PrefBlog

Bonds were very weak today, as economic news filtered through:

On Thursday, the March producer price index declined by 0.5% month-over-month, while economists had expected the measure to remain flat. That followed Wednesday’s lower-than-expected reading on consumer prices.

Weekly jobless claims, meanwhile, came in at 239,00 for the week that ended April 8, above views for 235,000.

Today’s news was similar:

But a slew of mixed economic data including retail sales, industrial production and consumer sentiment cemented expectations that the Fed will hike rates another 25 basis points at next month’s policy meeting.

“Industrial production and capacity utilization came in stronger than expected,” Bruno added. “Both point to an economy that still has some vibrancy, which gives Fed cover to continue its rate hike policy in May possibly into June.”

Those expectations were underscored by Atlanta Fed President Raphael Bostic, who said another 25 basis point hike could allow the Fed to end its tightening cycle, even as Chicago Fed President Austan Goolsbee called for the central bank to be prudent.

At last glance, financial markets have priced in a 74% likelihood of that happening, according to CME’s FedWatch tool.

BIS published a paper by Biliana Alexandrova Kabadjova, Anton Badev, Saulo Benchimol Bastos, Evangelos Benos, Freddy Cepeda- Lopéz, James Chapman, Martin Diehl, Ioana Duca-Radu, Rodney Garratt, Ronald Heijmans, Anneke Kosse, Antoine Martin, Thomas Nellen, Thomas Nilsson, Jan Paulick, Andrei Pustelnikov, Francisco Rivadeneyra, Mario Rubem do Coutto Bastos and Sara Testi titled Intraday liquidity around the world:

Focus
Banks typically make large payments to each other through large-value payment systems (LVPS). Most LVPS settle payments on a gross basis, which means that banks must fund each payment one by one. While this helps to reduce any credit risk that arises if payments are accumulated and settled on a net basis, it is liquidity-intensive, because banks need to cover any mismatches between incoming and outgoing payments by drawing on their reserves or central bank credit lines. This gives rise to strategic behaviour in how banks manage their intraday liquidity. In this paper, we use a unique cross-country data set to assess intraday liquidity usage by banks around the world.

Contribution
This paper is the first to assemble a data set of payments activity, intraday liquidity usage and institutional characteristics covering LVPS in nine major economies over a long period of time, including the 2007–09 financial crisis. The data let us analyse the effects of the institutional characteristics of an LVPS on intraday liquidity usage, including the effect of so-called liquidity-saving mechanisms (LSM) that many LVPS introduced in the last two decades. As such, this study is valuable for payment system policy makers and operators seeking to update or develop new LVPS and for payment system overseers and bank supervisors that assess intraday liquidity usage in LVPS.

Findings
How banks manage their intraday liquidity depends on the availability and cost of intraday liquidity and LVPS design features. Banks coordinate and recycle their payments less when reserves are higher and the opportunity cost of holding reserves increases. Payment timing, coordination and the resulting level of liquidity efficiency also vary with incentives for early payment submission and specific LSM design features. Such features include the criteria and algorithms used to prioritise/deprioritise or offset payments in a payment system queue. Another key insight is that banks appear to condition their payment behaviour on specific design features, which may weaken some of the features’ intended liquidity-saving effects.

Abstract
We study intraday liquidity usage and its determinants using a unique cross-country data set on large-value payments. We document that the amount of intraday liquidity that financial institutions around the world use each day equals, on average, 15% of their total daily payment values or 2.8% of their countries’ GDP. We then define and calculate system-level measures of liquidity efficiency and inequality in liquidity provision. We show that these measures vary systematically with the degree of payment coordination among payment system participants, the quantity and opportunity cost of central bank reserves and institutional characteristics, such as incentives for early payment submission and liquidity saving mechanism (LSM) design. Our results are consistent with the notion that payment system participants behave strategically and manage intraday liquidity actively. Participants also appear to condition their payment behaviour on specific LSM characteristics, which may weaken some of the LSMs’ intended effects.

The Bank of Canada has released a Staff Working Paper by Alistair Macaulay and Wenting Song titled Narrative-Driven Fluctuations in Sentiment: Evidence Linking Traditional and Social Media:

This paper studies the role of narratives for macroeconomic fluctuations. We micro-found narratives as directed acyclic graphs and show how exposure to different narratives can affect expectations in an otherwise standard macroeconomic model. We capture such competing narratives in news media’s reports on a US yield curve inversion by using techniques in natural language processing. Linking these media narratives to social media data, we show that exposure to a recessionary narrative is associated with a more pessimistic sentiment, while exposure to a nonrecessionary narrative implies no such change in sentiment. In a model with financial frictions, narrative-driven beliefs create a trade-off for quantitative easing: extended periods of quantitative easing make narrative-driven waves of pessimism more frequent, but smaller in magnitude.
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We collect news articles devoted to an economic event and use topic models from natural language processing to extract narratives surrounding the event. We obtain empirical estimates of both the prevailing narratives and each article’s reliance on the narratives. Using these narratives, we provide empirical evidence on the importance of narratives for sentiment fluctuations. To isolate the effects of narratives, we focus on an episode of yield curve in version in 2019–—a popular recession indicator in the US with a nebulous theoretical foundation. Two competing narratives emanate from major news outlets: a “recession” narrative that links the inverted yield curve to an imminent recession, and a “nonrecession” narrative that makes no such connection.

