PrefBlog

TXPR closed at 539.19, down 2.78% on the day. Volume today was 1.47-million, fourth-highest of the past 21 trading days.

CPD closed at 10.82, down 2.26% on the day. Volume was 237,920, highest of the past 21 trading days.

ZPR closed at 8.93 after hitting a new 52-week low of 8.85, down 2.83% on the day. Volume was 615,230, by far the highest of the past 21 trading days.

Five-year Canada yields plummetted to 2.87% today, giving up yesterday’s gains and a bit more besides!

Equities had a bad day, but bounced a little in the afternoon:

Markets shuddered Wednesday on worries about a spreading banking crisis and how badly it will hit the global economy, with stocks and bond yields falling on both sides of the Atlantic.

The S&P 500 sank as much as 2.1% before ending the day with a loss of 0.7%, while markets in Europe fell more sharply as shares of Switzerland’s Credit Suisse dropped to a record low. The Dow Jones Industrial Average lost 280 points, or 0.9%, after dropping as much as 725 points. The Nasdaq composite rose 0.1% after erasing a steep decline.

The TSX fared even worse than Wall Street, as a big drop in oil prices pressured the energy sector, while the heavily weighted financial sector also saw another day of steep declines. The S&P/TSX Composite Index lost 1.6%, only modestly off its lows for the session, as oil sank to its lowest level in more than a year.
…
Some of this week’s wildest action has been in the bond market, where traders are rushing to guess what all the chaos will mean for future Fed action. On one hand, stress in the financial system could push the Fed to hold off on hiking rates again at its meeting next week, or at least refrain from the larger rate hike it had been potentially signaling.

On the other hand, inflation is still high. While taking it easier on interest rates could give more breathing space to banks and the economy, the fear is such a move by the Fed could also give inflation more oxygen.
…
The volatility in global credit markets has dramatically impacted where money markets are placing bets on the next Bank of Canada rate setting, although these bets are seeing large swings day to day. Interest rate probabilities based on overnight swaps trading suggest a 60% chance of a quarter of a percentage point cut at the central bank’s next meeting in April. These same markets are pricing in a full 75 basis points of cuts in the bank’s trend-setting interest rate by this fall. Just a week ago, they were pricing in another interest rate hike this year.

A bit more colour on SVB:

Gregory Becker, the chief executive of Silicon Valley Bank, leaned back in his chair at a technology conference last week in San Francisco’s luxurious Palace Hotel, and delivered a bullish message.
…
What he didn’t say was that, roughly a week earlier, the rating agency Moody’s had called to tell Mr. Becker that his bank’s financial health was in jeopardy, and its bonds were in danger of being downgraded to junk. Realizing the bank needed to raise cash, Mr. Becker had been scrambling since then to fix things.
…
As of Dec. 31, SVB classified most of its debt portfolio, or roughly $95 billion, as “held to maturity.” Because of a quirk in banking regulation, the bank didn’t have to account for fluctuations in the value of those bonds on its balance sheet.

On average, banks with at least $1 billion in assets classified only 6 percent of their debt in this category at the end 2022. But Silicon Valley Bank put 75 percent of its debt as held to maturity, according to a research report by Janney Montgomery Scott.

And it’s not OSFI’s problem!

The Superintendent of Financial Institutions took additional action to protect creditors of the Silicon Valley Bank’s Canadian branch by taking permanent control of its assets. In addition, the Ontario Superior Court of Justice granted a winding up order in respect of the institution.

The winding up order under section 10.1 of the Winding-up and Restructuring Act begins an orderly, court-supervised process to restructure the branch as a result of the newly created, full-service U.S. Federal Deposit Insurance Corporation (FDIC) “bridge bank” – Silicon Valley Bridge Bank, N.A. – in a way that best serves the interests of its creditors and will allow operations of the Silicon Valley Bank to continue in Canada.

The process is intended to facilitate an orderly transition of the Canadian branch of Silicon Valley Bank to the FDIC Bridge Bank. PriceWaterhouseCooper Inc. has been appointed by the court to oversee the transition. As the court order has been granted, OSFI no longer has an active role in the resolution of this matter.

On March 12, the Superintendent took temporary control of the assets held by Silicon Valley Bank’s Canadian branch in Toronto after the California Department of Financial Protection and Innovation shut down the bank, which is headquartered in Santa Clara, California, and appointed the FDIC as its receiver.

Credit Suisse joined the fun:

Shares in Credit Suisse tumbled to a record low on Wednesday, leading a brutal day for banking stocks, as the embattled Swiss lender’s biggest shareholder said it would not make further investments in the firm.

A plunge of nearly 27 percent in Credit Suisse’s shares raised new worries about the banking industry on a day when broader European stock markets suffered sharp losses.
…
The latest setback came on Wednesday, when the chairman of the state-owned Saudi National Bank — which, as part of the firm’s turnaround plan, agreed to invest up to $1.6 billion for a nearly 10 percent stake, making it the Credit Suisse’s largest shareholder — ruled out any more investments in the firm.

But the reason the Saudi bank provided did not have to do with losing faith in Credit Suisse’s finances.
…
If Saudi National Bank were to raise its stake above 10 percent, it would be subject to additional Swiss regulations that Mr. Al Khudairy said he was not interested in becoming subject to.

But they do have some hope:

The cost of financial contracts that insure against a default by the bank spiked to the highest level on record.

Unlike Silicon Valley Bank, Credit Suisse is considered a global systemically important financial institution, with $569 billion in assets as of year’s end and vastly stricter capital requirements. There is no sign of a gaping hole in the bank’s balance sheet, and it has tens of billions of dollars in cash stored at central banks across the world that it can draw upon, said Johann Scholtz, a research analyst at Morningstar.

But the costs to fund its operations have jumped significantly in recent weeks.

Banks often borrow from each other in what are known as overnight lending markets. The cost of that funding is partially influenced by the price of an instrument known as a credit default swap — essentially, a form of insurance that one party buys to protect against the possibility that another party will default. The higher the risk of default, the higher the price of the C.D.S., and the higher the cost of funding.

Given Credit Suisse’s struggles, the danger that it could default drove banks and others that do business with Credit Suisse to buy more swaps to cover their increased risk. As the price of Credit Suisse’s swaps rose throughout the trading day Wednesday, the likelihood that the bank would have to pay a lot more in the overnight market to fund itself also rose.
…
Shortly after European markets closed on Wednesday, Switzerland’s central bank and Finma, the country’s financial regulator, issued a joint statement certifying Credit Suisse’s financial health.

The firm “meets the higher capital and liquidity requirements applicable to systemically important banks” and was not directly at risk from the banking turmoil in the United States, the two said. Still, they noted that Credit Suisse’s stock and debt prices had fallen — and that the Swiss National Bank would backstop the bank if needed.

“We welcome the statement of support,” Credit Suisse said in a statement.

