Month: July 2022

TXPR closed at 590.71, down 1.31% on the day. Volume today was 2.04-million, fourth-highest of the past 21 trading days.

CPD closed at 11.83, down 0.59% on the day and hitting a new 52-week low. Volume was 145,260, third-highest of the past 21 trading days. The 52-week high for CPD, by the way, is 14.15 – so should it hit 11.32 we can solemnly discuss how the preferred share market has crashed. Maybe we’ll get on TV!

ZPR closed at 9.85 down 1.10% on the day. Volume of 358,370 was highest of the past 21 trading days.

Five-year Canada yields were down to 2.99% today. Maybe all this inflation nonsense is over now! Or maybe:

Bond yields saw some of their biggest declines of the year Thursday after soft U.S. economic data and the first interest rate hike in 11 years by the European Central Bank spurred more concern that a recession is just around the corner.

Stocks closed higher, with U.S. indexes posting bigger gains than the TSX thanks to a rally in growth stocks.
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The number of Americans enrolling for unemployment benefits rose last week to the highest in eight months and a gauge of factory activity slumped this month, the latest indications the U.S. economy is slowing under the weight of rising interest rates and high inflation.

The ECB has joined the party:

The European Central Bank raised interest rates by more than expected on Thursday as concerns about runaway inflation trumped worries about growth, even while the euro zone economy is suffering from the impact of Russia’s war in Ukraine.

The ECB raised its benchmark deposit rate by 50 basis points to zero percent, breaking its own guidance for a 25 basis point move as it joined global peers in jacking up borrowing costs. It was the ECB’s first rate increase in 11 years.

Policymakers also agreed to provide extra help for the euro zone’s big debtor nations – Italy among them – with a new bond purchase scheme. Sources told Reuters they did not expect to use it imminently despite a selloff in Italian bonds.

Ending an eight-year experiment with negative interest rates, the ECB also lifted its main refinancing rate to 0.50%, and promised another hike, possibly as soon as its Sept. 8 meeting, with more to follow later.
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But even if the ECB is now moving more quickly, Ms. Lagarde said the terminal rate – or level where hikes end – has not changed.

The ECB did not provide guidance for its expected rate hike in September, saying only that further increases will be as appropriate and decisions will be made meeting-by-meeting.

The ECB had for weeks guided markets to expect a 25-basis-point increase on Thursday, but sources close to the discussion told Reuters early this week that 50 basis points had come into play as part of a deal including help for indebted countries.

I love market chatter and the chatterers! Apparently this unchanged forecast for the terminal rate – which is what? maybe a year away? – has cheered everybody up, or at least those who have forgotten that last week the forecast was to hike rates 0.25% this week.

Canadian inflation has hit a new high for this cycle:

Canadian inflation jumped to the highest rate in nearly four decades in June, although there are tentative signs that consumer price growth is close to topping out, offering relief to families.

The consumer price index (CPI) rose 8.1 per cent in June from a year earlier, up from 7.7 per cent in May, Statistics Canada said on Wednesday. It was the highest inflation rate since January, 1983. Financial analysts were expecting worse, with inflation climbing to 8.4 per cent.

The acceleration was mainly because of gasoline, Statscan said. Consumers paid 6.2 per cent more at the pump in June than May, and 55 per cent more on an annual basis.

However, crude oil has tumbled in recent weeks, which has started to reflect in retail pricing. The national average price for regular unleaded gas was $1.87 a litre on Tuesday, down from a peak of $2.15 in early June, according to data from Kalibrate Technologies.

Shelter and grocery costs grew at slightly slower annual rates in June, a potential sign of progress for cash-strapped household budgets. And excluding food and energy, core inflation rose 0.4 per cent in June, a slower pace than in recent months.

Britain is also suffering from high inflation:

Consumer prices in Britain rose 9.4 percent in June from a year earlier, intensifying the squeeze on household budgets as inflation continued to run at its fastest pace in 40 years.

