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It was an interesting day:

Wall Street surged on Thursday as investors weighed the prospect of economic recovery against bellicose remarks from President Donald Trump regarding U.S.-China trade and a whistleblower’s dire warnings about the U.S. response to the coronavirus pandemic. It was a volatile session in both the U.S. and Canada, where the TSX closed flat.
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Unofficially, the Dow Jones Industrial Average rose 1.61% to end at 23,622.19 points, while the S&P 500 gained 1.16%, to 2,852.63.

The Nasdaq Composite climbed 0.92% to 8,944.66.

In Canada, the S&P/TSX Composite Index closed up 6.45 points, or 0.04%, at 14,509.66. It was a mixed session overall, with the energy sector only managing a 0.39% advance despite a 9% rally in the price of crude oil.

TXPR closed at 507.95, down 0.85% on the day. Volume today was 2.00-million, well below the average of the past thirty days.

CPD closed at 10.13, down 1.27% on the day. Volume was 152,641, fourth-highest of the past 30 trading days.

ZPR closed at 7.86, down 1.38% on the day. Volume of 316,241 was high in the context of the past 30 trading days.

Five-year Canada yields were down 1bp to 0.38% today.

Credit availability for retail real-estate speculation is tightening:

Big lenders are tightening their requirements for real estate investors, mortgage brokers say, which could further slow activity in places such as Southern Ontario where investor demand had driven up prices and sales.

Bank of Nova Scotia, for example, is no longer allowing home buyers to use funds from a home equity line of credit for a down payment on a rental property, according to a memo the bank sent to mortgage brokers.
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For example, banks have told brokers they want to see that real estate investors have liquid assets or assets that can easily be turned into cash to cover mortgage payments if renters are unable to make their payments. They are asking to see bank deposits for rent whereas previously the borrower could simply show the rental lease agreement. Banks are also constantly reconfirming a borrower’s income. Before the pandemic, a home buyer’s income would be verified during the mortgage application.

And the BoC is warning of higher corporate funding costs:

The Bank of Canada said that its extraordinary efforts to soothe rattled financial markets are working, but it warned that credit downgrades and rising funding costs remain key threats to the corporate landscape – and the struggling energy sector in particular.

In its annual Financial System Review, the central bank said that 73 per cent of Canadian investment-grade debt is BBB-rated, which is just above speculative grade status. Sweeping credit-rating downgrades could swell the number of junk bonds, forcing companies to refinance at higher rates.

“The risk of credit downgrades is intensifying refinancing risks,” the Bank of Canada warned in its review, adding that the energy sector is particularly vulnerable.

“The energy sector has the most refinancing needs over the next six months ($6-billion) and faces the most potential downgrades. This sector’s ability to secure refinancing will be particularly tested with low oil prices,” the bank said.
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Even though the Bank of Canada said that its liquidity and bond-buying helped to calm financial markets, redemptions from bond funds totalled $14-billion in March, or 4.5 per cent of assets under management, as investors ran for the exits

Although this total was considerably better than the central bank’s model simulation, which implied that redemptions could have hit $31-billion or 9.5 per cent of assets under management, the central bank warned that bond funds could be more vulnerable to another wave of redemptions, which can force funds to dump assets.

Fixed income funds have already used up part of their cash buffers to meet redemptions, and as a result the cash holdings of bond funds have fallen from an average of 4.2 per cent to just 3 per cent at the end of March.

The full text of the report is on the BoC website and has many interesting charts. As far as I can tell, it’s no longer being provided as a PDF any more; a change to which I cannot help but ascribe sinister motivations. But perhaps production of the PDF has merely been delayed …

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Powell reminded us today that monetary policy is one thing and fiscal policy is another thing:

The Federal Reserve chair, Jerome H. Powell, delivered a stark warning on Wednesday that the United States was experiencing an economic hit “without modern precedent,” one that could permanently damage the economy if Congress and the White House did not provide sufficient financial support to prevent a wave of bankruptcies and prolonged joblessness.

Mr. Powell’s blunt diagnosis was the latest indication that the trillions of dollars that policymakers have already funneled into the economy may not be enough to forestall lasting damage from a virus that has already shuttered businesses and thrown more than 20 million people out of work.
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“The recovery may take some time to gather momentum,” Mr. Powell said at a Peterson Institute for International Economics virtual event. “Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.”

The markets hated this heresy:

U.S. and Canadian stocks fell sharply Wednesday after Federal Reserve Chairman Jerome Powell warned of extended economic weakness due to the coronavirus pandemic and called for Congress to agree on additional fiscal support.

