Category: Market Action

TXPR closed at 559.12, up 0.99% on the day. Volume today was 1.52-million, fourth-highest of the past 21 trading days.

CPD closed at 11.21, up 0.81% on the day. Volume was 130,720, near the median of the past 21 trading days.

ZPR closed at 9.36, up 0.21% on the day. Volume was 232,310, near the median of the past 21 trading days.

Five-year Canada yields were down to 3.53% today.

TXPR closed at 553.64, up 0.92% on the day. Volume today was 1.27-million, near the median of the past 21 trading days.

CPD closed at 11.12, up 2.11% on the day. Volume was 181,620, fourth-highest of the past 21 trading days.

ZPR closed at 9.34, up 2.52% on the day. Volume was 214,210, near the median of the past 21 trading days.

Five-year Canada yields were down slightly to 3.64% today.

DBRS published a commentary on gilts:

Pressures have continued to mount in the UK government bond market. To a large extent this reflects concerns over the current incongruence between fiscal and monetary policies in the UK, with the market volatility exacerbated by liability-driven investment (LDI) funds. UK gilts have again come under pressure in less than a month, with another sell-off and yield spike, following the governor of the Bank of England’s (BoE) confirmation that the temporary emergency support adopted in September would end on 14th October as planned. The sell-off of gilts took place despite additional interventions by the BoE on 10th and 11th October. We see with some concern how the BoE interventions this week initially failed to contain market pressures.

We highlight the risk that volatility in the gilt market could turn more long lasting. Persistent pressures and dysfunction could pose risks to the UK’s financial stability. Financial instability would ultimately have adverse consequences for the financial flexibility of the UK government. We see both the health of the pension fund sector – as one of the main holders of government bonds – and the efficient functioning of the gilt market, as key for the financial flexibility of the UK government.

While we see with concern the ongoing pressures in the gilt market and the liquidity issues in the pension fund sector, we expect the BoE to continue to address potential risks to financial stability, preventing liquidity issues turning into solvency problems at a systemic level. That said, we continue to monitor market and policy developments. We would see with great concern a situation in which the BoE measures fail to prevent contagion from the stresses in pension funds to other financial market participants.

Key Highlights
• The inconsistency between fiscal and monetary policies remains a concern, posing risks for policy credibility.
• If pressures in the gilt market prove persistent, financial stability risks could emerge.
• Financial stability risks could have adverse consequences for the financial flexibility of the UK government. The efficient functioning of the gilt market remains crucial.

My understanding is that Truss’ leadership is now a laughingstock on deathwatch.

TXPR closed at 548.21, down 1.38% on the day. Volume today was 1.51-million, tied for third-highest of the past 21 trading days.

That’s below all-time low for the TXPR price index, barring the depths of the COVID Catastrophe:

The prior non-COVID low close was reached on 2016-1-18, with TXPR at 549.26. This is wild. And at a time when widespread and substantial dividend increases are as certain as anything ever gets in this wicked world! We can argue about how widespread and how substantial, but really!

CPD closed at 10.95, down 1.00% on the day. Volume was 99,270, near the median of the past 21 trading days.

ZPR closed at 9.16, down 1.19% on the day. Volume was 230,090, well above the median of the past 21 trading days.

Five-year Canada yields were up slightly to 3.62% today.

US inflation numbers came in high:

Prices continued to climb at a brutally rapid pace in September, with a key inflation index increasing at the fastest rate in 40 years, bad news for the Federal Reserve as it struggles to wrestle the cost of living back under control.

Overall inflation climbed 8.2 percent over the year through September, according to the latest Consumer Price Index report on Thursday, a slight moderation from August but more than what economists had expected.

Even more worrisome, underlying inflation trends are headed in the wrong direction. After stripping out fuel and food — which are volatile and removed to get a better sense of the trajectory — prices climbed 6.6 percent over the year through September. That was the quickest rate since 1982.
…
While wages are not climbing quickly enough to keep up with inflation, they are rising much more rapidly than is typical. Average hourly earnings for rank-and-file workers climbed 5.8 percent over the year through September. Those pay gains hovered around 2 percent or 3 percent in the decade leading up to the pandemic.