Bonds went crazy:

The two-year Treasury yield, which is particularly sensitive to Fed policy, fell by a fifth of a percentage point, a big move for that asset, to just over 4 percent. Futures markets still expect that Fed policymakers will raise rates by a quarter-point at their next meeting, but they now believe that the central bank will begin cutting rates in the second half of the year, setting rates at a lower level at the end of the year than they are now.

In a sign of the whipsaw trading conditions confronting traders, a measure of volatility in the bond market soared to its highest level since 2009.

But there was good news for one Canadian company:

The U.S. regulator approved Canadian Pacific Railway Ltd.’sCP-T +5.47%increase
US$27-billion takeover of Kansas City Southern on Wednesday, allowing Canada’s second-biggest rail shipper to forge a network that reaches the Gulf of Mexico and Pacific Ocean via the North American industrial heartland.

“This merger will create the first railroad providing single-line service spanning Canada, the United States, and Mexico,” the U.S. Surface Transportation Board said in its ruling.

The takeover is expected to create jobs, remove 64,000 trucks from North American roads, and support investment in infrastructure, the STB said.

But there are other markets in the doldrums:

The Canadian Real Estate Association says homes sales shrunk by 40 per cent in February compared with a year ago.

The association says February sales were comparable to what was recorded during the same month in 2018 and 2019, before the COVID-19 pandemic.

The year-over-year drop in home sales in February came as the national average sale price posted an 18.9 per cent decline compared with the all-time record in February 2022.

The real estate association says the actual average home price in Canada was $662,437 in February.

And the US is getting a version of Interac:

The Federal Reserve announced that the FedNow Service will start operating in July and provided details on preparations for launch.

The first week of April, the Federal Reserve will begin the formal certification of participants for launch of the service. Early adopters will complete a customer testing and certification program, informed by feedback from the FedNow Pilot Program, to prepare for sending live transactions through the system.

Certification encompasses a comprehensive testing curriculum with defined expectations for operational readiness and network experience. In June, the Federal Reserve and certified participants will conduct production validation activities to confirm readiness for the July launch.

“We couldn’t be more excited about the forthcoming FedNow launch, which will enable every participating financial institution, the smallest to the largest and from all corners of the country, to offer a modern instant payment solution,” said Ken Montgomery, first vice president of the Federal Reserve Bank of Boston and FedNow program executive. “With the launch drawing near, we urge financial institutions and their industry partners to move full steam ahead with preparations to join the FedNow Service.”

FedNow has a dedicated explanatory website. Take that, Venmo! Suck it, PayPal!

PerpetualDiscounts now yield 6.43%, equivalent to 8.36% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.88% on 2023-3-10 and since then the closing price has changed from 15.35 to 15.38, an increase of 19bp in price, with a Duration of 12.47 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decline in yield of about 1bp since 3/10 to 4.87%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened substantially to about 350bp from the 320bp reported March 8.

The US Inflation report came out today:

Price increases did cool slightly on an annual basis, with the Consumer Price Index climbing 6 percent over the year through February, the Labor Department said Tuesday. That was down from 6.4 percent in January, and matched the slowdown that economists expected. That seemed like an encouraging sign, but the underlying details of the report made the data more worrying.

Inflation looked far firmer beneath the surface. The price index climbed 0.5 percent from the previous month after it was stripped of food and fuel prices — both of which bounce around a lot — offering a sense of underlying price pressures. That was up from 0.4 percent in January and more than economists had forecast.

In fact, the increase was the fastest monthly pickup in the so-called core index since September, which is not the kind of progress central bankers are hoping for a year into their fight against inflation.
…
But policymakers have watched with concern as price increases have spread into services categories, which include purchases like manicures, travel and restaurant meals. Those areas more closely reflect underlying economic momentum, and price pressures in them can be harder to stamp out.

In February, a measure of services inflation that excludes housing — a metric the Fed watches very closely — picked up notably on a monthly basis. Bloomberg’s version of the gauge climbed 0.43 percent last month, up from 0.27 percent in January.

Teachers had a good year:

Teachers’ annual return beat its internal benchmark of 2.3 per cent, and its net assets increased to $247.2-billion. The plan’s managers have set at target to reach $300-billion in assets by 2030.

Over 10 years, Teachers has returned 8.5 per cent, and the plan was considered fully funded at year-end.

The gains Teachers reported in 2022 stand in contrast to double-digit percentage losses for many public stock and bond indexes, which plunged last year as high inflation and rapidly rising interest rates created volatility in markets.
…
By comparison, Royal Bank of Canada’s RBC I&TS All Plan Universe saw defined benefit pension plan assets – as measured by a typical mix of publicly held stocks and bonds – shrink 10.3 per cent last year, which was the largest loss since the 2008 financial crisis.
…
Among other major pension plans, Ontario Municipal Employees Retirement System (OMERS) gained 4.2 per cent in 2022, while the Caisse de dépôt et placement du Québec lost 5.6 per cent. Yet the results of different plans are not directly comparable because of differences their portfolios, the makeup of their membership, their liabilities and plan structures.

TXPR closed at 555.98, down 1.38% on the day. Volume today was 894,490, well below the median of the past 21 trading days.

CPD closed at 11.06, down 0.72% on the day. Volume was 152,900, second-highest of the past 21 trading days.

ZPR closed at 9.15, down 0.97% on the day. Volume was 225,260, fourth-highest of the past 21 trading days.

Five-year Canada yields plummetted to 2.92% today.

Well, it was a big day for lots of people:

The stocks of U.S. regional banks plummeted on Monday as investors reassessed how much such lenders were worth following the recent sudden collapses of Signature Bank and Silicon Valley Bank.

Rapidly falling prices led to the temporary halt in trading for roughly a dozen banks in the morning when they triggered so-called circuit breakers, which are meant in part to prevent runaway crashes.

First Republic Bank stood out as the worst mover on the day, down 60 percent. Arizona-based Western Alliance tumbled 45 percent, KeyCorp and Comerica both dropped nearly 30 percent, and Utah-based Zions Bancorp fell about 25 percent.
…
The two-year Treasury yield, which is sensitive to changes in interest rate expectations, fell 0.59 percentage points, to just above 4 percent — its biggest one-day drop since the “Black Monday” of October 1987, one of the most severe market crashes on record.
…
Investors’ expectations for where the Fed will have set interest rates by June have fallen from 5.48 percent last week to 4.57 percent on Monday.

There was this early commentary about SVB:

The collapse may have been an unforced, self-inflicted error: The bank’s management chose to sell $21 billion of bonds at a $1.8 billion loss, in large part, it appears, because many of those bonds were yielding an average of only 1.79 percent at a time when interest rates had risen drastically and the bank was starting to look like an underperformer relative to its peers. Moody’s was considering downgrading its rating. The bank’s management — with the help of Goldman Sachs, its adviser — chose to raise new equity from the venture capital firm General Atlantic and also to sell a convertible bond to the public.

It isn’t clear if the bond sale or the fund-raising, at least initially, had been made under duress. It was meant to reassure investors. But it had the opposite effect: It so surprised the market that it led the bank’s very smart client base of venture capitalists to direct their portfolio clients to withdraw their deposits en masse.

