PrefBlog

There were no surprises in Yellen’s testimony to Congress:

Federal Reserve Chairman Janet Yellen pledged to maintain her predecessor’s policies by scaling back stimulus in “measured steps” and signaled that the bar is high for a change in that plan.

Only a “notable change in the outlook” for the economy would prompt policy makers to slow the pace of tapering, Yellen said in response to a question today during testimony to the House Financial Services Committee. “It’s important for us to take our time to assess” the significance of recent reports showing payrolls expanded less than projected, she said.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts up 14bp, FixedResets gaining 1bp and DeemedRetractibles winning 18bp. Floating Rate issues were atop the Performance Highlights table. Volume was below average.

Nothing happened today.

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts off 17bp, FixedResets up 10bp and DeemedRetractibles gaining 6bp. The Performance Highlights table is dominated by losing Floating Rate issues. Volume was extremely low.

Golly, what a surprise:

Bank of England officials told currency traders it wasn’t improper to share impending customer orders with counterparts at other firms, a practice at the heart of a widening probe into alleged market manipulation, according to a person who has seen notes turned over to regulators.

A senior trader gave his notes from a private April 2012 meeting of currency dealers and two central bank staff members to the Financial Conduct Authority about six weeks ago because of mounting media coverage of the investigation, said the person, who asked not to be named while probes are under way.

Traders representing some of the world’s biggest banks told officials at the meeting that they shared information about aggregate orders before currency benchmarks were set, three people with knowledge of the discussion said. The officials said there wasn’t a policy on such communications and that banks should make their own rules, according to the people.

I don’t see anything wrong with sharing this information, anyway. To me, it’s all part of the ‘beat bankers up’ hysteria, led by people who act as if they do not understand what it is that institutional desks do – though I’m quite sure this is disingenuous.

It will be interesting to see how Danish mortgages turn out:

Denmark, which in 2010 became the first European nation to pass a law preventing bank bailouts, is now signaling it will take an equally hard line with its mortgage industry. The stance comes from a country whose $550 billion home-loan market — the world’s biggest per capita — is more than 1 1/2 times gross domestic product.

About a third of Danish mortgages are refinanced annually in bond auctions. The government has proposed a law that seeks to address refinancing risks by forcing bond investors to accept 12-month maturity extensions if an auction fails or if interest rates jump more than 5 percentage points.

The Danish mortgage industry’s size and systemic importance this week led Standard & Poor’s to conclude that the government would have to step in should auctions fail. According to the rating company, Denmark’s economy will already be in a crisis warranting some form of intervention if mortgage banks can’t sell their bonds.

From an investor’s perspective, the law brings a lot of wrong-way risk with it (i.e., bad news is correlated). What effect will this have on mortgage rates?

Crumby jobs number in the US:

Payrolls rose less than projected in January and the jobless rate unexpectedly dropped to the lowest level in more than five years, clouding the outlook for the U.S. economy and Federal Reserve.

The 113,000 gain in hiring fell short of the 180,000 advance that was the median forecast of economists surveyed by Bloomberg and followed a 75,000 increase the prior month, Labor Department data showed today in Washington. Unemployment declined to 6.6 percent, the least since October 2008, from 6.7 percent in December.

Contrariwise, the the Canadian number looked OK…

The Canadian economy added 29,400 jobs in January after a month-earlier drop, led by gains in self employment and in the public sector.

The employment gain and a drop in the number of people looking for work sent country’s jobless rate down two notches to 7 per cent in January. The increase comes after employers shed 44,000 positions in December, Statistics Canada said Friday.

… but has been criticized:

“The January Canadian jobs report was good on the headline but weak in the details,” said senior economist Krishen Rangasamy of National Bank Financial.

“The job gains were driven by self-employment and the number of paid jobs grew a meagre 1,000 as gains in government offset further declines in the private sector,” he added, referring to a loss of 14,000 jobs among corporations.

“After the weather wreaked havoc in the prior month, causing a massive 44,000 drop, employment bounced back in affected sectors such as agriculture, construction, and accommodation services.”

He cited the “more reliable” six-month moving average, which shows employment up 15,000 a month since August, with 12,000 of them in the private sector.

That, he added, is “not a bad performance, and consistent with the pick-up in economic growth in the second half of 2013.”

Meanwhile, the Toronto Exchange is losing subscribers:

TMX Group Inc. disclosed on Wednesday that there was an 8 per cent slump “in the average number of professional and equivalent real-time market data subscriptions to Toronto Stock Exchange and TSX Venture Exchange products.” That is by far the steepest drop in the past eight years, and takes the number down to 139,939 from 151,799 in 2012.

Maybe they’ll cut the price to increase subscriptions. Ha-ha.

The hot new topic is flexible exchange rates:

In October 2001, [Fed vice-governor nominee] Stanley Fischer traveled to the London School of Economics to speak on the lessons of his seven years battling turmoil in emerging markets as the International Monetary Fund’s No. 2 official.

Lecturing in the Old Theatre at the university where he studied in the 1960s, Fischer posed a question: What would he have done differently to thwart the Asian financial crisis of 1997-1998? Among his answers: Pushing harder for exchange-rate flexibility.
…
Emerging-market stocks and exchange rates have had the worst start to a year since 2010. Even so, said Dominic Wilson, chief markets economist at Goldman Sachs Group Inc. in New York, “currency weakness itself is unlikely to be as sharply disruptive as it was in the late 1990s.”

