PrefBlog

TXPR closed at 556.81, up 1.30% on the day. Volume today was 4.74-million, the highest by far of the past 21 trading days, more than 2.5 times that of the second-place day.

CPD closed at 11.04, up 0.64% on the day. Volume was 204,050, the highest by far of the past 21 trading days, about 2.5 times that of the second-place day.

ZPR closed at 9.17, up 1.44% on the day. Volume was 153,210, near the median of the past 21 trading days.

Five-year Canada yields down slightly to 3.12% today.
There was some news today but broader markets were pretty calm:

Equities showed little reaction to economic data in the form of S&P Global’s flash U.S. Composite PMI Output Index, which said U.S. business activity accelerated to an 11-month high in April.
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Economic data in the euro zone also showed the region’s economic recovery unexpectedly gained steam this month, with HCOB’s flash Composite Purchasing Managers’ Index climbing to an 11-month high.
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This week, economic reports have largely pointed to a slowing U.S. economy, although comments from a host of Fed officials have indicated the central bank is still likely to hike by 25 basis points at its May meeting. Markets are currently pricing in an 85.4% chance of a 25 basis point hike at the May policy announcement, according to CME’s FedWatch Tool.
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The yield on 10-year Treasury notes was up 2.3 basis points to 3.568%.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 0.7 basis points at 4.177%.

US Regulators are seeking to broaden the regulatory net:

The multi-regulator Financial Stability Oversight Council released the proposals for public comment just over a month after two regional bank failures sparked the biggest financial system contagion threat since the 2008 financial crisis.

U.S. Treasury Secretary Janet Yellen has raised concerns about non-bank financial institutions, including hedge funds, because of their lack of supervision and the potential for systemic spillovers from firms in distress.

Revisions to guidance on branding such firms as systemically important reverse some aspects of Trump-era changes in 2019 that made such designations more difficult.

Yellen said the new guidance removes some “inappropriate hurdles” to designating non-bank firms, causing the process to take up to six years.

“That is an unrealistic timeline that could prevent the Council from acting to address an emerging risk to financial stability before it’s too late,” she said in remarks to the FSOC meeting she chaired on Friday.

The new guidance drops 2019 requirements that FSOC assess the likelihood of a firm’s financial distress, apply an “activities-based approach” and conduct a cost benefit analysis prior to designation — which National Credit Union Administration Chair Todd described as a “Rube Goldberg-like process.”

These will be replaced with a quantitative and qualitative analysis process under which the council determines whether “material financial distress at the company or the company’s activities could pose a threat to U.S. financial stability,” a Treasury official told reporters, adding that it was not a complete return to 2012 guidance.
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FSOC’s proposed new risk assessment framework aims to enhance the council’s ability to address financial stability risks by reviewing a broad range of asset classes, institutions and activities, according to a Treasury fact sheet.

These include markets for debt, loans, short-term funds equities, digital assets and derivatives; counterparties, payment and clearing systems; and financial entities including banking institutions, broker dealers, asset managers, investment firms, insurers, and mortgage originators and services.

The new framework also specifies vulnerabilities that FSOC and member regulators would consider when evaluating potential stability risks. These include leverage, liquidity risk and maturity mismatches, market interconnections and concentration, operation risks and risk management activities.

Philip R Lane, Member of the Executive Board of the European Central Bank, gave a speech titled Monetary policy tightening and the financing of firms:

As the cost of borrowing increased and banks tightened their requirements for loan approvals, bank lending to firms has slowed. Bank credit as a share of GDP is declining – faster, in fact, than in previous tightening episodes – and markets expect it to decline significantly further this year (Chart 9). There are several factors driving this. First, the current tightening has occurred against the backdrop of adverseaggregate supply shocks. Second, the current reduction in credit supply is stronger than usual, mainlyreflecting heightened risk perceptions on the bank side. Third, the pace and size of the current policy rateincreases is extraordinary. This might imply a higher sensitivity of borrowing to rate increases at thecurrent juncture.
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The second source of external financing for firms is through corporate bond issuance. Net issuance ofdebt securities was basically flat in the first three quarters of 2022 (Chart 10). Tighter monetary policyincreases the cost of market-based debt more quickly than that of bank loans. Market-based finance became relatively more expensive in the initial tightening phase, leading to a shift from debt issuance tobank loans. However, the acceleration of the pass-through to lending rates in the last quarter of 2022 has reduced the relative attractiveness of bank loans, leading to a rebound in corporate bond issuance at theend of 2022. In February of this year, however, net issuance of corporate bonds turned negative again,meaning that firms are now issuing fewer new securities than are maturing. Together with the negative bank lending flows, this contributes to the fast decline in overall debt financing obtained by firms.

