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Canadian inflation hit a new 31-year high:

The Consumer Price Index rose 6.8 per cent in April from a year earlier, Statistics Canada said Wednesday, edging up from 6.7 per cent the previous month. It was the latest in a string of troublesome reports: Also on Wednesday, Britain said its inflation rate hit a 40-year high of 9 per cent, while in the United States it hit 8.3 per cent last week.

On a monthly basis, consumer prices rose 0.6 per cent. The average of the Bank of Canada’s core measures of inflation – which strip out volatile items, such as gasoline, and give a better sense of underlying price pressures – jumped to 4.2 per cent from 3.9 per cent.

The inflationary surge is a financial stress for many households. In April, the average hourly wage rose 3.3 per cent on an annual basis, or much lower than inflation – meaning, the average worker is seeing their purchasing power decline, a trend in place for several months.
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Households paid nearly 10 per cent more for groceries, the steepest annual gain since 1981. Statscan noted that gains are “broad-based, with consumers paying more for nearly everything at the grocery store.” Over the past year, the price of pasta has risen nearly 20 per cent, fresh fruit by 10 per cent and coffee by around 14 per cent.

Housing was another source of pain. Shelter costs rose 7.4 per cent on an annual basis, the highest in nearly four decades. In part, that was due to sharply higher prices for energy to heat homes. Rents rose 4.5 per cent, with larger gains in Ontario and British Columbia.

Gasoline prices fell slightly in April, although were up 36 per cent from a year earlier. With the average price of gas soaring above $2 a litre this week in Canada, energy should continue to put upward pressure on inflation, which could hit 7 per cent shortly, Mr. Mendes said.

In Britain, energy was the culprit:

UK inflation, the rate at which prices rise, jumped to 9% in the 12 months to April, up from 7% in March.

The surge came as millions of people saw an unprecedented £700-a-year increase in energy costs last month.

Higher fuel and food prices, driven by the Ukraine war, are also pushing the cost of living up, with inflation expected to continue to rise this year.

Citizens Advice said “the warning lights could not be flashing brighter” for the government to offer more support for households, and debt charities urged anyone finding it difficult to pay bills to seek help earlier rather than later in the year.

Around three quarters of the rise in inflation in April came from higher electricity and gas bills, according to the Office for National Statistics (ONS).

PerpetualDiscounts now yield 5.89%, equivalent to 7.66% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.97%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 270bp from the 280bp reported May 11.

TXPR closed at 628.86, up 0.83% on the day. Volume today was 2.26-million, above the median of the past 21 trading days.

CPD closed at 12.59, up 1.21% on the day. Volume was 53,630, lowest of the past 21 trading days.

ZPR closed at 10.46 up 0.67% on the day. Volume of 86,110 was the lowest of the past 21 trading days.

Five-year Canada yields were up to 2.89% today.

S&P commented on the BAM Spinout Plan:

Brookfield Asset Management (BAM) announced definitive plans to spin off its asset management business in the form of a tax-free special distribution to shareholders, creating a new listed entity. This separation is expected to close by year-end 2022.

The asset management business (“spinco”) will be publicly traded on the New York and Toronto stock exchanges. BAM will maintain 75% ownership of spinco.

We affirmed our ratings on Brookfield Asset Management Inc. because we continue to view BAM’s business position as strong and its leverage and cash flow as unchanged, since we believe growth in other BAM businesses will offset BAM’s lower proportion of spinco’s earnings.

At the same time, we affirmed our ‘A-‘ issue rating on the firm’s senior notes, ‘BBB’ issue rating on the firm’s junior subordinated notes, and ‘BBB’ and ‘P-2’ (Canadian scale) issue ratings on the firm’s preferred stock. We also affirmed our short-term issuer rating and commercial paper rating at ‘A-1’, and our Canadian scale commercial paper rating at ‘A-1 (mid)’.

The stable outlook reflects our expectation for BAM’s fee-bearing capital and earnings to continue to grow as the company maintains leverage of 2x-3x post-spin.

We view this transaction as strategically consistent with BAM’s previous launches of its renewables, infrastructure, real estate, and private equity platforms into separately managed businesses over the past 15 years. That said, this pending spin-off modestly weakens our view of BAM as an asset manager due to the resulting dilution in earnings contribution from the asset management business. Furthermore, we may view it negatively if BAM were to spin off a larger portion (more than 25%) of its investment in the asset manager, thereby further reducing spinco’s earnings contribution to BAM.

We consider BAM’s post-spin financial risk as largely unchanged from our current assessment because we expect growth in BAM’s other businesses to offset the lower earnings contribution from asset management. We expect BAM’s weighted leverage to remain 2x-3x over the next two years, and we weight our pro forma debt-to-EBITDA metric 50% for 2023 and 50% for 2024 to fully reflect the post spin-off view.

