Category: Market Action

TXPR closed at 554.08, up 1.04% on the day. Volume today was 1.65-million, well above the median of the past 21 trading days.

CPD closed at 11.05, up 1.00% on the day. Volume was 138,780, second-highest of the past 21 trading days.

ZPR closed at 9.30, up 0.87% on the day. Volume was 563,620, highest of the past 21 trading days and more than double that of the second-highest.

Five-year Canada yields were down precipitously to 3.34% today.

Equities had an even hotter day:

Investors stampeded back into stocks Thursday, and sent bond yields to their biggest daily decline in more than a decade, after U.S. consumer price data suggested the Federal Reserve may be reaching a turning point in its battle against stubborn inflation.
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Both Wall Street and Bay Street saw their biggest advance since April 2020. The S&P 500 jumped 5.5% and the Dow Jones Industrial Average rose just over 1,200 points. The tech-heavy Nasdaq, which is particularly sensitive to the path of interest rates, rallied 7.3%. The Canadian benchmark stock index rose 3.3%, closing at its highest level since Aug. 25.

Even bitcoin surged, recovering nearly all its losses from Wednesday when a failed buyout for a troubled cryptocurrency exchange sent shockwaves through the sector.
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For the next Bank of Canada policy meeting on Dec. 7, the market is now pricing in a 73% probability of a 25-basis-point hike in its overnight rate, versus 54% odds prior to the data, as bets of a larger 50-basis-point hike declined, according to Refinitiv Eikon data.

The U.S. 10-year Treasury yield dropped about 30 basis points to a five-week low of 3.813%, its largest daily fall since March 2009. Canada’s five-year government bond – influential in the setting of mortgage rates – fell 26 basis points to 3.336%. The U.S. dollar plummeted, sending the Canadian dollar up 1.2% to a seven-week high of 74.79 cents US.

Lower bond yields and expectations central banks are nearly at the end of their rate-hiking cycle provided a shot of confidence to market bulls who have been arguing the recovery in equity markets is only in its early stages. But most agreed several more months of declining inflation numbers would be needed to confirm the trend.

So, yes, there was an encouraging US inflation number:

Consumer Price Index data released on Thursday showed that inflation cooled more than expected in October, welcome news for the Federal Reserve and White House after months of limited progress on bringing down inflation.

While inflation is still rapid, it slowed notably last month. Consumer prices picked up by 7.7 percent in the year through October, less than the 7.9 percent that analysts had expected, and down from 8.2 percent in the year through September. On a monthly basis, price gains climbed by 0.4 percent between September and October, matching the previous month.

After stripping out food and fuel, both of which jump around in price, a “core” inflation index decelerated to 6.3 percent on an annual basis, down from 6.6 percent in the prior reading.
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Market expectations for where interest rates will move to next year dropped from a peak of over 5 percent to around 4.9 percent, as investors dialed back expectations of the number of interest rate increases to come.

The two-year Treasury yield, which is sensitive to changes in Fed policy, plummeted by more than 0.2 percent, to around 4.4 percent. The dollar also fell swiftly, down 1 percent against a basket of currencies that represent America’s major trading partners.
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Food prices continued to grow in October, inflating grocery bills for American households, though at a slightly slower pace than in previous months. The price of food rose 0.6 percent last month, down from 0.8 percent growth in September.

While prices of some items have retreated after spiking earlier this year, others are reaching fresh highs. The price of cereals and bakery products climbed 0.8 percent from the previous month, driven by a 2 percent increase in the price of flour. Lunch meats rose 3.4 percent from September and lettuce increased by 3.3 percent. The price of eggs, which have been inflated this year because of an outbreak of avian flu, soared 10.1 percent on the month.

But the price of some products began to fall after peaking earlier this year. The price of frankfurters fell 2.3 percent. Whole milk fell 0.9 percent, and fresh fruits declined 2.4 percent.

On an annual basis, the food index rose 10.9 percent, down slightly compared with the pace of growth last month.

Some support for the official numbers was provided by the Fed’s Underlying Inflation Gauge:

• The UIG “full data set” measure for October is currently estimated at 4.2%, a 0.3 percentage point decrease from the current estimate of the previous month.
• The “prices-only” measure for October is currently estimated at 5.7%, a 0.3 percentage point decrease from the current estimate of the previous month.
• The twelve-month change in the October CPI was +7.7%, a 0.5 percentage point decrease from the previous month.
• -For October 2022, trend CPI inflation is estimated to be in the 4.2% to 5.7% range, a similar range to September, with a 0.3% decrease on its lower and upper bounds.

