Category: Market Action

The ECB hiked again:

The European Central Bank opted for a smaller rate hike at its Thursday meeting, taking its key rate from 1.5% to 2%, but said it would need to raise rates “significantly” further to tame inflation.

t also said that from the beginning of March 2023 it would begin to reduce its balance sheet by 15 billion euros ($15.9 billion) per month on average until the end of the second quarter of 2023.

It said it would announce more details about the reduction of its asset purchase program (APP) holdings in February, and that it would regularly reassess the pace of decline to ensure it was consistent with its monetary policy strategy.

The widely expected 50 basis point rate rise is the central bank’s fourth increase this year. A basis point is equivalent to 0.01%.

It hiked by 75 basis points in October and September and by 50 basis points in July, bringing rates out of negative territory for the first time since 2014.

“The Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target,” the ECB said in a statement.

… as did the Bank of England:

The Bank of England on Thursday raised interest rates by a widely expected 50 basis points (bps) to 3.50%, in its ninth straight increase – and its eighth this year.

The BoE, which is battling double-digit inflation that has unleashed a cost-of-living crisis that is pushing the economy deeper into recession, has raised rates by a combined 325 bps in 2022 alone to their highest since late 2008.

UK rates began rising in December 2021, making the BoE the first of the world’s major central banks to kick off a monetary policy-tightening cycle.
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Furthermore, a breakdown of votes by Monetary Policy Committee members showed policymakers divided.

Some voted for an outsized 75-bps rise, while others said now was the time to stop tightening monetary policy altogether.

… and equities tanked:

The S&P 500 fell 2.5%, with more than 90% of stocks in the benchmark index closing in the red. The Dow Jones Industrial Average was down 2.2% and the Nasdaq composite lost 3.2%. The broad slide erased all the weekly gains for the major U.S. indexes.

European stocks fell sharply, with Germany’s DAX dropping 3.3%. The Canadian benchmark index fell 1.5% to a five-week low.

The wave of selling came as central banks in Europe raised interest rates a day after the U.S. Federal Reserve hiked its key rate again, emphasizing that interest rates will need to go higher than previously expected in order to tame inflation.

So, yesterday there was encouraging news on US inflation:

Inflation remains unusually rapid for now: Tuesday’s 7.1 percent reading is an improvement, but it is still much faster than the roughly 2 percent that prevailed before the pandemic.

The details of the report suggested that further cooling is likely in store.

Many of the categories in which price increases are now slowing are tied more to the pandemic and supply chains than to Fed policy. For instance, food and fuel price jumps are moderating after climbing rapidly earlier this year, an effect of transportation issues and fallout from the war in Ukraine. Used car prices, which were severely elevated by a collision of consumer demand and parts shortages, are now falling sharply.

And today the FOMC announced:

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are contributing to upward pressure on inflation and are weighing on global economic activity. The Committee is 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 raise the target range for the federal funds rate to 4-1/4 to 4-1/2 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, 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 the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. 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 public health, 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; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.

The New York Times commented:

• The Fed’s rate move was widely expected by economists, and raised rates at a slower pace from the previous four meetings, when rates increased in three-quarter-point increments.
• The central bank emphasized that it would do more to restrain the economy than previously expected. Rates are expected to rise to 5.1 percent next year, officials projected, up from 4.6 percent when they last issued forecasts, in September. The next Fed decision will come Feb. 1. “We have more work to do,” the Fed chair, Jerome H. Powell, said at a news conference. He also dismissed the idea of rate cuts next year, which some traders have been predicting.
• The forecasts showed that Fed officials expect inflation to remain higher for longer than they thought a few months ago. They now expect consumer prices to rise 3.1 percent next year and 2.5 percent in 2024. Mr. Powell said that, despite some recent moderation in price pressures, “inflation risks are to the upside.”
• Officials also projected that economic growth would fall sharply and that unemployment would rise notably, nudging the economy to the brink of recession. The unemployment rate is predicted to remain elevated in 2024 and 2025, a clear sign of how the Fed’s efforts to control inflation will take a toll on workers and the broader economy.
• Stocks fluctuated after the rate announcement, as investors assessed Mr. Powell’s determination to tame inflation and the Fed’s forecasts for rates that remain higher for longer than previously expected. Investors expected the 0.5-percentage-point rise in interest rates but were not betting on increases to the Fed’s forecasts for rates next year alongside a higher inflation forecast. The S&P 500 dipped shortly after the rate announcement, eventually closing 0.6 percent lower.

