Category: Market Action

There were no big surprises in the FOMC announcement of a 75bp policy hike:

Recent indicators of spending and production have softened. Nonetheless, 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 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate. 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.

The NYT commented:

Mr. Powell’s comments were precisely what stock investors wanted to hear.
Investors have worried about the Fed tipping the American economy into recession, so Wall Street on Wednesday honed in on signals that the Fed could slow its pace of interest rate increases in the future and that Mr. Powell is aware of early signs of a slowdown in the economy.

The S&P 500 stock index ended the day up 2.6 percent, and the Nasdaq Composite posted its best day since April 2020. Markets can quickly change their tune, though, especially with new data on growth coming out Thursday. The last two times the Fed raised rates, the S&P 500 rallied on the day of the announcement but fell sharply the day after.

And there is good news from US politicians, at last. I’ve been hoping for this for years:

Dozens of former Republican and Democratic officials will announce on Wednesday a new national political third party to appeal to millions of voters they say are dismayed with what they see as America’s dysfunctional two-party system.

The new party, called Forward, will initially be co-chaired by former Democratic presidential candidate Andrew Yang and Christine Todd Whitman, the former Republican governor of New Jersey. They hope the party will become a viable alternative to the Republican and Democratic parties that dominate U.S. politics, founding members told Reuters.

Party leaders will hold a series of events in two dozen cities this autumn to roll out its platform and attract support. They will host an official launch in Houston on Sept. 24 and the party’s first national convention in a major U.S. city next summer.

Whether or not it gains any traction is another matter, of course, what with Americans so fond of hating each other. But we can hope!

PerpetualDiscounts now yield 6.19%, equivalent to 8.05% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.84%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has skyrocketted to 320bp from the 265bp reported July 20.

US PMI contracted:

The S&P Global flash composite purchasing managers output index slid 4.8 points to 47.5, the weakest reading since May 2020, the group reported Friday. Outside of the early months of the pandemic, the July figure is the weakest in data back to 2009. Readings below 50 indicate contraction. The new orders gauge expanded modestly after contracting the previous month.
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Similar results were seen in Europe. The group’s index of activity in the euro area unexpectedly shrank for the first time since early 2021. Output worsened among manufacturers, while growth in the service sector came close to stalling.

The US contraction was led by a steep decline in service-sector activity. The group’s services gauge slid to 47, the lowest print since May 2020. Excluding the pandemic, the July figure was the weakest in records back to 2009. Even so, firms continued to add jobs at a solid pace.

Meantime, the group’s manufacturing index eased to a two-year low of 52.3 in July. New orders shrank for a second month and employment growth slowed. Export orders also contracted as a stronger dollar and grimmer global picture weighed on foreign demand.

Lagarde now says the ECB Terminal Rate is whatever it takes:

The European Central bank will raise its interest rates until inflation falls back to its 2% target, the ECB’s President Christine Lagarde said in an interview with Germany’s Funke Mediengruppe published on Friday.

It was Lagarde’s strongest commitment to date to fighting inflation, which hit 8.6% in the euro zone last month, despite growing fears of a recession in the bloc as a result of Russia’s invasion of Ukraine.

“We will raise interest rates for as long as it takes to bring inflation back to our target,” she told the German network of newspapers.

From yesterday’s reporting, I thought the “Terminal Rate” was an ECB forecast, but it turns out that it’s just a calculated market number:

TXPR closed at 590.71, down 1.31% on the day. Volume today was 2.04-million, fourth-highest of the past 21 trading days.

CPD closed at 11.83, down 0.59% on the day and hitting a new 52-week low. Volume was 145,260, third-highest of the past 21 trading days. The 52-week high for CPD, by the way, is 14.15 – so should it hit 11.32 we can solemnly discuss how the preferred share market has crashed. Maybe we’ll get on TV!

ZPR closed at 9.85 down 1.10% on the day. Volume of 358,370 was highest of the past 21 trading days.

