PrefBlog

The Fed released its FOMC Statement on schedule:

Economic activity expanded at a modest pace in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.

The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains 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 5 to 5-1/4 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, 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 its previously announced plans. 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 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; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.

For media inquiries, please email media@frb.gov or call 202-452-2955.

The NYT points out:

But in their statement announcing the decision, policymakers also indicated that they will watch to see whether future rate moves are necessary. That marks a shift in stance: For months, they had assumed that additional changes would be needed.

The change opens the door to a possible pause in Fed interest rate increases, but it also leaves central bankers with options. Officials could raise rates by more if the economy and inflation prove hot.
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Investor bets on where interest rates go from here are firmly tilted toward a pause and then lower interest rates later in the year. One calculation put the likelihood the Fed holds off changing interest rates when it next meets in June at 80 percent.
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Stocks rose after the Fed raised rates and omitted previous language in its statement that signaled more rate increases to come, ushering in the pause investors had hoped for. The S&P 500 rose 0.4 percent.
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The yield on two-year government bonds, which are sensitive to changes in interest rates, latched on to the potential pause, falling to 3.93 percent.
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Cutting interest rates this year is “not in our forecast” says Powell, in response to a question about investors already pricing in swift cuts to interest rates as soon as September.
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The S&P 500 skidded at the end of Powell’s press conference, down 0.5 percent, having initially reacted to the Fed’s policy announcement positively. Investors appeared to react to Powell repeating that the central bank does not expect to cut interest rates this year, with interest rates remaining higher for longer weighing on the market.

PerpetualDiscounts now yield 6.24%, equivalent to 8.11% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.87% on 2023-4-28 and since then the closing price has changed from 15.38 to 15.47, an increase of 59bp in price, with a Duration of 12.42 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decrease in yield of about 5bp since 4/28 to 4.82%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to about 330bp from the 315bp reported April 26.

Still no time!

First Republic finally succumbed:

Regulators seized control of First Republic Bank and sold it to JPMorgan Chase on Monday, a dramatic move aimed at curbing a two-month banking crisis that has rattled the financial system.

First Republic, whose assets were battered by the rise in interest rates, had struggled to stay alive after two other lenders collapsed last month, spooking depositors and investors.

First Republic was taken over by the Federal Deposit Insurance Corporation and immediately sold to JPMorgan. The deal was announced hours before U.S. markets are set to open, and after a scramble by officials over the weekend.
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JPMorgan will “assume all of the deposits and substantially all of the assets of First Republic Bank,” the F.D.I.C. said in a statement. The regulator estimated that its insurance fund would have to pay out about $13 billion to cover First Republic’s losses. JPMorgan also said that the F.D.I.C. would provide it with $50 billion in financing.
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By last week, after an alarming earnings report in which the bank disclosed that customers had withdrawn more than half of its deposits, it became clear that there was no option outside a government takeover.
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Like the other two failed banks — Silicon Valley Bank and Signature — First Republic collapsed under the weight of loans and investments that lost billions of dollars in value as the Federal Reserve rapidly raised interest rates to fight inflation.
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Other regional lenders, like Utah’s Zions Bank and PacWest of Los Angeles, have firmed their footing faster than First Republic, and bank analysts do not see another collapse as imminent. The stocks of every other bank in the S&P 500 stock index rose on Friday even as First Republic’s shares ended the day down more than 40 percent in anticipation of the government takeover.

Sic transit gloria mundi!

I still have no time to catch up on all the links I have saved …

So here’s the 2023-4-28 report, very late, but it’s here! I have all kinds of links to discuss, but they’ll just have to wait!

Sorry this is so late! A month-end jam-up, coupled with a very enjoyable and excellent dinner with an old friend, conspired to cause delays. I won’t be posting the results for the 28th tonight, but I’ll catch up on the weekend, I promise! (… and there’s another month-end to do for the fund, too!)

TXPR closed at 548.04, down 0.51% on the day. Volume today was 918,780, third-lowest of the past 21 trading days.

CPD closed at 10.82, down 1.19% on the day. Volume was 73,500, above the median of the past 21 trading days.

ZPR closed at 8.97, down 0.99% on the day. Volume was 197,250, above the median of the past 21 trading days.

Five-year Canada yields up a bit to 3.01% today.

Bonds were basically quiet:

The Bank of Canada did not hike interest rates earlier this month because it wanted to see more evidence of the effects of previous monetary tightening on growth and inflation, a summary of deliberations from the policy meeting showed.

Canadian inflation excluding food and energy costs is expected to remain above 3% until the fourth quarter of this year, the median forecast of seven economists surveyed by Reuters showed, which could dash hopes of an early BoC shift to cutting interest rates.

