PrefBlog

TXPR closed at 589.22, down 1.04% on the day. Volume today was 1.51-million, highest of the past 21 trading days.

CPD closed at 11.79, down 0.51% on the day. Volume was 58,350, third-highest of the past 21 trading days.

ZPR closed at 9.915, down 0.35% on the day. Volume of 153,080 was fourth-highest of the past 21 trading days.

Five-year Canada yields were up to 3.36% today.

Equities got hurt today:

Major U.S. and Canadian stock indexes ended lower on Thursday, falling for a third straight session as investors reacted to the Federal Reserve’s latest aggressive move to rein in inflation by selling growth stocks, including technology companies. Benchmark U.S. Treasury yields hit an 11-year high and a key part of the U.S. yield curve was the most inverted in at least two decades, further raising concerns of a looming recession.

The Fed lifted rates by an expected 75 basis points on Wednesday and signaled a longer trajectory for higher policy rates than markets had priced in. The U.S. central bank’s projections for economic growth released on Wednesday were also eye-catching, with growth of just 0.2% this year, rising to 1.2% for 2023.
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The Dow Jones Industrial Average fell 107.1 points, or 0.35%, to 30,076.68, the S&P 500 lost 31.94 points, or 0.84%, to 3,757.99 and the Nasdaq Composite dropped 153.39 points, or 1.37%, to 11,066.81.
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In bond markets, the yield curve between U.S. two-year and 10-year notes inverted as far as minus 58 basis points, the most inverted level since at least 2000, indicating rising concerns about an impending recession. It was last at minus 41 basis points.

Two-year yields reached 4.163%, the highest since October 2007. Five-year yields hit 3.942%, the highest since November 2007 and benchmark 10-year yields jumped to 3.716%, the highest since February 2011.

Canadian government bond yields were higher across a steeper curve, tracking the move in U.S. Treasuries.

The 10-year Canadian bond yield rose 7.7 basis points to 3.119% but fell 10.5 basis points further below the equivalent U.S. rate to a gap of 57.5 basis points.

The Canadian dollar was trading 0.2% lower at 1.3490 to the greenback, or 74.13 U.S. cents, after touching its weakest intraday level since July 2020.

The Fed hiked 75bp to 3.00%:

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is 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 raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. 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 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; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.

Their projection for the Fed Funds Rate in 2023 increased to 4.6%, up sharply from the June projection of 3.8%. However the post-2025 ‘longer-run’ projection remains at 2.5%. It should be noted that the projections for 2024 from the FOMC participants are all over the map, from a low of 2.625% to a high of 4.625%.

Powell was asked about housing prices:

Federal Reserve Chair Jerome Powell on Wednesday said the U.S. housing market will probably go through a “correction” after a period of “red hot” price increases that have put home ownership out of reach for many Americans.

“There was a big imbalance … housing prices were going up at an unsustainably fast level,” Powell said at a news conference following the Fed’s decision to raise its policy rate by another 75 basis points. “For the longer term what we need is supply and demand to get better aligned so housing prices go up at a reasonable level, at a reasonable pace and people can afford houses again. We probably in the housing market have to go through a correction to get back to that place.”

In the end, equities were down and bonds were flat:

After seesawing in the afternoon, the S&P 500 closed 1.7 percent lower for the day, as investors reacted to policymakers forecasts for higher interest rates in the future.
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However, bond traders took a more muted view of the Fed’s guidance. The two-year Treasury yield, sensitive to changes in Fed policy, only inched higher, to 4.02 percent. Futures prices that show where investors expect rates to be at the end of the year barely budged, despite a marked increase to the Fed’s own rate forecasts.

PerpetualDiscounts now yield 6.32%, equivalent to 8.22% interest at the standard equivalency factor of 1.3x. Long corporates now yield 5.06%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained at the 315bp reported September 14.

Today’s Canada inflation release didn’t cause any problems:

Canada’s annual inflation rate slowed to 7.0 per cent in August largely driven by the price of gasoline falling, but the cost of groceries continues to climb.

In its latest monthly consumer price index (CPI) report, Statistics Canada said grocery prices rose at the fastest rate since 1981, with prices up 10.8 per cent compared with a year ago.
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Statistics Canada said the 0.3 per cent decline in the CPI from July to August is the largest monthly decline since the early months of the pandemic.

