PrefBlog

TXPR closed at 631.54, down 2.00% on the day. Volume today was 1.30-million, below the median of the past 21 trading days.

CPD closed at 12.55, down 1.34% on the day. Volume was 55,120, near the median of the past 21 trading days.

ZPR closed at 10.51 down 1.22% on the day. Volume of 230,470 was above the median of the past 21 trading days.

Five-year Canada yields were rocketted up to 3.54% today. Geez, it seems like only last Friday that I was using 3.36% to prepare the number for PrefLetter and reflecting on what a whopping great big number that was. Wait a minute … it was last Friday. Never mind.

It wasn’t a good day in Canada:

Money markets see about a 75% chance that the Bank of Canada would raise interest rates by three-quarters of a percentage point next month, which would be the biggest hike since August 1998, and expect rates to peak at about 3.9% next year.

Just two weeks ago, investors expected a so-called terminal rate of 3%.
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But the energy sector gave back some recent gains on Monday and fell 3.1%, while the materials group, which includes precious and base metal miners and fertilizer companies, tumbled 4.8% as gold and copper prices fell.

Technology shares, which are particularly sensitive to higher rates, lost 3.6%, with shares of cloud-based commerce platform company Lightspeed Commerce Inc down 14.4%.
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An index of world stocks dropped 3.7%.

As speculation simmers that the Fed could hike interest rates by 75 basis points at its June 14-15 policy meeting this week, markets ratcheted up expectations that U.S. rates would peak at around 4% next year, up an eye-watering 100 basis points from less than two weeks ago.

Investors are trying to predict where benchmark policy rates could peak in the United States and other major economies, as that would help determine equity valuations and how much further share prices could fall.

European shares tumbled 2.4% to their lowest in more than three months, and the euro STOXX volatility index – an equivalent in Europe of the U.S. VIX index, also known as Wall Street’s fear gauge – surged to a one-month high. The U.S. Vix index also leapt to its highest in over a month.

… and in the States:

On Monday, the S&P fell 3.9 percent, closing the day nearly 22 percent below its Jan. 3 peak and firmly in a bear market — a rare and grim marker of investors’ growing concerns for the economy.

A crucial report on Friday showed inflation in the United States was accelerating and creeping into every corner of the economy. Earlier last week, the World Bank issued a dire warning that global growth may be choked, especially as the war in Ukraine drags on.

Together, the data undercut optimism that the Federal Reserve, as it raises interest rates, would be able to keep price gains under control without damaging the American economy and sending ripples throughout the globe.

Monday’s trading ended with reports that the Fed is likely to discuss making its biggest interest-rate increase since 1994 when policymakers meet this week.

Meanwhile, Manulife Bank took a survey about the real economy:

• Over one in five Canadians of Canadians expect rising interest rates to have a significant negative impact on their overall mortgage, debt and financial situation.
• As many as eighteen per cent of homeowners believe they can no longer afford the house they own.
• Indebted Canadians are more likely to report that debt is causing them stress with close to half saying it is negatively impacting their mental health.
• The housing market is out of reach for most – two-thirds do not view home ownership as being affordable, in their local community.
• Nearly half of Canadians said they would struggle to handle unexpected expenses or are reconsidering summer vacation plans due to affordability concerns.

Oddly, I can’t find much about the survey itself on-line, in terms of details, demographics, financial situation of the respondents, etc. The ‘details’ provided at the link provided by Manulife aren’t worth much, so I suspect that this was simply a marketting effort, rather than a serious attempt to try to understand anything.

Now in its eleventh year, the Manulife Bank of Canada poll surveyed 2,001 Canadians in all provinces between ages 20 and 69 with household income of more than $40,000. The survey was conducted online by Ipsos between April 14 and April 20, 2022. National results were weighted by gender, age, region, and education. This survey has a credibility interval of +/- 2.5 per cent 19 times out of 20, of what the results would have been had all Canadian adults between the ages of 20 and 69 been surveyed.

US inflation wasn’t very encouraging:

Prices climbed 8.6 percent in the year through May, a re-acceleration of inflation that makes it increasingly difficult for consumers to afford everyday purchases and poses a major challenge for the Federal Reserve and White House as they try to secure a strong and stable economy.