It is not just service costs increasing. Grocery bills were up across the board in September, with increases in the cost of fruit, vegetables and bakery products. The price of apples rose 5 percent from the previous month, while lettuce gained 6.8 percent and flour 2 percent.

Meanwhile, there was good fiscal news in Ottawa:

Parliamentary Budget Officer Yves Giroux says in a new report that this year’s federal budget deficit is on pace to come in at $25.8-billion, which would be a significant improvement over the $52.8-billion estimate in the Liberal government’s April budget.

The independent officer of Parliament released an economic and fiscal outlook Thursday. The report updates projections for federal spending and revenue in light of the latest economic data and federal spending announcements, including the Liberals’ recently announced $4.6-billion affordability plan aimed at assisting low-income Canadians with higher costs of living.

While higher inflation and a relatively strong economy have boosted federal tax revenues above previous projections, higher interest rates are also forcing Ottawa to spend more to service the higher debt load that built up during the COVID-19 pandemic.

“Despite the projected decline in the budgetary deficit, public debt charges are projected to more than double from their 2020-21 level (of $20.4-billion), reaching $47.6-billion in 2027-28 due to higher interest rates and the additional accumulation of debt,” the report states.

Well, we can hope that this windfall revenue doesn’t immediately get spent, but I don’t advise counting on it. Never mind the fact that fiscal policy is currently diametrically opposed to monetary policy – we are all Albertans now. If you got it, spend it! Politicians of all stripes will be quick to bleat that the debt to GDP ratio is going down (or is at least projected to) – but nobody in their right mind considers that impressive. If a COVID-level public spending emergency explodes next week, do we have the financial capacity to cope with it? I doubt it – but nobody’s talking about the pain it will take to regain that flexibility. Pain requires the immediate prospect of a failed bond auction, like in 1994.

TXPR closed at 555.87, down 0.81% on the day. Volume today was 2.00-million, highest of the past 21 trading days.

That’s close to an all-time low for the TXPR price index, barring the depths of the COVID Catastrophe:

… but on 2016-1-18, TXPR closed at 549.26. Well, not much more to go until we sink below that low point!

CPD closed at 11.06, down 0.45% on the day. Volume was 84,920, near the median of the past 21 trading days.

ZPR closed at 9.27, down 0.32% on the day. Volume was 267,320, fourth-highest of the past 21 trading days.

Five-year Canada yields were down to 3.60% today.

PerpetualDiscounts now yield 6.60%, equivalent to 8.58% interest at the standard equivalency factor of 1.3x. Long corporates have been hammered in the past week to yield 5.39% (I’m suspicious about this number, especially since it’s precisely equal to the “Distribution Yield”), so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has eased to 320bp from the 340bp reported October 5.

TXPR closed at 559.28, down 1.87% on the day. Volume today was 1.64-million, highest of the past 21 trading days.

CPD closed at 11.11, down 1.77% on the day. Volume was 256,720, highest of the past 21 trading days.

ZPR closed at 9.30, down 1.69% on the day. Volume was 269,210, third-highest of the past 21 trading days.

Five-year Canada yields were up to 3.65% today.

Markets in general were pretty bad. Pundits had to stretch for a rationale:

The TSX, S&P 500 and Nasdaq ended lower on Tuesday, with indications from the Bank of England that it would support the country’s bond market for just three more days adding to market jitters. Stocks were also volatile ahead of U.S. inflation data and the start of third-quarter earnings later this week.

The Canadian benchmark index fared worse than its U.S. counterparts, as energy stocks fell briskly and cannabis stocks continued to give back gains from last week, when U.S. President Joe Biden revealed he will review how cannabis is classified as a controlled substance. The TSX closed nearly 2% lower to its lowest level since March 2021.

Bank of England Governor Andrew Bailey told pension fund managers to finish rebalancing their positions by Friday when the British central bank is due to end its emergency support program for the country’s bond market.