Using these identified narratives, we provide empirical evidence on the importance of narratives for sentiment fluctuations. To isolate the effects of narratives, we focus on an episode of yield curve in version in 2019–—a popular recession indicator in the US with a nebulous theoretical foundation. Two competing narratives emanate from major news outlets: a “recession” narrative that links the inverted yield curve to an imminent recession and a “nonrecession” narrative that makes no such connection.

Our main analysis studies the effects of narratives on the readers who are exposed. The most novel part of our data is the link from narratives in newspaper coverage to rich social network data from Twitter, which allows us to measure the spread of narratives. We use retweeting activities on Twitter to trace whether a Twitter user has engaged with news articles containing certain narratives. We find that after users are exposed to the recessionary narrative, their posted tweets display a more pessimistic sentiment, while exposure to the more neutral, nonrecessionary narrative has no such effect. The drop in sentiment following engagement with a recessionary narrative is persistent, remaining significant 30 days after the retweet. In addition, we apply our empirical framework to study recent inflation narratives. We document the rising prevalence of a narrative that emphasizes the connection of inflation to the real economy. Such a narrative is associated with sentiment declines during high inflation periods.
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Formalizing narratives as directed acyclic graphs, we show that certain groups of narratives will, in fact, have exactly the same effect on expectations. In the context of the inversion of the US yield curve in 2019, the distinguishing feature between a “recession” narrative and a “nonrecession narrative” is, therefore, whether there is a link connecting the inverted yield curve with an upcoming recession.\

Standard tools from topic modeling in natural language processing are well suited to making this distinction. We do this in a large corpus of articles from traditional news media, which is a key source of macroeconomic narratives (Andre et al., 2022b). Linking these articles with rich data on Twitter activity, we find that engaging with an article advancing a “recession” narrative causes a significant and persistent decline in the sentiment of that Twitter user, as embodied in their other activity on the social media site at the time. In contrast, engaging with a “nonrecession” narrative has no such effect on sentiment. This is precisely what would be predicted by models in which viral narratives affect aggregate behavior by shifting expectations. It also suggests a powerful role for the media in influencing aggregate sentiment (highlighted, for example, in Nimark, 2014).

We confirm this aggregate implication in a quantitative model informed by our empirical results. Yield curve inversions cause declines in expected incomes among households holding narratives in which such events are linked to recessions. This implies that extended periods of quantitative easing generate two novel offsetting effects: by flattening the yield curve, they make such narrative-driven fluctuations in sentiment more frequent. However, they
also reduce the prevalence of the “recession” narrative, reducing the magnitude of those fluctuations.

Another BoC Staff Working Paper by Ajit Desai, Zhentong Lu, Hiru Rodrigo, Jacob Sharples, Phoebe Tian and Nellie Zhang was titled From LVTS to Lynx: Quantitative Assessment of Payment System Transition:

Modernizing Canada’s wholesale payments system to Lynx from the Large Value Transfer System (LVTS) brings two key changes: (1) the settlement model shifts from a hybrid system that combined components of both real-time gross settlement (RTGS) and deferred net settlement (DNS) to an RTGS system; (2) the policy regarding queue usage changes from discouraging it to encouraging the adoption of the new liquidity-saving mechanism. We utilize this unique opportunity to quantitatively assess the effects of those changes on the behaviour of participants in the high-value payments system. Our analysis reveals the following: (1) At the system level, most payments are settled in a single stream with the liquidity-savings mechanism in Lynx—facilitating liquidity pooling and leading to higher efficiency than LVTS where payments were distributed in two streams. Moreover, due to Lynx’s liquidity-saving mechanism, many payments arrive earlier than those in LVTS, providing more opportunities for liquidity saving at the cost of slightly increased payment delay. (2) At the participant level, the responses are rather heterogeneous; however, our analysis suggests that liquidity efficiency is improved for several participants, and most experience slightly longer payment delays in Lynx than in LVTS.

François Villeroy de Galhau, Governor of the Bank of France, gave a speech titled How central banks should face instability and fragmentation:

French and European banks benefit from a well-diversified and profitable business base, be it on the deposits or on the credit side, unlike SVB. The increase in interest rates has even started to boost their net interest income, which grew by 12.7 % in 2022 at the twenty main Euro area banks – this should also raise questions over the alleged trade off between price stability and financial stability.

This trade off is a fashionable idea at the moment, but I find it overdone. The goals are not necessarily incompatible, and we have separate instruments to achieve them. For the great majority of European banks, higher interest rates are beneficial. If however action were needed on financial stability, this would be effected chiefly through temporary liquidity instruments, which would not conflict with the increase in interest rates needed to ensure price stability.

Be they energy price pressures or financial spill-overs, the challenges currently faced by central banks require more than individual actions – they call for strong and effective multilateral impetus. I say it here in Washington, during the IMF Spring Meetings.

However, the tide has been turning the other way since the Russian invasion of Ukraine. As geopolitical rifts deepen and trust fades, it is becoming more and more difficult for the G20 to deliver on its mandate, despite remarkable efforts from the Indonesian and now the Indian presidency. We need to find pragmatic ways forward to overcome deadlocks in global action and adapt to the new realities.

