Category: Market Action

The New York Fed has released its June 2022 Survey of Consumer Expectations:

Inflation

• Median one-year-ahead inflation expectations increased to 6.8%, from 6.6% in May, marking a new series high. In contrast, median three-year ahead inflation expectations decreased to 3.6% from 3.9%. The increase in short-term expectations was driven by respondents over age 60 and respondents with at least some college education. The decline in medium-term expectations was broad-based across education and income groups. Our measures of disagreement across respondents (the difference between the 75th and 25th percentiles of inflation expectations) increased at the one-year-ahead horizon and remained unchanged at the three-year-ahead 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, declined to 2.8% from 2.9%. After being stable at 3.0% during the first three months of the year, the series has trended down slightly. Disagreement across respondents in their five-year ahead inflation expectations has been trending up during this period and increased again in June.
• Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—increased at the one-year ahead horizon to a new series high, but remained unchanged at the three-year ahead horizon. Uncertainty at the five-year ahead horizon increased.
• The median expected change in home prices one year from now dropped sharply to 4.4% from 5.8%. This is the lowest reading of the series since February 2021. The decline, the second largest recorded in the survey’s series only to the sharp drop at the onset of the pandemic, was broad based across age, education, and income groups. The decline was largest in the West census region.
• Expectations about year-ahead price changes increased by 0.1 percentage point for gas (to 5.6%), rent (to 10.3%), medical care (to 9.5%), and college education (to 8.7%). The median one-year-ahead expected change in the price of food decreased by 0.1 percentage point to 9.2%.

There are also reports on expectations regarding the labour market and household finance.

Jobs, jobs … whoopsy!:

The Canadian economy posted a surprise loss of jobs in June, the first monthly decline that was not associated with tighter public-health restrictions since the outset of the pandemic.

Overall employment fell by 43,000 last month, fully retracing the increase of 40,000 in May, Statistics Canada said on Friday. Financial analysts were expecting a gain of 22,500 positions, based on the median estimate. The job losses were especially stark for the self-employed and those 55 and up.

Despite the decline, the unemployment rate fell to a new record low of 4.9 per cent (from 5.1 per cent) as fewer people searched for work.

Hiring conditions remain challenging in Canada. At last count, employers were recruiting for about one million positions – far greater than job-vacancy levels before the pandemic, impacting salaries.

Average hourly wages rose 5.2 per cent in June from a year earlier, up from 3.9 per cent in May. Wages have been accelerating as the labour shortage drags on, although pay hasn’t kept pace with inflation.

The US did better:

The economy added 372,000 jobs in June, a hotter-than-expected boost to the labor market that may ease worries of an impending recession, but that also complicates the job of the Federal Reserve as it seeks to quell inflation.

The unemployment rate was 3.6 percent, the same as a month earlier, the Labor Department reported Friday.

The number is in line with the average gain over the last few months, including 368,000 in April and 384,000 in May. Employers have continued to compete for workers in recent months, with initial unemployment claims rising only slightly from their low point in March.

The private sector has now regained its prepandemic number of jobs, while the public sector remains 664,000 jobs below February 2020. Other than the public sector, no industry lost jobs in June, on a seasonally adjusted basis.
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Wages continued to climb rapidly last month, offering little encouragement to the Federal Reserve as policymakers hope for a slowdown in pay gains that might allow inflation to moderate.

Average hourly earnings picked up by 5.1 percent in the year through June, moderating slightly from 5.3 percent in the year through May. Economists in a Bloomberg survey had expected a slightly bigger cool-down, to 5 percent.

So Musk is attempting to terminate the Twitter deal:

Less than three months ago, Elon Musk, the world’s richest man, struck a blockbuster $44 billion deal to buy Twitter. He proclaimed that the company had “tremendous potential.”
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In a regulatory filing prepared by his lawyers, Mr. Musk said he was terminating the Twitter deal because of a continuing disagreement over the number of spam accounts on the platform. He claimed that Twitter had not provided information necessary to calculate the number of those accounts — which the company has said is lower than 5 percent — and that it had appeared to make inaccurate statements.

The coming lawsuit should be immensely entertaining.

The New York Fed has updated its Global Supply Chain Pressure Index (GSCPI):

• Global supply chain pressures declined in June, continuing the decrease we observed for May.
• The June decline was mostly due to a large decrease in Chinese supply delivery times.
• The moves in the GSCPI over the past three months suggest that although global supply chain pressures have been decreasing, they remain at historically high levels.

PerpetualDiscounts now yield 6.10%, equivalent to 7.93% interest at the standard equivalency factor of 1.3x. Long corporates now yield 5.23%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 270bp from the 255bp reported June 29.

Sorry this is so late, but I went to see Harry Potter and the Cursed Child last night. It was a great show and I endorse it completely. Loaded with very well done special effects and a superb set. My friend and I were most impressed by the portrayals of the Dementors and Moaning Myrtle; I particularly liked the magic duel in the first act.

