PrefBlog

TXPR closed at 571.13, down 0.85% on the day. Volume today was 610,570, lowest of the past 21 trading days.

CPD closed at 11.38, down 0.35% on the day. Volume was 76,520, above the median of the past 21 trading days.

ZPR closed at 9.57, down 0.21% on the day. Volume of 143,460, near the median of the past 21 trading days.

Five-year Canada yields were unchanged today, as the market was on holiday.

David Parkinson of the Globe wrote a fine column on BoC transparency, by which I mean I agree with it:

Jeremy Harrison, the bank’s managing director of communications, told reporters that the document will be a “high-level summary” of the council’s discussions, rather than anything approaching a formal transcript of its meetings.

“Given our consensus-based decision-making system, the summary won’t provide attribution to individual council members, nor will it record votes because there are no votes in our system,” he said.
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It falls short of the decision-making transparency of most of the Bank of Canada’s leading global peers, which publish transcripts or minutes of their meetings, and publicly record the votes of each committee member.
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The black box of policy making has become an obstacle to the central banks’ credibility, as it works feverishly to not only fight inflation, but convince the Canadian public that it can win the fight, and that it has their best interests in mind. Two and a half years of policy extremes, of uncertainty and of an inflation problem that went unchecked for too long have cultivated distrust.

The bank needs to lift the curtain and be willing to be totally up-front with those doubters, to share not only its consensus views, but the compelling, passionate dissenting opinions that colour them. It needs to put more human faces on its process – even if those faces don’t always agree.

The Canadian economy remains sluggish:

Canada’s economic activity unexpectedly edged up in July, while gross domestic product in August was most likely flat, data showed on Thursday, with the surprise gain seen unlikely to change much for the central bank.

The Canadian economy grew 0.1 per cent in July, compared with analysts’ forecast for a 0.1 per cent decline, Statistics Canada data showed. Growth in goods-producing industries more than offset the first decrease in services-producing industries since January.

“The economy fared better than anticipated this summer, but the showing still wasn’t much to write home about,” Royce Mendes, head of macro strategy at Desjardins Group, said in a note.

The slight gain in July and likely lack of growth in August suggest third-quarter annualized GDP growth of about 1 per cent, well below the Bank of Canada’s most recent forecast of 2.0 per cent, analysts said.

German inflation came in high:

Consumer prices, harmonised to make them comparable with inflation data from other European Union countries (HICP), increased by 10.9% on the year, the federal statistics office said. A Reuters poll of analysts predicted a rise of 10.0%.

That was the highest reading since comparable data going back to 1996.

The increase was due to higher costs for energy – which were 43.9% higher compared with September 2021 – after a popular cheap transport ticket offer and a fuel tax cut expired at the end of August.

I’ve missed quite a few prospective clients to the siren call of private mortgages, so it was with some satisfaction that I read about Romspen:

Romspen Investment Corp., one of Canada’s largest private debt managers, is restricting redemptions from its flagship real estate fund, as the North American mortgage market adjusts to a prolonged period of rising interest rates.

This week, Romspen told its investors looking to cash out from the Romspen Mortgage Investment Fund that they may have to wait, citing delays in loan repayments and the need to protect against loan losses. The company uses investor money to provide mortgages to higher-risk commercial developers, who typically don’t qualify for bank loans.

The fund’s ability to pay back its investors largely relies on its borrowers’ ability to refinance their debt. But soaring mortgage rates have taken a toll on the cost and availability of refinancing in commercial real estate markets in the U.S. and Canada.

In a notice to unitholders on Monday, Romspen said it can’t continue to honour investor redemptions at the pace they’re being requested.

More than $700-million has been returned to Romspen’s investors over the past 18 months, and the current redemption queue represents roughly another $325-million – about 12 per cent of the fund’s assets. The fund had $2.8-billion in assets as of the end of June.

I’ve been trying to come to grips with the recent Gilt market fiasco:

Traders had reported heavy selling of long-dated Gilts as so-called liability-driven investment strategies managing defined benefit pension schemes have been forced to raise money to fund margin calls on their portfolios. Those margin calls had threatened to create a self-reinforcing feedback loop, where rising yields precipitate more calls for collateral and further selling, pushing up yields once more.

In one example of the extremity of market moves, the yield on 30-year UK inflation-linked bonds (which have historically been popular with LDI investors) jumped from below 0% the previous week to above 2.5% on Wednesday prior to the BoE’s announcement, before falling back to 0.7% on Thursday.