I now turn to the cost of corporate bond financing in more detail. The average yield on non-financialcorporate bonds has increased by over 300 basis points since the end of 2021. This increase is similar tothe increase in the cost of bank bond funding. It largely reflects changes in the risk-free rates due to themonetary policy tightening, as spreads – the difference between bond yields and risk-free rates – haveincreased less strongly over the same period (Chart 11). Corporate bond spreads have relativelycontained for both investment grade and high-yield securities during this tightening cycle, despite severalepisodic spikes. These bond spreads currently stand higher than in late 2021, at the beginning of ourmonetary policy normalisation cycle, but have remained roughly at the same level since June 2022.

The increase in spreads in the first half of 2022 points to increasing credit risk concerns in financialmarkets in the context of high macroeconomic uncertainty due to the Russian war against Ukraine and the energy price shock. While spreads showed some volatility since the summer of 2022, these had almost fully returned to 2021 levels before the banking turmoil triggered by the collapse of several mid-sized banks in the United States in March 2023. This episode led to a significant increase in spreads for both safer and riskier bonds, given the prevailing risk-off attitude in markets. However, spreads have already partly reversed these increases in the last few weeks.

“EUR STR” is the Euro Short Term Rate

Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, gave a speech titled Considerations for a Central Bank Digital Currency:

In broad terms, a CBDC is simply a new form of digital liability of a central bank. Because it is issued by a central bank, CBDC is typically thought of as being denominated in the currency of that central bank. One could imagine a digital U.S. dollar, a digital euro, or a digital pound. Beyond this baseline definition though, “what is a CBDC” defies a simple definition. A CBDC built on distributed ledger technology offers a wide range of design and potential use options, as well as potential risks. This variability complicates any discussion of a CBDC simply because we may not be talking about the same thing.

There are two threshold questions that a policymaker needs to ask before any decision to move forward with a CBDC. First, what problem is the policymaker trying to solve, and is a CBDC a potential solution? Second, what features and considerations—including unintended consequences—may a policymaker want to consider in deciding to design and adopt a CBDC? While it would be impossible for me to provide a comprehensive analysis of every issue surrounding CBDC, my goal today is to offer a perspective on these two threshold questions and to conclude with some thoughts about the imperative for future research on CBDCs and the potential future of CBDCs in the United States.
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One issue being examined is whether a CBDC or even broader forms of digital money could make the payment system more efficient. Do these new technologies present opportunities to increase the speed of payments and/or lower costs and frictions within the payment system?
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Another issue that some have raised is whether innovation in money and payments, including a potential U.S. CBDC, could improve financial inclusion. We can all agree that financial inclusion is an important goal when considering improvements in access to financial services, banking, and the payment system. However, in the United States today, over 95 percent of households have a least one member of the household with a banking relationship holding a checking or savings account.6 Of the remaining 4.5 percent who are not banked, nearly three-quarters have no interest in having a bank account, and approximately one-third cited a lack of trust in banks as the reason for not having a bank account. I think it is unlikely that this group would find the government somehow more trustworthy than highly regulated banks. Unbanked households are also less likely to own mobile phones or have access to the internet, which would present barriers to CBDC adoption. While there has been important research on these barriers to adoption, including consumer attitudes and technology requirements, policymakers also need to consider whether there are other means to improve financial inclusion, such as alternatives for making the distribution of government benefits more efficient and effective like promoting financial literacy.
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Another issue is whether the government should use new technologies, including a potential CBDC, to accomplish a variety of policy objectives beyond those directly related to the operating of an efficient and safe financial system. Imagine a scenario in which fiscal spending, in the form of government benefits or payments, could be transferred via CBDC and could include a limited timeframe in which they could be spent before expiring.
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As I previously noted, the introduction of the FedNow Service in the United States and other instant payments platforms globally leads me to ask: What could a CBDC accomplish, if anything, over and above what instant payments platforms alone can accomplish? There are potential use cases in the context of certain interbank transactions in wholesale markets, where some transactions are slow and heavily resource-intensive to clear and settle. Participants in the wholesale financial markets have been considering innovative ways to address these frictions with newer technologies such as distributed ledger technology in which shared information across counterparties could be leveraged to increase speed and reduce back-office costs to reconcile transactions before they settle. In the public debate about CBDC, some have argued that the introduction of a wholesale version of a CBDC could fully unlock the benefits of these newer technologies for these financial market use cases.
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In jurisdictions that have not adopted a CBDC, cash is generally the only central bank money available to the public, and it remains an important and popular means of payment. In some countries, however, digital payments have rapidly supplanted the use of cash. As a result of this trend, many central banks have cited the importance of access to central bank money by the general public as a potential reason to issue a CBDC. For example, Sir Jon Cunliffe of the United Kingdom examined the central role money plays in social and economic stability and concluded that, because private money has been replacing the use of government money over time, at some point “a retail, general purpose digital currency …will be needed in the U.K.”
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Some new private forms of money, often referred to as stablecoins, have emerged mainly to support trading in the crypto-asset ecosystem both as a means of payment and as a store of value. These stablecoins, which purport to have convertibility one-for-one with the dollar, have also been discussed as an alternative to traditional payments. However, stablecoins are less secure, less stable, and less regulated than traditional forms of money. and their structures and frameworks are opaque. To the extent stablecoins become widely used in day-to-day payments, these features could raise significant concerns. Of course, issuing a CBDC has been discussed as a potential alternative to stablecoins that could address some of these shortcomings. It is also possible that Congress could pass legislation to strengthen the regulation and oversight of stablecoins to mitigate some of these issues.

