Category: Market Action

TXPR closed at 598.14, down 0.68% on the day. Volume today was 1.33-million, second-highest of the past 21 trading days.

CPD closed at 11.935, down 0.95% on the day. Volume was 51,800, fourth-highest of the past 21 trading days.

ZPR closed at 10.02, down 0.89% on the day. Volume of 198,720 was second-highest of the past 21 trading days.

Five-year Canada yields were up to 3.36% today.

PerpetualDiscounts now yield 6.26%, equivalent to 8.14% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.99%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained at the 315bp reported September 7.

The US inflation number came in higher than expected:

Prices rose 8.3 percent from a year earlier, a rapid pace of increase for consumers and not as much of a slowdown as economists had expected, even as gas prices dropped and weighed on the overall numbers. At the same time, so-called core inflation re-accelerated notably in August. That measure strips out volatile food and fuel prices to give a better sense of underlying trends, and it tracks products like clothing and furniture along with an array of services.

The core gauge climbed by 6.3 percent in the year through August, compared with 5.9 percent in July. That pickup came partly because the August price gains are being measured against a relatively weak reading from the same month in 2021. When inflation is measured against a lower year-ago number, or “base,” it tends to appear faster.

But the report’s details also offered signs that underlying inflation pressures remain significant. While gas prices and used car and truck costs have begun to dip, other prices are rising fast enough to fully offset those declines: Prices climbed by 0.1 percent on a headline basis over the course of the past month as prices for meals at restaurants, rents and new vehicles picked up.

The market was flabbergasted:

The Dow Jones Industrial Average fell 1276.37 points, or 3.9 per cent, marking its worst one-day sell-off in more than two years. Canada’s S&P/TSX Composite Index fell nearly 1.8 per cent.

Bond yields jumped and gold prices fell, battering typical investing havens when stocks turn volatile. And the Canadian dollar slipped below 76 US cents, touching its lowest level since November 2020.
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U.S. financials fell 3.8 per cent and industrials fell 3.8 per cent. The tech-heavy Nasdaq Composite Index fell 5.2 per cent, with Apple Inc. down 5.9 per cent.

In Canada, Toronto-Dominion Bank fell 2.3 per cent and Shopify Inc. fell 5.8 per cent.

The yield on the 10-year U.S. Treasury bond rose above 3.4 per cent, or close to its recent multiyear high of 3.48 per in mid-June (bond yields and bond prices move in opposite directions), which signals market expectations that the Fed’s battle with inflation isn’t over.

The New York Fed released the August 2022 Survey of Consumer Expectations:

The main findings from the August 2022 Survey are:

Inflation

Median one- and three-year-ahead inflation expectations continued their steep declines in August: the one-year measure fell to 5.7% from 6.2% in July, while the three-year measure fell to 2.8% from 3.2%. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) increased to a new series high at the one-year horizon but 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, also declined to 2.0% from 2.3%. Disagreement across respondents in their five-year-ahead inflation expectations also declined in August.

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 expectations declined sharply by 1.4 percentage points to 2.1%, its lowest reading since July 2020, and falling below pre-pandemic levels. The decline was broad based across demographic groups and geographic regions. Home price expectations have now fallen by nearly two-thirds since the April 2022 reading of 6.0%.

Expectations about year-ahead price changes fell by 1.4 percentage points for gas (to 0.1%), 0.8 percentage point for food (to 5.8%), and 0.3 percentage point for rent (to 9.6%). The median expected change in the cost of medical care rose by 0.1 percentage point (to 9.3%) and was unchanged for college education at 8.4%.

The hit to Canadian wealth has been quantified:

Canadians saw their collective net worth fall by the most on record in the second quarter as financial markets and residential real estate hit a rough patch, ending a streak of massive wealth generation during the previous two years of the pandemic.

Household net worth fell by $990-billion in the second quarter to $15.2-trillion, a decline of 6.1 per cent from the first quarter, Statistics Canada said Monday in a report. Despite the drop, household wealth was still nearly $3-trillion higher than before the pandemic.
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At the same time, Canadians packed on loads of debt, a perennial concern for the domestic economy. That remained the case in the second quarter as households added a near record $56.3-billion in debt, taking total borrowing to $2.8-billion [sic – I’m sure they mean ‘trillion’], mostly in mortgages.

Canadians now owe $1.82 for every dollar of disposable income, just shy of a record.
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The credit tightening cycle hit Canadian real estate quickly. The value of residential real estate fell by 5 per cent in the second quarter, according to Monday’s report. Even so, it remained more than $2.3-trillion (or 41 per cent) higher than at the end of 2019. Home prices have continued to decline since the end of Statscan’s reporting period, further eroding wealth.

Similarly, the value of household financial assets dropped by 5.7 per cent in the second quarter as both equities and bonds tumbled. Major stock indices in Canada and the U.S. fell by double-digit percentages between April and June, while bond prices – which move inversely to yields – also fell. “The second quarter marked a less common occurrence when both bond and equity markets declined substantially,” Statscan said in its report.

The Junior Republicans have enthusiastically embraced the role of ‘party of stupid’:

And if this Conservative leadership race was a fight for the soul of the party, as former Progressive Conservative activist and senator Marjory LeBreton recently posited, well, the results are in. Reform is back, baby. Moderate conservatism is dead, and the harder-right, angrier, rougher edge will live the life everlasting. In the end, it wasn’t even close.

