PrefBlog

Changes in Fed policy can disproportionate effects:

Federal Reserve Bank of St. Louis President James Bullard said Fed officials will probably be careful about altering the pace of their reductions to bond buying because of a potentially significant impact on markets.

“If we move off our baseline, it’s going to have pretty big repercussions,” Bullard said today in an interview at Bloomberg’s headquarters in New York. “We’d be cautious in using that — it’s going to have to be a situation where you’re pretty sure things are moving off track.”
…
Bullard said the market’s reaction last June to a potential tapering, and the impact of the Fed’s surprise decision in September to maintain the pace of its asset purchases, illustrated that fluctuations in the amount of quantitative easing have “powerful” consequences.

In June, global equity markets lost $3 trillion in the five days after former Fed Chairman Ben S. Bernanke said he might reduce his $85 billion in monthly asset purchases that year and end them by mid-2014. In September, the Fed refrained from tapering, reversing a rise in bond yields and pushing back expectations for a tightening of monetary policy.

“In both of these cases, it showed it really matters a lot,” Bullard said. “Flow-based purchases have been really a powerful tool.”

Market movement was modest for Canadian preferred shares today, with PerpetualDiscounts off 2bp, FixedResets gaining 2bp and DeemedRetractibles up 3bp. The Performance Highlights table is notable for two winning Floating Rate issues. Volume was average.

DBRS commented on the Federal budget:

As anticipated at the time of DBRS’s last review, Canada’s debt burden appears to have reached an inflection point and reducing debt remains a long-term goal of the government. Gross market debt (the measure tracked by DBRS) is projected to fall by 3.1% to $647 billion by March 31, 2014, resulting in a debt-to-GDP ratio of roughly 35%, down from 37% a year earlier. For 2014-15, market debt is expected to remain relatively flat, pointing to a debt-to-GDP ratio of 34%. Total borrowing requirements are forecast at $232 billion in 2014-2015, comprised almost entirely of refinancing needs. The government plans to continue to reduce refinancing risk by replacing maturing treasury bills with longer-term bonds, which should lengthen the average term to maturity of the debt portfolio. In addition, the issuance of 50-year bonds is being contemplated, after having considered 40-year issuance in the previous budget.

… but there were also some cogent words from Konrad Yakabuski of the Globe:

Hence, Mr. Flaherty’s latest, and perhaps last, budget includes another $500-million for Ottawa’s so-called Automotive Innovation Fund, increasing the total to $1-billion. The funds are supposed to be doled out in “repayable contributions to automotive firms that are undertaking strategic large-scale research and development projects focused on new vehicle technologies.”

Don’t be fooled. About as much R&D goes on in Canada’s auto sector as in my kitchen. The AIF is a slush fund used to subsidize the wages of auto workers whose “quality,” according to a 2012 study by the Institute for Research on Public Policy, has “not proven to be an important factor in productivity growth in motor-vehicle assembly over the past 45 years.” Yet, Chrysler reportedly wants up to $700-million from Ottawa and Ontario to assemble a “new generation” of minivans in Windsor.
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According to the IRPP study by economists Leslie Shiell of the University of Ottawa and Robin Somerville of the Centre for Spatial Economics, the rescues cost Canadian taxpayers more than $500,000 for every job saved.

At least there’s a little good news for granny:

Canadian banks are slashing the trading fees charged by their online investing platforms, a sudden about-face after years of ignoring intense competition from independent rivals with cheaper prices.

In the past month, Royal Bank of Canada, Toronto-Dominion Bank and Bank of Montreal each cut their discount brokerage prices. Now any of their clients, regardless of their portfolio size, can buy or sell a stock for $9.95 to $9.99 – a low fee historically reserved for clients with tens of thousands of dollars to invest.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 22bp, FixedResets gaining 6bp and DeemedRetractibles flat. Volatility was minimal. Several issues saw heavy volume, but overall it was a light trading day.

PerpetualDiscounts now yield 5.61%, equivalent to 7.29% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.6%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 270bp, a slight (and perhaps spurious) narrowing from the 275bp reported February 5.

There were no surprises in Yellen’s testimony to Congress:

Federal Reserve Chairman Janet Yellen pledged to maintain her predecessor’s policies by scaling back stimulus in “measured steps” and signaled that the bar is high for a change in that plan.

Only a “notable change in the outlook” for the economy would prompt policy makers to slow the pace of tapering, Yellen said in response to a question today during testimony to the House Financial Services Committee. “It’s important for us to take our time to assess” the significance of recent reports showing payrolls expanded less than projected, she said.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts up 14bp, FixedResets gaining 1bp and DeemedRetractibles winning 18bp. Floating Rate issues were atop the Performance Highlights table. Volume was below average.

Nothing happened today.

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts off 17bp, FixedResets up 10bp and DeemedRetractibles gaining 6bp. The Performance Highlights table is dominated by losing Floating Rate issues. Volume was extremely low.

Golly, what a surprise:

Bank of England officials told currency traders it wasn’t improper to share impending customer orders with counterparts at other firms, a practice at the heart of a widening probe into alleged market manipulation, according to a person who has seen notes turned over to regulators.

A senior trader gave his notes from a private April 2012 meeting of currency dealers and two central bank staff members to the Financial Conduct Authority about six weeks ago because of mounting media coverage of the investigation, said the person, who asked not to be named while probes are under way.

Traders representing some of the world’s biggest banks told officials at the meeting that they shared information about aggregate orders before currency benchmarks were set, three people with knowledge of the discussion said. The officials said there wasn’t a policy on such communications and that banks should make their own rules, according to the people.