Moaning Myrtle

It was definitely a ‘risk-off’ kind of day!

Peter Misek of Framework Venture Partners takes us down memory lane:

Let’s revisit the past. In 1993, the new Chrétien government was ripe with ideas for pumping stimulus into the country. Its problems were familiar: health and education were clamouring for investment and every government department had needs.

Less than a year into the government’s mandate, a usually uneventful moment became a watershed lesson for Canada. With hours to go before a regular bond auction, there were no bids at any price, Mr. Chrétien confirmed in a 2011 Reuters interview.
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At the last minute, the auction received bids, but the damage was done. In a rare moment of clarity, common sense and heroism, Mr. Chrétien called emergency cabinet meetings and set the painful but needed course toward renewed prosperity in Canada.

Yes, it was common knowledge in the industry that the GOC bond auctions had come within a hairsbreadth of failing in 1993. Not enough people know that.

One of the truisms of politics is that the politicians generally know what has to be done; they just don’t know how to get re-elected if they do it. We were very fortunate that at that time there was a Liberal government in Canada: they had the political room to take the harsh steps that were required. If it had been a Progressive Conservative government in power, doing so would have reinforced their political stereotypes and in short order have taken them to the political wilderness – as Mike Harris and the Ontario PCs found out soon enough.

It’s time to break up the banks. This is tied selling:

Some of Canada’s largest banks are blocking online investors from buying high-interest-savings exchange traded funds, which compete with the banks’ own lucrative deposit accounts.

The discount brokerage arms at Royal Bank of Canada, Bank of Montreal and Toronto-Dominion Bank do not allow do-it-yourself investors to purchase high-interest-savings ETFs, also known as cash ETFs, or HISA ETFs. The funds, which are run by independent asset managers, mainly invest in pools of banks’ high-interest savings accounts and deposits.

Rising yields are doing wonders for the solvency ratios of DB pension plans:

Consulting firm Mercer Canada Ltd. said its Mercer Pension Health Pulse, which tracks the median solvency ratio of the defined benefit (DB) pension plans of Mercer clients, increased from 108 per cent on March 31 to 109 per cent by June 30. The measure was 96 per cent at the end of 2020 and 103 per cent at the end of 2021
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Aon PLC … said its pension risk tracker, which measures the aggregate solvency of DB pension plans of companies in the S&P/TSX Composite Index, increased from 100.5 per cent to 101.5 per cent during the past three months. It has risen all the way from 89.4 per cent at the end of 2020 and 97.2 per cent at the end of 2021.

Well, that’s the end of the first half!

U.S. and Canadian stocks on Thursday closed out their worst quarter since the onset of the COVID-19 pandemic with another session of broad losses and growing unease among investors that the bloodletting in markets won’t let up any time soon.

The world’s most closely followed benchmark stock index, the S&P 500, saw the steepest percentage decline in the first half of a year since 1970.

The Canadian stock market has fared better, but its outperformance has been eroding in recent weeks amid growing bets that a rush by central bankers to hike interest rates to combat skyrocketing inflation will push economies into recession. Such a scenario paints an unsupportive picture for the S&P/TSX Composite Index, due to its heavy weighting of economically sensitive sectors such as energy, metals and financials.

In total, more than US$13-trillion has been erased from global stocks in a year that has also seen steep losses in bond markets and a breathtaking drop in cryptocurrencies, once thought to be a compelling way to diversify away from larger asset classes.

But we’ll end things on a hopeful note:

An international team of researchers, led by scientists at the University of Manchester, has developed a fast and economical method of converting methane, or natural gas, into liquid methanol at ambient temperature and pressure. The method takes place under continuous flow over a photo-catalytic material using visible light to drive the conversion.

An eMail from the New York Fed brought news of a new index:

The Federal Reserve Bank of New York today announced the monthly publication of a first-of-its-kind research product focused on identifying periods of widespread distress in the U.S. corporate bond market. Starting with today’s publication, the Corporate Bond Market Distress Index (CMDI)—a summary metric of U.S. corporate bond market functioning—will be updated regularly at 10:00 AM ET on the last Wednesday of each month. The CMDI was first introduced through a New York Fed Staff Report in January 2021, and a subsequent Liberty Street Economics blog post in February 2021.

The CMDI is a unified measure that identifies periods of dislocations and is associated with future realizations of other financial market conditions. By applying the CMDI to historical data, the index identifies past periods of market distress, such as those around the global financial crisis peaking in late 2008 and early 2009 as well as during COVID-19-related market stress in 2020. Additional periods since the beginning of 2022 were identified in a recent Liberty Street Economics blog post in June 2022.

PerpetualDiscounts now yield 6.07%, equivalent to 7.89% interest at the standard equivalency factor of 1.3x. Long corporates now yield 5.33%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed slightly (and perhaps spuriously) to 255bp from the 260bp reported June 22.

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