Investors appeared to price in a deeper economic downturn than they had previously expected as they worried that Powell’s call for additional stimulus would go unanswered.

Sentiment for Toronto Stock Exchange stocks was further undermined by news that Norway’s US$1-trillion wealth fund blacklisted some Canadian oil companies such as Canadian Natural Resources Ltd and Suncor Energy Inc. The fund operates under ethical guidelines set by that country’s parliament and said it was excluding the companies for producing excessive greenhouse gas emissions.

The benchmark U.S. S&P 500 index fell 1.75 per cent and Canada’s S&P/TSX Composite Index lost 2.54 per cent to a two-week low as the energy sector tumbled 5.75 per cent.

TXPR closed at 512.29, down 2.03% on the day. Volume today was 2.71-million, roughly average in the context of the past thirty days.

CPD closed at 10.26, down 1.44% on the day. Volume was 237,998, the highest of the past 30 trading days, exceeding second-place April 29.

ZPR closed at 7.97, down 2.33% on the day. Volume of 397,224 was third-highest of the past 30 trading days, behind April 23 and April 30.

Five-year Canada yields were up 1bp to 0.39% today.

PerpetualDiscounts now yield 6.06%, equivalent to 7.88% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.31%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened dramatically, to 455bp from the 435bp reported April 29. We are now back above the pre-2020 record of 445bp briefly touched in 2008.

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Well, it was an historic day for jobs numbers:

The nation’s economic distress came into greater focus on Friday, offering a snapshot unseen since the Great Depression.

The Labor Department said the economy shed more than 20.5 million jobs in April, sending the unemployment rate to 14.7 percent as the coronavirus pandemic took a devastating toll.

The monthly data underscores the speed and depth of the labor market’s collapse. In February, the unemployment rate was 3.5 percent, a half-century low.

And the damage has only grown since then: Millions more people have filed claims for unemployment benefits since the monthly data was collected in mid-April.
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Indeed, last month’s job losses alone far exceed the 8.7 million in the last recession, when unemployment peaked at 10 percent in October 2009.

… and …:

Canada lost a record-setting number of jobs in April, and the unemployment rate surged to 13 per cent as companies were forced to slash payroll in response to lockdown measures aimed at curbing the spread of the novel coronavirus.

The number of employed people plunged by nearly two million last month, surpassing the record one million losses in March, Statistics Canada said on Friday. About three million people have lost their jobs over a two-month span, and hours have been significantly reduced for millions of others. The unemployment rate jumped from March’s 7.8 per cent.

Beneath the surface, the details in Friday’s report were even uglier, pointing to widespread disruptions in the labour market.

There was an apparent leak of the Canadian data:

Statistics Canada says it will investigate how sensitive information on the country’s employment numbers was distributed ahead of the official release time – a market-moving leak the federal Finance Minister’s office condemned as “unacceptable.”

The country’s national statistical agency released data on the labour force survey for April at 8:30 a.m. EDT Friday on its website. Just before 8 a.m., however, citing “a person familiar with the matter,” Bloomberg News published a story saying the country lost about two million jobs, with the unemployment rate rising to 13 per cent. The job losses were fewer than economists had expected.

“We are conducting an investigation related to this matter and will take appropriate measures,” said Jacques Fauteux, Statscan’s assistant chief statistician.

Some will be thrilled to learn that:

Financial markets on Thursday began pricing in a negative U.S. interest rate environment for the first time, as investors grappled with the economic consequences of the new coronavirus outbreak.

… and …:

Fed fund futures priced in the possibility of negative rates for the second day, starting as soon as December. That comes even as numerous Federal Reserve officials including Chair Jerome Powell have said that they don’t see an advantage to the policy.

There is nothing to suggest that negative interest rates would be a suitable option for the United States, Richmond Fed President Thomas Barkin said on Thursday.

It didn’t do the Canadian preferred share market much immediate harm!

TXPR closed at 524.70, up 0.52% on the day. Volume today was 1.82-million, and this reasonable (in the long term) number was second-lowest of the past thirty days, ahead of only May 1.

CPD closed at 10.51, up 0.19% on the day. Volume was 81,924, on the low side in the context of the past 30 trading days.

ZPR closed at 8.24, up 0.24% on the day. Volume of 130,303 was well below the average of the past 30 trading days.

Five-year Canada yields were up 2bp to 0.39% today.

And now … on to PrefLetter!