“We’ve been hearing that LDI investors have had to raise collateral by selling bonds and that’s a big reason why long-dated Gilts – and inflation-linked bonds in particular – have been under so much pressure,” said Mike Riddell, a senior portfolio manager at Allianz Global Investors.
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Experts note the rise in Gilt yields isn’t all bad news for UK pension funds, as it has also decreased the value of their defined benefit liabilities at the same time. Some funds that haven’t used so many derivatives to hedge their liabilities, or leveraged their Gilt holdings in repo markets, may also see the rise in yields as a buying opportunity.

“If you’re an LDI fund your overall funding level has improved because of the fall in the value of your liabilities, but it’s the cash that needs to be posted against your hedges – that’s the issue. And it’s unclear how the dynamic plays out to be honest because all LDI funds are very different,” said [senior portfolio manager at Federated Hermes, Orla] Garvey.

There is the usual attempt to defend the product:

PAN Trustees chairman Steve Delo agrees that it is the sudden stress situation that caused the problems in the market: “We have a situation where sensible decisions have been taken by pension schemes in a sensible way over the years to put on large LDI positions. LDI has served everyone very well. But in this circumstance, the aggregation of it all across the industry has resulted in panic and urgency, and that’s what we’ve had to deal with.”

Widely used investment vehicles are now not quite as flexible or as liquid as everyone perhaps thought they would be during a stress situation, he adds: “Suddenly everything becomes cumbersome, locked up, bureaucratic at a time where swift decisions need to be taken while still trying to maintain robust governance.”

But finally I found an informative Washington Post column:

1. What’s ‘liability-driven’ investment?

It’s a strategy used by pension funds to manage their assets to ensure they can meet future liabilities, thus the name. The trades are typically used by so-called defined benefit pension plans, which guarantee retirees a certain payout regardless of swings in financial markets. The strategy often involves derivatives — interest-rate swaps and other contracts that allow them to hedge their bets in case the market moves against them. To arrange them, the funds have to put up some collateral for the trade. If yields fall they make money and if yields rise they typically face a margin call and have to pay more to the counterparty because the bonds are worth less.

2. Who’s doing it?

Firms including BlackRock Inc., Legal & General Group Plc and Schroders Plc manage LDI funds on behalf of pension clients. Many pension funds outsource their entire portfolios, including LDI trades, to those managers, while others might just use LDI funds offered by asset managers. There are firms, like Cardano and Insight Investments where LDI is the main bulk of their business. The amount of liabilities held by UK pension funds that have been hedged with LDI strategies has more than tripled in size to £1.5 trillion ($1.6 trillion) in the 10 years through 2020, according to the UK’s Investment Association. The entire UK government debt market is £2.3 trillion. retirees a certain payout regardless of swings in financial markets. The strategy often involves derivatives — interest-rate swaps and other contracts that allow them to hedge their bets in case the market moves against them. To arrange them, the funds have to put up some collateral for the trade. If yields fall they make money and if yields rise they typically face a margin call and have to pay more to the counterparty because the bonds are worth less.

So there’s a place to start, anyway. Blackrock even has a website section devoted to their awesome and wonderful LDI funds – but it’s completely worthless. Just a bit of juvenile marketting bumf published with the objective of getting you to call a salesman; no meat on that bone!

That’s a shame, but fortunately the Washington Post comes to my aid again:

The resulting problems for pension funds were twofold. First, to offset liabilities they had bought long-dated gilts (and probably some long-dated inflation-linked bonds) via counterparts who held those positions for them. Second, because the UK market is relatively small, they had also bought fairly low-quality investment-grade credit in the US and swapped these exposures into sterling. That left them with a dollar short position on one leg of the swap. Both types of trade were done via counterparts who demanded collateral — lots of it. Often, that meant selling other assets, hence the vortex of the past few days which the BOE has, rightly, alleviated by its actions. I am not sure that this is the end of the story.

So it’s useful to know that one reason to use derivatives is because the market simply isn’t big enough to accomodate all those who want to invest in it. And then there’s leverage:

“As a result of the extreme volatility in the gilts market this week, we have been working expediently over recent days to support our clients’ interests,” a BlackRock spokesperson said in an emailed statement.

“We have been reducing leverage in some of our LDI funds, acting prudently to preserve our clients’ capital in extraordinary market conditions. Trading in BlackRock funds has not been halted, nor has BlackRock ceased trading in gilts.”

LDI funds can be leveraged up to four times, industry consultants say.