Five-year Canada yields were down to 2.99% today. Maybe all this inflation nonsense is over now! Or maybe:

Bond yields saw some of their biggest declines of the year Thursday after soft U.S. economic data and the first interest rate hike in 11 years by the European Central Bank spurred more concern that a recession is just around the corner.

Stocks closed higher, with U.S. indexes posting bigger gains than the TSX thanks to a rally in growth stocks.
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The number of Americans enrolling for unemployment benefits rose last week to the highest in eight months and a gauge of factory activity slumped this month, the latest indications the U.S. economy is slowing under the weight of rising interest rates and high inflation.

The ECB has joined the party:

The European Central Bank raised interest rates by more than expected on Thursday as concerns about runaway inflation trumped worries about growth, even while the euro zone economy is suffering from the impact of Russia’s war in Ukraine.

The ECB raised its benchmark deposit rate by 50 basis points to zero percent, breaking its own guidance for a 25 basis point move as it joined global peers in jacking up borrowing costs. It was the ECB’s first rate increase in 11 years.

Policymakers also agreed to provide extra help for the euro zone’s big debtor nations – Italy among them – with a new bond purchase scheme. Sources told Reuters they did not expect to use it imminently despite a selloff in Italian bonds.

Ending an eight-year experiment with negative interest rates, the ECB also lifted its main refinancing rate to 0.50%, and promised another hike, possibly as soon as its Sept. 8 meeting, with more to follow later.
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But even if the ECB is now moving more quickly, Ms. Lagarde said the terminal rate – or level where hikes end – has not changed.

The ECB did not provide guidance for its expected rate hike in September, saying only that further increases will be as appropriate and decisions will be made meeting-by-meeting.

The ECB had for weeks guided markets to expect a 25-basis-point increase on Thursday, but sources close to the discussion told Reuters early this week that 50 basis points had come into play as part of a deal including help for indebted countries.

I love market chatter and the chatterers! Apparently this unchanged forecast for the terminal rate – which is what? maybe a year away? – has cheered everybody up, or at least those who have forgotten that last week the forecast was to hike rates 0.25% this week.

Canadian inflation has hit a new high for this cycle:

Canadian inflation jumped to the highest rate in nearly four decades in June, although there are tentative signs that consumer price growth is close to topping out, offering relief to families.

The consumer price index (CPI) rose 8.1 per cent in June from a year earlier, up from 7.7 per cent in May, Statistics Canada said on Wednesday. It was the highest inflation rate since January, 1983. Financial analysts were expecting worse, with inflation climbing to 8.4 per cent.

The acceleration was mainly because of gasoline, Statscan said. Consumers paid 6.2 per cent more at the pump in June than May, and 55 per cent more on an annual basis.

However, crude oil has tumbled in recent weeks, which has started to reflect in retail pricing. The national average price for regular unleaded gas was $1.87 a litre on Tuesday, down from a peak of $2.15 in early June, according to data from Kalibrate Technologies.

Shelter and grocery costs grew at slightly slower annual rates in June, a potential sign of progress for cash-strapped household budgets. And excluding food and energy, core inflation rose 0.4 per cent in June, a slower pace than in recent months.

Britain is also suffering from high inflation:

Consumer prices in Britain rose 9.4 percent in June from a year earlier, intensifying the squeeze on household budgets as inflation continued to run at its fastest pace in 40 years.

Rising prices for food and motor fuels were the biggest reason for the jump in inflation in June, up from a 9.1 percent rate the month before, the Office for National Statistics said on Wednesday. Motor fuel prices have risen more than 40 percent over the past year, with gasoline and diesel prices setting record highs. In June, food and drink prices jumped nearly 10 percent from a year earlier, the biggest increase since 2009, with prices for milk, cheese and eggs rising notably over the past month. Household energy bills also remain a major source of soaring inflation.

With inflation at its highest level in four decades, households are feeling the pain acutely because pay increases are lagging far behind prices. Pay, after it was adjusted for inflation and excluding bonuses, fell 2.8 percent in March to May, compared with a year earlier, the statistics agency said on Tuesday. That’s the steepest decline in so-called real wages on record.