Alternatives to multilateral cooperation, such as regionalism, “minilateralism”,ii or “polylateralism”iii can usefully supplement it. Working on smaller scales, or relying on non-state actors could help achieve breakthroughs. Yet they cannot replace it. They lack the global reach of international state cooperation.iv Hence my call for a focused or pragmatic multilateralism. v The principle is simple: rather than pursuing an exaggerated ambition, focus at present multilateral efforts on a few selected global issues, where there are clear common interests. In my view, without pretending to be exhaustive, these global issues on which interests and deliverables could converge encompass the following three “Cs”: climate, crypto-assets, cross-border payments.

The BoC has released a Staff Working Paper by Andrew Glover and Jacob Short titled Demographic Origins of the Decline in Labor’s Share:

Since 1980, the earnings share of older workers has risen in the United States. At the same time, labor’s share of income has declined significantly. We hypothesize that an aging workforce has contributed to the decline in labor’s share of income. We formalize this hypothesis in an onthe-job search model in which employers of older workers may have substantial monopsony power due to the decline in labor market dynamism that accompanies aging. The greater monopsony power manifests as a growing wedge between a worker’s earnings and their marginal product over the life cycle. We estimate the profile of these wedges using crossindustry variation in labor’s share and the age distribution of earnings. We find that a 60-yearold worker receives half the marginal product relative to when they were 20. Together with recent demographic trends, this can account for 59% of the recent decline in labor’s share of earnings in the United States.

And the BoC has released a Staff Working Paper by Stephen Ayerst, Faisal Ibrahim, Gaelan MacKenzie and Swapnika Rachapalli titled Trade and Diffusion of Embodied Technology: An Empirical Analysis:

Using data from patents, citations, inter-sectoral sales and customs, we examine the international diffusion of technology through imports of sectoral knowledge and production inputs. We construct measures of the flow of technology embodied in imports. These measures are weighted by inter-sectoral knowledge and production input-output linkages that capture the relevance of this technology for generating new innovations in different sectors in importing countries. We develop an instrumental variable strategy to identify the causal effects of technology embodied in imports on innovation and diffusion outcomes. For sectors in importing countries, increases in both knowledge- and production-weighted embodied technology imports lead to technology diffusion (measured using backward citations in new patent applications) and increases in the rate of new innovations (measured using the forward citations those patents receive). Effects are substantially larger for knowledge-weighted imports of embodied technology, which also lead to improvements in the average quality of new innovations.

The BoC kept the policy rate steady:

The Bank of Canada today held its target for the overnight rate at 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is also continuing its policy of quantitative tightening.

Inflation in many countries is easing in the face of lower energy prices, normalizing global supply chains, and tighter monetary policy. At the same time, labour markets remain tight and measures of core inflation in many advanced economies suggest persistent price pressures, especially for services.

Global economic growth has been stronger than anticipated. Growth in the United States and Europe has surprised on the upside, but is expected to weaken as tighter monetary policy continues to feed through those economies. In the United States, recent stress in the banking sector has tightened credit conditions further. US growth is expected to slow considerably in the coming months, with particular weakness in sectors that are important for Canadian exports. Meanwhile, activity in China’s economy has rebounded, particularly in services. Overall, commodity prices are close to their January levels. The Bank’s April Monetary Policy Report (MPR) projects global growth of 2.6% this year, 2.1% in 2024, and 2.8% in 2025.

In Canada, demand is still exceeding supply and the labour market remains tight. Economic growth in the first quarter looks to be stronger than was projected in January, with a bounce in exports and solid consumption growth. While the Bank’s Business Outlook Survey suggests acute labour shortages are starting to ease, wage growth is still elevated relative to productivity growth. Strong population gains are adding to labour supply and supporting employment growth while also boosting aggregate consumption. Housing market activity remains subdued.

As more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year. Softening foreign demand is expected to restrain exports and business investment. Overall, GDP growth is projected to be weak through the remainder of this year before strengthening gradually next year. This implies the economy will move into excess supply in the second half of this year. The Bank now projects Canada’s economy to grow by 1.4% this year and 1.3% in 2024 before picking up to 2.5% in 2025.

CPI inflation eased to 5.2% in February, and the Bank’s preferred measures of core inflation were just under 5%. The Bank expects CPI inflation to fall quickly to around 3% in the middle of this year and then decline more gradually to the 2% target by the end of 2024. Recent data is reinforcing Governing Council’s confidence that inflation will continue to decline in the next few months. However, getting inflation the rest of the way back to 2% could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize. As it sets monetary policy, Governing Council will be particularly focused on these indicators, and the evolution of core inflation, to gauge the progress of CPI inflation back to target.

In light of its outlook for growth and inflation, Governing Council decided to maintain the policy rate at 4½%. Quantitative tightening continues to complement this restrictive stance. Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Mark Rendell comments in the Globe:

The bank’s updated inflation forecast is little changed from January. It expects the annual rate of inflation to drop to around 3 per cent by the middle of the year, from 5.2 per cent in February. Inflation is then expected to decline gradually to 2 per cent by the end of 2024.