So I’m still a little foggy on the function of these “LDI firms” who take leveraged positions via interest-rate swaps on gilts. Why do they do it? There’s the suggestion that the funds want some kind of asset-liability duration matching (“immunization” is the word usually used on PrefBlog!), which is fine. Very good, in fact; I have praised the pension fund HOOPP on this blog, for taking the time – almost uniquely in the financial world – of talking to their clients, understanding what they want their portfolios to do (‘pay off this schedule of obligations!’) and investing accordingly to minimize risk – the word ‘risk’ being defined in a meaningful way, that is, not by some brain-dead MBA/CFA parrotting dim memories of the Capital Asset Pricing Model.

I still haven’t come up with a sensible explanation of why these exposures should be leveraged, however. One possibility is that it’s simply a mechanism to buy as much duration as possible with the least amount of cash, but I haven’t seen any explainers at all on this. Another thing that I don’t know is just how these leveraged derivative bets work. The presence of margin calls suggest that the funds will attempt to keep a fixed number of contracts alive per unit in the fund, rather than operating like a retail leverage fund, in which the attempt is to maintain a fixed amount of leverage on the capital in the fund – which, notoriously, imposes a buy-high-sell-low investment strategy on the operation – but this is not quite clear. Blackrock reduced leverage in its funds … were they mechanically buying high and selling low, or what’s the whole story here?

The claim that the gilt market is simply too small to absorb the pension funds that are dependent upon it is interesting. There is at least one article in the Interesting External Papers category of PrefBlog that shows the regulators have been very worried in the past about what I call ‘liquidity inversions’ – situations in which a small, illiquid physical market is used to price a large, very liquid, derivatives market (another resource is my piece on Liquidity Black Holes). Even a dominance of the pension funds in the physical market could be problematic – financial markets work best when there is a wide variety of players with differing rationales buying and selling with each other. The commentary I’ve seen has been mainly in the context of derivative-based ETFs on Emerging Market equities being sold in the west; could this have really happened with gilts? I look forward to the next few years and the publication of learned treatises on the September 2022 Gilt Saga.

Anyway, back to more domestic matters – Mohammed El-Erian writes a piece about the implications of damaged Fed credibility:

Ominously, these market signals indicate that the US economy (and therefore the global economy) lacks both a monetary-policy anchor and a sufficiently credible central bank. As a result, the US needs more monetary-policy tightening than it would have if the Fed had reacted in a timely and credible fashion. That will indeed produce “pain,” in the form of foregone growth (actual and potential) and higher unemployment, which will hit the most vulnerable segments of society the hardest.

For the global economy, this will translate into even greater growth fragility at a time when Europe is heading into recession, China’s performance is increasingly lagging its economic potential, and little fires are burning across the developing world. Despite this increased fragility, many other central banks will have no choice but to follow the Fed in raising interest rates beyond what would have otherwise been needed, in order to avoid “importing” more damaging inflation and unsettling financial instability.

Now that the Fed finds itself in such an uncomfortable situation – one mostly of its own making – it may be inclined to eschew further rate hikes, particularly given the growing criticism that it is tipping the economy into recession, destroying wealth, and fueling instability. Yet such a course of action would risk repeating the monetary-policy mistake of the 1970s, saddling America and the world with an even longer period of stagflationary trends. Instead, the Fed should be doing much more to contain the adverse spillovers of its policy mistake, including through innovative thinking about its monetary-policy framework and more proactive collaboration with other policymaking entities (domestic and abroad).

And in Canada:

The Securities and Exchange Commission today announced insider trading charges against two Canadian software engineers who made $1.6 million by trading ahead of non-public, market-moving financial information.

According to the SEC’s complaint, from at least May 2018 to July 2021, Harpreet Saini and John Lester Mandac Natividad, both of Ontario, were employed by a newswire distribution company specializing in corporate press releases, and had access to its internal press release distribution system that allowed them to preview headlines, times, and publication dates of forthcoming announcements. As alleged, Saini and Natividad collectively traded in advance of more than 1,600 announcements distributed by their employer and would routinely exit their positions after the market reacted to the news in the press releases.
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The Ontario Securities Commission (OSC) today announced that Saini and Natividad have been charged with fraud and insider trading offenses under the Ontario Securities Act.

Sorry this is late! I had better things to do last night!

TXPR closed at 577.09, up 0.81% on the day. Volume today was 1.47-million, third-highest of the past 21 trading days.

CPD closed at 11.50, up 1.32% on the day. Volume was 188,770, second-highest of the past 21 trading days.

ZPR closed at 9.65, up 1.05% on the day. Volume of 190,270 was well above the median of the past 21 trading days.

Five-year Canada yields were plunged to 3.28% today.