OSFI has updated its definition of capital for Limited Recourse Capital Notes – issuance caps are as follows:

• Deposit-Taking Institutions : Greater of $150 million, 0.75% Risk Weighted Assets (RWA), or 50% of the institution’s aggregate net AT1 capital
• Life Insurers, and fraternal benefit societies: Greater of $150 million or 12.5% of Net Tier 1 capital
• P&C and Mortgage Insurers: Greater of $150 million or 20% of Total Capital Available, excluding accumulated other comprehensive income (AOCI)

Issuance FLOORS are:

• Deposit-Taking Institutions : Lesser of 0.30% RWA or 20% of the institution’s aggregate net AT1 capital
• Life Insurers, and fraternal benefit societies: 5.0% of Net Tier 1 capital
• P&C and Mortgage Insurers: 8.0% of Total Capital Available, excluding AOCI

The issuance floors were added in March, 2021 after the introduction in July, 2020.

PerpetualDiscounts now yield 6.55%, equivalent to 8.52% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.02% on 2022-11-30 and since then the closing price has changed from 15.13 to 15.56, an increase of 264bp in price, with a Duration of 12.37 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decline in yield of about 21bp since 11/30 to 4.81%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 370bp from the 380bp reported December 7.

The Survey of Consumer Expectations came out today:

Inflation

Median inflation expectations decreased at both the one- and three-year-ahead horizons in November, by 0.7 percentage point (to 5.2%) and by 0.1 percentage point, to 3.0%, respectively. Both decreases were broad-based across education and income groups. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at both horizons.

Median five-year-ahead inflation expectations, which have been elicited in the monthly SCE core survey on an ad-hoc basis since the beginning of this year and were first published in July 2022, also decreased, by 0.1 percentage point to 2.3%. Disagreement across respondents in their five-year-ahead inflation expectations decreased in November.

Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—decreased at both the short-term and medium-term horizon.

Median home price growth expectations dropped by 1.0 percentage point to 1. 0%, its lowest reading since May 2020. The decrease was broad-based across education and income groups but most pronounced for respondents from the South. Since August 2022, home price growth expectations have been well below their pre-pandemic levels.

Median year-ahead expected price changes declined by 0.6 percentage point for gas (to 4.7%), 0.8 percentage point for food (to 8.3%), and 0.1 percentage point for rent . The median expected change in the cost of medical care remained unchanged at 9.6%, while the median expected change in the cost of college education increased by 0.1 percentage point to 9.4%. *

Canadian debt payments climbed:

Canadians saw their wealth tumble and their debt obligations rise substantially during the summer as the Bank of Canada hiked interest rates in aggressive fashion.

Households made about $230-billion in debt payments during the third quarter, a record increase of 5.6 per cent from the second quarter, Statistics Canada said on Monday. In particular, the interest portion of debt payments jumped by 16.2 per cent, also a record.

Meanwhile, household net worth – the value of all assets minus liabilities – fell by around $330-billion during the third quarter, following a record decline of more than $930-billion between April and June. Despite the swoon, household net worth of $15.1-trillion remains about $2.7-trillion higher than at the end of 2019.
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The household debt burden – more formally known as the ratio of credit market debt to disposable income – rose to 183.3 per cent in the third quarter from 182.6 per cent in the second quarter. The ratio is nearing a record of nearly 185 per cent in 2018.
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As interest rates have risen, Canadians are taking on debt at a slower pace. Households added $33-billion of debt in the third quarter, down from about $57-billion in the second quarter. When interest rates were at rock-bottom levels in 2020 and 2021, Canadians were borrowing heavily, particularly for mortgages as home transactions hit record highs.

