Category: Market Action

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.
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“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.

Amortization times for variable rate mortgages are increasing:

The growing proportion of mortgages with long amortizations gives an indication of the number of borrowers who could face significant hikes to monthly payments when they renew their loans. Currently, the bulk of variable-rate borrowers have fixed monthly payments and are not seeing their payment immediately spike with every Bank of Canada interest rate hike. But when they renew their mortgage, they will face a much higher monthly payment.

At Royal Bank of Canada, Bank of Montreal and Canadian Imperial Bank of Commerce, the percentage of mortgages with an amortization of more than 30 years has grown to around 30 per cent as of the end of October, according to their quarterly results released this week. (RBC hit 27 per cent, BMO reached 31.3 per cent and CIBC was at 30 per cent.)

That is a huge jump compared to October of last year, when the three banks had no mortgages with an amortization above 30 years, according to their financial disclosures.

At the end of July, mortgages with terms of over 30 years accounted for one quarter of the three banks’ residential mortgage portfolios. At the end of April, those loans made up 10.6 per cent of BMO’s portfolio, and 12 per cent of mortgages at RBC and CIBC.

Toronto-Dominion Bank’s financial report disclosed that 28.9 per cent of its mortgages had terms over 30 years as of the end of October. Previously, TD has not disclosed amortization periods that have stretched beyond the mortgage’s original contract. Its second and third quarter results showed the share of mortgages with their original amortizations, and only 1 per cent of its loans had terms greater than 30 years.

TXPR closed at 557.30, up 0.72% on the day. Volume today was 2.01-million, third-highest of the past 21 trading days.

CPD closed at 11.15, up 1.09% on the day. Volume was 194,590, second-highest of the past 21 trading days.

ZPR closed at 9.30, up 1.31% on the day. Volume was 244,270, a little above the median of the past 21 trading days.

Five-year Canada yields were down to 3.18% today.

A “risk-on” day was attributed to remarks by Powell:

Jerome H. Powell, the Federal Reserve chair, signaled on Wednesday that the central bank could slow its rapid pace of interest rate increases at its December meeting while making clear that borrowing costs have farther to climb as policymakers remain concerned about a sustained bout of inflation.

Investors cheered his comments, with stocks surging at the mere hint that the Fed’s supersize rate increases could soon taper off even as Mr. Powell underlined that he and his colleagues were focused on raising rates high enough to tame inflation, rather than on how fast they got there.

The S&P 500 climbed more than 3 percent, the index’s best day in over two weeks. The Nasdaq composite index, which is particularly sensitive to changing views on interest rates, rose 4.4 percent.
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“My colleagues and I do not want to over-tighten,” Mr. Powell said, referring to rate increases that tighten the flow of money too much. “Cutting rates is not something we want to do soon. So that’s why we’re slowing down, and going to try to find our way to what that right level is.”

Still, Mr. Powell and his colleagues are trying to strike a balance. Even as they lay the groundwork to imminently slow down, they want to make it clear that they are not giving up on their campaign against rapid price increases.
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“Consumer spending has remained resilient” and is “supported by labor income growth and still elevated savings,” Lisa D. Cook, a Fed governor, said during a speech in Michigan on Wednesday. “How far we go, and how long we keep rates restrictive, will depend on observed progress in bringing down inflation.”

The road to slower inflation could be a long one. Mr. Powell pushed back on any notion that a recent moderation in price increases is a sure sign that price jumps will return to more acceptable levels soon.

“Down months in the data have often been followed by renewed increases,” he said. And while many economists expect inflation to moderate next year, “forecasts have been predicting just such a decline for more than a year, while inflation has moved stubbornly sideways.”

I was all set to report stunning success in my campaign for more precise yield-to-maturity reporting for ZLC, given a recent eMail received from BMO:

Further to your inquiry. I have been informed we are working on a fix for our site to have an as of date for Weighted average yield to maturity, added. Each ETF may differ, however I believe ZLC is weekly.

… but BMO has taken the wind out of my sails by implementing this within a few days of letting me know; readers can now expect weekly amusement from my adjustment of the reported yields. I will be continuing the use of ZLC as my benchmark for long corporate yields as:

• It has been hallowed by years of use
• It’s investible by retail
• It’s a good fund

PerpetualDiscounts now yield 6.52%, equivalent to 8.48% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.97% on 2022-11-25 and since then the closing price has changed from 15.24 to 15.12, a decline of 79bp in price, with a Duration of 12.31 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 6bp since 11/25 to 5.03%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly to 345bp from the 340bp reported November 23.