That’s when Asian nations including South Korea and Thailand spent reserves trying to defend exchange-rate pegs, only to eventually devalue and seek IMF bailouts. As one currency after another became delinked from the U.S. dollar, investors attacked in waves that would culminate in Russia’s debt default and the collapse of Long Term Capital Management.
…
Following Fischer’s prescriptions, emerging markets have made other changes to ensure they are less vulnerable than they were in the late 1990s, [former IMF economist Eswar] Prasad said. Their external debt as a share of exports has fallen to 70 percent from about 160 percent in 1998; interest payments on foreign debt have declined to less than 3 percent of exports from 8 percent; and reserves as a percentage of total debt have doubled to more than 100 percent, according to Goldman Sachs.

… and it was also Tiff Macklem’s swan-song:

Since 1995, the target has been to achieve an annual total rate of inflation of 2 per cent – the midpoint of our control range of 1 to 3 per cent – as measured by the consumer price index (CPI). The target is reviewed jointly with the federal government approximately every five years, and was last renewed in 2011.3

To achieve that target, an essential component of our monetary policy framework is a flexible exchange rate. The floating exchange rate is part of the monetary transmission mechanism. It allows the Bank to pursue its own “made-in-Canada” monetary policy that is directed at achieving 2 per cent inflation in Canada and stabilizing our economy. The flexible exchange rate also serves as a kind of shock absorber for the Canadian economy, helping it absorb and adjust to shifts in the global economy. [Conference reference]

In light of the recent depreciation of the Canadian dollar, it bears stressing that the Bank does not have a target for the exchange rate – it has an inflation target. The exchange rate is determined in markets, and we neither promote any specific value for the Canadian dollar, nor thwart its movements.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 2bp, FixedResets down 10bp and DeemedRetractibles gaining 5bp. Floaters bounced back after getting hit in the past few days and dominated the good part of the Performance Highlights table. Volume was below average, but the highlights were exclusively FixedResets – probably due to the new issue.

Hands up, everybody who didn’t see this coming! Suing CRAs is fashionable!

Today’s looniest financial story is surely that Italy’s state auditor, the Corte dei Conti, has opened an investigation into Standard & Poor’s, Moody’s and Fitch for downgrading Italy’s debt over the past couple of years. Loony first of all for the reasoning:

Notifying S&P that it was considering legal action, the Corte dei Conti wrote: “S&P never in its ratings pointed out Italy’s history, art or landscape which, as universally recognised, are the basis of its economic strength.”

But also for the size of the claim: “Standard & Poor’s revealed on Tuesday it had been notified by Corte dei Conti that credit rating agencies may have acted illegally and opened themselves up to damages of €234bn.”

It was another mildly poor day for the Canadian preferred share market, with PerpetualDiscounts off 6bp, FixedResets down 12bp and DeemedRetractibles losing 14bp. The surprisingly lengthy performance highlights table is dominated by losers. Volume was high.

DBRS doesn’t like the New Brunswick budget:

DBRS notes that the Province of New Brunswick (the Province or New Brunswick; rated A (high) with a Stable trend) kicked off the provincial budget season with its 2014 budget on February 4, 2014, which calls for a slow and protracted path back to balance by 2017-18. Although last year’s budget incorporated no firm time commitment to restore balance, the plan presented in 2012-13 did point to a balanced budget by 2014-15. DBRS was aware that some slippage had been incurred in light of weak economic performance but did not expect the full extent of deterioration revealed in yesterday’s budget. As a result, the revised fiscal targets raise the possibility of as much as $400 million to $500 million in additional debt over the next four fiscal years, which was not factored into last year’s rating review. While the revised outlook is potentially manageable for the credit profile, DBRS remains concerned that continued sluggish economic growth for an extended period of time or weakening fiscal resolve could push credit metrics to levels no longer consistent with the current ratings.
…
Based on the revised fiscal forecasts, DBRS-adjusted debt is estimated to have risen by 5% in 2013-14 to $12.5 billion. As a result of Statistics Canada’s downward revisions to historical GDP figures in December 2013 combined with very slow nominal GDP growth in 2013, debt-to-GDP is forecast to reach almost 40% at March 31, 2014. The Province’s debt burden is expected to peak around 41% in 2015-16. This exceeds the peak at the time of last year’s review and, more importantly, is well above pre-recession levels of less than 30%. As a result, even if the Province successfully executes its fiscal recovery plan as currently envisioned, DBRS believes little flexibility will be left within the current rating for further erosion. Additional fiscal slippage pushing the debt-to-GDP ratio toward 45% would be cause for concern for DBRS and could result in downward pressure on the rating.

It was a mildly negative day for the Canadian preferred share market, with PerpetualDiscounts down 7bp, FixedResets off 3bp and DeemedRetractibles losing 9bp. A surprisingly lengthy Performance Highlights table is notable for the presence of losing Floating Rate issues. Volume was below average.

PerpetualDiscounts now yield 5.58%, equivalent to 7.25% interest at the standard conversion factor of 1.3x. Long Corporates now yield about 4.5% (maybe a little less), so the pre-tax interest-equivalent spread is now about 275bp, the same as that reported on January 29.

Nothing happened today.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 38bp, FixedResets gaining 11bp and DeemedRetractibles up 16bp. The performance highlights table is short, but comprised entirely of winning PerpetualDiscounts. Volume was average.