Meanwhile, the bank revised its GDP growth forecast to reflect the resilience of the Canadian economy at the start of the year. It now expects 1.4 per cent GDP growth in 2023, up from 1 per cent forecast in January. It downgraded its 2024 GDP growth forecast to 1.3 per cent from 1.8 per cent.
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The annual rate of consumer price index inflation peaked at a four-decade high of 8.1 per cent last June. It has fallen steadily since then, thanks to lower energy prices and a slowdown in durable goods inflation as global transportation costs have receded.

Service price inflation is proving stickier. This is closely tied to the ongoing tightness in labour markets, which is pushing up wages.
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“The limited tightening in financial conditions due to the recent banking sector stress has been embedded into the base case,” the bank said in its Monetary Policy Report, published Wednesday.

“However, if global banking stresses intensify further, global credit conditions could tighten significantly. If this risk materializes, a more severe global slowdown and sharply lower commodity prices could follow.”

The Office of the Comptroller of the Currency (OCC) has released its Interest Rate Risk Statistics Report:

This report provides statistics for different bank populations. The OCC calculated exposures and risk
limits for the most commonly modeled target accounts in different interest rate stress scenarios. The
OCC also calculated key NMD assumptions for different NMD types. This report provides tables with
statistics on

• • projected changes in 12-month net interest income (NII) in parallel interest rate shock scenarios ranging from –200 basis points to +400 basis points.
• • projected changes in economic value of equity (EVE) in parallel interest rate shock scenarios ranging from –200 basis points to +400 basis points.
• • banks’ policy limits for changes in NII and EVE in parallel interest rate shock scenarios ranging from –200 basis points to +400 basis points.
• • NMD repricing rates and average lives for different account types.

…
The statistics in this report are based on data from 899 banks. The as-of date of the data ranges from March 31, 2021, to December 31, 2022.

Andrew Bailey, Governor of the Bank of England, gave a speech:

Moving on, let me now point to an area where we are at risk of contradicting ourselves. I said that assured value was a key principle of digital money. How does this fit with the idea that we could resolve failed banks and allow deposits (inside money) to take a haircut? One answer is that it depends on the size of the deposit above a certain threshold. The idea behind deposit protection is to set a level below which the assurance of value holds, and above which it does not. Practice, I would suggest, points to the difficulty of this principle.

In seeking to solve too big to fail we have tackled this problem by requesting an additional slice of subordinated liabilities which can explicitly bear losses by being converted into equity in the event of a resolution. I’m not talking here about AT1 securities, but what comes further up the hierarchy – what in Europe we call ‘Eligible Liabilities’. The point is that for large banks we have reinforced the assurance of deposits by requiring a bigger cushion of loss absorbing liabilities.

But smaller banks find it harder to issue marketable long-term debt securities that can count as Eligible Liabilities. I think the answer here lies in the world of deposit insurance.

The US authorities have announced a review of their deposit insurance system. In the UK, the Bank is also considering improvements to our approach to depositor pay-outs for smaller banks which do not have Eligible Liabilities. Our work has thus far focused on the speed of pay-outs. Going further and considering increasing deposit protection limits could have cost implications for the banking sector as a whole. As with all things relating to bank resolution, there is no free lunch.
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Given the increase in bank regulation required in the aftermath of the financial crisis, it is not surprising that the last decade has seen a relative and absolute increase in non-bank finance.

Continuing the theme developed earlier, one important way to look at the bank versus
non-bank world is that in the former there is assurance on the value of money as the main liability of banks, while in the latter the value of investments explicitly and deliberately is not assured.

This is important, but we also have to recognise that the growth of non-bank finance has led to the significant expansion of the landscape of systemic risk since the crisis.

In other words, we have seen that the non-bank world can transmit risk into the bank world, and other parts of the core of the financial system, like central counterparties. Consequently, the relative focus of our financial stability work has shifted to the risks posed by non-bank financial institutions (NBFIs).

Moreover, we have seen a common theme running through incidents that have occurred – the dash for cash in 2020, the Archegos Collapse, the LDI pension fund issue, the nickel metals case – namely that for firms to understand and respond to the full risk implications they would have had to observe and respond to a much larger picture of risks than they did observe, and from that came potentially larger risks.

There is a challenge of breadth and depth in the NBFI world. It is a very large and disparate landscape with many activities and entities. As a result, we have to survey a lot of ground to look out for risks. But in order to understand these risks, we need to get into the detail, hence the depth issue. LDI was a good case study of this. The LDI fund world comprised 85% of the larger so-called segregated funds, and 15% of the smaller pooled funds. Our stress testing work focussed on the 85%, but the problem arose in the 15%.

In some ways the issues around NBFI bear a striking resemblance to ages old challenges in finance, such as leverage, and inter connectivity with other parts of the financial system, creating the scope for spill-overs and systemic consequences. But the heterogeneity of the landscape means that there is no single magic number for leverage as we have with banks, and the inter connectivity can be hard to map, reflecting the recent incidents.