Self-described centrists in the party have certainly been angered by Mr. Poilievre’s online rhetoric and pro-crypto appeals, not to mention his sympathy for the anti-mandate freedom convoy. Some of them were so perturbed by the prospect of Mr. Poilievre’s ascension that they organized under the title of Centre Ice Conservatives, a dust cloud of respectability meant to form itself into the nucleus of a new party.
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The centrists may yet prove to be Cassandras. Mr. Poilievre’s campaign may indeed foreshadow a far darker track: a destructive populism that plays on World Economic Forum conspiracy theories and undermines trust in long-standing institutions like the Bank of Canada in favour of a politics rooted in narcissism and grievance.

I’m not one of those ‘self-described centrists’, by the way, having quit the party (and my position on the local riding executive) the day after Harper’s ascension. But I would happily join a fiscally responsible party that embraced pragmatism over ideology … where’s Bill Davis when we need him?. Until we get one, however, I’ll just have to learn to endure being sneezed on in the name of freedom, bitcoin advertisements and a steady diet of resentment and claims of victimhood. Can’t wait.

The ECB got tough:

The European Central Bank made its largest-ever interest rate increase Thursday, following the U.S. Federal Reserve and other central banks in a global stampede of rapid rate hikes meant to snuff out the inflation that is squeezing consumers and pushing Europe toward recession.

The bank’s governing council raised its key benchmarks by an unprecedented three-quarters of a percentage point for the 19 countries that use the euro currency. The ECB usually moves rates by a quarter-point and had not raised its key bank lending rate by three-quarters of a point since the euro’s launch in 1999.

Bank President Christine Lagarde said the ECB would keep hiking rates “over the next several meetings” because “inflation remains far too high and is likely to stay above our target for an extended period.”

There was mixed news about jobs in Canada:

Canada’s unemployment rate shot up in August as the economy shed jobs for a third consecutive month, the latest sign of a chill spreading through the labour market.

Employment fell by 40,000 in August, taking total losses since May to 114,000, Statistics Canada said Friday in a report. The unemployment rate rose to 5.4 per cent from a record low of 4.9 per cent in July. Economists were expecting a far stronger month, with 15,000 jobs created and the jobless rate nudging up to 5 per cent.
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The job losses in August were largely concentrated among young people (15 to 24) and those approaching the traditional retirement age (55 to 64).
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The tight hiring conditions are reflected in wages, which are rising quickly. The average hourly wage rose 5.4 per cent in August from a year earlier, up from 5.2 per cent in June and July, although those figures lag the annual inflation rate of 7.6 per cent in July. The Bank of Canada monitors wages for signs they are driving up inflation and making its task of reining in consumer price growth more difficult.
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In Friday’s report, Statscan also found that more people are considering a change in jobs. Almost 12 per cent of permanent employees were planning to leave their jobs over the next year, about double the level in January. Among workers whose hourly wages were in the bottom 20 per cent, almost one in five were planning to leave their jobs.

More tough talk from Powell:

Jerome H. Powell, the Federal Reserve chair, signaled on Thursday that the central bank will continue raising interest rates in order to convince the American public that it is serious about bringing soaring price growth back to normal levels, further cementing market expectations of another aggressive rate increase this month.

“The longer inflation remains well above target, the greater the risk that the public sees higher inflation as the norm,” Mr. Powell said in a moderated discussion with Peter H. Goettler, the president and chief executive of the Cato Institute in Washington. “History cautions strongly against prematurely loosening policy.”

I must say, I find the recent trend of issuing LRCNs and OTC Preferreds at enormous spreads to be perplexing. The latest one is:

The Toronto-Dominion Bank (“TD”) (TSX: TD) (NYSE: TD) today announced the pricing of a Canadian public offering of C$1.5 billion of 7.283% Non-Viability Contingent Capital (“NVCC”) Additional Tier 1 (“AT1”) Limited Recourse Capital Notes Series 2 (the “LRCNs”).

The LRCNs will bear interest at a rate of 7.283 per cent annually, payable semi-annually, for the initial period ending on, but excluding, October 31, 2027. Thereafter, the interest rate on the LRCNs will reset every five years at a rate equal to the prevailing 5-year Government of Canada Yield plus 4.10 per cent. The LRCNs will mature on October 31, 2082. The expected closing date of the offering is September 14, 2022. TD Securities is acting as lead agent and sole bookrunner on the issue.

Concurrently with the issuance of the LRCNs, TD will issue 1,500,000 Non-Cumulative 5-Year Fixed Rate Reset NVCC Preferred Shares, Series 29 (“Preferred Shares Series 29”) to be held by Computershare Trust Company of Canada, as trustee for TD LRCN Limited Recourse Trust™ (the “Limited Recourse Trust”). In case of non-payment of interest on or principal of the LRCNs when due, the recourse of each LRCN holder will be limited to that holder’s proportionate share of the Limited Recourse Trust’s assets, which will consist of Preferred Shares Series 29 except in limited circumstances.

With the prior written approval of the Superintendent of Financial Institutions (Canada), TD may redeem the LRCNs commencing on October 1, 2027, and every five years thereafter, during the period from and including October 1 to and including October 31. TD may redeem the LRCNs in whole or in part on not less than 10 days’ and not more than 60 days’ prior notice to the LRCN holders.

The net proceeds from this transaction will be used for general corporate purposes.

Thanks to Assiduous Reader Yomgui for bringing this to my attention!

PerpetualDiscounts now yield 6.22%, equivalent to 8.09% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.94%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to 315bp from the 310bp reported August 31.