PerpetualDiscounts now yield 6.21%, equivalent to 8.07% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.10% on 2023-4-14 and since then the closing price has changed from 15.00 to 15.10, an increase of 67bp in price, with a Duration of 12.31 (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 4/14 to 5.05%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to about 300bp from the 310bp reported April 12.

There was good news from Canadian inflation:

The Consumer Price Index (CPI) rose 4.3 per cent in March from a year earlier, down from February’s 5.2-per-cent pace, Statistics Canada reported on Tuesday. The slowdown was widely anticipated and matched financial analysts’ predictions.
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Even so, the short-term trend has noticeably cooled off. Expressed at an annualized rate, the three-month change in core inflation (excluding food and energy) was 3.1 per cent in March, down from 3.4 per cent in February. It had peaked at more than 8 per cent in May, 2022.
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Gasoline prices fell nearly 14 per cent over the past year, although they were up 1.2 per cent from February. The price of durable goods rose 1.6 per cent in March on a 12-month basis, slowing from a 3.4-per-cent gain in February.

There have also been slight improvements in the grocery sector: Those prices rose 9.7 per cent over the past year, down from increases of more than 11 per cent in recent months.

On the flip side, mortgage interest costs have surged by 26.4 per cent over the past year, rising from February’s gain of nearly 24 per cent. “This was the largest yearly increase on record as Canadians continued to renew and initiate mortgages at higher interest rates,” Statscan said in its release. Excluding these costs, the CPI rose 3.6 per cent over the past 12 months.

The New York Fed released its Business Leaders Survey:

Activity in the region’s service sector continued to decline modestly, according to firms responding to the Federal Reserve Bank of New York’s April 2023 Business Leaders Survey. The survey’s headline business activity index was little changed at -9.8. The business climate index moved down nine points to -47.7, suggesting the business climate remains much worse than normal. Employment levels were unchanged, representing the first time in two years that employment has not increased. Wage increases moderated noticeably, and input and selling price increases slowed. Looking ahead, firms do not expect conditions to improve over the next six months.

The Bridging Finance story is getting even more interesting:

In a lawsuit filed with the Ontario Superior Court, PricewaterhouseCoopers Inc., the receiver, alleges that “throughout KPMG’s tenure, the Bridging funds materially misrepresented the value of their assets and financial performance. KPMG negligently failed to detect and report on these misstatements.”
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Early last year, PwC estimated that investors will lose $1.3-billion, meaning almost two-thirds of Bridging’s $2.09-billion in assets under management have vanished – one of the largest collapses of an investment manager in Canadian history.

PwC increased that estimate to $1.4-billion in its new lawsuit, and it blames KPMG. ”The Bridging funds are insolvent, and KPMG is liable for the liquidation deficit.” PwC argues the shortfall “would have been avoided if KPMG had conducted the audit competently and in accordance with applicable standards.”

OSFI has released its Annual Risk Outlook for 2023-2024:

Today, the Office of the Superintendent of Financial Institutions (OSFI) released its Annual Risk Outlook (ARO) for 2023-24, a publication that outlines what OSFI sees as the most significant risks facing Canada’s financial system in the upcoming year. The ARO also informs Canadians about the actions OSFI will take in response to these risks.

OSFI’s Annual Risk Outlook for 2023-24 identifies the following key risks:

• Housing Market Downturn Risk
• Liquidity and Funding Risk
• Commercial Real Estate (CRE) Risk
• Transmission Risk from the Non-bank Financial Intermediaries (NBFI) sector
• Corporate and Commercial Credit Risk
• Digital Innovation Risk
• Climate Risk
• Cyber Risk
• Third Party Risk

As the risk environment that Canadian financial institutions operate in changes, OSFI will be reliably open and transparent about the supervisory and regulatory actions it takes in response.

A download is available from the press release page.