And the New York Fed updated the Underlying Inflation Gauge:

• The UIG “full data set” measure for March is currently estimated at 4.3%, a 0.5 percentage point decrease from the current estimate of the previous month.
• The “prices-only” measure for March is currently estimated at 3.6%, a 0.3 percentage point decrease from the current estimate of the previous month.
• The twelve-month change in the March CPI was +5.0%, a 1.0 percentage point decrease from the previous month.
  • -For March 2023, trend CPI inflation is estimated to be in the 3.6% to 4.3% range, a lower and slightly narrower range than February, with a 0.3 percentage point decrease on its lower bound and a 0.5 percentage point decrease on its upper bound.

PerpetualDiscounts now yield 6.24%, equivalent to 8.11% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.95% on 2023-4-6 and since then the closing price has changed from 15.32 to 15.25, a decrease of 46bp in price, with a Duration of 12.42 (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 3/31 to 4.99%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to about 310bp from the 305bp reported April 5.

Pablo Hernández de Cos, Governor of the Bank of Spain, gave a speech titled Latest monetary policy developments in the euro area:

We also provided more detail on what will guide our assessment of the inflation outlook and, therefore, our monetary policy decisions. In particular, we announced that this assessment will depend on three main factors. First, incoming economic and financial data. Second, the of underlying inflation dynamics. And lastly, the strength of monetary policy transmission.

I will now elaborate on these three factors.

The first is our assessment of the inflation outlook in light of the incoming economic and financial data. This assessment will be informed primarily by our staff macroeconomic projections, on which all data are incorporated in a coherent manner.

In this regard, the staff March forecast pointed to a weakening of activity in 2023, with real euro area GDP expected to grow by 1% in 2023 (compared with 3.6% in 2022). This scenario is somewhat more optimistic than that of the previous projections (published in December), reflecting better than expected recent economic data and the fall in the cost of energy, so that real income losses are lower. Growth is expected to pick up, to 1.6%.
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Headline inflation is expected to remain high for the rest of 2023, albeit on a downward path that will take it to 2.8% in the last quarter of the year. This drop in inflation is mainly explained by the energy component, while underlying inflation is expected to remain elevated. Specifically, the ECB projections point to inflation averaging 5.3% in 2023, before decreasing to 2.9% in 2024 and to 2.1% in 2025. This downward trend would be underpinned by the gradual disappearance of upward pressures from the reopening of the economy, previous supply-side shocks (supply bottlenecks and high energy prices) and euro depreciation, reinforced by increasing pass-through of the recent fall in energy prices and exchange rate appreciation. The fall in inflation in the medium term is also explained by a moderation in domestic demand pressures, owing inter alia to increasing dampening effects of our monetary policy decisions.
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A third element that adds a certain degree of complexity to the inflation outlook relates to fiscal policy. In 2022 and 2023, euro area countries significantly increased their fiscal policy support measures to protect businesses and households from rising energy prices and inflation, bringing the total gross stimulus to close to 2% of euro area GDP in both years. While these measures helped to contain inflation in 2022 and are expected to do so in 2023, the extent of their impact this year is still uncertain. And the withdrawal of these measures will push consumer prices upwards in the coming years, especially in 2024.3 In this regard, it is important to stress that, in the current high inflation setting, an appropriate policy mix requires a fiscal stance that, at the aggregate euro area level, is not at odds with the tightening of our monetary policy. This means that government support measures should be temporary, targeted and tailored to preserving incentives to consume less energy, and they should be gradually rolled back as energy prices fall. Otherwise, we are at risk of driving up medium-term inflationary pressures, which
could call for a stronger monetary policy response.

Jobs, jobs, jobs (US Version)!

The economy in March continued its descent from dizzying heights, with employment growing at a healthy rate but one that nonetheless signifies employers are pulling back as steadily rising interest rates take their toll.

Employers added 236,000 jobs last month, the Labor Department reported on Friday, while the unemployment rate decreased to 3.5 percent, from 3.6 percent in February.

The range of industries beginning to fade has widened, as warehousing, retail, manufacturing, construction and financial activities — those more sensitive to borrowing costs — either lost jobs or stayed flat over the month.
…

• Year-over-year growth in average hourly earnings slowed slightly in March, to 4.2 percent, a sign the Federal Reserve has been looking for as it seeks to quell inflation. The report reflected a labor market that is gently decelerating, a sign of the kind of soft economic landing that the Fed has been shooting for.
• The U.S. labor force added nearly half a million workers in March and the share of Americans considered in their prime working age rose to 80.7 percent, the highest rate since 2001. So much for “nobody wants to work anymore.”
• The report delivered welcome news for President Biden, who has said that the job market needed to cool to tame high inflation. But analysts warn that the outbreak of banking sector turmoil means that the coming months could bring a more rapid deceleration in hiring.
• Bond yields jumped in response to the fresh data, as investors added to bets that interest rates would rise. Stock markets were closed on Friday for the Easter holiday but the bond market opened for a shortened session, during which yields continued to record unusually big swings.

So this year’s tussle is between the economists and the players! Who will win?

The Bank of Canada will keep its key interest rate steady at 4.50 per cent through 2023, according to most economists polled by Reuters, with an even smaller minority now expecting an interest-rate cut by year-end than a poll taken a month ago.

Markets still expect more than 50 basis points of cuts, pricing fuelled by fears last month over stresses in the U.S. and European banking sector, despite Canada’s economy and labour market performing better than expected.
…
In March, the BoC was the first major central bank to stop its aggressive hiking cycle and is on what it calls a conditional pause. So all 33 economists polled March 31-April 6 said it will hold its overnight rate at 4.50 per cent on April 12.