All told, consumers have about $2.8-trillion in debt, of which $2.1-trillion is mortgages.

And Macklem warned that we shouldn’t celebrate peak policy rates just yet:

Bank of Canada Governor Tiff Macklem said there is a “greater risk” of not doing enough to tackle inflation than doing too much and damaging economic growth, even as the bank has signalled that it is nearing the end of its aggressive rate-hike cycle.

In a year-end speech in Vancouver, Mr. Macklem reiterated that the central bank has entered a new phase of monetary policy. After raising interest rates seven consecutive times, the bank has moved from asking how big the next rate hike should be to asking whether to raise interest rates at all. That could mean a pause to rate increases as early as January.

But Mr. Macklem also suggested that the bank remains concerned about throwing in the towel too early. The annual rate of inflation was 6.9 per cent in October, still more than three times the bank’s 2-per-cent inflation target.

“If we raise rates too much, we could drive the economy into an unnecessarily painful recession and undershoot the inflation target,” he said at the event, held by the Business Council of British Columbia.

“If we don’t raise them enough, inflation will remain elevated, and households and businesses will come to expect persistently high inflation. With inflation running well above target, this is the greater risk.”

BoC deputy governor Sharon Kozicki took pains to confirm the interpretation of yesterday’s rate hike announcement:

The Bank of Canada could pause interest rate hikes as early as next month as it shifts to a more “data-dependent” approach to monetary policy, although the bank is still prepared to be “forceful” if necessary, deputy governor Sharon Kozicki said on Thursday.

“We are moving from how much to raise interest rates to whether to raise interest rates,” Ms. Kozicki said in a speech to the Urban Development Institute of Quebec in Montreal.

She was speaking the day after the central bank delivered another 50-basis-point rate hike, lifting the benchmark lending rate to 4.25 per cent, the highest level since early 2008.

After seven consecutive rate hikes, which have dramatically increased the cost of borrowing for Canadians over the past nine months, the bank is preparing to step back to assess the impact of its aggressive tightening on inflation and the broader economy.

“If we are surprised on the upside, we are still prepared to be forceful. But we recognize that we have raised interest rates rapidly and that their effects are working their way through the economy,” Ms. Kozicki said, according to the prepared text of her speech.

The next rate decision on Jan. 25 will be based on incoming data, she said. Markets expect the bank to stand pat at 4.25 per cent next month.
…
“The largest shifts in spending have been in the most interest-sensitive areas, suggesting our monetary policy actions are working to rebalance supply and demand,” Ms. Kozicki said.

The markets took the Bank of Canada rate hike in stride:

Canada’s main stock index edged lower on Wednesday to its lowest closing level in nearly three weeks as a drop in oil prices weighed on energy shares and the Bank of Canada raised interest rates to the highest level in almost 15 years.

The S&P/TSX composite index ended down 16.95 points, or 0.1%, at 19,973.22, its fourth straight day of declines and its lowest closing level since Nov. 17.

U.S. benchmark S&P 500 also dipped as investors weighed potential recession fears linked to the pace of the Federal Reserve’s monetary policy tightening.
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Money market participants see a 91% chance that the Fed will increase its key benchmark rate by 50 basis points in December to 4.25%-4.50%, with rates peaking in May 2023 at 4.93%.

PerpetualDiscounts now yield 6.57%, equivalent to 8.54% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.02% on 2022-11-30 and since then the closing price has changed from 15.13 to 15.70, an increase of 377bp in price, with a Duration of 12.37 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decline in yield of about 30bp since 11/30 to 4.72%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened dramatically to 380bp from the 345bp reported November 30.