And, it’s been a long time, but there can be penalties for deliberate lies:

The judge in the Fox News defamation case said on Tuesday that the case was resolved, abruptly ending a long-running dispute over misinformation in the 2020 election just as a highly anticipated trial was about to begin.

It was a last-minute end to a case that began two years ago and after the disclosure of hundreds of thousands of pages of documents that peeled back the curtain on a media company that has long resisted outside scrutiny. The settlement included a $787.5 million payment from Fox, according to Justin Nelson, a lawyer for Dominion.
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Another election technology company, Smartmatic, filed a $2.7 billion defamation lawsuit against Fox in February 2021, accusing the news network of falsely implicating the company in a bogus narrative about vote rigging in the 2020 election.

“Dominion’s litigation exposed some of the misconduct and damage caused by Fox’s disinformation campaign,” a Smartmatic spokesman said in a statement on Tuesday. “Smartmatic will expose the rest.”

Smartmatic said in its complaint that Fox knowingly aired more than 100 false statements. A day after the suit was filed, Fox Business canceled the show of Lou Dobbs, who was named as a defendant.

There was an interesting post on Financial Wisdom Forum today:

I have in mind to add one or two perpetuals to our portfolio. There are quite a number of choices. I decided to only look at those with P1 credit ratings. Question is how to choose between shares with similar yields? My gut feel is to buy those with lower price and coupon rate. Interested in any comments.

Just for fun, I asked Bing and ChatGPT. Bing never seemed to understand question and kept telling me to sort on credit rating (they were the same!). ChatGPT gave a very comprehensive answer. More or less confirmed my feeling, but did encourage me to go look at the prospectus! (I will, once I have a short list)

This is the up to date list sorted and extracted from my Google Sheets spreadsheet:

He makes a transcript of the ChatGPT interaction in a later post. The machine did a pretty good job!

I must say, I don’t quite understand what is going on at Emerge:

The Toronto-based company, which manages about $118-million in assets, owes a total of $2.53-million across six of its Emerge ARK funds, a group of investment funds that are sub-advised by prominent U.S. investor Cathie Wood.

The total amount owed was first disclosed in 2019, the year Emerge entered the Canadian ETF industry with the launch of the ARK funds. At that time, Emerge owed $486,442 to five ETFs. By the end of 2021, the debt had grown to $1.12-million and was spread across six ETFs. Six months later, by June 30, 2022, the figure had jumped 127 per cent to $2.53-million.

The amounts owed to the funds are money that was “pre-paid” to Emerge for managing the ETFs, according to a note in the funds’ 2019 annual financial statements. Emerge said the money was used to cover operating expenses for the funds, a cost that is typically paid directly by a fund manager when first launching an ETF or mutual fund, in order to keep management fees low for investors.

It is unconventional for an investment manager to use money from inside an investment fund to prepay the fund manager. And it is even more unusual for a manager to carry a balance owing, year-over-year, with accrued interest for operating expenses, as Emerge did.

However, it always does my heart good to learn of trouble at private mortgage companies:

Romspen Investment Corp., one of Canada’s largest private mortgage lenders, is locked in a court battle with its largest borrower after multiple loan defaults allegedly totalling $333-million – unpaid debt that has hindered its ability to fund investor redemptions.

Romspen has asked the Ontario Superior Court to appoint a receiver to take control of three properties that underpin the distressed loans. If approved, the receiver could sell the properties as it sees fit and the proceeds would allow Romspen to recoup some, or all, of the money it is owed. The three affected properties are located in Toronto: Woodbine Mall and Rexdale Mall, in the city’s northwest corner, and 1500 Birchmount Rd., in the city’s northeast corner.

The borrower, Issa El-Hinn, also known as Chris Hinn, is a commercial real estate investor and businessman. He originally defaulted on multiple Romspen loans in 2018, according to court filings, but signed a forbearance agreement with the lender at the time and has since sold six properties, remitting $222-million worth of proceeds to Romspen. The alleged $333-million still owed to Romspen is over and above the $222-million already remitted.

BIS has released a working paper by Claudio Borio, Marc Farag and Fabrizio Zampolli titled Tackling the fiscal policy-financial stability nexus:

Focus
Despite the great strides made by policy reforms following the Great Financial Crisis, the link between fiscal policy and financial stability has attracted less attention. We review the channels through which fiscal and financial risks propagate and mutually reinforce each other and suggest how policy could best tackle these links.

Contribution
We provide a holistic perspective on the fiscal policy-financial stability nexus, also involving monetary and prudential policies. In doing so, we highlight the importance of both protecting the financial system from the sovereign and protecting the sovereign from the financial system.