In these tempestuous times, it’s nice to see the world uniting on a political question:

British Prime Minister Liz Truss’s plan to slash taxes and drive up government borrowing has managed to upset almost every corner of the financial world and prompt growing calls, at home and abroad, for the new Prime Minister to reverse course.

Since the tax plan was announced last Friday, a chorus of voices has come out against it, ranging from the International Monetary Fund to credit-rating agencies, economists, pension funds and British homeowners who could see their monthly mortgage payments rise by as much as 70 per cent in the coming months.

In a blunt rebuke of the government, the IMF said late Tuesday that given rising global inflation “we do not recommend large and untargeted fiscal packages at this juncture.” It also urged Chancellor of the Exchequer Kwasi Kwarteng “to re-evaluate the tax measures, especially those that benefit high-income earners.”

On Wednesday, Moody’s said the plan raised questions about the credibility of the government’s fiscal strategy and added that “large unfunded tax cuts are credit-negative,” suggesting a potential downgrade to the country’s credit rating.

It will be hard to top Brexit as a political and economic disaster, but Truss is trying!

Chaos in the gilt market brought BoE intervention:

British government bond prices soared on Wednesday after the Bank of England said it would buy long-dated bonds to bring calm to the market, although analysts had doubts about how long the respite would last.

Finance minister Kwasi Kwarteng set plans for unfunded tax cuts and more government borrowing last week, sparking a historic slide in sterling markets that sent the pound to an all-time low against the U.S. dollar, just below $1.04.

Having failed to cool a sell-off with a verbal intervention the previous day, the BoE announced an emergency move that it said would prevent the turmoil in markets from spreading through the country and seizing up credit flows.

The central bank said it would buy long-dated gilts “on whatever scale is necessary” to restore order to the market.

The BoE also said it was keeping its goal to reduce its 838 billion pounds ($892 billion) of gilt holdings by 80 billion pounds over the next year, but would postpone the start of sales – due to begin next week – because of the market conditions.

Ahead of the BoE’s announcement, strategists said the 2.1 trillion-pound gilt market was seizing up, with very poor liquidity and pricing quality being a clear sign of market dysfunction.

Thirty-year gilt yields – which move in the opposite direction to prices – finished the day more than 100 basis points lower at 3.934% after they rose to 5.092% in early trading – the highest level for 30-year yields since 2002.

Geez … it seems like only yesterday that I was marvelling about a full point move in long-bond yields in a mere week!

Part of the problem, apparently, is margin calls on pension funds:

A dramatic upswing in British government bond yields this week triggered calls for cash from defined benefit pension funds, forcing them to slash positions and prompt the Bank of England to mount an emergency 65 billion pound ($69 billion) bond buying programme in an effort to stabilise the market.

To avoid being exposed to market volatility, the [pension fund] schemes typically hedge their positions through gilt derivatives managed by so-called liability-driven investment (LDI) funds.

For example, pension schemes might pay the floating rate leg of an interest rate swap and receive fixed rates, according to Chris Arcari, head of capital markets at consultants Hymans Robertson.

The funds are leveraged which increases their exposure to market moves.

If yields go up too far and too fast, the schemes need to provide more cash – or collateral – to the LDI funds because their positions become loss-making – they are paying out more money in the transaction than they are receiving.
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Pension schemes either sold gilts to get hold of ready cash to meet those collateral calls, or they were kicked out of their derivatives positions because they could not pay up in time and had to sell gilts to avoid having a naked exposure to further sharp moves. LDI funds also sold index-linked gilts to shore up the cash in their funds.

So my question is: why would a pension fund invest in a leveraged swap on gilts in the first place? Why not buy the underlying gilts themselves, like, you know, normal people?

I don’t know, of course, but it’s my guess is that some guy with an MBA convinced some other guys with MBAs that it would be a full eighth of a basis point cheaper to go the derivative route (MBA, you will remember, stands for More Bad Assets). I’ve heard lots of schemes like that over the years; it’s all wonderful until somebody remembers about collateral. Remember CIBC and the deal with Goldman and Lehman on AIC Credit Default Swaps? It was a nice deal, easy money, until the collateral calls started coming in.

Meanwhile, the BoC announced:

The Bank of Canada today welcomed the publication by the International Monetary Fund (IMF) of its final report summarizing its pilot review of the Bank’s transparency practices. The report contained several recommendations for how the Bank could further enhance its transparency, and the Bank published its formal response to those recommendations today.

