0.1 percentage point to 5 per cent.

PerpetualDiscounts now yield 6.59%, equivalent to 8.57% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.86% on 2022-12-16 and since then the closing price has changed from 15.46 to 15.20, a decline of 168bp in price, with a Duration of 12.42 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 14bp since 12/16 to 5.00%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 355bp from the 370bp reported December 14.

TXPR closed at 536.60, down 0.78% on the day and setting a new 52-week low of 536.33. Volume today was 2.70-million, fifth-highest of the past 21 trading days.

CPD closed at 10.73, down 0.46% on the day. Volume was 142,560, below the median of the past 21 trading days.

ZPR closed at 8.90, down 0.67% on the day after setting a new 52-week low of 8.88. Volume was 239,970, below the median of the past 21 trading days.

Five-year Canada yields were up sharply to 3.08% today.

The attribution was more of the same, with a new player:

U.S. and Canadian stocks closed modestly higher on Tuesday after four sessions of declines, but investors fretted about weak holiday shopping and rising bond yields added pressure after the Bank of Japan’s surprise tweak of its monetary policy.

Fears about the economic impact of the Federal Reserve’s plan to keep raising U.S. interest rates have weighed heavily on equities since its policy meeting last week.

Adding to pressure on equity prices was an increase in U.S. Treasury yields after the BOJ made a surprise tweak to its bond yield control that allows long-term interest rates to rise more. In the U.S., the yield on the 10-year Treasury rose to 3.68% from 3.59% late Monday. The Canadian 10-year government bond yield was up 13 basis points by late afternoon to just above 3% – its highest level since the end of November.

The BoJ’s move caused much speculation:

Shares tanked, while the yen and bond yields spiked following the decision, which caught off-guard investors who had expected the BOJ to make no changes to its yield curve control (YCC) until Governor Haruhiko Kuroda steps down in April.

In a move explained as seeking to breathe life back into a dormant bond market, the BOJ decided to allow the 10-year bond yield to move 50 basis points either side of its 0-per-cent target, wider than the previous 25 basis point band.

But the central bank kept its yield target unchanged and said it will sharply increase bond buying, a sign the move was a fine-tuning of existing ultraloose monetary policy rather than a withdrawal of stimulus.

Mr. Kuroda said the move was aimed at ironing out distortions in the shape of the yield curve and ensuring the benefits of the bank’s stimulus program are directed to markets and companies.
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The BOJ’s ultralow rate policy and its relentless bond buying to defend its yield cap have drawn increasing public criticism for distorting the yield curve, draining market liquidity and fuelling an unwelcome yen plunge that inflated the cost of raw material imports.

Much of that public anger has centred on Mr. Kuroda, who was hand-picked by former prime minister Shinzo Abe as BOJ governor a decade ago to rev up sluggish consumer demand with massive monetary stimulus.

In a rare acknowledgment of the drawbacks of his policy, Mr. Kuroda said the decision to widen the yield band now came from surveys showing a sharp deterioration in bond market functions.

He also said the BOJ must look not just at downside but upside risks to growth and inflation, signalling that there was scope for a withdrawal of stimulus next year if economic conditions allow.

TXPR closed at 540.84, down 0.72% on the day and setting a new 52-week low of 540.55. Volume today was 3.38-million, highest of the past 21 trading days.

CPD closed at 10.78, down 1.64% on the day. Volume was 205,080, second-highest of the past 21 trading days.

ZPR closed at 8.96, down 1.32% on the day; the close is a new 52-week low. Volume was 387,830, fourth-highest of the past 21 trading days.

Five-year Canada yields were up a bit to 2.98% today.

Equities got hit again today, with the chattering class blaming the usual suspects:

U.S. and Canadian equities closed lower on Monday for a fourth straight session, with Nasdaq leading declines, as investors shied away from riskier bets, worried the Federal Reserve’s tightening campaign could push the U.S. economy into a recession. All major sectors on the TSX ended with losses, with Algonquin Power and Utilities falling to its lowest point in more than seven years after an analyst cut his price target on the utility.

Major North American stock indexes have been under pressure since Wednesday, when Fed Chair Jerome Powell took a hawkish tone while the central bank raised interest rates. Powell promised further rate increases even as data showed signs of a weakening economy.

The S&P 500, the Dow Jones industrials and the Nasdaq have sold off sharply for December and are on track for their biggest annual declines since the 2008 financial crisis.

I feel that a sigificant contributor to preferred market losses in the month to date has been pressure from tax loss sellers – those individuals who are so often happy to take an additional loss of $1.00 if it will save them a dime in taxes.

It this is correct, then we may be heading for a reprise of December, 2008; losses had of course been very heavy in the preceding year and tax loss selling was very popular. So the market popped as soon as trades started having 2009 settlement dates and the selling pressure came off. We see the same effect, although not as nicely, in 2015, which was the other bad year for which I have convenient records.

Some Assiduous Readers might be amused to learn that the TXPR price index in 2008 was in the 650-700 range, while in 2022 it’s in the 545-560 range – call it a little over one-sixth lower. In 2015, price levels were intermediate.

So anyway, what I’m suggesting is that there is a chance of a market pop on December 29 and 30 of this year, when trades will start settling in 2023 and losses will no longer count towards 2022 taxes. Far be it from me to suggest such a crazy notion as market timing, but risk avoidance is another matter – those investors who are currently underweight preferred shares (relative to their desired allocation) may consider it prudent to rebalance prior to December 29, rather than waiting until the new year. Note that the market may well be relatively illiquid in the last week of the year.

TXPR closed at 544.76, down 0.51% on the day. Volume today was 1.76-million, well below the median of the past 21 trading days.

CPD closed at 10.96, down 0.18% on the day. Volume was 309,220, by far the highest of the past 21 trading days.

ZPR closed at 9.08, down 0.76% on the day. Volume was 578,290, second-highest of the past 21 trading days.

Five-year Canada yields were down to 2.94% today.

The New York Fed released the underlying inflation gauge:

• The UIG “full data set” measure for November is currently estimated at 4.1%, a 0.2 percentage point decrease from the current estimate of the previous month.
• The “prices-only” measure for November is currently estimated at 5.6%, a 0.1 percentage point decrease from the current estimate of the previous month.
• The twelve-month change in the November CPI was +7.1%, a 0.7 percentage point decrease from the previous month.
  • For November 2022, trend CPI inflation is estimated to be in the 4.1% to 5.6% range, a slightly wider range than October, with a 0.2% decrease on its lower bound and a 0.1% decrease on its upper bound.

Equities got hit again:

U.S. and Canadian stocks dropped for a third straight session on Friday and suffered a second straight week of losses as fears continued to mount that the Federal Reserve’s campaign to arrest inflation would tilt economies into a recession.

Equities have been staggered since the U.S. central bank’s decision to raise interest rates by 50 basis points this past week. That was widely expected, but then came comments from Fed Chair Jerome Powell that signaled more policy tightening ahead. The central bank projected that interest rates would top the 5% mark in 2023, a level not seen since 2007.

Further comments from other Fed officials fueled the concern. New York Fed President John Williams said on Friday it remains possible the U.S. central bank will raise rates more than it expects next year. The policymaker added that he does not anticipate a recession due to the Fed’s aggressive tightening.

In addition, San Francisco Federal Reserve Bank President Mary Daly said it is “reasonable” to believe that once the Fed’s policy rates reached their peak, they could stay there into 2024.