PrefBlog

The New York Fed released its Underlying Inflation Gauge update today:

• The UIG “full data set” measure for May is currently estimated at 3.5%, a 0.5 percentage point decrease from the current estimate of the previous month.
• The “prices-only” measure for May is currently estimated at 3.0%, a 0.4 percentage point decrease from the current estimate of the previous month.
• The twelve-month change in the May CPI was +4.0%, a 0.9 percentage point decrease from the previous month.
  • -For May 2023, trend CPI inflation is estimated to be in the 3.0% to 3.5% range, a lower and slightly narrower range than April, with a 0.4 percentage point decrease on its lower bound and a 0.5 percentage point decrease on its upper bound.

The clown show at Canaccord is taking an intermission:

Executives at Canaccord Genuity Group Inc. have officially scrapped their all-cash $1.1-billion management buyout offer, ending a fight that turned into a hostile takeover from within and resulted in the resignations of multiple board directors.

The investment dealer’s management team announced early Wednesday that they have let their bid to take the company private expire – an outcome they had previously warned could happen after disclosing a vague “ongoing regulatory matter” in one of Canaccord Genuity’s foreign subsidiaries. The team also said they have agreed to a two-year standstill with the board.

The company’s shares closed Wednesday at $8 a piece, dropping to roughly where they were trading when the takeover saga began five months ago.

The FOMC Statement was ‘steady as she goes’:

Recent indicators suggest that economic activity has continued to expand at a modest pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.

The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5 to 5-1/4 percent. Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.

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 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; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.

PerpetualDiscounts now yield 6.68%, equivalent to 8.68% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.16% on 2023-6-9 and since then the closing price has changed from 14.94 to 14.87, a decrease of 47bp in price, with a Duration of 12.28 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 4bp since 6/9 to 5.20%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened sharply to about 350bp from the 325bp reported June 7.

US inflation numbers came out today:

The Consumer Price Index climbed 4 percent in the year through May, slightly less than the 4.1 percent economists had expected and the slowest pace in more than two years. In April, it had climbed 4.9 percent.
…
After stripping out food and fuel prices, the closely watched measure of “core” prices picked up 5.3 percent in May compared with a year earlier. That was slightly higher than the 5.2 percent economists had expected, but lower than 5.5 percent the previous month.

Still, there were lingering signs that inflation has staying power. Fed officials also monitor month-to-month changes in prices, particularly for the core index, to get a sense of the recent trends in inflation. That figure continued to pick up at an unusually quick pace in May.
…
Rents were up 8.7 percent in May from a year earlier, the Labor Department said Tuesday, down slightly from the 8.8 percent increase in April. That might not sound like much, but it’s the first time the year-over-year rate of rent increases has fallen in roughly two years. Over the past three months, rents have risen at their slowest rate since early 2022.

… and I still have no time!

There’s a bit of cheerful news in the fiscal wasteland:

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Long-Term Debt rating of the Province of Ontario (Ontario or the Province) at AA (low) and the Short-Term Debt rating at R-1 (middle). DBRS Morningstar also confirmed the Ontario Electricity Financial Corporation’s (OEFC) Long-Term Obligations rating at AA (low) (based on the Province’s rating). Concurrently, DBRS Morningstar changed the trends on all ratings to Positive from Stable.

The Positive trends reflect DBRS Morningstar’s assessment that Ontario’s fiscal management has improved. Despite economic headwinds, DBRS Morningstar has increased confidence that Ontario’s improved fiscal outlook can be sustained. Stronger-than-anticipated revenue growth has been allowed to flow to the bottom line, while increased program spending is, in part, being offset by a lapse in temporary Coronavirus Disease (COVID-19) supports and other one-time measures.

Ontario’s fiscal outlook continues to improve relative to prior expectations. For 2023–24, Ontario forecasts a budget deficit of $1.3 billion, after incorporating a $1.0 billion reserve. Should the reserve be unnecessary, the budget is essentially balanced. The Province then anticipates small surpluses in 2024–25 and 2025–26. On a DBRS Morningstar-adjusted basis, after including capital expenditures (capex) as incurred rather than as amortized and assuming some modest capex underspending, this equates to DBRS Morningstar-adjusted deficits of 1.0% of GDP or less over the forecast horizon.

Ontario’s debt outlook is expected to show steady improvement, provided the economy remains resilient and fiscal targets are met. On a DBRS Morningstar-adjusted basis, the debt-to-GDP ratio is estimated to fall to roughly 37.0% by 2025–26. Despite ongoing economic uncertainty, DBRS Morningstar believes that Ontario’s track record of budgetary outperformance, combined with the ongoing use of conservative assumptions, could lead to an even faster decline in the debt-to-GDP ratio, which supports the Positive trends.

Economic growth is expected to slow in Ontario as global economic conditions deteriorate in response to central bank efforts to raise policy rates and curb inflation. The Province is forecasting real GDP growth of just 0.2% for 2023, which appears conservative in relation to the current private-sector consensus. Real GDP growth is then forecast to rebound to 1.3% in 2024. Recent financial market instability and deteriorating credit conditions present downside risks to the outlook, while the evolving outlook for inflation and interest rates along with global geopolitical tensions present further uncertainty.

RATING DRIVERS
DBRS Morningstar will look to resolve the Positive trends within the next 12 months. Provided the Province continues to demonstrate prudent fiscal discipline and the economic backdrop remains supportive, DBRS Morningstar could upgrade the ratings by one notch. DBRS Morningstar could restore the Stable trends should there be a deterioration in one or more critical rating factors or a material deterioration in financial risk metrics such that DBRS Morningstar has reduced confidence that the debt-to-GDP ratio will remain on a downward trend.