DBRS has commented on the proposed BAM restructuring:

According to DBRS Morningstar’s analysis, with a reduction of 25% in the FFO from the AMB, the Restructuring is expected to have a modestly negative impact on BAM’s credit metrics such as the FFO-to-debt and cash flow-to-debt ratios. However, DBRS Morningstar views the impact as manageable because BAM’s credit metrics are currently strong for the ratings. Moreover, the metrics will remain supported by growing fee-bearing capital and the incremental FFO from Real Estate as a result of last year’s acquisition of the 38% interest in Brookfield Property Partners LP that BAM did not already own. From a business risk profile perspective, the Restructuring is expected to only have a modestly negative impact on BAM’s risk profile as the relative importance of the asset management business, which is viewed as being of higher credit quality relative to BAM’s other business pillars, will decline somewhat. However, DBRS Morningstar notes that the other major business pillars (such as Real Estate, Renewable, Infrastructure, and Private Equity) continue to benefit from sound fundamentals, providing superior business diversification to BAM. Furthermore, the reduction in the AMB FFO only partially offset the significant increases in AUM and fee-bearing capital in recent years.

DBRS Morningstar believes if the Restructuring is implemented as currently planned, there will be no rating impact on BAM and its guaranteed subsidiaries. However, DBRS Morningstar could take a negative rating action if (1) the Company’s credit metrics weaken materially from the level as required by DBRS Morningstar on a sustained basis; or (2) its business risk profile post Restructuring deteriorates significantly. DBRS Morningstar currently considers these scenarios unlikely.

TXPR closed at 622.93, up 0.90% on the day. Volume today was 1.26-million, third-lowest of the past 21 trading days.

CPD closed at 12.40, up 0.90% on the day. Volume was 92,050, ahead of only May 12 in the past 21 trading days.

ZPR closed at 10.36 up 1.07% on the day. Volume of 165,670 was below the median of the past 21 trading days.

Five-year Canada yields were up to 2.80% today.

TXPR closed at 617.40, down 0.67% on the day. Volume today was 1.28-million, third-lowest of the past 21 trading days.

CPD closed at 12.29, up 0.08% on the day. Volume was 87,210, lowest of the past 21 trading days.

ZPR closed at 10.245 down 0.53% on the day. Volume of 440,140 was third-highest of the past 21 trading days.

Five-year Canada yields were down a bit to 2.75% today.

Brookfield Asset Management has announced:

In our year-end letter, we mentioned that we were considering publicly listing a partial interest in our asset management organization. We have been very encouraged by the feedback we received from shareholders and concluded that publicly listing a 25% interest in our asset management business will be overwhelmingly positive. We expect that these shares can be distributed to shareholders before year end. The distribution will be tax-free for Canadian and U.S. shareholders and we are working through the taxation in other jurisdictions.

This move will be credit-negative for BAM issues to some extent, since there will be structural subordination of the preferreds, which I assume will stay at the holding company level. I have not yet seen any credit agency commentary regarding this announcement.

The US Inflation Number came out today:

Energy prices fell 2.7 percent in April, driven by a decrease in the cost of gasoline, which fell 6.1 percent from March. But overall energy prices were still 30.3 percent higher than a year earlier, more than three times the rate of both overall inflation and so-called core inflation.
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Prices of dairy, eggs and cereals soared in April, pushing up overall inflation as an outbreak of bird flu, the rising cost of fuel and fertilizer, labor shortages and other factors added to prices at restaurants and grocery stores.

The price of food rose 0.9 percent in April from the previous month, the 17th consecutive monthly increase, according to the Consumer Price Index compiled by the Bureau of Labor Statistics and released on Wednesday.

The increase was driven by a 2.5 percent increase in the price of dairy, a 2.0 percent increase in nonalcoholic beverages and a 10.3 percent increase in the cost of eggs, as avian flu decimated poultry flocks.

But prices of fruits and vegetables declined from the previous month, and the overall pace of rising prices for groceries cooled slightly in April, rising 1.0 percent after an increase of 1.5 percent the previous month.
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The Consumer Price Index rose 8.3 percent in the year through April, a slight deceleration from March, when prices rose 8.5 percent, but still a bigger jump than economists had expected. The government’s report also showed core inflation — which strips out volatile food and gas prices — rose 0.6 percent in April from the previous month, faster than its 0.3 percent increase in March.

PerpetualDiscounts now yield 5.91%, equivalent to 7.68% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.86%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to 280bp from the 275bp reported May 4.

The New York Fed released its Household Debt and Credit Report today:

The Quarterly Report on Household Debt and Credit for the first quarter of 2022 shows a solid increase in total household debt of $266 billion, to $15.84 trillion. Balances now stand $1.7 trillion higher than at the end of 2019, before the COVID-19 pandemic. Mortgage and auto loan balances rose by $250 billion and $11 billion, respectively, in the quarter, although originations for both subsided from historically high levels in 2021. Credit card balances declined by $15 billion, in line with seasonal trends typically seen at the start of the year, but are still $71 billion higher than in 2021:Q1, representing a substantial year-over-year increase.

TXPR closed at 618.14, down 1.14% on the day. Volume today was 1.47-million, well below the median of the past 21 trading days.

CPD closed at 12.28, down 0.97% on the day. Volume was 107,800, near the median of the past 21 trading days.

ZPR closed at 10.26 down 0.87% on the day. Volume of 173,220 was near the median of the past 21 trading days.