Findings
We make a number of policy recommendations. First, policymakers need to consider the risks of financial instability when deciding on the size of fiscal buffers and measuring cyclically adjusted fiscal positions. Second, policymakers should continue to make progress towards reducing the favourable treatment of debt versus equity. Finally, in prudential regulation, more could be done to ensure that capital and liquidity requirements better reflect banks’ sovereign exposures. Similarly, it will be important to recognise the role of non-bank financial intermediation in the broader nexus between fiscal policy and financial stability.

Abstract
Tackling the fiscal policy-financial stability nexus is essential to ensure financial and hence macroeconomic stability. In this paper, we review the literature on this topic and suggest how policy could best tackle the link. Doing so involves action on two fronts. First, incorporating financial stability considerations in the design of fiscal policy. This means, in particular, considering the risk of financial crises when assessing fiscal space, recognising the flattering effects of financial booms on fiscal positions and removing or reducing fiscal incentives to private debt accumulation. Second, acknowledging that domestic currency-denominated public debt is not fully risk-free in the design of the prudential regulation of financial institutions. This calls for carefully balanced risk-sensitive capital charges or other measures to limit banks’ sovereign exposures with due regard to the special role of government bonds in the financial system and country-specific characteristics. That said, prudent regulation cannot substitute for fiscal prudence.
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Based on data available at the end of 2018, the approach finds that the fiscal costs linked to possible future crises estimated based on those factors are significant (Graph 4). The expected average fiscal cost is within a range of 5–30% of GDP for advanced economies, with a cross-country average of 20%. The range is similar for emerging markets and less developed economies, although the cross-country average is lower. At the tail of the distribution, the fiscal losses can be substantial. On average across advanced economies, the 95th quantile is approximately 38% of GDP and the 99th quantile exceeds 40%.

Comparing estimates of these fiscal cost with typical estimates of fiscal space for OECD countries (eg Fournier and Fall (2017), Fournier and Bétin (2018)) suggests that the available space should be sufficient to absorb the cost of the crisis for most, but not all, economies in our sample.23 However, these measures of fiscal space are likely to overstate the true amount of space available as they do not consider several sources of uncertainty. In the case of EMEs, considering the calculations of, for instance, Ganiko et al (2016) which account for various sources of uncertainty, fiscal sustainability in a number of countries looks vulnerable in the case of serious financial stress.

Any estimate of a fiscal cost is inevitably subject to a very high degree of uncertainty due to the method used, data availability and the impossibility of incorporating all relevant information. For this reason, the method proposed by Borio, Contreras and Zampolli (2020) is intended to be just one input in what is a much more complex decision. In particular, the method does not take into account the probability of a crisis; only the fiscal cost given a crisis. In addition, the estimates of fiscal cost might not capture the full benefits of the financial reforms following the GFC. These have not just raised bank capital, but also improved its quality and robustness, introduced liquidity standards, implemented macroprudential frameworks and put in place specific arrangements to ensure the orderly resolution of systemically important banks (BIS (2018), Borio, Farag and Tarashev (2020)). Finally, large estimates of the ex ante fiscal cost do not imply that the best solution is necessarily or exclusively of a fiscal nature: prudential regulation is always an essential part of the solution (see below).

The New York Fed has released the March SCE Labor Market Survey:

• The average full-time offer wage received in the past four months increased to $62,088 from $59,834 in November 2022.
• Satisfaction with wage compensation, non-wage benefits, and promotion opportunities at current jobs all declined.
• The average reservation wage—the lowest wage respondents would be willing to accept for a new job—rose to a new series high of $75,811. The increase was driven by respondents above age 45 and those with at least a college degree.
• Conditional on expecting an offer, the average expected annual salary of job offers in the next four months declined to $58,710 from a series high of $61,187 in November 2022.
• For those who are currently employed, the expected likelihood of moving to a new employer and moving to unemployment in the next four months increased to 12.5 percent and 2.5 percent, respectively. This increase was driven by men and respondents without a college degree.

RBC (US) got into some trouble over churning:

RBC Wealth Management-U.S. was censured and ordered to pay almost $1.1 million over allegations it failed to properly supervise brokers’ sales of syndicate preferred stock, according to a Financial Industry Regulatory Authority settlement finalized on Friday.

Between January 2017 and December 2018, nearly 40 RBC brokers engaged in unsuitable short-term trading of syndicate preferred shares that generated unnecessary commissions while often resulting in losses for customers, according to Finra.

RBC’s supervisory system failed to flag the preferred stock sales because it “employed no alerts specific to preferred stock” and more general trading alerts were not tailored to pick up on short-term preferred trades, Finra said. RBC thus violated the regulator’s rules requiring a “reasonably designed” supervisory system, according to the settlement.