I don’t see anything wrong with sharing this information, anyway. To me, it’s all part of the ‘beat bankers up’ hysteria, led by people who act as if they do not understand what it is that institutional desks do – though I’m quite sure this is disingenuous.

It will be interesting to see how Danish mortgages turn out:

Denmark, which in 2010 became the first European nation to pass a law preventing bank bailouts, is now signaling it will take an equally hard line with its mortgage industry. The stance comes from a country whose $550 billion home-loan market — the world’s biggest per capita — is more than 1 1/2 times gross domestic product.

About a third of Danish mortgages are refinanced annually in bond auctions. The government has proposed a law that seeks to address refinancing risks by forcing bond investors to accept 12-month maturity extensions if an auction fails or if interest rates jump more than 5 percentage points.

The Danish mortgage industry’s size and systemic importance this week led Standard & Poor’s to conclude that the government would have to step in should auctions fail. According to the rating company, Denmark’s economy will already be in a crisis warranting some form of intervention if mortgage banks can’t sell their bonds.

From an investor’s perspective, the law brings a lot of wrong-way risk with it (i.e., bad news is correlated). What effect will this have on mortgage rates?

Crumby jobs number in the US:

Payrolls rose less than projected in January and the jobless rate unexpectedly dropped to the lowest level in more than five years, clouding the outlook for the U.S. economy and Federal Reserve.

The 113,000 gain in hiring fell short of the 180,000 advance that was the median forecast of economists surveyed by Bloomberg and followed a 75,000 increase the prior month, Labor Department data showed today in Washington. Unemployment declined to 6.6 percent, the least since October 2008, from 6.7 percent in December.

Contrariwise, the the Canadian number looked OK…

The Canadian economy added 29,400 jobs in January after a month-earlier drop, led by gains in self employment and in the public sector.

The employment gain and a drop in the number of people looking for work sent country’s jobless rate down two notches to 7 per cent in January. The increase comes after employers shed 44,000 positions in December, Statistics Canada said Friday.

… but has been criticized:

“The January Canadian jobs report was good on the headline but weak in the details,” said senior economist Krishen Rangasamy of National Bank Financial.

“The job gains were driven by self-employment and the number of paid jobs grew a meagre 1,000 as gains in government offset further declines in the private sector,” he added, referring to a loss of 14,000 jobs among corporations.

“After the weather wreaked havoc in the prior month, causing a massive 44,000 drop, employment bounced back in affected sectors such as agriculture, construction, and accommodation services.”

He cited the “more reliable” six-month moving average, which shows employment up 15,000 a month since August, with 12,000 of them in the private sector.

That, he added, is “not a bad performance, and consistent with the pick-up in economic growth in the second half of 2013.”

Meanwhile, the Toronto Exchange is losing subscribers:

TMX Group Inc. disclosed on Wednesday that there was an 8 per cent slump “in the average number of professional and equivalent real-time market data subscriptions to Toronto Stock Exchange and TSX Venture Exchange products.” That is by far the steepest drop in the past eight years, and takes the number down to 139,939 from 151,799 in 2012.

Maybe they’ll cut the price to increase subscriptions. Ha-ha.

The hot new topic is flexible exchange rates:

In October 2001, [Fed vice-governor nominee] Stanley Fischer traveled to the London School of Economics to speak on the lessons of his seven years battling turmoil in emerging markets as the International Monetary Fund’s No. 2 official.

Lecturing in the Old Theatre at the university where he studied in the 1960s, Fischer posed a question: What would he have done differently to thwart the Asian financial crisis of 1997-1998? Among his answers: Pushing harder for exchange-rate flexibility.
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Emerging-market stocks and exchange rates have had the worst start to a year since 2010. Even so, said Dominic Wilson, chief markets economist at Goldman Sachs Group Inc. in New York, “currency weakness itself is unlikely to be as sharply disruptive as it was in the late 1990s.”

That’s when Asian nations including South Korea and Thailand spent reserves trying to defend exchange-rate pegs, only to eventually devalue and seek IMF bailouts. As one currency after another became delinked from the U.S. dollar, investors attacked in waves that would culminate in Russia’s debt default and the collapse of Long Term Capital Management.
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Following Fischer’s prescriptions, emerging markets have made other changes to ensure they are less vulnerable than they were in the late 1990s, [former IMF economist Eswar] Prasad said. Their external debt as a share of exports has fallen to 70 percent from about 160 percent in 1998; interest payments on foreign debt have declined to less than 3 percent of exports from 8 percent; and reserves as a percentage of total debt have doubled to more than 100 percent, according to Goldman Sachs.

… and it was also Tiff Macklem’s swan-song:

Since 1995, the target has been to achieve an annual total rate of inflation of 2 per cent – the midpoint of our control range of 1 to 3 per cent – as measured by the consumer price index (CPI). The target is reviewed jointly with the federal government approximately every five years, and was last renewed in 2011.3

To achieve that target, an essential component of our monetary policy framework is a flexible exchange rate. The floating exchange rate is part of the monetary transmission mechanism. It allows the Bank to pursue its own “made-in-Canada” monetary policy that is directed at achieving 2 per cent inflation in Canada and stabilizing our economy. The flexible exchange rate also serves as a kind of shock absorber for the Canadian economy, helping it absorb and adjust to shifts in the global economy. [Conference reference]

In light of the recent depreciation of the Canadian dollar, it bears stressing that the Bank does not have a target for the exchange rate – it has an inflation target. The exchange rate is determined in markets, and we neither promote any specific value for the Canadian dollar, nor thwart its movements.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 2bp, FixedResets down 10bp and DeemedRetractibles gaining 5bp. Floaters bounced back after getting hit in the past few days and dominated the good part of the Performance Highlights table. Volume was below average, but the highlights were exclusively FixedResets – probably due to the new issue.