Category: Market Action

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.
…
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.
…
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.
…
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.
…
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.

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.
…
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.