The “prices-only” underlying inflation gauge (UIG) is derived from a large number of disaggregated price series in the consumer price index (CPI), while the “full data set” measure incorporates additional macroeconomic and financial variables. For a list of the series employed, see the data appendix.

But Tiff Macklem was not so sunny:

Bank of Canada governor Tiff Macklem said that unemployment needs to rise in order to slow down inflation, although elevated levels of job vacancies could soften the blow.

In a speech in Toronto hosted by the Public Policy Forum, Mr. Macklem said that Canada’s labour market is overheating, with unemployment near a record low and businesses struggling to find workers. This is feeding through into inflation, as companies bid up wages to compete for employees.

“We need to rebalance the labour market,” Mr. Macklem said. “This will be a difficult adjustment. We want to do this in the best way possible for Canadian workers and businesses.”

Mr. Macklem’s comments come on the heels of a blowout jobs report last Friday. Employment jumped by 108,000 in October, recouping all of the jobs lost during the summer slowdown. Average hourly wages were up 5.6 per cent that month compared to the previous year, while the rate of unemployment remained steady at 5.2 per cent as work force participation rose.
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“The unemployment rate in June hit a record low – and while that seems like a good thing, it is not sustainable,” Mr. Macklem said. “The tightness in the labour market is a symptom of the general imbalance between demand and supply that is fuelling inflation and hurting all Canadians.”

And it appears that troubles in the construction & development industry are worsening:

Romspen, one of Canada’s biggest private mortgage lenders, with $3.2-billion in assets under management, is freezing investor redemptions, citing some trouble with loan repayments.

The act of freezing redemptions, known as “gating” in the investment industry, prevents investors from taking their money out of the fund. Because Romspen is a private lender, a preset mechanism for redemptions normally permits a certain amount to be paid back to investors each month.

The company has not said how long the freeze will last. Instead, it told investors this week that it will “temporarily defer payment of unit redemptions requests until there is more clarity with respect to the fund’s timetable for borrower loan repayments and the receipt of proceeds of collateral and asset monetizations.”

Romspen’s portfolio largely comprises construction and predevelopment loans, and it lends to borrowers across the United States and Canada. In its letter to investors, the company warned that “if redemption demands continue at high levels, the trustees may be compelled to institute other temporary liquidity management measures.”

TXPR closed at 548.39, down 0.56% on the day. Volume today was 1.72-million, fourth-highest of the past 21 trading days.

CPD closed at 10.94, down 0.36% on the day. Volume was 63,550, well below the median of the past 21 trading days.

ZPR closed at 9.22, unchanged on the day. Volume was 275,640, highest of the median of the past 21 trading days.

Five-year Canada yields were down to 3.63% today.

And bitcoin got absolutely hammered today, which may be related to troubles at FTX:

The near-collapse of FTX, a dominant cryptocurrency exchange once seen as a trustworthy oasis in a sketchy industry, is ricocheting through the crypto sector at alarming speed, sending the prices of multiple cryptocurrencies plummeting and raising serious doubts about the business model for all crypto assets.

The potential for contagion is only growing following the news late Wednesday that Binance, a rival exchange, is walking away from its potential takeover of FTX, citing concerns about FTX’s finances and a new regulatory probe of the exchange.

I’ve thought for a long time that being a small-time landlord is one of the worst jobs in the world. Many disagree:

New data published by Statistics Canada suggests that while the share of Canadians reporting rental income has grown modestly since 2000, thanks to the growing population the net number of small landlords is up about 32 per cent just since 2008.

In a report published online, Statistics Canada says it obtained data from tax filings that showed 1,356,650 households reported income from rentals.
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In total about 7.9 per cent of Canadian households reported a median rental income of $2,750 (up from 2000 when 7.4 per cent reported a median rental income of $790).

Statcan’s data shows landlord life has also gotten more lucrative: In 2000, 65 per cent of landlord households reported their rental income was net positive (in other words, profitable), by 2020 with vastly more landlords to compete against 76.3 per cent reported profitable rental income. (The low point in that stretch came during the 2008 financial crisis when only 63 per cent reported profits.)