This past spring, using the IMF’s new Central Bank Transparency Code (CBTC), an IMF Mission Team made up of independent experts reviewed the Bank’s transparency practices across five areas: governance, policies, operations, outcomes and official relations. The Mission Team met with staff and management from across the Bank as well as with a broad range of stakeholders, including academics, think tanks, parliamentarians, market participants and journalists.
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In its response, the Bank announced that it will publish a summary of deliberations after each policy rate announcement, beginning in January 2023. More details about this new publication will be shared in the months ahead.

The Bank also agreed to enhance transparency around its risk management and audit functions. And it will strengthen its efforts to communicate broadly, and in plain language, about financial stability issues.

The IMF report, all 100 pages of it, is available HERE. Recommendation #4 is:

4. Consider publishing a detailed summary of monetary policy deliberations by the Governing Council, as well as enhancing its communication on ex-post evaluation of the policy decisions, disclosing alternative policy scenarios, and improving the timeliness and accessibility of published macroeconomic projections.

… to which the Bank responded:

Over the past several years, the Bank has taken a number of steps to provide further transparency about its monetary policy decisions and deliberations. These include:
• providing a discussion of key issues that were relevant to Governing Council’s policy deliberations in the
opening statements at Monetary Policy Report (MPR) press conferences.
• introducing economic progress report speeches one day after each non-MPR policy decision. These speeches are delivered by members of Governing Council and discuss key issues relevant to policy deliberations. The Governing Council member delivering the speech is also available to the press.
• including in the most recent renewal of Canada’s monetary policy framework, jointly agreed to by the Bank and the Government of Canada, the Bank’s consideration of a broad range of labour market indicators. The Bank will systematically report to Canadians on how labour market outcomes have factored into its monetary policy decisions.
The Bank has been actively considering additional mechanisms to enhance transparency around its monetary policy decisions, including the publication of a summary of deliberations after each policy decision. The IMF’s consultation with the Bank’s stakeholders and resulting recommendation that the Bank should proceed with publishing such a summary have been very helpful in the Bank’s considerations of this matter.

As such, the Bank is committing to publish a summary of monetary policy deliberations after each policy decision, starting in January 2023. These summaries will be published on the Bank’s website, with a lag of roughly two weeks following each policy decision.

With respect to enhancing communication on ex-post evaluation of policy decisions, the Bank has been focused on reviewing its actions and analysis during the COVID-19 pandemic. In its July 2022 MPR, the Bank published an assessment of the main factors behind inflation forecast errors during the pandemic period. In February 2022, Deputy Governor Tim Lane provided a backward-looking assessment of the Bank’s policy actions and analysis during the pandemic. Bank staff have also published assessments of the impact on market functioning and pricing of some of its asset purchase programs, such as the Bankers’ Acceptance Purchase Facility and Government of Canada Bond Purchase Program.

As the Bank proceeds with further internal work evaluating lessons learned from its pandemic actions, it is committed to being transparent about these evaluations with Canadians.

With respect to disclosing alternative policy scenarios, the Bank has published such scenarios on an ad-hoc basis, most recently in the July 2022 MPR with a risk scenario examining what could happen if a wage-price spiral occurred. The Bank is open to providing such alternative scenarios more regularly as part of its MPRs. But it would retain appropriate flexibility to do so when it makes good sense and when it can help audiences better understand the Bank’s reaction function around key risks. The Bank prefers this approach rather than committing to systematically providing such scenarios in each MPR.

Finally, with respect to the timeliness and accessibility of published macroeconomic projections, the Bank is actively seeking ways to make the information underlying its economic forecasts more accessible to its audiences. This has included the increasing use of digital charts and tables with accessible, downloadable data. As the Bank develops its MPR into a fully digital product by the end of 2023, improved accessibility and the ability to interact more fully with its projections will be key guiding principles.

The Bank also publishes, with a five-year lag, the detailed staff economic projections that are provided to Governing Council in preparation for monetary policy decisions.

I suppose this “accessibility” drive includes such things a posts on Twitter and elsewhere. Let’s just hope that they refrain from intellectually dishonest obfuscation in those Tweets – their response to the ‘money printing’ accusations was disgraceful.

Regretably:

The announcement moves the Bank of Canada closer to the U.S. Federal Reserve, which publishes detailed minutes of the rate-setting meetings of its Federal Open Market Committee (FOMC). However, it stops short of giving the same level of detail.

“We do expect it to provide a high-level summary of the issues discussed by [the] governing council, as well as insight into the key points of focus in their deliberations on economic developments and the risks,” Jeremy Harrison, managing director of the bank’s communications department, said in a statement.

The summaries won’t attribute arguments to individual members of the six-person governing council, Mr. Harrison said. And because the council does not formally vote on monetary policy decisions, no votes will be recorded.