OSFI has announced:

The Office of the Superintendent of Financial Institutions (OSFI) and the Global Risk Institute (GRI) today jointly released a report on the ethical, legal, and financial implications of artificial intelligence (AI) on financial services institutions.

The partnership between OSFI and GRI created the Financial Industry Forum on Artificial Intelligence (FIFAI) which gathered Canada’s financial services experts from industry, government and academia on the application of AI. The rapid growth in digitalization and usage of AI across the financial services industry highlighted how current AI risk management frameworks must adapt to remain relevant, forward-looking, and responsive to industry needs. As the use of AI technologies continues to evolve, the need for guiding principles became apparent. The FIFAI discussions then led to the development of the EDGE principles, Explainability, Data, Governance and Ethics:

Explainability enables customers and relevant stakeholders to understand how an AI model arrives at its conclusions.
Data leveraged by AI allows financial institutions to provide targeted and tailored products and services to their customers or stakeholders. It also improves fraud detection, enhances risk analysis and management, boosts operational efficiency, and improves decision making.

Governance ensures a framework is in place that promotes a culture of responsibility and accountability around the use of AI in an organization.

Ethics encourages financial institutions to consider the broader societal impacts of their AI systems.

The full report has been made available.

Bonds were very weak today, as economic news filtered through:

On Thursday, the March producer price index declined by 0.5% month-over-month, while economists had expected the measure to remain flat. That followed Wednesday’s lower-than-expected reading on consumer prices.

Weekly jobless claims, meanwhile, came in at 239,00 for the week that ended April 8, above views for 235,000.

Today’s news was similar:

But a slew of mixed economic data including retail sales, industrial production and consumer sentiment cemented expectations that the Fed will hike rates another 25 basis points at next month’s policy meeting.

“Industrial production and capacity utilization came in stronger than expected,” Bruno added. “Both point to an economy that still has some vibrancy, which gives Fed cover to continue its rate hike policy in May possibly into June.”

Those expectations were underscored by Atlanta Fed President Raphael Bostic, who said another 25 basis point hike could allow the Fed to end its tightening cycle, even as Chicago Fed President Austan Goolsbee called for the central bank to be prudent.

At last glance, financial markets have priced in a 74% likelihood of that happening, according to CME’s FedWatch tool.

BIS published a paper by Biliana Alexandrova Kabadjova, Anton Badev, Saulo Benchimol Bastos, Evangelos Benos, Freddy Cepeda- Lopéz, James Chapman, Martin Diehl, Ioana Duca-Radu, Rodney Garratt, Ronald Heijmans, Anneke Kosse, Antoine Martin, Thomas Nellen, Thomas Nilsson, Jan Paulick, Andrei Pustelnikov, Francisco Rivadeneyra, Mario Rubem do Coutto Bastos and Sara Testi titled Intraday liquidity around the world:

Focus
Banks typically make large payments to each other through large-value payment systems (LVPS). Most LVPS settle payments on a gross basis, which means that banks must fund each payment one by one. While this helps to reduce any credit risk that arises if payments are accumulated and settled on a net basis, it is liquidity-intensive, because banks need to cover any mismatches between incoming and outgoing payments by drawing on their reserves or central bank credit lines. This gives rise to strategic behaviour in how banks manage their intraday liquidity. In this paper, we use a unique cross-country data set to assess intraday liquidity usage by banks around the world.

Contribution
This paper is the first to assemble a data set of payments activity, intraday liquidity usage and institutional characteristics covering LVPS in nine major economies over a long period of time, including the 2007–09 financial crisis. The data let us analyse the effects of the institutional characteristics of an LVPS on intraday liquidity usage, including the effect of so-called liquidity-saving mechanisms (LSM) that many LVPS introduced in the last two decades. As such, this study is valuable for payment system policy makers and operators seeking to update or develop new LVPS and for payment system overseers and bank supervisors that assess intraday liquidity usage in LVPS.

Findings
How banks manage their intraday liquidity depends on the availability and cost of intraday liquidity and LVPS design features. Banks coordinate and recycle their payments less when reserves are higher and the opportunity cost of holding reserves increases. Payment timing, coordination and the resulting level of liquidity efficiency also vary with incentives for early payment submission and specific LSM design features. Such features include the criteria and algorithms used to prioritise/deprioritise or offset payments in a payment system queue. Another key insight is that banks appear to condition their payment behaviour on specific design features, which may weaken some of the features’ intended liquidity-saving effects.