The Consumer Price Index climbed 1 percent from April — far more quickly than in the previous month — and by 0.6 percent after stripping out food and fuel prices, which can be volatile. That so-called core inflation reading matched April’s reading.
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The price of gasoline rose 4.1 percent in May over the previous month, bringing the increase from a year ago to 48.7 percent.

And globally, even the ECB is taking action:

The European Central Bank ended a long-running stimulus scheme on Thursday and said it would deliver next month its first interest rate hike since 2011, followed by a potentially larger move in September.

With inflation at a record-high 8.1% and still rising, the ECB now fears that price growth is broadening out and could morph into a hard-to-break wage-price spiral, heralding a new era of stubbornly higher prices.

The central bank for the 19 countries that use the euro said it would end quantitative easing on July 1, then raise interest rates by 25 basis points on July 21. It will then hike again on Sept. 8 and go for a bigger move, unless the inflation outlook improves in the meantime.

“We will make sure that inflation returns to our 2% target over the medium term,” ECB President Christine Lagarde told a news conference. “It is not just a step, it is a journey,” she said of the moves signalled on Thursday.

Meanwhile, supply chain fears originating in China are refreshing themselves:

China’s commercial hub of Shanghai will lock down millions of people for mass COVID-19 testing this weekend – just 10 days after lifting its gruelling two-month lockdown – unsettling residents and raising concerns about the business impact.

Racing to stop a wider outbreak after discovering a handful of community cases, including a cluster traced to a popular beauty salon, authorities have ordered PCR testing for all residents in 14 of Shanghai’s 16 districts over the weekend.

Five of the districts said residents would not be allowed to leave their homes while the testing was carried out. A notice issued by Changning district described the stay-home requirement as “closed management” of the community being sampled.

But at least there are jobs in Canada!

The economy added 40,000 jobs in May, driven by a gain in full-time jobs as the labour market continued to tighten and wages pushed higher, Statistics Canada said Friday.

The increase came as the unemployment rate fell to 5.1 per cent, the lowest rate since at least 1976 which is as far back as comparable data goes. The unemployment rate was 5.2 per cent in April.
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Statistics Canada said Friday average hourly wages for all employees rose 3.9 per cent on a year-over-year basis in May, compared with an increase of 3.3 per cent in April.

The jobs report follows a decision by the Bank of Canada last week to raise its key interest rate by half a percentage point to 1.5 per cent in an effort to help bring inflation back under control.

The annual pace of inflation rose to 6.8 per cent in April, the fastest year-over-year rise in 31 years.

The upshot is that GOC-5 is now 3.37%.

To top everything else, we have to batten down the hatches in preparation for bathroom wars:

Speaking on Thursday at The Times’s DealBook D.C. policy forum, Mr. Schultz said the coffee giant might no longer allow people who were not customers to use their stores’ bathrooms. The move would reverse a policy Starbucks instituted in 2018 in the wake of the arrest of two Black men in one of its Philadelphia stores. The two men had been reported to the police by a Starbucks employee after they were denied use of the store’s bathroom and asked to leave. They hadn’t made a purchase.

At the time, Starbucks announced that “any customer is welcome to use Starbucks spaces, including our restrooms, cafes and patios, regardless of whether they make a purchase.”

But on Thursday Mr. Schultz said that a growing mental health problem was making it difficult for his company’s employees to manage its stores under the current policies. Mr. Schultz said that the decision was an “issue of just safety” and that he thought Starbucks might have to put policies in place that limit the number of non-customers who come into its stores.

It’s becoming an issue:

Toronto, like many cities in Canada, has a washroom problem. There are not enough of them. According to the Public Toilet Index, Canada has 18 public toilets per 100,000 people, which is better than the United States (eight) but much worse than Iceland (56). Even if you are lucky enough to find a washroom in a park, you’d better make sure you only want to use it between the hours of 9 a.m. and 9 p.m., from May to October. Otherwise, please turn off your body’s taps.