Ah, the good old consensus story – a sure-fire recipe for mediocrity, ass-covering and Canadian levels of productivity.

And to wrap things up … here’s a snippet on one of my favourite topics – energy storage:

Jupiter Power LLC (“Jupiter Power” or “Jupiter”), the leading United States developer and operator of utility-scale, battery energy storage systems (“BESS”), today announced the execution of an agreement with Energy Vault Holdings Inc. ( NYSE: NRGV) (“Energy Vault”), a leader in sustainable, grid-scale energy storage solutions. Under this agreement, Jupiter Power and Energy Vault will expeditiously collaborate to secure 2.4 GWh of supply chain equipment and services that will be integrated and delivered through Energy Vault’s hardware and software management platform in Jupiter Power’s battery energy storage projects.

Jupiter Power and Energy Vault are committed to supporting U.S. based manufacturing for use in Jupiter’s BESS projects across the United States electric markets including ERCOT, MISO, CAISO, PJM, NYISO, and ISO-NE. The projects are expected to reach commercial operations in 2024 and 2025.

Under the agreement, Energy Vault will focus on maximizing U.S. localization and deployment of energy storage equipment that will qualify for the recently enacted Inflation Reduction Act’s Domestic Content Bonus Credit. As part of the joint effort, Jupiter Power will collaborate in siting the new domestic manufacturing facilities, where possible, by utilizing assets secured for future Jupiter Power projects across the country, including the siting of such facilities in “Energy Communities” locations prioritized for investment by the Inflation Reduction Act, such as brownfield coal sites and economically disadvantaged areas.
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The letter of intent agreement follows previously announced agreements between Jupiter Power and Energy Vault for BESS projects in Texas and California totaling 220 MWh, under which Energy Vault will supply a 100 MW (200 MWh) battery energy storage system at a Jupiter Power Facility near Fort Stockton, Texas, and additionally construct and commission a 10 MW (20 MWh) battery energy storage system for Jupiter Power in Carpinteria, California.

PerpetualDiscounts now yield 6.59%, equivalent to 8.57% interest at the standard equivalency factor of 1.3x. Long corporates now yield 5.00%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has rocketted to 355bp from the 315bp reported September 21.

The New York Fed has 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 New York Fed also published a piece on how quantitative tightening works:

Consistent with the plans announced in May, the Fed is reducing its balance sheet by redeeming securities up to certain monthly limits, known as caps (redemption is the process of allowing securities to mature without reinvestment). The caps ensure that runoff occurs in a predictable manner over time. For the first three months of runoff from June to August, caps allowed for runoff of up to $30 billion in Treasury securities and up to $17.5 billion in agency mortgage-backed securities (MBS) and agency debt each month. Starting this month, the caps increase to levels of $60 billion and $35 billion, respectively. In other words, the Fed had been reducing its securities holdings by up to a total of $47.5 billion each month from June through August, and starting in September, the maximum monthly reduction will be $95 billion. The Fed will reinvest any maturing amounts above the monthly caps by reinvesting at auctions for Treasury securities or by purchasing securities in the secondary market in the case of agency MBS.
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In most months, coupon securities will make up most of the redemptions (dark blue bars). Periodically, Treasury bills (dark red bars) will also be redeemed when aggregate coupon maturities are less than the cap. Proceeds from maturing Treasury securities (light blue and light red bars) in excess of the cap will continue to be reinvested into new securities at U.S. Treasury auctions.

The Fed’s treasury holdings can be tracked with the weekly H.4.1 release, which currently shows a balance of 8,393-billion, compared to the 2019 year-end figure of 3,745-billion. The difference in 4,648-billion, so at a rate of 100-billion per month, they’ll be tightening for the next 4-years-odd. At that rate, the gnomes of monetary policy will have repaired the pandemic damage long before the clowns of fiscal policy!

And here’s a Facebook comment on UK yields:

A full point on a long bond. In a week. That’s a loss in excess of 20%. In a week.

Reuters provides a bit more colour:

Yields on British government debt surged to new multi-year highs on Tuesday, led by 20 and 30-year bonds, adding to their steep climb since finance minister Kwasi Kwarteng announced sweeping tax cuts last week.

Thirty-year gilt yields soared to their highest since 2002, ending the session a whisker below 5%, roughly double their level in August and up by almost half a percentage point on Tuesday alone.

Yields on 20-year gilts were up by 35 basis points while the 10-year gilt extended its climb and remained on course for its biggest rise in any month since at least 1957.