A majority of forecasters, 23 of 31, said the rate would remain unchanged for the rest of 2023. Only seven expected at least one 25-basis-point rate cut by end-year, down from 13 in a survey taken about a month ago.

The IMF has released its Global Financial Stability Report which includes a chapter on Geopolitics and Financial Fragmentation: Implications for Macro-Financial Stability:

Rising geopolitical tensions among major economies have intensified concerns about global economic and financial fragmentation, which could have potentially important implications for global financial stability. Fragmentation induced by geopolitical tensions could affect the cross-border allocation of capital, international payment systems, and asset prices. This could pose macro-financial stability risks by increasing banks’ funding costs, reducing their profitability, and lowering the provision of credit to the private sector. Greater financial fragmentation could also exacerbate capital flow and macro-financial volatility by limiting international risk diversification. Policymakers need to be aware of potential financial stability risks associated with a rise in geopolitical tensions and assess and quantify geopolitical shock transmission to financial institutions. Financial institutions may need to hold adequate capital and liquidity buffers against rising geopolitical risks. The global financial safety net also needs to be buttressed through adequate levels of international reserves held by countries, central bank liquidity swap arrangements, and precautionary credit lines from international financial institutions.

One grudge the private-school boys at the major dealers have against market-making hedge funds is that they pull their capital out of the market when things get hairy. So, it turns out, do private mortgage lenders:

Private mortgage lenders are refusing to renew loans to their existing borrowers, leaving indebted homeowners without a source of funding.

Canadian Mortgages Inc., CMLS Financial, New Haven Mortgage Corp. and individual private lenders are some of those who have turned down requests to renew some of their borrowers’ loans after home prices tanked over this past year.

This is taking place in areas where home prices have dropped significantly. That includes Owen Sound, Bowmanville, Orillia, Timmins, Hamilton and Brampton in Ontario and Prince Rupert in British Columbia.

Private lenders are nervous they won’t be able to recoup their capital if borrowers are unable to make their monthly payments. Private lending is typically determined using a metric called the loan-to-value (LTV) ratio, which measures how much the homeowner owes relative to the appraised value of the property.
…
Currently, many private lenders are only willing to lend up to 75 per cent of the property’s value – also known as an LTV ratio of 75 per cent. When home prices were soaring in 2021, private lenders were willing to offer loans with an LTV ratio of 90 per cent.

Now that home prices have dropped, that has increased the risk to the lender and they are no longer willing to renew loans. When borrowers try to renew their mortgage, the lender is either refusing to renew their loan or telling borrowers that their properties need to be reappraised. And when the property is reappraised, it has a much lower value.

The New York Fed has released its Survey of Consumer Expectations:

Inflation

• Median inflation expectations increased by 0.5 percentage point at the one-year-ahead horizon to 4.7%, marking the first increase in the series since October 2022. Median inflation expectations increased by 0.1 percentage point at the three-year-ahead horizon to 2.8%, but decreased by 0.1 percentage point at the five-year-ahead horizon to 2.5%. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) increased at all three horizons.
• Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—increased at the one-year-ahead horizon, decreased at the three-year-ahead horizon, and remained unchanged at the five-year-ahead horizon.
• Median home price growth expectations increased by 0.4 percentage point to 1.8% in March, remaining far below the 12-month trailing average of 3.0% as well as their pre-pandemic levels. The increase was most pronounced among respondents with no more than a high school education and for those who live in the Midwest Census region.
• Median year-ahead expected price changes declined by 0.1 percentage point for gas (to 4.6%), 1.4 percentage point for food (to 5.9%), 0.1 percentage point for the cost of medical care (to 9.3%), and 0.2 percentage point for the cost of rent (to 9.2%). Median year-ahead expected cost of college education increased by 0.8 percentage point (to 8.9%). All commodity price expectations remain well above their pre-pandemic (March 2020) levels.

Labor Market

• Median one-year-ahead expected earnings growth remained unchanged at 3.0% in March. The series has been moving between a narrow range of 2.8% to 3.0% since September 2021; March marked the fourth consecutive month it remained at 3.0%.
• Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—increased by 1.3 percentage point to 40.7%. The increase was more pronounced for respondents with at least some college education, those between the ages of 40 and 60, and those with annual household incomes between $50k and $100k.
• The mean perceived probability of losing one’s job in the next 12 months decreased by 0.4 percentage point to 11.4%. The mean probability of leaving one’s job voluntarily in the next 12 months also declined by 1.5 percentage point to 19.3%.
• The mean perceived probability of finding a job (if one’s current job was lost) declined by 0.3 percentage point to 57.6% in March. The series has been moving between a narrow range of 57.2% to 58.2% since August 2022.

Something peculiar is happening at Emerge Canada Inc.:

Regulators have slapped the entire family of exchange-traded funds from Emerge Canada Inc. with a trading halt because the company has failed to find an auditor to review its financial statements.

Toronto-based Emerge revealed in mid-December that, nearly six weeks earlier, BDO Canada LLP had resigned as the auditors of the Emerge Funds. At the time, Emerge said it was “working expeditiously to appoint a successor auditor.”