And there was this comiseration:

But S.V.B.’s depositors are not normal customers. They’re start-up founders and investors, the kinds of people who scrutinize banks’ securities filings, who pay close attention to risk and volatility and who (most importantly) talk to each other on the internet all day. Once a few people in tech raised questions about the firm’s solvency, Slack channels and Twitter feeds lit up with dire warnings from venture capitalists, and soon many people were panicking.

Would all of this have happened if S.V.B.’s clientele had been made up of restaurant owners and dog groomers, instead of tech start-up founders? Possibly. But it seems unlikely. In this case, S.V.B.’s demise seems to have been hastened by the clubby, herd-following nature of the industry it served.

But on Sunday the hammer dropped:

After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.

Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

And – this is actually shocking and counterproductive – easy financing terms were announced:

The Federal Reserve is prepared to address any liquidity pressures that may arise.

The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.

Collateral taken at par, even when they’re not par and that is, in fact, the problem? This looks awfully close like lending to an insolvent bank, which is stupid, and doing so on easy terms, which is worse. Banks must be punished for using emergency funding!

Elizabeth Warren weighed in:

S.V.B. suffered from a toxic mix of risky management and weak supervision. For one, the bank relied on a concentrated group of tech companies with big deposits, driving an abnormally large ratio of uninsured deposits‌. This meant that weakness in a single sector of the economy could threaten the bank’s stability.

Instead of managing that risk, S.V.B. funneled these deposits into long-term bonds, making it hard for the bank to respond to a drawdown. S.V.B. apparently failed to hedge against the obvious risk of rising interest rates. This business model was great for S.V.B.’s short-term profits, which shot up by nearly 40 ‌percent over the last three years‌ — but now we know its cost.

S.V.B.’s collapse set off looming contagion that regulators felt forced to stanch, leading to their decision to dissolve Signature Bank. Signature had touted its F.D.I.C. insurance as it whipped up a customer base tilted toward risky cryptocurrency firms.

Had Congress and the Federal Reserve not rolled back the stricter oversight, S.V.B. and Signature would have been subject to stronger liquidity and capital requirements to withstand financial shocks. They would have been required to conduct regular stress tests to expose their vulnerabilities and shore up their businesses. But because those requirements were repealed, when an old-fashioned bank run hit S.V.B‌., the‌ bank couldn’t withstand the pressure — and Signature’s collapse was close behind.

So, who’s Signature?

State regulators closed New York-based Signature Bank on Sunday, the third largest failure in U.S. banking history, two days after authorities shuttered Silicon Valley Bank in a collapse that stranded billions in deposits.

The Federal Deposit Insurance Corporation (FDIC) took control of Signature, which had $110.36 billion in assets and $88.59 in deposits at the end of last year, according to New York state’s Department of Financial Services.
…
Signature was a commercial bank with private client offices in New York, Connecticut, California, Nevada and North Carolina, and had nine national business lines, including commercial real estate and digital asset banking.

As of September, almost a quarter of its deposits came from the cryptocurrency sector, but the bank announced in December that it would shrink its crypto-related deposits by $8 billion.

Those of an inquisitive bent might care to examine SVB’s investor relations page, particularly the 2022 Annual Financials. As I said here:

SVB had $15,160-million in unrealized losses in their HTM portfolio (page 125 of the PDF).

They had $16,004-million “Total SVBFG stockholders’ equity” (page 95 of the PDF).

HTM haa got to go!

I understand that some people feel that Historical Cost Accounting is fine, but I’ve never quite understood why. If something’s worth $1, then showing it on the books at $2 is just a lie, surely! It’s even worse when you use the concept to lie to yourself about the value of your GIC!

I do hope this issue is examined in the Fed’s review:

The Federal Reserve Board on Monday announced that Vice Chair for Supervision Michael S. Barr is leading a review of the supervision and regulation of Silicon Valley Bank, in light of its failure. The review will be publicly released by May 1.

“The events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review by the Federal Reserve,” said Chair Jerome H. Powell.

“We need to have humility, and conduct a careful and thorough review of how we supervised and regulated this firm, and what we should learn from this experience,” said Vice Chair Barr.

Anyway, this had an effect on short-term rates in Canada:

Quite the change from the rates I showed from March 10! Mark Rendell comments in the Globe:

As recently as last week, markets were expecting the U.S. central bank to increase its benchmark interest rate by another percentage point in the coming months, and to hold off rate cuts until 2024. But by Monday, markets were doubting that the Fed will raise rates at all at its next meeting on March 22, and pricing in cuts by this summer.

The abrupt shift in interest rate expectations roiled global bond markets. Two-year U.S. Treasury bond yields fell by 100 basis points over the past three trading days, the swiftest drop since the 1980s. Yields on two-year Government of Canada bonds dropped 42 basis points on Monday alone. (A basis point is 1/100th of a percentage point. Bond yields and prices move in opposite directions.)
…
But following on the heels of the U.K. bond crisis last fall – which saw pension funds squeezed by a sudden shift in asset valuations – the SVB episode has heightened concerns that aggressive monetary policy tightening has left underappreciated cracks throughout the financial system.

I must point out that it wasn’t poor innocent pension funds in the UK that were squeezed by a sudden shift in asset valuations … it was ultra-dumb pension funds run by bozo-dorks who believed in the equation:

who got burnt.

Anyway, in more traditional news, the Survey of Consumer Expectations came out today:

Median one-year-ahead inflation expectations declined by 0.8 percentage point to 4.2 percent, according to the February Survey of Consumer Expectations. Three-year-ahead expectations remained at 2.7 percent, while the five-year-ahead measure increased by 0.1 percentage point to 2.6 percent. Labor market expectations improved, with unemployment expectations and perceived job loss risk decreasing and job finding expectations increasing. Expectations for voluntary job quits reached the highest level since the start of the pandemic.

And I have completely lost confidence in governance at Canaccord:

Acquiescing to a major shareholder’s demands, the Canaccord Genuity Group Inc. board members who had been evaluating an insider bid to take the independent Canadian investment bank private have quit.

Gillian Denham, Dipesh Shah, Charles Bralver and Sally Tennant have all resigned as directors of the company, Canaccord announced early Monday. The four had previously comprised a special committee evaluating a takeover bid worth $11.25 per share, or about $1.1-billion, from more than 50 members of Canaccord’s management team.

The resignations come just days after Skky Capital Corp. Ltd, which owns an 8.8-per-cent stake in Canaccord, publicly called for the special committee to be replaced. Skky, a Bermuda-based fund manager controlled by Canadian financier Gordon Flatt, said on March 7 that it had “lost confidence” in the special committee after it rejected the management group’s offer as too low.

Andrew Willis comments in the Globe:

In rough terms, there’s $500-million up for grabs in the fight for investment bank Canaccord Genuity Group CF-T -2.37%decrease
.

On Monday, we found out who stands to win that half-billion-dollar prize. It will likely be claimed by Canaccord’s executives, who are attempting to take the dealer private for $1.1-billion.