The September 2022 Survey of Consumer Expectations was released:

Inflation

Median one-year-ahead inflation expectations continued to decline in September, falling by 0.3 percentage point to 5.4%, its lowest reading since September 2021. In contrast, three-year-ahead inflation expectations rose slightly to 2.9% from 2.8% in August. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) was unchanged at the one-year horizon and decreased at the three-year horizon.
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, increased by 0.2 percentage point to 2.2%. Disagreement across respondents in their five-year-ahead inflation expectations declined in September.
Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—decreased at the short-term horizon and was unchanged at the medium-term horizon.
Median home price growth expectations declined by 0.1 percentage point to 2.0, its lowest reading since June 2020. The decline was most pronounced among respondents with a college education and annual household income over $100k, but was broad based across geographic regions. Home price growth expectations remain subdued relative to their pre-pandemic levels.
Expectations about year-ahead price changes rose by 0.4 percentage points for gas (to 0.5%), 1.0 percentage point for food (to 6.9%), 0.6 percentage point for college education (to 9.0%) and 0.1 percentage point for rent (to 9.7%). The median expected change in the cost of medical care, on the other hand, fell by 0.1 percentage point (to 9.2%).

Jobs, jobs, jobs!

The labor market remained strong in September, showing its resilience. But the persistent strength in hiring also underscored the challenges facing the Federal Reserve as it tries to curtail job growth enough to tame inflation.

Employers added 263,000 jobs last month on a seasonally adjusted basis, the Labor Department said Friday. That was down from 315,000 in August. The unemployment rate fell to 3.5 percent, from 3.7 percent a month earlier.
…
Average hourly earnings climbed 5 percent from a year earlier, the Labor Department reported, roughly matching economists’ expectations but slowing down slightly from the prior annual reading. Wages had climbed 5.2 percent in the year through August.

On a monthly basis, wages rose 0.3 percent, matching both economists’ expectations and the prior month’s gain.

… and in the frozen north:

The Canadian economy posted a modest gain in employment in September, reversing some of the losses seen in previous months and suggesting the labour market remains exceptionally tight.

The unemployment rate for the month fell to 5.2 per cent as fewer people looked for work, down from 5.4 per cent in August, Statistics Canada reported in its labour force survey released on Friday.

Meanwhile, the economy added 21,000 jobs.

The bumpin employment was expected as job losses in the education sector during the summer were reversed with the reopening of schools.

The report said gains in education, health care and social assistance were offset by losses in several other sectors, including manufacturing and information, culture and recreation.

TXPR closed at 568.84, down 0.68% on the day. Volume today was 1.05-million, near the median of the past 21 trading days.

CPD closed at 11.29, down 0.53% on the day. Volume was 47,440, well below the median of the past 21 trading days.

ZPR closed at 9.44, down 0.74% on the day. Volume was 73,340, fourth-lowest of the past 21 trading days.

Five-year Canada yields were up 6bp to 3.52% today.

Today’s market weakness has been attributed to central banks:

Major North American indexes closed lower on Thursday as concerns mounted ahead of closely watched monthly jobs reports Friday that the Federal Reserve’s aggressive interest rate stance will lead to a recession.
…
The Bank of Canada has also been raising rates at a rapid pace. Its governor, Tiff Macklem, made clear in a speech Thursday that the central bank will not yet be pivoting away from its hawkish stance. Macklem said the currency’s recent weakness will offset some easing of inflation pressures that could come from improving global supply chains and lower commodity prices.

Money markets raised bets on a 50-basis-point hike at the BoC’s next policy announcement on Oct. 26, pricing in a 70% chance of such a move versus roughly 50% before the governor’s speech.

Canadian government bond yields rose across a more deeply inverted curve, with the 2-year moving above the 4% threshold for the first time since October 2007. It was up 14.7 basis points at 4.013% by late afternoon.
…
Chicago Fed President Charles Evans was the latest to spell out the central bank’s outlook on Thursday, saying policymakers expect to deliver 125 basis points of rate hikes before year’s end as inflation readings have been disappointing.

There was other reporting on Macklem’s speech:

The labour market remains too tight, he said, putting upward pressure on wages and business costs. Likewise, inflation is increasingly being driven by domestic factors, which is showing up in service-sector prices that aren’t as responsive to higher borrowing costs.

“Domestic inflationary pressures have yet to ease. That doesn’t mean higher interest rates are not working, but it will take time,” Mr. Macklem said.
…
Mr. Macklem pointed to some promising signs for the trajectory of inflation. Oil prices have fallen in recent months as the outlook for global economic growth has darkened. Supply chain bottlenecks are improving and shipping costs have receded.