The federal agency said transportation and shelter prices drove the deceleration in consumer prices.

Gas prices were up 22.1 per cent in August compared with a year ago, but down 18.8 per cent since June.

The Bank of Canada will be paying close attention to its preferred measures of core inflation, which tend to be less volatile and help the bank see through temporary changes in the consumer price index. Those measures all point to a slowdown in annual inflation in August as well.

The FDIC published a paper by Matthew D. Peppe and Haluk Unal titled Do Municipalities Pay More to Issue Unrated Bonds? :

Approximately 34% of local municipal bond issues were issued without ratings during 1998 to 2017. We study the circumstances that affect the decision to obtain a rating and whether unrated bonds, controlling for observable risk factors, are more expensive to issue than rated bonds. Results show that issuers are less likely to obtain ratings for smaller issues, negotiated offerings, and bonds with high proxies for risk such as coming from areas with low personal income. We estimate the effect of forgoing a rating on offering yields using a doubly-robust Inverse Probability Weighted Regression Adjustment that controls for confounding that arises from risk and other characteristics affecting both the choice to obtain a rating and the yield. We separately analyze revenue bonds, general obligation bonds, bank qualified, and not bank qualified bonds and find ratings decrease offering yields by 47, 49, 60, and 42 basis points respectively. The higher offering yields cost municipalities $22.5B in higher interest expense during our sample period. We find the choice of issuers to forgo ratings despite the substantial potential savings appears to be influenced by the dual underwriters who also work as advisors to the issuer. These underwriters benefit from not obtaining a rating because it lowers the price investors are willing to pay from the bond, but also lowers the price the underwriter must pay the issuer and thus increases the underwriter’s profit.

Gotta love that last line in the abstract!

Enbridge has issued some sub-debt – USD, 50-year term – I haven’t investigated further details.

TXPR closed at 598.14, down 0.68% on the day. Volume today was 1.33-million, second-highest of the past 21 trading days.

CPD closed at 11.935, down 0.95% on the day. Volume was 51,800, fourth-highest of the past 21 trading days.

ZPR closed at 10.02, down 0.89% on the day. Volume of 198,720 was second-highest of the past 21 trading days.

Five-year Canada yields were up to 3.36% today.

PerpetualDiscounts now yield 6.26%, equivalent to 8.14% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.99%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained at the 315bp reported September 7.

The US inflation number came in higher than expected:

Prices rose 8.3 percent from a year earlier, a rapid pace of increase for consumers and not as much of a slowdown as economists had expected, even as gas prices dropped and weighed on the overall numbers. At the same time, so-called core inflation re-accelerated notably in August. That measure strips out volatile food and fuel prices to give a better sense of underlying trends, and it tracks products like clothing and furniture along with an array of services.

The core gauge climbed by 6.3 percent in the year through August, compared with 5.9 percent in July. That pickup came partly because the August price gains are being measured against a relatively weak reading from the same month in 2021. When inflation is measured against a lower year-ago number, or “base,” it tends to appear faster.

But the report’s details also offered signs that underlying inflation pressures remain significant. While gas prices and used car and truck costs have begun to dip, other prices are rising fast enough to fully offset those declines: Prices climbed by 0.1 percent on a headline basis over the course of the past month as prices for meals at restaurants, rents and new vehicles picked up.

The market was flabbergasted:

The Dow Jones Industrial Average fell 1276.37 points, or 3.9 per cent, marking its worst one-day sell-off in more than two years. Canada’s S&P/TSX Composite Index fell nearly 1.8 per cent.

Bond yields jumped and gold prices fell, battering typical investing havens when stocks turn volatile. And the Canadian dollar slipped below 76 US cents, touching its lowest level since November 2020.
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U.S. financials fell 3.8 per cent and industrials fell 3.8 per cent. The tech-heavy Nasdaq Composite Index fell 5.2 per cent, with Apple Inc. down 5.9 per cent.

In Canada, Toronto-Dominion Bank fell 2.3 per cent and Shopify Inc. fell 5.8 per cent.

The yield on the 10-year U.S. Treasury bond rose above 3.4 per cent, or close to its recent multiyear high of 3.48 per in mid-June (bond yields and bond prices move in opposite directions), which signals market expectations that the Fed’s battle with inflation isn’t over.