There’s also a significant wealth gap between those with rental income and those without: Artisinal landlords had a median annual income of $113,030, nearly double that of the 15,751,670 families with no rental income ($63,040).

I’m actually impressed that so many are cash-flow-positive; but I’ll bet that changes a bit when the mortgages get renewed!

Unfazed by the Republicans’ lack of wholesale success in the US mid-terms, the Junior Republicans are practicing their use of the victim card:

Unlike other party leaders, Mr. Poilievre does not routinely take questions from journalists, who are members of the press gallery, on Parliament Hill. The Parliamentary Press Gallery consists of 302 members from 48 agencies and outlets, including national and international organizations, not counting freelance journalists.

“It’s not just the Parliamentary Press Gallery that controls the agenda, and I think that’s what’s going on here. The Parliamentary Press Gallery believes it should dominate political discourse. I believe we have a big country, with people who are not necessarily part of the press gallery,” Mr. Poilievre told journalists.

Hey, it’s easier than answering questions!

PerpetualDiscounts now yield 6.82%, equivalent to 8.87% interest at the standard equivalency factor of 1.3x. Long corporates continue to yield 5.49%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has gaped wider to 340bp from the 305bp reported November 2. However, I suspect that the “Weighted Average Yield to Maturity” reported by BMO on their ZLC page is not kept current; anything to withhold information from the masses is good business for the banks! I’ve sent an inquiry; we’ll just see what kind of answer I get!

Jobs, jobs, jobs!:

The Canadian economy showed resilience in October as it created a robust number of jobs, more than recouping the positions lost during a summer lull.

Employment jumped by 108,000 in October, far more than the 10,000 that financial analysts expected, Statistics Canada said on Friday. Combined with a modest gain in September, the recent uptick has taken total employment to an all-time high. The unemployment rate held steady at 5.2 per cent as more people participated in the labour market.
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Analysts were encouraged by the details of the Canadian report: Job creation was entirely in full-time positions and mostly in the private sector. Total hours worked rose 0.7 per cent, an early sign economic growth will remain positive in the fourth quarter.

Compensation, meanwhile, picked up again. Average hourly wages grew 5.6 per cent over the past year, up from 5.2 per cent in September, marking a fifth consecutive month above 5 per cent.
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Traders are pricing in a 65-per-cent chance the Bank of Canada hikes its key rate by 50 basis points on Dec. 7. (A basis point is 1/100th of a percentage point.) Prior to the jobs report, those odds were about 50 per cent.

… and in the States:

Job growth remained stubbornly robust in October despite higher interest rates, defying policymakers’ efforts to dampen the labor market and curb the fastest inflation in generations.

Employers added 261,000 jobs last month on a seasonally adjusted basis, the Labor Department said Friday. That was down from 315,000 in September. The unemployment rate rose to 3.7 percent.
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Average hourly earnings climbed by 4.7 percent in the year through October. While that is a slight slowdown from 5 percent in the year through September, it remains a very rapid pace. Between September and October, wages climbed by 0.4 percent, more than the increase the month before and the fastest pace of monthly increase since July.

TXPR closed at 555.07, down 0.63% on the day. Volume today was 1.28-million, near the median of the past 21 trading days.

CPD closed at 11.03, down 0.72% on the day. Volume was 70,360, below the median of the past 21 trading days.

ZPR closed at 9.22, down 0.86% on the day. Volume was 224,300, above the median of the past 21 trading days.

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

Even more spending from the Feds today:

Finance Minister Chrystia Freeland delivered a fall economic update Thursday that warns of a potential recession next year, and includes plans for a tax on share buybacks, significant incentives for green energy investment, and spending on students and low-income workers.

All Canada student and apprentice loans would be interest free, at a cost of $2.7-billion over five years, and another $4-billion over six years would be automatically issued in advance payments of the Canada Workers Benefit to people who had qualified the previous year.
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The new measures specifically related to boosting business investment are worth $10.9-billion over six years. They include $250-million over five years for a package of new job training programs. There is also a new Investment Tax Credit for Clean Technologies that will offer a refundable tax credit equal to 30 per cent of the capital cost of investments in energy projects such as solar, wind and small nuclear reactors. The Finance Department is planning consultations to include labour conditions in order to access the full credit.
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The proposed tax on share buybacks had not previously been signalled and is sure to generate significant policy debate, as it has south of the border.