Municipal balance sheets may become less useful:

The independent body that sets accounting standards for Canada’s public sector is proposing rule changes that would allow municipalities to include the value of wetlands, grasslands and other natural assets on their balance sheets.

The Public Sector Accounting Board (PSAB) has been scrutinizing ways to recognize the value of a wide range of natural settings, from rivers and ponds to fields and marshes. The board is embarking on a complex process that would pave the way for new standards governing what is allowed to appear on financial statements.

Advocates for revamping accounting rules say that during a time of heightened concerns over climate change, it’s crucial to place financial values on natural assets and their environmental benefits. For example, adding the value of a river or marsh to its assets would enhance a city’s credit rating and potentially reduce its borrowing costs.

It’s ridiculous. Natural assets may well be valuable, but that’s not the same thing as ‘convertible into cash’. I strongly agree that municipalities should maintain wetlands, grasslands etc. due to thir valu, but this value should be accounted for separately; for instance, a credit analyst might reduce the normal probability of a very destructive flood due to these features.

On the other hand, of course, there’s the Bloomberg Effect; very few of the careful and extremely well paid financial analysts around bother reading financial statements in all their glory; they’ll go to Bloomberg and get the Recommended Ratios (required for box-ticking purposes) from a standard screen. It’s much faster, leaving more time for lunch with clients.

Canadian Utilities will aquire a portfolio of wind and solar assets and projects in Alberta and Ontario for a purchase price of $730 million:

With respect to CUL’s business risk profile, there would be no material immediate impact following the closing of the Acquisition as most CUL’s consolidated cash flows would still be from its stable, low-risk regulated utilities in Canada and Australia. DBRS Morningstar expects CUL’s regulated utility operations to continue to generate over 90% of CUL’s consolidated cash flow in the medium term post-Acquisition, as the size of the Acquisition is relatively modest compared with CUL’s total assets of approximately $21.4 billion as at June 30, 2022. However, after the Acquisition, should CUL take on an aggressive expansion in renewable generation assets to a degree that future cash flow (or EBITDA) contributed to CUL from its regulated utilities declines to significantly below 90% on a sustained basis, its rating could be affected. DBRS Morningstar is of the view that renewable generation assets, even when fully contracted, would entail higher risk than regulated utility assets.

With respect to CUL’s financial risk profile, DBRS Morningstar thinks the potential financing of the Acquisition would have no immediate material impact on its consolidated credit ratios. Following the closing of the Acquisition, DBRS Morningstar expects CUL to reasonably finance its future renewable generation projects in a manner so that its current credit metrics would remain relatively stable and solid within the required range to maintain its “A” rating, as indicated in DBRS Morningstar’s “Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry” (September 2022). A material deterioration of CUL’s consolidated credit metrics, notwithstanding its business risk profile, could have a negative impact on CUL’s ratings. DBRS Morningstar believes that CUL has sufficient liquidity to finance the Acquisition.

TXPR closed at 572.75, up 0.53% on the day. Volume today was 1.43-million, fifth-highest of the past 21 trading days.

CPD closed at 11.35, up 0.35% on the day. Volume was 81,670, near the median of the past 21 trading days.

ZPR closed at 9.51, up 0.21% on the day. Volume was 233,840, well above the median of the past 21 trading days.

Five-year Canada yields were up sharply to 3.46% today.

Apparently:

U.S. private employers stepped up hiring in September, the ADP National Employment report on Wednesday showed, suggesting rising rates and tighter financial conditions have yet to curb labor demand as the Fed battles high inflation.

The Institute for Supply Management’s services industry employment gauge shot up in another sign labour remains strong as the overall industry slowed modestly in September.

The Fed is expected to deliver a fourth straight 75-basis-point rate hike when policymakers meet Nov. 1-2, the pricing of fed fund futures shows, according to CME’s FedWatch tool.

San Francisco Fed President Mary Daly told Bloomberg TV in an interview that inflation is problematic and that the U.S. central bank would stay the course.

“The path is clear: we are going to raise rates to restrictive territory, then hold them there for a while,” she said. “We are committed to bringing inflation down, staying course until we are well and truly done.”

PerpetualDiscounts now yield 6.48%, equivalent to 8.42% interest at the standard equivalency factor of 1.3x. Long corporates continue to yield 5.00%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has eased to 340bp from the 355bp reported September 28.