Returns demanded by investors from holding government bonds in many rich economies have risen swiftly in recent weeks on worries about surging inflation.”

But the jump has been particularly sharp in Britain where new Prime Minister Liz Truss has promised to end the economic policy “orthodoxy” by cutting taxes in an attempt kick-start growth, adding to the country’s already high debt levels.

Tuesday’s rise in British gilt yields accelerated around the time the Bank of England’s chief economist, Huw Pill, said the BoE was likely to deliver a “significant policy response” to the government’s huge tax cuts but should wait until its next scheduled meeting in November.

Some investors and economists have said the British central bank should hold an emergency meeting now and deliver a big interest rate hike to prop up the value of the pound and avoid further inflation pressure.

Interest rate swaps now price in only a modest chance of an emergency BoE rate hike in the next few weeks, but suggest the BoE will raise rates to 3.5% or even 3.75% at its next meeting, up from 2.25% now. Bank Rate is seen reaching 6% by March next year.

TXPR was down again today, but only by about 16bp. These days, I guess that counts as a win!

TXPR closed at 573.34, down 1.51% on the day. Volume today was 954,690, near the median of the past 21 trading days.

CPD closed at 11.35, down 1.48% on the day. Volume was 170,320, second-highest of the past 21 trading days.

ZPR closed at 9.55, down 1.75% on the day. Volume of 290,470 was second-highest of the past 21 trading days.

Five-year Canada yields were up sharply to 3.46% today.

Equities got hit again:

Confidence among stock traders was also shaken by dramatic moves in the global foreign exchange market as sterling hit an all-time low on worries that the new British government’s fiscal plan released Friday threatened to stretch the country’s finances.

That added an extra layer of volatility to markets, where investors are worried about a global recession amid decades-high inflation. The CBOE Volatility index, hovered near three-month highs.

The Dow is now down 20.5% from its record high close on Jan. 4. According to a widely used definition, ending the session down 20% or more from its record high close confirms the Dow has been in a bear market since hitting its January peak.

The S&P 500 has yet to drop below its intra-day low on June 17. It is down about 23% so far in 2022.

U.S. Treasury yields hit fresh highs on Monday, rising in tandem with euro zone and British government debt yields amid concerns that central banks globally will keep tightening monetary policy to curb stubbornly high inflation.
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Canada’s S&P/TSX Composite Index closed down 153.94 points, or 0.83%, at 18,327.04 – the lowest since March 4, 2021.

The economically-sensitive energy sector was once again ground zero for a lot of the selling, losing about 3%. Oil prices fell $2 a barrel, settling at nine-month lows in choppy trade, pressured by a strengthening U.S. U.S. West Texas Intermediate crude for November delivery dropped to US$76.71, the lowest since Jan. 6.

The UK has a talent for shooting itself in the foot on a grand scale. My baptism of fire as a portfolio manager was the Exchange Rate Mechanism withdrawal of 1992; since then has come Brexit and now:

On Monday, prices for British government bonds plummeted, and yields surged, sending borrowing costs to new highs. The 10-year yield, which influences mortgages, business loans and other types of debt, hit its highest level in more than a decade. It traded at around 4.15 percent on Monday, double where it was a month and a half ago.

As traders dumped British assets, analysts have said the government’s plan to quickly grow the economy through deregulation and tax cuts, which will require tens of billions of pounds in additional borrowing at a time of rising interest rates and high inflation, was a gamble.

On Friday, Kwasi Kwarteng, who has been chancellor of the Exchequer for about three weeks in prime minister Liz Truss’s new government, announced a series of cuts to income taxes, reduced levies on home purchases and scrapped a plan to increase the corporate tax rate. There were dozens of other policy measures, which come on top of an expansive, costly plan to cap the cost of electricity and gas for households and businesses.

Despite the breadth of new measures, the government did not have the Office for Budget Responsibility, an independent watchdog, assess the polices and provide updated economic and fiscal forecasts.

In particular:

Ms. Truss won the race to succeed Boris Johnson as leader of the Conservative Party, and prime minister, on Sept. 5. She ran on a free-enterprise platform that focused on lowering taxes and reducing the role of government. After a 10-day pause because of the death of the Queen on Sept. 8, Ms. Truss and Kwasi Kwarteng, the new Chancellor of the Exchequer, have come out swinging.

Last Friday, Mr. Kwarteng unveiled a mini-budget that included the biggest tax cuts in 50 years. Among the measures announced were plans to lower the top tax rate to 40 per cent from 45 per cent, scrap a planned increase in corporate tax and eliminate a cap on bonuses paid to bank executives. And over the weekend, Mr. Kwarteng signalled that the government will go even further in a coming budget.