Monday, Emerge acknowledged it has yet to find a new auditor. Lacking one, it failed to file audited annual financial statements for its funds by a March 31 deadline. As a result, the Ontario Securities Commission issued a cease-trade order on Thursday for all the Emerge funds.
…
In its December 14 filing, Emerge said BDO “resigned, on its own initiative” on Nov. 3. Emerge said BDO Canada LLP had no reservations in its reports for the Emerge Funds for the two most recently completed financial years, which were 2020 and 2021. Also, there no were no “reportable events,” which are types of disagreements with auditors or other accounting issues that are defined in securities law.

The next day, in a filing to all provincial securities regulators, BDO said “We agree with the statements made in the Change of Auditor Notice pertaining to our firm.”

And we should all Raise a glass to Bing Newcomb:

Mr. Newcomb, who co-founded the company E*Trade and wrote the computer code that made it work, died on Jan. 29 at his home in Palo Alto, Calif. He was 79.
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In 1980, Mr. Newcomb and William A. Porter were introduced by a mutual friend at a Halloween party in Palo Alto. Mr. Porter, a onetime cowboy turned electronics whiz, had just purchased an Apple II personal computer, the company’s first model aimed at consumers. How, he wondered, could he and other individuals use the new technology to buy and sell stocks from home?

Mr. Newcomb, who had been working as a freelance computer programmer, hiring himself out to banks and other businesses that needed a guide to emerging digital technologies, provided the answers.

In 1982, with $15,000 in capital, the partners started TradePlus, one of the first electronic trading platforms. Its first trade was made on July 11, 1983, by a Michigan dentist.
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By 1994, revenues had risen geometrically, from $850,000 only two years earlier to nearly $11 million. A business journal proclaimed the firm to be the fastest-growing private company in Silicon Valley. It went public as the E*Trade Group in 1996.

Mr. Newcomb, who had been the company’s chief system architect and vice president for research and development, retired with 2.4 million shares of the company in 1997, when the price per share was about $23.

Jobs, jobs, jobs!

The Canadian economy added more jobs than expected in March and the unemployment rate remained near a record low for a fourth straight month, data on Thursday showed, a sign of economic resilience ahead of a central bank policy meeting next week.

The economy gained a net 34,700 jobs, almost entirely in the private sector, and the unemployment rate held steady at 5.0 per cent, Statistics Canada reported.
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Thursday’s jobs figures as well as robust GDP data released last week are likely to complicate the central bank’s plans to avoid further rate moves. The average hourly wage for permanent employees rose 5.2 per cent in March on a year-over-year basis, down from 5.4 per cent in February.

The bank’s next rate decision is due on Wednesday.
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The employment gains last month were driven by the services sector, which added a net 75,500 jobs, mostly in transportation and warehousing as well as support services. Those additions more than offset the decline of 40,900 jobs in the goods sector, which was dragged down by job losses in construction as well as natural resources.

The New York Fed has updated the Global Supply Chain Pressure Index:

• Global supply chain pressures decreased again in March, falling from .28 to 1.06 standard deviations below the index’s historical average.
• There were significant downward contributions by many of the factors, with the largest negative contributions from European Area delivery times, European Area backlogs, and Taiwanese purchases.
• The GSCPI’s recent movements suggest that global supply chain conditions have largely normalized after experiencing temporary setbacks around the turn of the year.

BIS has released a working paper titled Big techs and the credit channel of monetary policy:

Focus
Big techs are lending to small and medium-sized enterprises and vendors on their e-commerce platforms, thus encroaching on financial markets. These changes in financial intermediation could affect monetary policy transmission in at least two ways. First, the business model of big techs depends on using vast amounts of data instead of collateral to solve agency problems between borrowers and lenders. By using machine learning and big data to generate credit scores, big techs can assess a company’s creditworthiness more accurately than traditional credit bureau ratings can. As a result, this may decrease the relevance of the “collateral channel” and, simultaneously, increase the responsiveness of credit to changes in firms’ business conditions. Second, the threat of reputational damage, or of being excluded from the e-commerce platform, serves as an extra-legal but highly effective means of contract enforcement for big tech firms.

Contribution
We view big tech credit through the lens of a model where big techs facilitate matching on the e-commerce platform and extend loans. While bank credit is backed by collateral, big techs reinforce credit repayment by threatening to exclude borrowers from the platform. The most significant difference between big tech credit and bank credit lies in the borrowers’ cost of default. If a firm defaults on bank credit, it loses its collateral, usually real estate. In contrast, if a company defaults on big tech credit, it loses access to the e-commerce platform, thereby jeopardising future profits.

Findings
We find that, first, an improvement in big techs’ matching efficiency on the e-commerce platform raises the value for firms of trading on the platform and accessing big tech credit. Higher future profits ease financing constraints and increase firms’ production, driving aggregate output closer to the efficient level. Second, the response of credit and output to a monetary policy shock depends on how sensitive the firms’ opportunity cost of default on big tech credit (ie the stream of future profits from operating on the big tech platform) is compared with the cost of defaulting on bank credit (ie the value of physical collateral). In our baseline calibration, the introduction of big tech credit mitigates the initial responses of aggregate credit and output to a monetary shock. However, it increases the persistence of the effect of monetary policy on the macroeconomy. Third, big techs’ macroeconomic efficiency gains are limited by the distortionary nature of the fees collected from their users.