The losers are the company’s shareholders, whose best hope for a sweeter takeover offer vanished over the weekend, when Canaccord’s four-member special committee and a fifth independent director resigned. The most dramatic act any board member can contemplate is quitting. To have five directors exit during a takeover is a sign of serious dissention.

I’m sure glad I’m not a shareholder. The company is run by scoundrels.

But at least the day is not devoid of cheerful news:

A trio of competition law experts are calling on federal Industry Minister François-Philippe Champagne to open up the domestic telecom market to foreign companies in order to bring down cellphone prices.

They called for sweeping changes to restrictions on foreign ownership rules as Mr. Champagne is poised to make a decision on Rogers Communications Inc.’s … $20-billion takeover offer for Shaw Communications Inc. and the federal government is updating competition laws.

Three former leaders of the Competition Bureau and Competition Tribunal – the federal agencies charged with consumer protection – said rules protecting domestic telecom companies that date back to the 1960s no longer serve the country’s interests.

“Historical restrictions on foreign-based ownership have become outdated in the current environment where Canadian consumers are demanding lower prices, akin to that paid by consumers in many other countries,” the report said.

Its authors are Calvin Goldman, former commissioner of competition, Larry Schwartz, an ex-member of the Competition Tribunal, and Richard Taylor, who was deputy commissioner of the Competition Bureau. The C.D. Howe Institute, a Toronto-based think tank, published the paper on Friday.

Yes! Start with telecom, then get cracking on banks, eggs and milk! Move it!

Jobs, jobs, jobs!

Employers added 311,000 jobs in February, the Labor Department reported Friday, continuing a hotter-than-expected streak that has created abundant job opportunities while frustrating the Federal Reserve in its drive to contain stubborn inflation.
…
Wages grew 0.2 percent from January to February, a continued deceleration and the smallest increase since February 2022. That is likely to provide some comfort to Federal Reserve policymakers, who have closely watched earnings as a driver of inflation.
…
Average hourly earnings for workers grew at modest pace in February — and were up 4.6% compared to a year earlier. That is not too far from the rate before the current inflation spike. No sign of a “wage-price spiral” there, and yet, with inflation still hovering near 6% for now, the idea that the labor market needs to soften to slow overall consumer demand will remain.

… and in the frozen north:

Employment in Canada rose slightly last month after January’s jobs report raised eyebrows among economists anticipating a slowdown in the labour market this year.

In its labour force survey Friday, Statistics Canada said the economy added 22,000 jobs in February, with employment up in the private sector.

The federal agency said the country’s unemployment rate held steady at five per cent, hovering near record-lows.

The bulk of the job gains were made in health care and social assistance, public administration and utilities. Meanwhile, jobs were lost in business, building and other support services.
…
With affordability top-of-mind for many Canadians, the latest jobs report shows the gap between wage growth and inflation is narrowing. Average hourly wages were up 5.4 per cent in February compared with a year ago while annual inflation rate was 5.9 per cent in January.

Many looked at the Canadian wage gains:

Canadian wage growth picked up in February and surpassed 5 per cent, a potential setback for the Bank of Canada as it tries to subdue inflation and a rollicking labour market.

On an annual basis, average hourly wages rose 5.4 per cent to $33.16, an acceleration from the 4.5-per-cent pace in January, Statistics Canada said Friday in a report. Financial analysts were expecting wage growth of 5.1 per cent. To an extent, the numbers were influenced by the comparison to February, 2022, when lower-paid service workers were rehired after COVID-19 lockdowns, pushing down average pay that month.
…
However, labour productivity – as measured by real gross domestic product per hour worked – has fallen for three consecutive quarters. Put another way, employees are producing fewer goods and services per hour of work. To compensate for less output and rising labour costs, many companies will charge their customers higher prices.

This article had great tables, showing the swap contract implied rates before the jobs report:

… and at about 11am, when jobs had been digested and news of SVB bank was the theme of the moment:

There’s enough of a difference there to make a difference!

But the big news is that SVB Bank went bust today:

Silicon Valley Bank, one of the world’s most prominent technology financiers, failed Friday in the largest collapse of a U.S. bank since the 2008 credit crisis, stunning a sector already mired in a deep downturn.

The 40-year-old bank, a mainstay financier across the tech world, including a presence in Canada, was shut Friday by California’s Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation as receiver.
…
The shutdown of SVB stemmed from its decision in 2021 to pull back on lending and instead stash tens of billions into long-term, low-interest-rate mortgage-backed securities.

But as interest rates rose, bond values fell, saddling SVB with a paper loss, which it crystalized when it was forced to sell some bonds for a US$1.8-billion loss.

SVB revealed the loss and plans to hastily sell US$2.25-billion in shares on Thursday. That sent its stock price tumbling 60 per cent, and prompted calls by some venture capital firms for companies in their portfolios to pull deposits with SVB, which set off a run on the bank.

Sounds like somebody at SVB skipped the lecture on Risk at CFO school! But banking can be a tough business – unless you’re protected from foreign competition – and I’ve done nowhere near enough study of the issue to justify pointing a finger.

The failure had an effect on markets:

The KBW regional banking index ended the session down 2.4% while the S&P 500 financials index lost 1.8%.
…
In Toronto, the S&P/TSX composite index ended down 311.8 points, or 1.55%, at 19,774.92, its lowest closing level since Jan. 5.

For the week, the index was down 3.9%, its biggest weekly decline since September.
…
Financials, the most heavily-weighted sector on the TSX, fell 2.2%, including declines for the six major bank stocks.

Information technology lost 2.5%, while energy was down 1.3% even as U.S. crude oil futures settled 1.3% higher at $76.68 a barrel.

All ten major sectors ended lower.

But there were other bankruptcies:

Bank of Montreal is buying LoyaltyOne Co., which runs the Air Miles loyalty rewards program, after the company filed for credit protection as a result of heavy debts and stiff competition.

Air Miles launched in Canada in 1992. BMO BMO-T -2.65%decrease
is currently the company’s leading partner, and a number of its credit cards are tied to the loyalty rewards program. BMO is buying Air Miles out of creditor protection for US$160-million, plus some assumed liabilities.

The Air Miles program has hemorrhaged partners over the past few years. The company relies on strong relationships with leading retailers, which offer the loyalty program’s reward points to customers, and receive marketing data and tools from LoyaltyOne in return. Retailers have also historically liked that the program helped to create repeat customers.

The partners Air Miles has shed in the past two years include the LCBO – which sells alcohol in Ontario – Lowe’s and Staples Canada.

In June, 2022, Air Miles suffered a major blow when grocers Sobeys and Safeway, which are owned by the same company, left the program. At the time, the Sobeys relationship represented roughly 10 per cent of adjusted earnings before interest, taxes, depreciation and amortization for Loyalty Ventures Inc., LoyaltyOne’s U.S.-based parent company.