The share buyback and energy incentives are aimed at responding to a major package of tax and climate policy reforms approved this year through the U.S. Inflation Reduction Act.

The U.S. act includes a 1-per-cent excise tax on stock buybacks, which refers to situations when companies use excess cash to purchase their own shares. U.S. Democrats said the tax will raise billions in new revenue while also encouraging companies to put excess cash toward investment and wages. The economic impact of the tax and buybacks in general is a matter of considerable policy debate.

Ms. Freeland’s update proposes a 2-per-cent tax that would apply on the net value of all types of share buybacks by public corporations in Canada. The government says details of the new tax will be announced in the 2023 budget and would come into force on Jan. 1, 2024.
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Robert Asselin, senior vice-president of policy for the Business Council of Canada, said he was skeptical about Ms. Freeland’s vow of fiscal prudence.

“They are spending about 45 per cent of the revenue windfall they are getting for a very inflationary economy. For me, that is not fiscal prudence,” Mr. Asselin said in an interview, adding all of their windfall should have been directed at deficit reduction.

The student loan interest relief is modest:

Finance Minister Chrystia Freeland has announced plans to erase the interest on federal student and apprentice loans as part of the government’s fall fiscal update.

The move, made amid soaring living costs and the threat of a looming recession, would bring relief to many budget-strapped young Canadians who’ve been borrowing to finance their education. The measure, if implemented, would kick in on April 1, the day after a temporary freeze on the accrual of interest on federal student loans is set to expire.

It would make the loans interest free at that point and apply to those currently being repaid as well.
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Half of all postsecondary students in Canada rely on student loans to help them pay for school, the federal government said in its fall update, released on Thursday. Eliminating the interest on the federal portion of government loans would save the average borrower $410 a year, it added.

The proposed change would cost taxpayers $2.7-billion over five years and $556.3-million a year thereafter, the government estimated.

The share buyback tax is more controversial:

Ottawa plans to introduce a 2-per-cent tax on share buybacks, in an effort to have corporations increase spending on workers – and potentially reap some of the financial windfall being enjoyed by the oil and gas sector.

The federal Liberals said Thursday that the change would also encourage companies to reinvest their profits in workers and in Canada more broadly. The new tax reflects a similar move in the United States, which imposed a 1-per-cent tax on stock buybacks in August as part of the Biden administration’s Inflation Reduction Act.

While details of the corporate tax will be announced in Budget 2023, it will apply to the net value of all types of share buybacks by public companies in Canada from Jan. 1, 2024, according to the government’s fall economic update. Ottawa estimates the measure will dump an extra $2.1-billion into federal coffers over a five-year period.
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The use of stock buybacks in corporate Canada has exploded over the past few years.

Five years ago, the members of the S&P/TSX 60 Index – some of Canada’s biggest companies – spent nearly twice as much cash paying dividends to shareholders as they did repurchasing their shares. Now, stock buybacks outpace dividend payments.

The TSX 60 companies spent $67.1-billion in the past 12 months repurchasing their common shares, according to S&P Global Market Intelligence. That compares to $26.1-billion five years ago.

In contrast, dividend payments to shareholders have not grown nearly as much. The TSX 60 companies paid $59.4-billion in dividends in the past 12 months, according to S&P Global Market Intelligence. That compares to $45.8-billion five years ago.

TXPR closed at 558.61, down 0.61% on the day. Volume today was 1.74-million, fourth-highest of the past 21 trading days.

CPD closed at 11.105, down 0.76% on the day. Volume was 53,510, second-lowest of the past 21 trading days.

ZPR closed at 9.30, down 0.54% on the day. Volume was 198,970, above the median of the past 21 trading days.

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

The Fed bumped the policy rate 75bp to 3.75%:

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 creating additional 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 3-3/4 to 4 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.

Mohamed El-Erian comments:

As widely expected, the Federal Reserve hiked interest rates by 75 basis points.

As to what’s next: I suspect the entire focus will be on interpreting the additional language in the statement (in red).

… and the NYT commented:

While Mr. Powell said during a new conference that “at some point” it would be appropriate to slow the pace of increases, he also suggested that interest rates would peak at a higher level than the 4.6 percent that the Fed predicted in September.

