PrefBlog

Canadian inflation is quiescent:

Statistics Canada reported Wednesday that the consumer price index (CPI) 12-month inflation rate was just 0.1 per cent in August, the second straight month at that low level, amid slumping prices for air travel and at the gas pumps. On a month-over-month basis, the index actually fell 0.1 per cent in August from July.
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However, the central bank’s three measures of “core” inflation – aimed at filtering out transitory price swings in segments of the CPI – look healthier than the pandemic-distorted CPI number, averaging 1.7 per cent, up from 1.6 per cent in July.
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The pandemic’s impacts on the inflation picture were most evident in prices for two key consumer products that typically rise in the summer due to high demand: Airline tickets were down 16 per cent in August compared with a year earlier, while gasoline was down 11 per cent.

Statscan said that excluding gasoline – a major component of the CPI – year-over-year inflation was 0.6 per cent in August, down from 0.7 per cent in July.

And the FOMC issued a statement after its meeting:

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have picked up in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

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 public health, 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; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Loretta J. Mester; and Randal K. Quarles.

Voting against the action were Robert S. Kaplan, who expects that it will be appropriate to maintain the current target range until the Committee is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals as articulated in its new policy strategy statement, but prefers that the Committee retain greater policy rate flexibility beyond that point; and Neel Kashkari, who prefers that the Committee to indicate that it expects to maintain the current target range until core inflation has reached 2 percent on a sustained basis.

So, not much change in Fed monetary policy, as expected; and as usual the most interesting part of the release is the list of dissenters and their rationale.

PerpetualDiscounts now yield 5.31%, equivalent to 6.90% interest at the standard equivalency factor of 1.3x. Long corporates now yield 2.88%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to 400bp from the 395bp reported September 9.

There’s a couple of preferred share lawsuits brewing:

Both client groups allege that throughout 2017 and the first half of 2018, Mr. Liu recommended a new investment strategy that “assured safety” of their principal and provided “reasonable” investment returns.

Shortly after, clients allege they were instead placed in a high-risk strategy that involved short-selling bonds – particularly Canadian government bonds – to purchase long positions in preferred shares, many of which had variable rates or rates that reset based on interest rate movement.

According to court documents, Mr. Liu further advised the clients to begin trading on margin – investing using borrowed money – in order to purchase a larger amount of preferred shares. In some instances, clients allege Mr. Liu engaged in this strategy without informing them or seeking their permission.

None of the clients were told it was “a high-risk, speculative strategy” that was inconsistent with their low-risk investment objectives, the suit alleges.

Shorting governments is similar in investment characteristics to taking a mortgage … see this comment and my answer which refers back to this old comment and my answer. One of the risks I didn’t mention was price risk – the risk that the market values of the two sides of the position could move against you. Unless something else goes wrong, this shouldn’t hurt a long-term investor … but what were the investors in this strategy told?

Eventually, we get down to the same old question: just what the hell does “risk” mean, anyway?

A bit more on the pandemic recovery:

One of the biggest, and perhaps unsurprising, divides is that of income. Lower-paid workers lost more jobs and more hours of work than those with higher pay, partly a reflection of the lockdown of the lower-wage services sector and the ability of higher paid professionals to work from home.

But the magnitude of that divide is revealing. For workers earning around minimum wage, paid $14 an hour or less, 23 per cent either lost their job by August or saw their hours cut by more than half. Workers in the middle of the wage scale, with an hourly rate between $25 and $28, fared better, with just 7 per cent unemployed or losing more than half of their hours.

But for the highest paid workers, the recession had come and gone by August. The top two income categories, those earning between $40 and $48 an hour, and more than $48, did experience a loss of jobs and hours worked in the early days of the pandemic. But they quickly rebounded from those relatively small losses, as the chart below indicates. For those earning $48 an hour or more, 4 per cent more were employed or worked more than in February, before the pandemic shut down the economy.

Click for Big

TXPR closed at 579.36, down 0.85% on the day. Volume today was 2.88-million, very high in the context of the past thirty days.

CPD closed at 11.55, down 0.69% on the day. Volume was 50,155, below the median of the past 30 trading days.

ZPR closed at 9.12, down 0.76% on the day. Volume of 221,471 was near the median of the past 30 trading days.

Five-year Canada yields were down 2bp to 0.36% today.

Bank of Canada Governor Tiff Macklem has had some things to say:

In text prepared for a speech delivered via video-conference Thursday, Mr. Macklem said that the nature of the pandemic, and the close-contact sectors of the economy that remain the most strained, have meant disproportionate job losses for women, young Canadians and low-income workers, despite the strong rebound in employment since broad virus-containment measures were lifted.

While the federal government’s Canadian Emergency Response Benefit has done a good job replacing the lost incomes for these most-affected groups, he said, the risk is that many of these workers will suffer permanent job losses. That, he said, would not only hurt these individuals, but would threaten to weigh down the economy more generally.