With excellent timing, the New York Fed has released a staff report by Nicola Cetorelli, Mattia Landoni, and Lina Lu titled Non-Bank Financial
Institutions and Banks’ Fire-Sale Vulnerabilities:

Banks carry significant exposures to nonbanks from direct dealings, but they can also be exposed, indirectly, through losses in asset values resulting from fire-sale events. We assess the vulnerability of U.S. banks to fire sales potentially originating from any of twelve separate nonbank segments and identify network-like externalities driven by the interconnectedness across nonbank types in terms of asset holdings. We document that such network externalities can contribute to very large multiples of an original fire sale, thus suggesting that conventional assessments of fire-sale vulnerabilities can be grossly understated and highlighting the value of treating nonbank financial institutions as one organic whole for monitoring purposes.
…
The risk exposures of banks from direct links to NBFIs are certainly of first-order importance. The inability of NBFI counterparties to honor their liabilities would cause losses and possible distress, with a potential for further shock propagation. However, banks may also be exposed to NBFIs indirectly, simply by virtue of common asset holdings: there may be states of the world where certain nonbanks may experience distress, and as a result they may be forced to sell assets at fire-sale conditions. Such asset sales, in turn, may depress prices and thus impair the net worth of banks that hold similar assets. In addition to recent, prominent examples of fire sales by British pension funds and U.S. money market funds (Li et al., 2021), this behavior has been documented for many other NBFI types, such as insurance companies (Merrill et al, 2021; Ellul et al., 2011; 2015), broker-dealers (see, e.g., Rosengren, 2014; Begalle et al., 2016; Carlson and Macchiavelli, 2020), hedge funds (Edwards, 1999) and equity and bond mutual funds (Coval and Stafford, 2007, Falato et al., 2021).
…
The analysis has allowed us to rank order the twelve NBFI segments along separate dimensions: First, in terms of the relative ability to impose direct, first-round losses on banks. Finance companies and life insurers are at the top of this ranking, because of their size and direct asset overlap with banks. Second, on the basis of segments’ capacity to impose aggregate losses, once the knock-on, second-round effects are taken into account. Bond and equity funds, but also pension funds, rise at the top of the ranking because they can impose diffused first-round losses across all segments or concentrated losses on segments highly influential on banks. Third, we also rank segments for their role as vectors of shock propagation. Along this dimension, life insurers and P&C insurers are at the top of the ranking because of their very diversified asset portfolios, which make them especially vulnerable to first-round losses originating from a diverse cross-section of other segments.

And the IMF has released a working paper by Divya Kirti, Maria Soledad Martinez Peria, Prachi Mishra and Jan Strasky titled What Policy Combinations Worked? The Effect of Policy Packages on Bank Lending during COVID-19:

This paper analyzes the impact of fiscal, monetary, and prudential policies during the COVID-19 pandemic on bank lending across a broad sample of countries. We combine a comprehensive announcementlevel dataset of policy actions with bank and firm-level information to analyze the effectiveness of different types of policies. We document that different types of policies were introduced together and hence accounting for policy combinations, or packages, is crucial. Lending grew faster at banks in countries that announced packages combining fiscal, monetary, and prudential measures relative to those that relied on some, but not all, policy dimensions. Within packages including all three types of policy measures, banks in countries with more and larger measures saw faster loan growth. The impact was larger among more constrained banks with low equity levels. Large packages combining fiscal, monetary and prudential policies also increased liquidity for bank dependent firms, but did not disproportionately benefit unviable firms.

… and the BoC updated its Indicators of financial vulnerabilities:

The loan-to-income (LTI) ratio is a measure of initial affordability. It is calculated when a new mortgage is issued and compares the size of the mortgage to the gross income stated by the homebuyer when they qualified for the mortgage. Research by Bank staff found that, all else being equal, homebuyers with higher LTI ratios are more vulnerable to financial stress (Bilyk, Chow and Xu 2021). This means that highly indebted homebuyers are more likely to fall behind on debt payments if they experience a negative income shock or a rise in mortgage interest rates. The Bank uses the share of new mortgages with an LTI ratio greater than 450% to identify the most vulnerable households.

The mortgage debt service ratio (DSR) measures the share of income a homebuyer dedicates to their mortgage debt payments. All else being equal, a household that spends a large portion of its income on mortgage payments may be more vulnerable to financial stress—it may be more likely to fall behind on debt payments if a negative income shock or a rise in mortgage interest rates were to occur. The Bank uses the share of new mortgages with a mortgage DSR greater than 25% to identify the most vulnerable households.

There are other charts available. I must compliment the BoC on the design for this page – the charts are very easy to download. Well done!

It was a funny day for the Canadian preferred share market – TXPR was down about 80bp shortly prior to the close, but was only down 8bp when everyone packed up for the weekend.

Banks don’t compete on price. They do, however, compete by regulation:

The federal banking watchdog has launched a formal review of cash exchange-traded funds, one of Canada’s most popular retail investments, amid a Bay Street spat that stems from surging demand for them.

The Office of the Superintendent of Financial Institutions, which regulates banks, launched its review in the fall and is studying any liquidity concerns posed by these ETFs, according to three financial industry sources. The Globe and Mail is not identifying the sources because they were not authorized to speak publicly about the matter.
…
This access has rankled some banks, according to the sources, because ETFs that offer premium rates to retail clients are likely to lure away customers from banks, hitting that sector’s profits.
…
Royal Bank of Canada RY-T -0.63%decrease
does not provide funding for any cash ETFs, and Toronto-Dominion Bank TD-T -1.45%decrease
has only minimal exposure. Both banks have blocked access to these funds on their online retail investing platforms.

BoC Senior Deputy Governor Carolyn Rogers reminds us that the policy rate ‘pause’ may be temporary:

“If we continue to see the above-average wage growth that we’ve been seeing in Canada without stronger growth in productivity, it will be difficult to bring inflation all the way down to 2 per cent,” Ms. Rogers said in a speech to the Manitoba Chambers of Commerce.

The central bank’s decision to hold its overnight rate at 4.5 per cent on Wednesday marked a turning point after eight consecutive rate hikes. However, Ms. Rogers emphasized that this is a “conditional pause,” and that the bank could restart its rate-hike campaign if inflation and economic growth don’t slow as quickly expected.

“We’ll need to see more evidence to fully assess whether monetary policy is restrictive enough to return inflation to 2 per cent,” she said.

Markets were unkind to banks today:

Wall Street’s three major stock indexes closed lower on Thursday, with bank stocks creating the biggest drag while investors also worried that Friday’s jobs report could spur more aggressive interest rate hikes from the Federal Reserve. The Canadian benchmark stock index also fell and closed at its lowest level in nearly two months.

The S&P 500′s bank index finished down 6.6% after hitting its lowest level since mid-October. Investors fled the sector after tech-industry lender SVB Financial Group launched a share sale to shore up its balance sheet due to declining deposits from startups struggling for funding.

This is due, apparently, to problems at a techno-bank:

The S&P 500 bank index was down 4.6% on Thursday as investors grew wary of the entire sector after SVB Financial Group’s share sale announcement and crypto bank Silvergate’s decision to wind down operations.