I was struck by the juxtaposition of two stories on the Globe’s website, the first, Toronto condo sellers are giving up on resistant buyers:

Struggling sellers in Toronto’s condo market are bringing a wave of units for rent to the downtown core.

“We’ve started to shift a lot of sellers into the rental market,” says Christopher Bibby, broker with Re/Max Hallmark Bibby Group Realty.

Some frustrated owners are trimming their asking price and still not getting showings, says Mr. Bibby, who estimates that condo prices in the city have slipped between six and eight per cent since the peak in early spring
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Mr. Bibby says he can understand why buyers are nervous when they are grappling with soaring inflation and a string of interest rate hikes by the Bank of Canada. Many are betting that home prices have farther to fall.
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Condo sales in the Greater Toronto Area plunged 40 per cent in June compared with June, 2021, according to the Toronto Regional Real Estate Board, while the average price jumped 9.3 per cent in the same period.

… and the second was Toronto condo rents hit record high as renters face ‘extreme’ affordability challenge:

It’s a landlord’s market in Toronto once again. Condo rents hit a record high in the second quarter of this year, as soaring borrowing costs pushed residents into the rental market and more people flocked back to the city.

Across the Toronto region, the average monthly rent rose 17 per cent to $2,533 over the past four quarters, according to industry research firm Urbanation Inc., with rent for a typical studio condo climbing 25 per cent over that period.
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According to Urbanation calculations, condo owners shouldered an average monthly cost of $3,125 during the second quarter, when mortgages had an interest rate of about 3 per cent. The average rent for a similar condo unit was $2,533. That means the average monthly rent was nearly $600 less than the average monthly ownership cost. And that was before last week’s massive one-percentage-point interest rate increase.

Now, with mortgage rates near 5 per cent, Urbanation said condo owners are likely paying an average of $1,100 more a month than renters. “This will provide further fuel for the rental market as more first-time buyers become shut out of the ownership market,” the report said.

So the negative carry is getting negativer. Rents will come down once enough owners have capitulated and sold their investments at a loss to new owners who will have lower mortgage payments.

PerpetualDiscounts now yield 6.07%, equivalent to 7.89% interest at the standard equivalency factor of 1.3x. Long corporates now yield 5.26%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed slightly (and perhaps spuriously) to 265bp from the 270bp reported July 13.

David Berman penned a piece in Saturday’s Globe titled Bonds are in the dumps. Here’s why this investor is buying:

Hanif Mamdani, the lead manager of Royal Bank of Canada’s giant PH&N High Yield Bond Fund, offers a high-profile example of an investor looking to take advantage of eye-popping bond yields.

He’s now prowling for corporate bonds he believes could deliver double-digit annualized returns – breathtaking gains in the normally staid world of bonds – within a couple of years.
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Now, he believes that one of the most promising areas of the market is Canadian corporate bonds with investment grade ratings that are now trading at unusually high yields.

He pointed to a couple of examples.

He bought CIBC’s limited recourse capital notes – or LRCN, a subordinated debt instrument with a five-year term – with yields as high as 7.4 per cent.

The trouble is, of course, that LRCNs are not bonds and are not even genuine subordinated debt, despite OSFI’s best efforts to pull the wool over the eyes of unwary investors. They are preferred shares dressed up as bonds to allow portfolio managers and investment companies to gull the naive. Another problem, of course, is that the term is not, in fact, five years.

TXPR closed at 599.96, down 0.73% on the day. Volume today was 3.07-million, by far the highest of the past 21 trading days. The day was again enlivened by late-day movement, some of it in the Extended Session:

CPD closed at 12.02, down 0.41% on the day. Volume was 51,310, slightly below the median of the past 21 trading days.

ZPR closed at 10.03 down 0.20% on the day. Volume of 94,850 was well below the median of the past 21 trading days.

Five-year Canada yields were down to 3.10% today.