Abstract
We study intraday liquidity usage and its determinants using a unique cross-country data set on large-value payments. We document that the amount of intraday liquidity that financial institutions around the world use each day equals, on average, 15% of their total daily payment values or 2.8% of their countries’ GDP. We then define and calculate system-level measures of liquidity efficiency and inequality in liquidity provision. We show that these measures vary systematically with the degree of payment coordination among payment system participants, the quantity and opportunity cost of central bank reserves and institutional characteristics, such as incentives for early payment submission and liquidity saving mechanism (LSM) design. Our results are consistent with the notion that payment system participants behave strategically and manage intraday liquidity actively. Participants also appear to condition their payment behaviour on specific LSM characteristics, which may weaken some of the LSMs’ intended effects.

The Bank of Canada has released a Staff Working Paper by Alistair Macaulay and Wenting Song titled Narrative-Driven Fluctuations in Sentiment: Evidence Linking Traditional and Social Media:

This paper studies the role of narratives for macroeconomic fluctuations. We micro-found narratives as directed acyclic graphs and show how exposure to different narratives can affect expectations in an otherwise standard macroeconomic model. We capture such competing narratives in news media’s reports on a US yield curve inversion by using techniques in natural language processing. Linking these media narratives to social media data, we show that exposure to a recessionary narrative is associated with a more pessimistic sentiment, while exposure to a nonrecessionary narrative implies no such change in sentiment. In a model with financial frictions, narrative-driven beliefs create a trade-off for quantitative easing: extended periods of quantitative easing make narrative-driven waves of pessimism more frequent, but smaller in magnitude.
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We collect news articles devoted to an economic event and use topic models from natural language processing to extract narratives surrounding the event. We obtain empirical estimates of both the prevailing narratives and each article’s reliance on the narratives. Using these narratives, we provide empirical evidence on the importance of narratives for sentiment fluctuations. To isolate the effects of narratives, we focus on an episode of yield curve in version in 2019–—a popular recession indicator in the US with a nebulous theoretical foundation. Two competing narratives emanate from major news outlets: a “recession” narrative that links the inverted yield curve to an imminent recession, and a “nonrecession” narrative that makes no such connection.

Using these identified narratives, we provide empirical evidence on the importance of narratives for sentiment fluctuations. To isolate the effects of narratives, we focus on an episode of yield curve in version in 2019–—a popular recession indicator in the US with a nebulous theoretical foundation. Two competing narratives emanate from major news outlets: a “recession” narrative that links the inverted yield curve to an imminent recession and a “nonrecession” narrative that makes no such connection.

Our main analysis studies the effects of narratives on the readers who are exposed. The most novel part of our data is the link from narratives in newspaper coverage to rich social network data from Twitter, which allows us to measure the spread of narratives. We use retweeting activities on Twitter to trace whether a Twitter user has engaged with news articles containing certain narratives. We find that after users are exposed to the recessionary narrative, their posted tweets display a more pessimistic sentiment, while exposure to the more neutral, nonrecessionary narrative has no such effect. The drop in sentiment following engagement with a recessionary narrative is persistent, remaining significant 30 days after the retweet. In addition, we apply our empirical framework to study recent inflation narratives. We document the rising prevalence of a narrative that emphasizes the connection of inflation to the real economy. Such a narrative is associated with sentiment declines during high inflation periods.
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Formalizing narratives as directed acyclic graphs, we show that certain groups of narratives will, in fact, have exactly the same effect on expectations. In the context of the inversion of the US yield curve in 2019, the distinguishing feature between a “recession” narrative and a “nonrecession narrative” is, therefore, whether there is a link connecting the inverted yield curve with an upcoming recession.\

Standard tools from topic modeling in natural language processing are well suited to making this distinction. We do this in a large corpus of articles from traditional news media, which is a key source of macroeconomic narratives (Andre et al., 2022b). Linking these articles with rich data on Twitter activity, we find that engaging with an article advancing a “recession” narrative causes a significant and persistent decline in the sentiment of that Twitter user, as embodied in their other activity on the social media site at the time. In contrast, engaging with a “nonrecession” narrative has no such effect on sentiment. This is precisely what would be predicted by models in which viral narratives affect aggregate behavior by shifting expectations. It also suggests a powerful role for the media in influencing aggregate sentiment (highlighted, for example, in Nimark, 2014).

We confirm this aggregate implication in a quantitative model informed by our empirical results. Yield curve inversions cause declines in expected incomes among households holding narratives in which such events are linked to recessions. This implies that extended periods of quantitative easing generate two novel offsetting effects: by flattening the yield curve, they make such narrative-driven fluctuations in sentiment more frequent. However, they
also reduce the prevalence of the “recession” narrative, reducing the magnitude of those fluctuations.