Shares in SVB, whose operating segments include Silicon Valley Bank, led declines, with a drop of 43.8% to $150.62 after it announced the $1.75 billion share sale late on Wednesday as it battles cash burn due to declining deposits from startups struggling with a venture capital funding drought.

The second biggest decliner in the S&P 500 index was another San Francisco-based bank, First Republic, which was off 14.1% after hitting its lowest level since October 2020. Also Zion Bancorp, down 8.2%.

The SPDR S&P regional banking ETF was down 6.0% after hitting its lowest point since January 2021.

The BoC maintained the policy rate:

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.

Global economic developments have evolved broadly in line with the outlook in the January Monetary Policy Report (MPR). Global growth continues to slow, and inflation, while still too high, is coming down due primarily to lower energy prices. In the United States and Europe, near-term outlooks for growth and inflation are both somewhat higher than expected in January. In particular, labour markets remain tight, and elevated core inflation is persisting. Growth in China is rebounding in the first quarter. Commodity prices have evolved roughly in line with the Bank’s expectations, but the strength of China’s recovery and the impact of Russia’s war in Ukraine remain key sources of upside risk. Financial conditions have tightened since January, and the US dollar has strengthened.

In Canada, economic growth came in flat in the fourth quarter of 2022, lower than the Bank projected. With consumption, government spending and net exports all increasing, the weaker-than-expected GDP was largely because of a sizeable slowdown in inventory investment. Restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and foreign demand.

The labour market remains very tight. Employment growth has been surprisingly strong, the unemployment rate remains near historic lows, and job vacancies are elevated. Wages continue to grow at 4% to 5%, while productivity has declined in recent quarters.

Inflation eased to 5.9% in January, reflecting lower price increases for energy, durable goods and some services. Price increases for food and shelter remain high, causing continued hardship for Canadians. With weak economic growth for the next couple of quarters, pressures in product and labour markets are expected to ease. This should moderate wage growth and also increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers.

Overall, the latest data remains in line with the Bank’s expectation that CPI inflation will come down to around 3% in the middle of this year. Year-over-year measures of core inflation ticked down to about 5%, and 3-month measures are around 3½%. Both will need to come down further, as will short-term inflation expectations, to return inflation to the 2% target.

At its January decision, the Governing Council indicated that it expected to hold the policy interest rate at its current level, conditional on economic developments evolving broadly in line with the MPR outlook. Based on its assessment of recent data, Governing Council decided to maintain the policy rate at 4½%. Quantitative tightening is complementing this restrictive stance. Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase 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 of the G&M comments:

Interest rate swaps, which capture market expectations about future rate hikes, are pricing in another quarter-point rate increase this summer, and no rate cuts before the end of the year.
…
Much of the decline in inflation has come from falling oil prices, as well as a drop in durable goods inflation, thanks to lower shipping costs and less consumer demand. For inflation to keep falling, there will also need to be a slowdown in service price inflation, which is driven to a large extent by wages.

Fabio Panetta, Member of the Executive Board of the European Central Bank, gave a speech titled The Quick and the Dead: building up cyber resilience in the financial sector:

The Euro Cyber Resilience Board for pan-European Financial Infrastructures (ECRB) has played a key role in protecting the security and integrity of the financial system from these threats. The last three years have shown that we can work under adverse conditions towards a common goal. Our financial infrastructures have proven their resilience to cyber threats. But this does not mean we can become complacent or any less vigilant in the face of cyber threats. We simply cannot afford to fall behind the curve: cybersecurity must be the backbone of digital finance.

Today I will take stock of the ECRB’s work. I will then discuss current cyber threats and emerging risks before outlining the implications for our work in the future.
…
The recent cyberattack on the third-party provider ION Cleared Derivatives shows how an attack on one software provider may cascade onto their clients. In this specific case, the disruptions to the trading and clearing of financial derivatives remained limited, but we cannot ignore scenarios where the attacks could have propagated quickly, disrupting the financial system.

This case signalled the need for financial entities to review their third-party providers, the providers of these third-parties, their cyber resilience levels and the systemic impact that may ensue from a cyberattack on any of these providers. In particular, it is vital to assess critical service dependencies on third-party products and services which could be disrupted or even terminated as a result of a cyberattack. Mitigating measures need to be put in place.
…
Ransomware attacks are growing more sophisticated and damaging, which in turn may enable ransomware threat actors to obtain even more resources. 2022 was one of the most active years for ransomware activity. However, it was also the first year that the majority of victims of ransomware attacks decided not to pay up, which indicates that the approach towards ransomware attacks is changing.

Authorities globally are stepping up their efforts to counter ransomware. For instance, the G7 issued
Fundamental Principles on Ransomware Resilience in October 2022.

We need to tackle ransomware attacks from various angles.

First, every firm must be ready to repel ransomware attacks, either through the use of proper cyber hygiene practices or by ensuring that data is backed up regularly and is kept up-to-date and tamper-proof.

Second, enforcement agencies need to conduct forensic analyses, locate attackers and join forces to prosecute them.

Third, crypto-assets – especially unbacked crypto-assets, which are used to make ransomware payments owing to the anonymity and money laundering possibilities they offer – need to be strictly regulated. Similarly, crypto-asset transfers must be traceable.

The proposed EU Regulation for Markets in Crypto-Assets (MiCA) and revision to the Regulation on information accompanying transfers of funds, which extends the “travel rule” to crypto-assets, are important steps. However, to be effective and prevent regulatory arbitrage, regulation must be stepped up globally. Implementation of the Financial Action Task Force (FATF) guidance for crypto-assets and its enforcement at international level are therefore crucial.
…
Even if we do not realise it, the use of artificial intelligence (AI) is already widespread. We use AI every day, including on our phones, in our homes and at the workplace. And firms use it to harness big data.

AI can help to strengthen cybersecurity, for instance, by improving the detection of highly sophisticated cyberattacks through its ability to identify abnormal system behaviour compared with an established baseline. This is the kind of potential that we need to leverage.

But AI can also multiply cyber risks by, for instance, helping malicious individuals, even those who have limited or no technical skills, draft very convincing phishing emails or identify topics that will achieve the maximum engagement from those being targeted. To make matters worse, AI can even create and fix code that can be used to exploit and compromise the endpoint. This opens up new possibilities for malicious individuals to use AI to launch cyberattacks. Although AI development firms try to install safeguards to prevent its unethical use, they can be circumvented.