Canadian government bond yields were higher across the curve, recouping some of the previous day’s decline. The 10-year rose 3.9 basis points to 2.849%. (Reporting by Fergal Smith)

Prof Claudia Buch, Vice-President of the Deutsche Bundesbank, gave a speech:

Spring has come, but whether the crypto-asset winter is over remains to be seen. Those who see crypto-assets mainly as a conduit for illegal and gambling activities would certainly hope that turbulent spells in markets for crypto-assets have provided a salutary lesson. Those who see productive potential in these new technologies would hope that these episodes help separate the wheat from the chaff.

Which of those views prevails is an open issue. Whether crypto-assets that promise to improve the provision of financial services ultimately deliver on those promises crucially depends on the regulatory response. Which services are useful, how market structures evolve, whether new entrants are able to challenge the incumbents, what risks are associated with this – all this is shaped by regulations that apply to crypto markets.

Today, I would like to focus on the financial stability implications of crypto-assets. So far, the crypto market has been small. Market capitalisation of crypto-assets stands around 0.2% of global financial assets.

However, if there is one thing we’ve learnt from the past, it is that even seemingly small pockets of distress can breed financial crises. Crypto-assets promise innovative ways of providing financial services, just as the securitisation of financial assets did in the 1990s. Securitisation was an innovation considered to improve the allocation of risks in the financial system. It, too, started small in the 1980s, only to grow to an annual issuance volume of approximately half of outstanding mortgage and consumer loans in 2007. Similarly, the US mortgage market was considered to be of relatively minor importance – only to send shockwaves through the global financial system in 2007-08.

Here’s an opinion on economic forecasting from former chief economist of ATB Financial Todd Hirsch:

No one knows this better than economists. I’ve spent most of the past three decades working on teams within various think tanks, companies and banks, trying to forecast the economy. And I’ve concluded that it’s a waste of time. Why?

First, we’re getting worse at it. The problem isn’t faulty mathematical models or econometric techniques. Rather, the problem is the growing number of things that hit us from out of the blue – the so-called “black swan” events that are, by definition, unforeseeable.

No one in 2019 predicted a pandemic. No one in 2021 predicted a massive ground war in Europe. No one in 2022 predicted a series of bank failures. (Yes, of course, some experts had warned of all of these things, but they were nowhere on economists’ radar.) The frequency of these sorts of events is growing at an alarming rate.
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The idea that anyone can predict GDP growth to a tenth of a percentage point is hubris. A better strategy would be to prepare for any possibility. That, to a certain degree, is what economic forecasters do when we apply a “high, low and base-case” probability to a range of scenarios.

But by assigning one scenario the “base-case,” we’re still trying to convince ourselves that we can get the forecast correct. And that leads us right back to the start, where we lull ourselves into a false confidence.

Prepare for any outcome. Plan around multiple scenarios. Be ready to react swiftly as economic situations change. Don’t become complacent, thinking you know what’s going to happen.

I like this guy!

The New York Fed has updated its Corporate Bond Market Distress Index:

Corporate bond market functioning moved closer to historical norms over the month of April, with the end-of-month market-level CMDI above its historical median.

Market functioning in both the high-yield and investment-grade sectors remained roughly flat over the course of the month.

Looks like another scandal is brewing with construction loans:

The lawsuit claims StateView – founded in 2010 by brothers Dino and Carlo Taurasi with friend and chief financial officer Daniel Ciccone – repeatedly deposited cheques written on the RBC accounts into the TD accounts, and the Canadian Clearing and Settlement Systems (which handles transactions between financial institutions) conditionally credited the value of the cheques to the TD account “pending final settlement.”

TD alleges that before the transfer cleared, however, StateView moved the conditionally credited money out – either to a different account at another bank, or wire transferred it to a third party – and then stopped payment on the original RBC cheques. To avoid detection of this scheme, called cheque-kiting, TD further alleges StateView processed a large volume of “sham transactions” between other TD accounts.
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In the wake of TD’s filings, StateView is facing demands for repayment from at least two other lenders that could see an unfinished townhouse project (Nao Towns Phase II in Markham, Ont., with 96 units) pushed into insolvency.
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StateView also has several Ontario projects under construction, sold out or “fully reserved” that may now be subject to reorganization of StateView’s debts. Those include: High Crown Estates in King City (48 units), MiNu Towns in Markham (147 units), On the Mark in Markham (164 units), Elia Collection in Newmarket (72 units), Queen’s Court in Brampton (82 towns and detached homes), Elm & Co. in Stouffville (202 units) and BEA Towns in Barrie (218 units).

PerpetualDiscounts now yield 6.23%, equivalent to 8.10% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.97% on 2023-4-21 and since then the closing price has changed from 15.25 to 15.31, an increase of 39bp in price, with a Duration of 12.34 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decrease in yield of about 3bp since 4/21 to 4.94%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to about 315bp from the 300bp reported April 19.