He also noted that rates would “have to go higher and stay higher for a while” — a development that could make achieving a so-called “soft landing” harder.

Here’s what else to know:

The Fed acknowledged that more rate increases were coming, but also signaled that it was aware that its tightening was adding up.
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Stocks rallied immediately after the Fed’s announcement, rebounding from losses earlier in the day, while government bond yields fell. But as Mr. Powell began answering questions from reporters, stocks fell sharply after he suggested that interest rates could peak at a level higher than what policymakers previously projected and noted that it would be “very premature” to consider a pause in rate increases. Bond yields became more mixed, with traders seemingly unsure what to make of Mr. Powell’s comments.

Mr. Powell also made clear that the bigger risk to the economy was in not acting to tame inflation, noting that if the Fed over-corrects, it has the tools to walk that back. The bigger economic risk is “if we don’t get inflation under control because we don’t tighten enough.”

And Macklem spoke to the Senate:

Inflation remains far too high, Mr. Macklem told the Senate committee on banking, commerce and the economy. At the same time, the Canadian economy is expected to “stall” in the coming quarters, he said. This puts the central bank in a precarious spot.

“If we don’t do enough, Canadians will continue to endure the hardship of high inflation. And they will come to expect persistently high inflation, which will require much higher interest rates and, potentially, a severe recession to control inflation,” Mr. Macklem told the Senate committee. He was there to explain the bank’s latest interest rate hike, announced last week.

“If we do too much, we could slow the economy more than needed. And we know that has harmful consequences for people’s ability to service their debts, for their jobs and for their businesses.”

PerpetualDiscounts now yield 6.56%, equivalent to 8.53% interest at the standard equivalency factor of 1.3x. Long corporates have posted an awesome recovery recently to yield 5.49%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has gaped wider to 305bp from the 260bp reported October 26.

How about that US inflation, eh?:

Friday’s report from the Commerce Department showed that prices rose 6.2 per cent in September from 12 months earlier, the same year-over-year rate as in August.

Excluding volatile food and energy costs, so-called core prices rose 5.1 per cent last month from a year earlier. That’s faster than the 4.9 per cent annual increase in August, though below a four-decade high of 5.4 per cent reached in February.
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Higher pay is helping maintain spending for many workers. Wages and benefits rose 5 per cent in the July-September quarter from a year ago. That was a healthy gain, just below a two-decade high of 5.1 per cent reached in the April-June quarter.

Still, there are signs that pay growth is cooling a bit. On a quarterly basis, it rose 1.2 per cent from the April-June quarter to the July-September period. Yet that marked a second straight quarterly slowdown after compensation growth had reached a 20-year high of 1.4 per cent in the first three months of 2022.
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Americans, on average, built up their savings during the pandemic, a time when many people stayed home, postponed travel and vacations and dined out less. Economists estimate that that extra savings totalled about $2.4-trillion last year, mostly among higher-income Americans. But it is being spent down and now stands at about $1.5-trillion.

Friday’s report also showed that consumers spent more last month, even after adjusting for inflation, a sign of Americans’ willingness to keep spending in the face of high prices. Consumer spending increased 0.6 per cent from August to September, or 0.3 per cent after accounting for price increases.

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Europe’s worse:

Preliminary data on Monday from Europe’s statistics office showed headline inflation came in at an annual 10.7% this month. This represents the highest ever monthly reading since the euro zone’s formation. The 19-member bloc has faced higher prices, particularly on energy and food, for the past 12 months. But the increases have been accentuated by Russia’s invasion of Ukraine in late February.

This proved to be the case once again, with energy costs expected to have had the highest annual rise in October, at 41.9% from 40.7% in September. Food, alcohol and tobacco prices also climbed in the same period, jumping 13.1% from 11.8% in the previous month.
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Monday’s data comes after individual countries reported flash estimates last week. In Italy, headline inflation came in above analysts’ expectations at 12.8% year on year. Germany also said inflation jumped to 11.6% and in France the number reached 7.1%. The different values reflect measures taken by national governments, as well as the level of dependency that their nations have, or had, on Russian hydrocarbons.

There are, however, euro nations where inflation rose by more than 20%. This includes Estonia, Latvia and Lithuania.