Mr. Kwarteng and Ms. Truss said the measures would spur economic growth and free up businesses to expand. They have yet to spell out in detail how to pay for everything, but government borrowing is expected to climb by as much as £100-billion ($147-billion).

The scale of Friday’s announcement and the level of borrowing have roiled financial markets. On Friday, the pound sank 3 per cent in value against the U.S. dollar, the biggest single-day drop in two years.

Doctrinaire trickle-downism! At a time when gas prices are putting more pressure on household and government finances and nobody’s even thought about paying for the pandemic. Ridiculous.

On a lighter note, charges have been laid in an absurd stock manipulation scheme:

The Securities and Exchange Commission today charged Peter L. Coker Sr., Peter L. Coker Jr., and James T. Patten for their roles in orchestrating fraudulent manipulative securities trading schemes. These schemes included artificially inflating the share price of Hometown International, which operated a New Jersey deli producing less than $40,000 in annual revenue, from approximately $1 per share in October 2019 to nearly $14 per share by April 2021, leading to a grossly inflated market capitalization of $100 million.

According to the SEC’s complaint, Patten, Coker Sr., and Coker Jr., who was the former Chairman of the Board of Hometown International, took control of the outstanding shares of Hometown International and a separate shell company, E-Waste Corp., artificially inflated the price of both issuers’ stock through manipulative trading, and used the entities to acquire privately-held companies in reverse mergers, with the intent to thereafter dump their shares at grossly inflated prices. Before the defendants were able to reap the intended profits of the schemes, as alleged, numerous news articles were published discussing the issuers’ inflated stock prices.

TXPR closed at 582.15, down 1.20% on the day. Volume today was 1.60-million, highest of the past 21 trading days. The market actually rallied a bit in the extended session – TXPR was at 580.27 at 4:00pm.

CPD closed at 11.52, down 2.29% on the day. Volume was 193,120, by far the highest of the past 21 trading days.

ZPR closed at 9.72, down 2.02% on the day. Volume of 327,260 was by far the highest of the past 21 trading days.

Five-year Canada yields were down slightly to 3.34% today.

Equities got hammered:

Global stocks fell sharply on Friday, sending the Dow Jones Industrial Average to a new low for the year as economic developments raised fresh concerns of a deteriorating global economy that may be teetering on the edge of recession.

The S&P/TSX Composite Index fell nearly 2.8 per cent, to 18,480.98, its worst performance in more than three months. The Canadian benchmark is now just 152 points above its 2022 low close in mid-July.

The broader S&P 500 index fell 1.7 per cent, to 3,693.23, putting it within 26 points of its recent low in mid-June. The Dow ended the day down 1.6 per cent.

The declines followed the release of business surveys from France, Germany and Britain, which showed that manufacturing activity contracted sharply in all three countries in September, as Europe confronts soaring energy prices and geopolitical instability from the war in Ukraine.
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An attempt on Friday by the British government under Liz Truss, the new Prime Minister, to support economic growth appeared to trigger further disorder in financial markets.

The government’s sweeping tax cuts in its mini-budget pushed up British borrowing costs dramatically as bond yields soared and sent the pound tumbling more than 3 per cent to a new 37-year low against the U.S. dollar.
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The latest sentiment survey from the American Association of Individual Investors, for the week ended Sept. 21, showed that 60.9 per cent of respondents felt bearish about the stock market over the next six months.

That was the survey’s most dour reading since 2009 during the financial crisis.

Retail spending also appears to be taking a hit. Canadian retail sales in July fell 2.5 per cent, according to a report released on Friday.

The decline was significantly greater than the 2 per cent drop that economists had been expecting. Though falling gasoline prices explained a big part of the decline, sales fell in nine of 11 categories, suggesting a broader downturn amid rising borrowing costs.

Meanwhile, at the BoC:

Union leaders are calling on the Bank of Canada to halt further interest-rate hikes, arguing that the brunt of a potential recession will be borne by Canadian workers whose wages are already lagging behind inflation.

A group of top labour leaders recently met with BoC Governor Tiff Macklem to make the case for restraint. The central bank has increased interest rates five times since March, and union leaders are concerned that it is not paying enough attention to the damage that further monetary policy tightening could do to employment.

“It can take a year or more to see the full impact of the bank’s actions and that’s why we recommended to them a wait-and-see approach,” said Mark Hancock, national president of the Canadian Union of Public Employees, who attended the virtual meeting on Sept. 16.

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.