CIBC finally got its press release announcing its LRCN issue out the door:

CIBC (TSX: CM) (NYSE: CM) today announced an offering of $750 million of 4.375% Limited Recourse Capital Notes Series 1 (Non-Viability Contingent Capital (NVCC)) (Subordinated Indebtedness) (the “LRCNs”). The LRCNs will be sold through a dealer syndicate led by CIBC Capital Markets.

The LRCNs will bear interest at a rate of 4.375% annually, payable semi-annually, for the initial period ending on, but excluding, October 28, 2025. Thereafter, the interest rate on the LRCNs will reset every five years at a rate equal to the prevailing 5-year Government of Canada Yield plus 4.000%. The LRCNs will mature on October 28, 2080. The expected closing date of the offering is September 16, 2020.

In connection with the issuance of the LRCNs, CIBC will issue Non-Cumulative 5-Year Fixed Rate Reset Class A Preferred Shares Series 53 (Non-Viability Contingent Capital (NVCC)) (the “Series 53 Shares”) to be held by Computershare Trust Company of Canada as trustee of a newly formed trust (the “Limited Recourse Trust”). In case of non-payment of interest on or principal of the LRCNs when due, the recourse of each LRCN holder will be limited to that holder’s proportionate share of the Limited Recourse Trust’s assets, which will consist of Series 53 Shares except in limited circumstances.

CIBC may redeem the LRCNs during the period from September 28 to and including October 28, commencing in 2025 and every five years thereafter with the prior written approval of the Superintendent of Financial Institutions (Canada), in whole or in part on not less than 15 nor more than 60 days’ prior notice.

The net proceeds from this transaction will be used for general banking purposes of CIBC.

The Bank of Canada maintained its policy rates:

The Bank of Canada today maintained its target for the overnight rate at the effective lower bound of ¼ percent. The Bank Rate is correspondingly ½ percent and the deposit rate is ¼ percent. The Bank is also continuing its quantitative easing (QE) program, with large-scale asset purchases of at least $5 billion per week of Government of Canada bonds.

Both the global and Canadian economies are evolving broadly in line with the scenario in the July Monetary Policy Report (MPR), with activity bouncing back as countries lift containment measures. The Bank continues to expect this strong reopening phase to be followed by a protracted and uneven recuperation phase, which will be heavily reliant on policy support. The pace of the recovery remains highly dependent on the path of the COVID-19 pandemic and the evolution of social distancing measures required to contain its spread.

The rebound in the United States has been stronger than expected, while economic performance among emerging markets has been more mixed. Global financial conditions have remained accommodative. Although prices for some commodities have firmed, oil prices remain weak.

In Canada, real GDP fell by 11.5 percent (39 percent annualized) in the second quarter, resulting in a decline of just over 13 percent in the first half of the year, largely in line with the Bank’s July MPR central scenario. All components of aggregate demand weakened, as expected.

As the economy reopens, the bounce-back in activity in the third quarter looks to be faster than anticipated in July. Economic activity has been supported by government programs to replace incomes and subsidize wages. Core funding markets are functioning well, and this has led to a decline in the use of the Bank’s short-term liquidity programs. Monetary policy is working to support household spending and business investment by making borrowing more affordable.

Household spending rebounded sharply over the summer, with stronger-than-expected goods consumption and housing activity largely reflecting pent-up demand. There has also been a large but uneven rebound in employment. Exports are recovering in response to strengthening foreign demand, but are still well below pre-pandemic levels. Business confidence and investment remain subdued. While recent data during the reopening phase is encouraging, the Bank continues to expect the recuperation phase to be slow and choppy as the economy copes with ongoing uncertainty and structural challenges.

CPI inflation is close to zero, with downward pressure from energy prices and travel services, and is expected to remain well below target in the near term. Measures of core inflation are between 1.3 percent and 1.9 percent, reflecting the large degree of economic slack, with the core measure most influenced by services prices showing the weakest growth.

As the economy moves from reopening to recuperation, it will continue to require extraordinary monetary policy support. The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. To reinforce this commitment and keep interest rates low across the yield curve, the Bank is continuing its large-scale asset purchase program at the current pace. This QE program will continue until the recovery is well underway and will be calibrated to provide the monetary policy stimulus needed to support the recovery and achieve the inflation objective.

BMO finally announced its LRCN issue which was discussed here yesterday:

Bank of Montreal (TSX:BMO, NYSE:BMO or the “Bank”) today announced the offering of C$1.25 billion of non-viability contingent capital (“NVCC”) Additional Tier 1 (AT1) Limited Recourse Capital Notes, Series 1 (the “LRCNs”).

The LRCNs will bear interest at a rate of 4.300 per cent annually, payable semi-annually, for the initial period ending November 26, 2025. Thereafter, the interest rate on the LRCNs will reset every five years at a rate equal to the prevailing 5-year Government of Canada Yield plus 3.938 per cent. The LRCNs will mature on November 26, 2080. The expected closing date of the offering is September 16, 2020.