Rising prices for food and motor fuels were the biggest reason for the jump in inflation in June, up from a 9.1 percent rate the month before, the Office for National Statistics said on Wednesday. Motor fuel prices have risen more than 40 percent over the past year, with gasoline and diesel prices setting record highs. In June, food and drink prices jumped nearly 10 percent from a year earlier, the biggest increase since 2009, with prices for milk, cheese and eggs rising notably over the past month. Household energy bills also remain a major source of soaring inflation.

With inflation at its highest level in four decades, households are feeling the pain acutely because pay increases are lagging far behind prices. Pay, after it was adjusted for inflation and excluding bonuses, fell 2.8 percent in March to May, compared with a year earlier, the statistics agency said on Tuesday. That’s the steepest decline in so-called real wages on record.

I was struck by the juxtaposition of two stories on the Globe’s website, the first, Toronto condo sellers are giving up on resistant buyers:

Struggling sellers in Toronto’s condo market are bringing a wave of units for rent to the downtown core.

“We’ve started to shift a lot of sellers into the rental market,” says Christopher Bibby, broker with Re/Max Hallmark Bibby Group Realty.

Some frustrated owners are trimming their asking price and still not getting showings, says Mr. Bibby, who estimates that condo prices in the city have slipped between six and eight per cent since the peak in early spring
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Mr. Bibby says he can understand why buyers are nervous when they are grappling with soaring inflation and a string of interest rate hikes by the Bank of Canada. Many are betting that home prices have farther to fall.
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Condo sales in the Greater Toronto Area plunged 40 per cent in June compared with June, 2021, according to the Toronto Regional Real Estate Board, while the average price jumped 9.3 per cent in the same period.

… and the second was Toronto condo rents hit record high as renters face ‘extreme’ affordability challenge:

It’s a landlord’s market in Toronto once again. Condo rents hit a record high in the second quarter of this year, as soaring borrowing costs pushed residents into the rental market and more people flocked back to the city.

Across the Toronto region, the average monthly rent rose 17 per cent to $2,533 over the past four quarters, according to industry research firm Urbanation Inc., with rent for a typical studio condo climbing 25 per cent over that period.
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According to Urbanation calculations, condo owners shouldered an average monthly cost of $3,125 during the second quarter, when mortgages had an interest rate of about 3 per cent. The average rent for a similar condo unit was $2,533. That means the average monthly rent was nearly $600 less than the average monthly ownership cost. And that was before last week’s massive one-percentage-point interest rate increase.

Now, with mortgage rates near 5 per cent, Urbanation said condo owners are likely paying an average of $1,100 more a month than renters. “This will provide further fuel for the rental market as more first-time buyers become shut out of the ownership market,” the report said.

So the negative carry is getting negativer. Rents will come down once enough owners have capitulated and sold their investments at a loss to new owners who will have lower mortgage payments.

PerpetualDiscounts now yield 6.07%, equivalent to 7.89% interest at the standard equivalency factor of 1.3x. Long corporates now yield 5.26%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed slightly (and perhaps spuriously) to 265bp from the 270bp reported July 13.

David Berman penned a piece in Saturday’s Globe titled Bonds are in the dumps. Here’s why this investor is buying:

Hanif Mamdani, the lead manager of Royal Bank of Canada’s giant PH&N High Yield Bond Fund, offers a high-profile example of an investor looking to take advantage of eye-popping bond yields.

He’s now prowling for corporate bonds he believes could deliver double-digit annualized returns – breathtaking gains in the normally staid world of bonds – within a couple of years.
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Now, he believes that one of the most promising areas of the market is Canadian corporate bonds with investment grade ratings that are now trading at unusually high yields.

He pointed to a couple of examples.

He bought CIBC’s limited recourse capital notes – or LRCN, a subordinated debt instrument with a five-year term – with yields as high as 7.4 per cent.

The trouble is, of course, that LRCNs are not bonds and are not even genuine subordinated debt, despite OSFI’s best efforts to pull the wool over the eyes of unwary investors. They are preferred shares dressed up as bonds to allow portfolio managers and investment companies to gull the naive. Another problem, of course, is that the term is not, in fact, five years.