Washrooms may not figure in most people’s reckoning of a great city, but they should. They allow people who might otherwise feel leery about straying too far from their own bathrooms – the elderly, people with young children, those with inflammatory bowel disease – to have full access to their cities. Years ago, when I was living in London and writing about the lack of toilets there, I interviewed urban planning professor and public washroom advocate Clara Greed, who called this unnecessary constraint “the bladder’s leash.” I’ve loved that phrase ever since.
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It was not always this way. In the early 20th century, Toronto built public palaces for its thrones, a fascinating history that is laid out in the Gotta Go TO report for Toronto’s Public Space Committee. But those public washrooms were closed by the early 1980s, because the city, like many others, insisted that bathrooms be installed in gas stations instead of being a municipal responsibility. This led to the private handoff of bathroom keys we’re stuck with today: If you don’t fill one tank, good luck trying to empty the other.

Well, of course public washrooms are a public good and should be publicly funded. Not in the States, though – that’s a radical left-wing idea!

TXPR closed at 647.35, down 0.87% on the day. Volume today was 2.29-million, well above the median of the past 21 trading days.

CPD closed at 12.80, down 1.46% on the day. Volume was 62,090, slightly above the median of the past 21 trading days.

ZPR closed at 10.73 down 1.02% on the day. Volume of 297,580 was second-highest of the past 21 trading days.

Five-year Canada yields were down to 3.19% today.

The Bank of Canada released its Financial System Review – 2022:

Fragile liquidity in fixed-income markets is an ongoing structural vulnerability. A sudden spike in demand for liquidity from asset managers could exceed the willingness of banks to supply such liquidity, causing large price movements and a potential freeze in some markets. The recent tightening in financial conditions and increased market volatility have reduced liquidity.
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This structural vulnerability has developed in part because the asset management sector—which includes investment funds, pension funds and insurance companies—has grown from $2.3 trillion in assets under management in 2008 to $7.1 trillion in 2021. Over this period, some asset managers have shifted their portfolios to riskier, less-liquid assets. For instance, mutual funds have increased their allocations to corporate bonds from more-liquid government bonds, including those with a lower quality of credit….Market functioning could be severely impaired if these dealers are unwilling to buy these assets if, for example, the riskiness of these assets increases or dealers approach internal risk limits. This happened in March 2020, causing some fixed-income markets to freeze and making it harder for firms to generate cash. (… For a more detailed assessment, see J.-S. Fontaine, C. Garriott, J. Johal, J. Lee, and A. Uthemann, “COVID‑19 Crisis: Lessons Learned for Future Policy Research,” Bank of Canada Staff Discussion Paper No. 2021-2 (February 2021).)

BoC Goveernor Tiff Macklem is talking tough:

Bank of Canada governor Tiff Macklem said the central bank may need to raise its benchmark interest rate to 3 per cent or above to bring inflation under control, and that the bank’s governing council is open to larger rate hikes if needed.

This echoes remarks made by deputy governor Paul Beaudry last week. It opens the door to a 75 basis point interest rate hike at the bank’s next meeting in July.

“We may need to take more interest rate steps to get inflation back to target. Or we may need to move more quickly, we may need to take a larger step,” Mr. Macklem said in a Thursday news conference following the release of the central bank’s annual Financial System Review.

It’s enough to drive a man to drink, and I don’t mean milk:

The cost of milk is rising at its fastest clip in years, propelled by a big annual hike in the benchmark regulated price in Canada’s supply management system.

And now, dairy farmers are asking for an unusual mid-year increase that, if approved, is certain to push retail prices even higher. That may seem like a slam-dunk condemnation of Canada’s tightly regulated dairy market, with its production quotas, government-dictated prices and even a butter-storage surcharge.
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It’s worth noting, however, that U.S. consumers enjoyed relatively low milk prices for more than a half-decade. Regulated Canadian prices were generally trending upward during that time; Canadian consumers did not get the price breaks their U.S. counterparts did.

So, supply management has cost Canadian milk consumers – but those costs arrived long before the current inflationary surge.

TXPR closed at 653.02, down 0.75% on the day. Volume today was 2.67-million, second-highest of the past 21 trading days.

CPD closed at 12.99, down 0.76% on the day. Volume was 94,770, above the median of the past 21 trading days.

ZPR closed at 10.84 down 1.00% on the day. Volume of 392,410 second-highest of the past 21 trading days.

Five-year Canada yields were up to 3.23% today. These bonds are on sale this week!

PerpetualDiscounts now yield 5.70%, equivalent to 7.41% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.94%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed slightly (and perhaps spuriously) to 245bp from the 250bp reported June 1.