Abstract
We document some stylized facts on big tech credit and rationalize them through the lens of a model where big techs facilitate matching on the e-commerce platform and extend loans. The big tech reinforces credit repayment with the threat of exclusion from the platform, while bank credit is secured against collateral. Our model suggests that: (i) a rise in big techs’ matching efficiency increases the value for firms of trading on the platform and the availability of big tech credit; (ii) big tech credit mitigates the initial response of output to a monetary shock, while increasing its persistence; (iii) the efficiency gains generated by big techs are limited by the distortionary fees collected from users.
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Our paper aims to shed some light on the effects of big techs’ entry into finance on the macroeconomy and on monetary policy transmission. We develop a model that can replicate two key empirical facts about big techs. First, using macro data for China and the US, and extending previous evidence based on Chinese micro data, we show that big tech credit does not react to changes in asset prices and local economic conditions, unlike bank credit. Second, we use local projections to shed light on the importance of the physical collateral channel relative to the network collateral channel for the transmission of monetary policy. Key drivers of the strength of these channels is the sensitivity of commercial property prices and e-commerce sales to monetary policy. We show that commercial property prices respond more strongly than e-commerce sales to a monetary policy shock, although less persistently.
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The crucial difference between big tech credit and bank credit relates to borrowers’ opportunity cost of default. Firms that default on bank credit lose their collateral (real estate). In contrast, those that default on big tech credit lose access to big techs’ e-commerce platform, and hence their future profits. An incentive compatible contract thus limits the total amount of credit to the sum of physical and network collateral. Nominal wages are sticky, and monetary policy affects the real economy. When search frictions in the goods markets and credit frictions in the financial markets are set to zero, the model collapses to the basic New Keynesian model with sticky wages.3

We obtain three sets of results. First, an expansion in big techs, as captured by an increase in matching efficiency on the commerce platform, raises the value for firms of trading in the platform and the availability of big tech credit. This in turn relaxes financing constraints and increases firms’ production, driving aggregate output closer to the efficient level. Second, the reaction of credit and output to a monetary policy shock crucially depends on the sensitivity of firms’ opportunity cost of default on big tech credit (the stream of future profits from operating on the big tech platform) compared to that of defaulting on bank credit (the value of physical collateral). In our baseline calibration, the introduction of big tech credit mitigates the initial responses of aggregate credit and output to a monetary shock, but increases the persistence of the effect of monetary policy on the macroeconomy. Third, big techs’ macroeconomic efficiency gains are limited by the distortionary nature of the fees collected from their users.

AIMCo beat its benchmarks:

Alberta Investment Management Corp. reported a 3.4-per-cent loss last year as falling values for publicly traded stocks and bonds outweighed strong returns from investments in infrastructure and renewable resources.
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AIMCo’s 2022 returns were still 1.8-per-cent higher than its internal benchmark in spite of the loss, demonstrating how difficult it was to be an investor last year as high inflation and rapid interest-rate increases shook global markets. Like many of its peers, AIMCo suffered from a rare simultaneous dive in public equities and fixed income markets, which make up a large share of the plan’s assets.

Aimia is facing a shareholder revolt:

Mithaq Capital SPC, a family office based in Saudi Arabia that owns nearly 20 per cent of Toronto-based Aimia, announced plans Thursday to vote against the re-election of the company’s entire board of directors.
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In a statement, Mithaq said it has lost confidence in the board and the management team, and that “it would be in the best interests of Aimia to reconstitute the board.”

The reasons underlying Mithaq’s opposition “include concerns previously raised with Aimia regarding capital allocation decisions relating to acquisitions,” the statement said.

Mithaq is not planning to nominate any replacement candidates and declined to comment further on what exactly motivated it, though Aimia has recently made its two largest acquisitions since pivoting away from loyalty programs.

In January, Aimia bought Tufropes Pvt. Ltd. for $253-million. India-based Tufropes makes synthetic fibre ropes and netting for the aquaculture and maritime industries. Then last month, the company paid $332-million for Italian chemical company Giovanni Bozzetto SpA.
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Mithaq has amassed a significant portion of its stake in Aimia very recently. While the family office holds 19.9 per cent of Aimia’s outstanding common shares, that figure was only 12.6 per cent as of Feb 1.

Over the course of its transformation, Aimia’s work force has shrunk dramatically to about 20 people as of late 2020 from roughly 450. In its most recent quarter, Aimia reported a net loss of $23.3-million, which was roughly 60-per-cent wider than the $14.6-million loss the company reported during the same period a year earlier.

… and the company is fighting back:

Hours later, the company fired back, alleging what Mithaq really wanted was for Aimia to support its own investments.

“Many of the investments [Mithaq] recommended would have resulted in substantial losses to Aimia (including one target that subsequently filed for bankruptcy),” the company said in a statement released early Thursday afternoon.

Aimia also said Mithaq had “previously lobbied the company to invest in public securities, including some in which they hold an interest.” An unnamed former insider of an Amia affiliate – who the company claimed was recently terminated for allegedly misusing confidential information – lobbied alongside Mithaq for those investments, the statement said.