Another BoC Staff Working Paper by Ajit Desai, Zhentong Lu, Hiru Rodrigo, Jacob Sharples, Phoebe Tian and Nellie Zhang was titled From LVTS to Lynx: Quantitative Assessment of Payment System Transition:

Modernizing Canada’s wholesale payments system to Lynx from the Large Value Transfer System (LVTS) brings two key changes: (1) the settlement model shifts from a hybrid system that combined components of both real-time gross settlement (RTGS) and deferred net settlement (DNS) to an RTGS system; (2) the policy regarding queue usage changes from discouraging it to encouraging the adoption of the new liquidity-saving mechanism. We utilize this unique opportunity to quantitatively assess the effects of those changes on the behaviour of participants in the high-value payments system. Our analysis reveals the following: (1) At the system level, most payments are settled in a single stream with the liquidity-savings mechanism in Lynx—facilitating liquidity pooling and leading to higher efficiency than LVTS where payments were distributed in two streams. Moreover, due to Lynx’s liquidity-saving mechanism, many payments arrive earlier than those in LVTS, providing more opportunities for liquidity saving at the cost of slightly increased payment delay. (2) At the participant level, the responses are rather heterogeneous; however, our analysis suggests that liquidity efficiency is improved for several participants, and most experience slightly longer payment delays in Lynx than in LVTS.

François Villeroy de Galhau, Governor of the Bank of France, gave a speech titled How central banks should face instability and fragmentation:

French and European banks benefit from a well-diversified and profitable business base, be it on the deposits or on the credit side, unlike SVB. The increase in interest rates has even started to boost their net interest income, which grew by 12.7 % in 2022 at the twenty main Euro area banks – this should also raise questions over the alleged trade off between price stability and financial stability.

This trade off is a fashionable idea at the moment, but I find it overdone. The goals are not necessarily incompatible, and we have separate instruments to achieve them. For the great majority of European banks, higher interest rates are beneficial. If however action were needed on financial stability, this would be effected chiefly through temporary liquidity instruments, which would not conflict with the increase in interest rates needed to ensure price stability.

Be they energy price pressures or financial spill-overs, the challenges currently faced by central banks require more than individual actions – they call for strong and effective multilateral impetus. I say it here in Washington, during the IMF Spring Meetings.

However, the tide has been turning the other way since the Russian invasion of Ukraine. As geopolitical rifts deepen and trust fades, it is becoming more and more difficult for the G20 to deliver on its mandate, despite remarkable efforts from the Indonesian and now the Indian presidency. We need to find pragmatic ways forward to overcome deadlocks in global action and adapt to the new realities.

Alternatives to multilateral cooperation, such as regionalism, “minilateralism”,ii or “polylateralism”iii can usefully supplement it. Working on smaller scales, or relying on non-state actors could help achieve breakthroughs. Yet they cannot replace it. They lack the global reach of international state cooperation.iv Hence my call for a focused or pragmatic multilateralism. v The principle is simple: rather than pursuing an exaggerated ambition, focus at present multilateral efforts on a few selected global issues, where there are clear common interests. In my view, without pretending to be exhaustive, these global issues on which interests and deliverables could converge encompass the following three “Cs”: climate, crypto-assets, cross-border payments.

The BoC has released a Staff Working Paper by Andrew Glover and Jacob Short titled Demographic Origins of the Decline in Labor’s Share:

Since 1980, the earnings share of older workers has risen in the United States. At the same time, labor’s share of income has declined significantly. We hypothesize that an aging workforce has contributed to the decline in labor’s share of income. We formalize this hypothesis in an onthe-job search model in which employers of older workers may have substantial monopsony power due to the decline in labor market dynamism that accompanies aging. The greater monopsony power manifests as a growing wedge between a worker’s earnings and their marginal product over the life cycle. We estimate the profile of these wedges using crossindustry variation in labor’s share and the age distribution of earnings. We find that a 60-yearold worker receives half the marginal product relative to when they were 20. Together with recent demographic trends, this can account for 59% of the recent decline in labor’s share of earnings in the United States.

And the BoC has released a Staff Working Paper by Stephen Ayerst, Faisal Ibrahim, Gaelan MacKenzie and Swapnika Rachapalli titled Trade and Diffusion of Embodied Technology: An Empirical Analysis:

Using data from patents, citations, inter-sectoral sales and customs, we examine the international diffusion of technology through imports of sectoral knowledge and production inputs. We construct measures of the flow of technology embodied in imports. These measures are weighted by inter-sectoral knowledge and production input-output linkages that capture the relevance of this technology for generating new innovations in different sectors in importing countries. We develop an instrumental variable strategy to identify the causal effects of technology embodied in imports on innovation and diffusion outcomes. For sectors in importing countries, increases in both knowledge- and production-weighted embodied technology imports lead to technology diffusion (measured using backward citations in new patent applications) and increases in the rate of new innovations (measured using the forward citations those patents receive). Effects are substantially larger for knowledge-weighted imports of embodied technology, which also lead to improvements in the average quality of new innovations.