Concurrently with the issuance of the LRCNs, the Bank will issue NVCC Non-Cumulative 5-Year Fixed Rate Reset First Preferred Shares, Series 48 (“Preferred Shares Series 48”) to be held by Computershare Trust Company of Canada as trustee for a newly formed trust (the “Limited Recourse Trust”). In case of non-payment of interest on or principal of the LRCNs when due, the recourse of each LRCN holder will be limited to that holder’s proportionate share of the Limited Recourse Trust’s assets, which will consist of Preferred Shares Series 48 except in limited circumstances.

The Notes may be redeemed at the option of the Bank, with the prior written approval of the Superintendent of Financial Institutions (Canada), in whole or in part, on not less than 15 nor more than 60 days’ prior notice, every five years during the period from October 26 to and including November 26, commencing in 2025.

Net proceeds from this transaction will be used for general banking purposes.

DBRS rated a CIBC LRCN Issue at BBB(high):

DBRS Limited (DBRS Morningstar) assigned a provisional rating of BBB (high) with a Stable trend to Canadian Imperial Bank of Commerce’s (CIBC or the Bank) NVCC Additional Tier 1 (AT1) Limited Recourse Capital Notes Series 1 (the Capital Notes). DBRS Morningstar assigned the rating equal to the Bank’s Intrinsic Assessment of AA (low) less four rating notches, which is consistent with DBRS Morningstar’s standard notching for capital instruments with contingent risks and its ratings for the Bank’s NVCC Preferred Shares. This is one notch below the rating of CIBC’s NVCC Subordinated Debt.

DBRS Morningstar notes that the Capital Notes were granted Tier 1 capital treatment by the Office of the Superintendent of Financial Institutions.

… while S&P rates them at BB+:

S&P Global Ratings today said it assigned its ‘BB+’ issue-level rating to Canadian Imperial Bank of Commerce’s (CIBC; A+/Stable/A-1) Canadian dollar-denominated Additional Tier I Limited Recourse Capital Notes. Under this structure, a trust has been established where the bank is the sole beneficiary. Investors of the notes will have recourse only to the assets held by the trust. At the same time, S&P Global Ratings assigned its ‘BB+’ issue-level rating to the bank’s preferred shares, which will reside in the trust.

In accordance with our criteria for hybrid and other capital instruments, the rating reflects our analysis of the proposed instrument, and our assessment of CIBC ‘a-‘ stand-alone credit profile (SACP).

And the National Bank issue announced September 1 (discussed September 2) has closed and its DBRS rating has finalized.

PerpetualDiscounts now yield 5.33%, equivalent to 6.93% interest at the standard equivalency factor of 1.3x. Long corporates now yield 2.97%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed sharply to 395bp from the 415bp reported September 2.

DBRS has assigned a provisional rating of BBB(high) to a new issue of BMO LRCNs:

DBRS Limited (DBRS Morningstar) assigned a provisional rating of BBB (high) with a Stable trend to Bank of Montreal’s (BMO or the Bank) NVCC Additional Tier 1 (AT1) Limited Recourse Capital Notes Series 1 (the Capital Notes). DBRS Morningstar assigned the rating equal to the Bank’s Intrinsic Assessment of AA (low) less four rating notches, which is consistent with DBRS Morningstar’s standard notching for capital instruments with contingent risks and its ratings for the Bank’s NVCC Preferred Shares. This is one notch below the rating of BMO’s NVCC Subordinated Debt.

DBRS Morningstar notes that the Office of the Superintendent of Financial Institutions granted Tier 1 capital treatment to the Capital Notes.

While S&P has them at BBB-:

S&P Global Ratings today said it assigned its ‘BBB-‘ issue-level rating to Bank of Montreal’s (BMO; A+/Stable/A-1) Canadian dollar-denominated Additional Tier I Structure Limited Recourse Capital Notes. Under this structure, a trust has been established where the bank is the sole beneficiary. Investors of the notes will have recourse only to the assets held by the trust. At the same time, S&P Global Ratings assigned its ‘BBB-‘ issue-level rating to the bank’s preferred shares, which will reside in the trust.

In accordance with our criteria for hybrid and other capital instruments, the rating reflects our analysis of the proposed instrument, and our assessment of BMO’s ‘a’ stand-alone credit profile (SACP).

I have not been able to find a press release announcing the new issue.

But Canadians sure are saving!

But the ones who may end up doing the most good for our economy are the people who added a stunning $127-billion to savings and chequing accounts and term deposits in the first half of the year.
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Investor Economics, which provided the $127-billion figure, says the average amount of money flowing into savings, chequing and GIC accounts averaged $32-billion for the first half of 2017, 2018 and 2019. Those flows were considered to be fairly high until the pandemic scared people into maximizing their savings. “This year’s number is beyond anything we have seen,” Mr. Cardone said.

Another take on this trend comes from Statistics Canada, which tracks our national savings rate and has its eye on the pile of cash accumulated this year. The percentage of after-tax income going into savings has jumped from just 2 per cent to 3 per cent prepandemic to 28.2 per cent from April through June.