Equity horror today was blamed on central banks:

U.S. and Canadian stocks closed lower on Tuesday, with the S&P 500 declining for the fourth straight session, as skittish investors fretted over Federal Reserve rate hikes and further talk of a looming recession.

The S&P/TSX Composite Index fell to a two-week low, ending below 20,000, with lower oil prices weighing on resource shares and investors bracing for another interest rate hike by the Bank of Canada. All 10 of the TSX’s major sectors lost ground, including a decline of 3.5% for the energy sector. That matched the decline for U.S. crude prices, which settled at US$74.25 a barrel, as global demand concerns weighed.
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Fears about economic growth come amid a re-evaluation by traders of what path future interest rate hikes will take, following strong U.S. data on jobs and the services sector in recent days.

Money market bets are pointing to a 91% chance that the U.S. central bank might raise rates by 50 basis points at its Dec. 13-14 policy meeting, with rates expected to peak at 4.98% in May 2023, up from 4.92% estimated on Monday before service-sector data was released. For Canada, money markets are betting on a 25-basis-point increase when the BoC meets to set policy on Wednesday but a slim majority of economists in a Reuters poll expect a larger move.

Hey, how about that US jobs report, eh?:

America’s jobs engine kept churning in November, the Labor Department reported Friday, a show of continued demand for workers despite the Federal Reserve’s push to curb inflation by tamping down hiring.

Employers created 263,000 jobs, even as a wave of layoffs in the tech industry made headlines. That was only a slight drop from the revised figure of 284,000 for October.

The unemployment rate was steady at 3.7 percent, while wages have risen 5.1 percent over the year, more than expected.
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Friday’s jobs report suggested that hiring in service industries remained solid, and that wages continued to climb at a rapid pace: jumping by 5.1 percent over the past year, far more than economists expected. Wages in service industries picked up by 5.3 percent on an annual basis, much more than the 2.5 percent that was common in the decade leading up to the pandemic.

Another REIT’s looking sick:

Blackstone Inc limited withdrawals from its $69 billion real estate income trust (REIT) on Thursday after receiving too many redemption requests, an unprecedented blow to a franchise that helped it turn into an asset management behemoth.

The curbs in redemptions came because they hit pre-set limits, rather than Blackstone setting the redemption limits on the day. Nonetheless, they fuelled investor concerns about the future of the REIT, which makes up about 17% of Blackstone’s earnings. Blackstone shares ended trading down 7.1% on the news.

Investors in the REIT, which is not publicly traded, have been growing concerned that Blackstone has been slow to adjust the vehicle’s valuation to that of publicly-traded REITs, which have taken a hit amid rising interest rates, a source close to the fund said. Rising interest rates weigh on real estate values because they make financing them more expensive.

Blackstone has reported a 9.3% year-to-date return for its REIT, net of fees, while the publicly-traded REIT index is down 3.02% in the same period.

I have long been amused by the antics of banks and bankers seeking to convince the world they know anything about investment management. Broker research? Ha! Brokers are great for data and reasonable for ideas … but when it comes to actual, actionable investment advice, you’re better off asking the shoe-shine guy in the lobby. Broker research doesn’t exist for the purpose of improving returns; it exists for the purpose of encouraging you to trade, so they’ll just keep throwing out random ideas in the hopes that one will result in a nice little commission.

But even their data needs to be checked, because even the most cursory investment knowledge is heavily siloed in banks, and God forbid that anybody in the bond department know what a P/E ratio is supposed to be. As a result, silly mistakes get made – in addition to silly advice – one of which got passed on to me this morning in a very irate email addressed to IIROC and copied to me:

This time around, their new rollout of Advanced Dashboard is publishing Ex dividend dates that are 1 day prior to the actual event (and indeed so is the dividend payment date). Their web broker system publishes the accurate data.

Needless to say I sold 5k of a pref (TA.pr.d on nov 29) believing it was ex-d when in fact it was not.

Here are screenshots of my watchlist and best I can tell, ALL the ex-d dates are 1 day early.

Oh dear, oh dear, oh dear.