PrefBlog

PerpetualDiscounts now yield 6.26%, equivalent to 8.14% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.90% on 2024-11-19 and since then the closing price of ZLC has changed from 15.35 to 15.26, a total return of -0.59%, implying an increase of yields of 5bp (BMO reports a duration of 12.47, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 4.95%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 320bp from the 335bp reported November 13.

Canadian inflation is reported to have ticked up a little in October:

The Consumer Price Index rose at an annual rate of 2 per cent in October, up from 1.6 per cent in September, Statistics Canada said Tuesday in a report. Financial analysts were expecting an upturn to 1.9 per cent.

The inflation rate was guided higher by less flattering year-over-year calculations for gasoline prices and hefty increases in property taxes. On a monthly basis, the CPI rose 0.4 per cent.
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But Tuesday’s report also showed that core measures of inflation – which strip out volatile movements in the CPI – heated up last month, an unwelcome development. This could prompt the BoC to shift back to rate cuts of a quarter-percentage-point after its half-point reduction in October.
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Property taxes rose 6 per cent in October, year-over-year, up from 4.9 per cent in 2023 and the largest increase since 1992. Statscan makes an annual update to its property tax numbers in every October CPI report.

How market bets and economist views for future BoC rate cuts have shifted after today’s inflation data

Over all, housing inflation is trending lower. Shelter prices rose 4.8 per cent in October, year-over-year, compared with 5 per cent in September. Mortgage interest cost increases are slowing as the BoC cuts interest rates, and rents rose by an annual 7.3 per cent, down from 8.2 per cent in September. Still, national rents have jumped 25 per cent since the end of 2019, underscoring the financial headwinds facing millions of Canadians.

… and then:

Implied probabilities in swaps markets now suggest a 72 per cent chance of a 25 basis point cut on Dec. 11, and a 28 per cent chance that the bank will follow up with another jumbo 50 basis point cut, according to LSEG data.

Just prior to the inflation data, markets were pricing in 61 per cent odds of the 25 basis point cut.

Pre-Announcement

Post-Announcement

Interesting to see that the projected 2025-12-10 rate has ticked up to 2.81% from 2.78%.

Fairfax issues single-handedly lifted the market today, following reported reports (thanks, IrateAR!) that FFH will be issuing an LRCN-like sub-debt issue. We’ll see what gets reported tomorrow.

PerpetualDiscounts now yield 6.26%, equivalent to 8.14% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.77% on 2024-11-12 and since then the closing price of ZLC has changed from 15.51 to 15.46, a total return of -0.32%, implying an increase of yields of 3bp (BMO reports a duration of 12.49, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 4.80%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed slightly (and perhaps spuriously) to 335bp from the 340bp reported November 6.

So, there are disconcerting rumblings about the Fed:

Elon Musk, a key Trump backer who is expected to have considerable sway in helping shape Trump’s policies, included a “100” emoji while resharing Republican Sen. Mike Lee of Utah’s post on X calling for abolishing the Fed.

“The Executive Branch should be under the direction of the president,” Lee said Thursday in a post on X, hours after Fed Chair Jerome Powell told reporters he wouldn’t resign if Trump asked him to. “The Federal Reserve is one of many examples of how we’ve deviated from the Constitution in that regard,” Lee added. “Yet another reason why we should #EndTheFed.”
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“The American people re-elected President Trump by a resounding margin giving him a mandate to implement the promises he made on the campaign trail. He will deliver,” Leavitt said in an emailed statement to CNN.

Those promises include bringing interest rates “way down,” which Trump vowed to do if elected at the National Association of Black Journalists’ annual conference in August. Presidents, however, don’t have any direct influence over the rates Americans pay to borrow money.
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Trump floated requiring Fed officials to consult with him on interest rate decisions. That could lead to pressure on Fed officials to keep rates lower to satisfy Trump’s wishes, which in turn could reignite inflation.

During his first term, Trump also threatened to remove or demote Fed Chair Jerome Powell, whom he has at times blamed for keeping interest rates too high.

So how much would all that be worth in real life? Maybe a full point on 10-year treasuries, just for starters? All this would be on top of the firehosing of debt-funded money into the economy … well, Trump’s always been a fan of thugs like Erdogan and, I suppose, wants to do for the US what Erdogan’s done for Turkey.

What a world! “Axe the tax” is considered incisive political commentary, and a provincial party can project economic growth of 5.4% (in order to project a balanced budget, eventually) and still get a lot of votes … buckle your seatbelts, boys!

The FOMC eased 25bp to 4.50%:

Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.

In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4-1/2 to 4-3/4 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and 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 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; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Beth M. Hammack; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller.

… and equities responded:

The S&P 500 and S&P/TSX Composite indexes both closed at record highs on Thursday after the Federal Reserve announced a cut of 25 basis points in interest rates, extending a sharp rally sparked by Donald Trump’s return as U.S. president. Bond yields reversed course from Wednesday, however, and were lower for the session in both the U.S. and Canada.

It was the first record high close for the Canadian benchmark stock index since Oct. 17.
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Investor expectations that Trump would lower corporate taxes and loosen regulations sparked a surge in each of the three major indexes in the prior session, with both the Dow Industrials and S&P 500 recording their largest one-day percentage jumps in two years.
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Treasury yields, which have surged in recent weeks, retreated after a sharp rise on Wednesday, as the U.S. benchmark 10-year yield eased from a four-month high of 4.479% to 4.332% by late day.

Expectations for continued U.S. rate cuts have been dialed back recently, however, as economic data continues to point to a resilient economy and the potential for higher inflation as a result of likely tariffs and increased government spending under Trump’s administration.

Fed Chair Jerome Powell said no decision has been made on what sort of policy action the central bank will take in December but the central bank is “prepared to adjust our assessment of the appropriate pace and destination” for monetary policy amid uncertainty.

Meanwhile, Powell faces questions about his job security:

President-elect Donald Trump remains likely to allow Federal Reserve Chair Jerome Powell to serve out the remainder of his term, which expires in May 2026, according to a senior adviser to Trump who requested anonymity to describe private conversations.

The adviser cautioned that Trump could always change his mind, but his present view — and that of Trump’s economic team — is that Powell should remain atop the central bank as it pursues its policy of cutting interest rates. Trump in July told Bloomberg he had intended to keep Powell in his role at least for the duration of his term.

Still, Powell was peppered with questions about his job security during his first post-election press conference Thursday. Powell issued a terse “No” in response to a question about whether he would leave his Fed post before his term is up if President-elect Donald Trump asked him to. Powell later clarified that he believes Trump cannot fire him.

”Not permitted under the law,” Powell said.