Andrew Hauser, Executive Director for Markets of the Bank of England, gave a speech at the Chicago Booth Initiative on Global Markets’ Workshop on Market Dysfunction titled Looking through a glass
onion: lessons from the 2022 LDI intervention:

If the mayhem in financial markets in Spring 2020 had been a genuine one-off, that might have been the end of things. But what Lorie and I wanted to highlight was that, while Covid itself may have been truly exceptional, the financial market propagation mechanisms that turned that shock into a nascent systemic liquidity crisis reflected more structural trends: an increasing reliance by the real economy on core capital markets rather than banks; constraints on market intermediation capacity; and a range of unresolved vulnerabilities in non-bank firms that played an ever-growing role in those markets. In short, even if nothing as awful as Covid ever happened again, market dysfunction at a scale capable of threatening systemic stability could recur – and in all likelihood, would do so. And central banks needed to be ready to play their part.
…
In my remarks today, I want to discuss four main lessons that I take from those events: The LDI operations were successful, but highlight many questions for the future. For me, three in particular stand out:

1. The changing nature of systemic liquidity risk: though focus naturally alights on the idiosyncrasies of the autumn fiscal announcements and the UK LDI sector, the real import lies in the features the events had in common with the dash for cash and other similar developments: another reminder, if more were needed, that we face a new era of liquidity risk, originating outside the banking system, that can amplify shocks, destabilise core markets and undermine monetary and financial stability.

2. Public backstops vs private self insurance: as a central bank it fell to us to provide a public backstop to prevent systemic liquidity risk from undermining monetary and financial stability. At the same time, the events revealed material weaknesses in pension fund and LDI risk management. Given the costs involved, we must ensure public backstops do not end up substituting for a failure to achieve the appropriate level of private insurance against liquidity risk here and elsewhere in the non-bank sector.

3. Ensuring we have central bank tools that are effective: to backstop these new forms of systemic liquidity risk effectively, central banks need the right tools – to detect risks in a timely way; and to respond. In the LDI case, early warning required the use of qualitative as well as quantitative market intelligence. Effective response required the use of a buy/sell facility. Lending directly to non-banks would not have worked in this case. But it has many desirable properties for other scenarios, and is a high priority for future work.

4. Calibrating central bank tools to minimise risk: backstop facilities must be carefully designed if they are to be effective in removing the threat to systemic stability while minimising risks to the stance of monetary policy, to public funds, and to the incentives of market participants. In the LDI case, we sought to achieve that by grounding the objectives of the tool in restoring financial stability, targeting it on the parts of the market most in need of assistance, pricing it as a backstop to ensure we bought no more than needed, and ensuring it was strictly time limited, in its operation and in its unwind.

The LDI operations were successful, but highlight many questions for the future. For me, three in
particular stand out:

• Where do societies want to draw the line between public and private insurance against systemic liquidity in non-banks, and how do they ensure regulatory and central bank facility thinking develops in a co-ordinated way?
• What is the right mix of central bank tools between buy/sell and lending/repo facilities? Where lending is preferred, which firms do we need to reach to maintain stability; how do ensure we can reach them (legally and operationally); and what terms and conditions should they face?
• What are the pros and cons of establishing standing facilities, whose terms and conditions are known in advance; versus simply ensuring we are ready to act in a more discretionary ways as/when required?

In terms of the intervention tool itself, we would have much preferred to rely solely on collateralised
lending. But this wasn’t viable, for the simple reason that there was no-one either willing to, or capable of, borrowing from us at sufficient speed to staunch the firesale dynamic. The LDI funds themselves needed less leverage not more. The pension funds that invested in the LDI funds had collateral, but many lacked the ability to borrow, and anyway were too numerous and preoccupied in time-consuming processes aimed at reaching formal decisions as to whether to recapitalise their investments to act at the speed required. We had many ways to provide liquidity to the banks,[12] but they were already flush with liquidity, and no better placed than we were to pass liquidity on, either to pension schemes or LDI funds.[13] In the circumstances we faced, therefore, a buy/sell tool proved the only way to stop firesale dynamics in a timely manner (Figure 3).

This is clearly not where we want to be in the steady state. Collateralised lending programmes targeted directly at an appropriate set of non-banks would be materially less risky, to public money and to market incentives; they would pose fewer potential conflicts with monetary policy; and could be put in place ahead of potential shocks, with well-understood operational, collateral and pricing terms. Developing viable options for such facilities is therefore a high priority on our work programme. There are at least three key sets of operational design questions to tackle. First, which non-banks do you need to be able to get liquidity to, in order to stem potential systemic shocks effectively? Second, are those non-banks able to borrow (or can we devise mechanisms to allow them to do so), both in terms of their legal remits, and in terms of their operational arrangements? And, third, what terms and conditions would we want to impose on borrowers, including pricing, collateral requirements and any access conditions – including regulatory status? I have to say that my instincts are that finding a workable group of non-bank entities that are (a) collectively systemically important enough to allow us to maintain stability, (b) legally and operationally able to borrow at sufficient size and speed, and (c) willing to meet the conditions of a borrowing programme, could be challenging. But some central banks, for instance the Canadians,[14] have made important progress in this area – and we will be learning from them and others.

Footnote 14 is: See for instance: Canada: Contingent Term Repo Facility (yale.edu) and COVID-19 crisis: Liquidity management at Canada’s largest public pension funds (bankofcanada.ca).
And, just to put things in perspective:

PerpetualDiscounts now yield 6.37%, equivalent to 8.28% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.17% on 2023-2-28 and since then the closing price has changed from 14.83 to 15.00, an increase of 115bp in price, with a Duration of 12.26 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decline in yield of about 9bp since 2/28 to 5.08%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened substantially to about 320bp from the 295bp reported March 1.

TXPR closed at 567.37, down 0.51% on the day. Volume today was 1.50-million, third-highest of the past 21 trading days.

CPD closed at 11.27, down 0.35% on the day. Volume was 93,900, above the median of the past 21 trading days.

ZPR closed at 9.39, down 0.42% on the day. Volume was 247,320, second-highest of the past 21 trading days.

Five-year Canada yields were at 3.59% today.

Life wasn’t exactly rosy in other markets, which the pundits attribute to Powell’s testimony to Congress:

Of Wall Street’s three major indexes, the Dow Jones Industrial Average lost most ground with a 1.7% decline, while the S&P 500 fell 1.5% and the Nasdaq Composite lost almost 1.3%. The S&P/TSX Composite Index lost 1.2%.

Powell sent stock investors fleeing when he told U.S. lawmakers earlier in the day that the Fed is prepared to hike rates in larger steps if future economic data suggests tougher measures are needed to control rising prices.

The remarks followed recent data showing an unexpected inflation increase in January and an unusually large jobs gain for the month.

Traders dramatically raised their bets for a 50-basis-point rate hike in March after Powell’s comments, with money market futures last pricing in a more than 70% chance of such a move, up from around 31% on Monday, according to CME Group’s FedWatch tool.
…
The Dow Jones Industrial Average fell 574.98 points to 32,856.46; the S&P 500 lost 62.05 points to 3,986.37; and the Nasdaq Composite dropped 145.40 points to 11,530.33.

All 11 major S&P sectors closed lower, led by economically sensitive financials which finished down 2.5%. Declining least was the consumer staples index, down 0.97%.
…
Meanwhile, the yield on two-year Treasury notes, which best reflects short-term rate expectations, hit 5% for the first time since July 2007.
…
The Toronto Stock Exchange’s S&P/TSX composite index ended down 239.26 points at 20,275.54, its lowest closing level since last Wednesday

The NYT reported:

Mr. Powell, in remarks before the Senate Banking Committee, also noted that the Fed’s fight against inflation was “very likely” to come at some cost to the labor market.