Five-year Canada yields were down a bit to 2.82% today.

It was a pretty horrible day everywhere:

The S&P 500 fell 3.2 percent, adding to a downdraft that has knocked 16.3 percent off the index this year, including a five-week stretch of selling that is the market’s longest such decline in more than a decade.

The drop has stocks approaching a bear market, Wall Street’s term for a decline of 20 percent or more from recent highs, a retreat that serves as a marker of a severe shift in sentiment.

The focus of attention on Monday was China’s economy, after customs data showed that growth in the country’s exports slowed significantly in April and Li Keqiang, the Chinese premier, warned this weekend that the current state of the nation’s jobs market was “complicated and grave.”

But here’s a sign of the times:

Royal Bank of Canada RY-T -1.44%decrease
is raising base pay by 3 per cent for its lower-paid employees as part of a $200-million spending package that aims to fend off fierce competition for talent by improving salaries and benefits.

The unusual increase takes effect on July 1, and applies to all employees in a range of entry-level and less senior positions, including at branches, call centres and other divisions. Collectively, the employees receiving raises make up nearly half of all RBC staff, and chief executive officer Dave McKay said in a company memo that the raises are intended “to address the market pressures and the rising cost of living that is having a greater impact on colleagues in lower salary bands.”

He said RBC, which has more than 85,000 full-time equivalent employees, will take those market forces into account when the bank calculates its normal salary increases at the end of the fiscal year in October. Many other RBC employees, including those in senior roles, receive a significant amount of their pay from commissions or bonuses, which also surged in a busy year for traders and investment bankers. That has been a key factor driving costs higher for many banks over the past year.

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

• Median inflation expectations decreased in April at the one-year horizon to 6.3% from 6.6% in March. In contrast, median three-year-ahead inflation expectations rose by 0.2 percentage point to 3.9%. While both series remain elevated, they are 0.3 percentage point below their series highs. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at the one-year horizon but increased at the three-year horizon.
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• Expectations about year-ahead price changes fell sharply by 4.4 percentage points for the price of gas to 5.2%. The expected change in the price of food and medical care fell by 0.2 percentage point (to 9.4%) and by 0.1 percentage point (to 9.5%), respectively. The median expected change in the cost of a college education and rent rose by 0.6 percentage point (to 9.1%) and 0.1 percentage point (to 10.3%), respectively. The median expected increase in rent is now at a new series’ high.
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• Median one-year-ahead expected earnings growth remained unchanged in April at its series high of 3.0%.
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• The median expected growth in household income increased by 0.1 percentage point to 3.1% in April. This reading is comparable to its 12-month trailing average of 3.0%, but it is below the series high of 3.4% recorded in December 2021.
• Median household nominal spending growth expectations increased by 0.3 percentage point to 8.0%, marking a new series high. The increase was most pronounced for respondents over the age of 60 and those with at most a high school diploma.

There was a good jobs number in the US:

On Friday, the Labor Department reported that employers added 428,000 jobs in April, while average hourly earnings rose 5.5 percent from a year ago. While the report showed hiring remains resilient, economists have said that the strong job market and wage acceleration could incentivize the central bank to lift interest rates more aggressively.
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The central bank on Wednesday raised interest rates half a percentage point, the biggest increase since 2000. Speaking after the announcement, Jerome H. Powell, the Fed chair, cited the labor market, and in particular the record number of job openings relative to the number of unemployed workers, as a reason policymakers had become more aggressive in recent months.

“You can see that the labor market is out of balance; you can see that there is a labor shortage,” Mr. Powell said. In April, he described the labor market as “unsustainably hot.”
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The reaction to the jobs report was evident in the bond market too. The yield on 10-year Treasury notes, a proxy for investor expectations about interest rates, rose to 3.1 percent from 3 percent a day earlier.

Not so good in Canada:

Job creation in Canada slowed substantially in April and work absences due to COVID-19 spiked to near record levels, marking a subdued start to the second quarter but one that’s unlikely to divert the Bank of Canada from its quickest pace of policy tightening in decades.

The economy added 15,300 positions last month, Statistics Canada said Friday, short of the 40,000 jobs that financial analysts on Bay Street had expected. The unemployment rate fell to 5.2 per cent from 5.3 per cent, the lowest in nearly five decades of comparable data.

Hiring activity was closer to a typical month before the pandemic, following a blowout gain of roughly 409,000 positions in February and March combined as pandemic restrictions eased. It was the rare report of late that didn’t speak to sizzling growth in the Canadian economy.
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Total hours worked – a metric that economists look to for an indication of economic output – fell 1.9 per cent in April from March, partly because of a spike in illness-related absences from work, Statscan said. Nearly one in 10 employees were absent from work due to illness or disability in April, making it one of the largest months of absence during the pandemic.
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Thus far, wage growth has been slow to pick up and doesn’t come close to matching inflation, amounting to a reduction in purchasing power for the average worker. In April, average hourly wages rose 3.3 per cent on an annual basis – similar to March’s 3.4-per-cent pace, but lagging growth in 2019, when the labour market was experiencing similarly tight conditions.