The New York Fed released the August 2022 Survey of Consumer Expectations:

The main findings from the August 2022 Survey are:

Inflation

Median one- and three-year-ahead inflation expectations continued their steep declines in August: the one-year measure fell to 5.7% from 6.2% in July, while the three-year measure fell to 2.8% from 3.2%. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) increased to a new series high at the one-year horizon but decreased at the three-year horizon.

Median five-year-ahead inflation expectations, which have been elicited in the monthly SCE core survey on an ad-hoc basis since the beginning of this year and were first published in July 2022, also declined to 2.0% from 2.3%. Disagreement across respondents in their five-year-ahead inflation expectations also declined in August.

Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—decreased at the short-term horizon and was unchanged at the medium-term horizon.

Median home price expectations declined sharply by 1.4 percentage points to 2.1%, its lowest reading since July 2020, and falling below pre-pandemic levels. The decline was broad based across demographic groups and geographic regions. Home price expectations have now fallen by nearly two-thirds since the April 2022 reading of 6.0%.

Expectations about year-ahead price changes fell by 1.4 percentage points for gas (to 0.1%), 0.8 percentage point for food (to 5.8%), and 0.3 percentage point for rent (to 9.6%). The median expected change in the cost of medical care rose by 0.1 percentage point (to 9.3%) and was unchanged for college education at 8.4%.

The hit to Canadian wealth has been quantified:

Canadians saw their collective net worth fall by the most on record in the second quarter as financial markets and residential real estate hit a rough patch, ending a streak of massive wealth generation during the previous two years of the pandemic.

Household net worth fell by $990-billion in the second quarter to $15.2-trillion, a decline of 6.1 per cent from the first quarter, Statistics Canada said Monday in a report. Despite the drop, household wealth was still nearly $3-trillion higher than before the pandemic.
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At the same time, Canadians packed on loads of debt, a perennial concern for the domestic economy. That remained the case in the second quarter as households added a near record $56.3-billion in debt, taking total borrowing to $2.8-billion [sic – I’m sure they mean ‘trillion’], mostly in mortgages.

Canadians now owe $1.82 for every dollar of disposable income, just shy of a record.
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The credit tightening cycle hit Canadian real estate quickly. The value of residential real estate fell by 5 per cent in the second quarter, according to Monday’s report. Even so, it remained more than $2.3-trillion (or 41 per cent) higher than at the end of 2019. Home prices have continued to decline since the end of Statscan’s reporting period, further eroding wealth.

Similarly, the value of household financial assets dropped by 5.7 per cent in the second quarter as both equities and bonds tumbled. Major stock indices in Canada and the U.S. fell by double-digit percentages between April and June, while bond prices – which move inversely to yields – also fell. “The second quarter marked a less common occurrence when both bond and equity markets declined substantially,” Statscan said in its report.

The Junior Republicans have enthusiastically embraced the role of ‘party of stupid’:

And if this Conservative leadership race was a fight for the soul of the party, as former Progressive Conservative activist and senator Marjory LeBreton recently posited, well, the results are in. Reform is back, baby. Moderate conservatism is dead, and the harder-right, angrier, rougher edge will live the life everlasting. In the end, it wasn’t even close.

Self-described centrists in the party have certainly been angered by Mr. Poilievre’s online rhetoric and pro-crypto appeals, not to mention his sympathy for the anti-mandate freedom convoy. Some of them were so perturbed by the prospect of Mr. Poilievre’s ascension that they organized under the title of Centre Ice Conservatives, a dust cloud of respectability meant to form itself into the nucleus of a new party.
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The centrists may yet prove to be Cassandras. Mr. Poilievre’s campaign may indeed foreshadow a far darker track: a destructive populism that plays on World Economic Forum conspiracy theories and undermines trust in long-standing institutions like the Bank of Canada in favour of a politics rooted in narcissism and grievance.

I’m not one of those ‘self-described centrists’, by the way, having quit the party (and my position on the local riding executive) the day after Harper’s ascension. But I would happily join a fiscally responsible party that embraced pragmatism over ideology … where’s Bill Davis when we need him?. Until we get one, however, I’ll just have to learn to endure being sneezed on in the name of freedom, bitcoin advertisements and a steady diet of resentment and claims of victimhood. Can’t wait.