His comments were the clearest acknowledgment yet that recent reports showing inflation remains stubborn and the job market remains resilient are likely to shake up the policy trajectory for America’s central bank.
…
But a number of recent economic reports have suggested that inflation did not weaken as much as expected last year and remained faster than expected in January, while other data showed hiring remains strong and consumer spending picked up at the start of the year.

While some of that momentum could have owed to mild January weather — conditions allowed for shopping trips and construction — Mr. Powell said the unexpected strength would probably require a stronger policy response from the Fed.

“The process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy,” he told the committee. “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”

Fed officials projected in December that rates would rise to a peak of 5 to 5.25 percent, with a few penciling in a slightly higher 5.25 to 5.5 percent. Mr. Powell suggested that the peak rate would need to be adjusted by more than that, without specifying how much more.

The Boston Fed has released a “Current Policy Perspective” by John Sabelhaus and Jeffrey P. Thompson titled “The Limited Role of Intergenerational Transfers for Understanding Racial Wealth Disparities”:

Transfers of wealth between generations—whether through inheritances or inter vivos gifts—are less important in explaining racial disparities in wealth than might be expected. While this factor looms large in the media’s discussions of racial inequality, it explains relatively little of the disparities evident in the data. One reason is that most people, regardless of race, receive no inheritance or other transfer of substantial value. In addition, most recipients of inheritances ultimately consume those bequests and do not plan to leave substantial gifts to their offspring. Further, the assets that account for a large majority of most households’ wealth (employment-based retirement plans and home equity) are not inherited and accumulate slowly over families’ working lives.

Using nonparametric decomposition techniques, we show that intergenerational transfers explain only a modest portion of disparities between white and non-white families. This finding is consistent with prior research, but we improve upon the existing literature in a variety of ways, including augmenting the wealth measure in the Survey of Consumer Finances to account for the value of defined benefit pensions, adding controls for lifetime earnings and the availability and generosity of employer-provided pensions, and capturing some inheritances and inter vivos transfers that are not typically reflected in most studies. When no other controls are included, we find that differences in intergenerational transfers account for 13 to 16 percent of white/non-white private wealth gaps. When we control for lifetime earnings, workplace pensions, and a handful of additional human capital variables, the marginal contribution of intergenerational transfers shrinks considerably, but the combined portion of the racial wealth gap that is explained rises to 80 to 90 percent. Policymakers interested in helping households build wealth are advised to look to ways that would enable them to boost the earnings that they receive over their lifetime.

The Canadian Securities Administrators are touting a software update for SEDAR. I have sent them an eMail with a question:

I understand that improvements to SEDAR “will produce better data for all stakeholders, so that analysts, investors, governments, academics and others can easily access and analyze robust data from the system to gain deeper insights into the state of the Canadian capital markets.” ( https://www.securities-administrators.ca/about-sedar/sedar-frequently-asked-questions/ )

Will the new system allow direct linking to any specific document at will by any of these analysts, investors, governments, academics and others without the necessity of obtaining written permission? Will access to an API make it possible for these users to devise their own search and download routines?

Please advise.

Sincerely,

Feel free to send them an eMail of your own!

The IMF has published an article by MARKUS BRUNNERMEIER titled RETHINKING MONETARY POLICY IN A CHANGING WORLD:

Although financial stability remains an important concern, there are important differences between the current environment and the one that followed the global financial crisis:

• Public debt is now high, so any interest rate increase to fend off inflation threats makes servicing the debt more expensive—with immediate and large adverse fiscal implications for the government. Since the beginning of the COVID-19 crisis in early 2020, it is also evident that fiscal policy can be a significant driver of inflation.
• Instead of deflationary pressures, most countries are experiencing excessive inflation. That means there is now a clear trade-off between a monetary policy that tries to reduce aggregate demand by raising interest rates and one that aims to ensure financial stability.
• The nature and frequency of shocks have changed. Historically shocks were mostly from increases or decreases in demand—with the prominent exception of the supply shocks during the so-called stagflation of the 1970s. Now there are many shocks: demand vs. supply, specific risks vs. systemic risks, transitory vs. permanent. It is difficult to identify the true nature of these shocks in time to respond. Central bankers need to be more humble.

The low interest rates and less extreme public debt levels that prevailed after the global crisis permitted central banks to ignore what were then relatively inconsequential interactions between monetary and fiscal policy. The period following the 2008 crisis was one of monetary dominance—that is, central banks could freely set interest rates and pursue their objectives independent of fiscal policy.
…
A key question for policy is what determines the winner of any contest between fiscal and monetary dominance. Legal guarantees of central bank independence are insufficient, by themselves, to guarantee monetary dominance: legislatures can threaten to change laws and international treaties can be ignored, which could cause a central bank to hold off its preferred policy. To promote monetary dominance, the central bank must remain well capitalized: if it requires frequent recapitalization from the government, the central bank looks weak and risks losing public support. Central banks with large balance sheets that contain many risky assets and pay interest on the reserves to private banks may have large losses as interest rates rise. Those losses could result in increased pressure from fiscal authorities to refrain from raising interest rates.

I haven’t written about drones for a long time. Let’s fix that:

The global commercial drone market hit US$8.15-billion in 2022, and it will rise to US$47.38-billion by 2030, according to Strategic Market Research – and North America is the leading market for commercial drone applications. The combination of automation with drone technology brings together two rapidly advancing fields in new and increasingly complex ways. The global autonomous drone market is expected to be worth US$56.5-billion US by 2030, up from US$15.5-billion today, according to a report by Markets N Research.

Those applications cut across industries, with both technological advances and growing adoption in the construction, agricultural and logistics industries driving the market.
…
Drones also offer significant potential advantages for delivery services, says Dan O’Toole, CEO and founder of Dronedek, which is developing smart technology-enabled mailboxes for autonomous drone deliveries.

As they mature, drone delivery services can offer cost and time savings over traditional methods, with added benefits like cutting the number of vehicles on the road and reducing labour needs, Mr. O’Toole says. Data released by McKinsey earlier this year indicated the number of daily drone deliveries continues to grow and that as it matures, the tech has the potential to lower both costs and carbon emissions compared with other forms of delivery transport.

“Drones could become an important part of the delivery supply chain,” the report reads, noting that more than 2,000 commercial drone deliveries took place each day in early 2022.

Yes! We want drone delivery! It’s 4am! Where’s my pizza?

Good news from the justice system!

After a 17-year court battle, an Ontario judge has ruled in favour of retail investors who suffered losses as two Canadian companies had let big investors make profitable, improper trades in a number of their funds.

Ontario Superior Court Justice Markus Koehnen in February found that both CI Mutual Funds Inc. and AIC Limited, which is now known as AIC Global Holdings Inc., breached their duty of care to prevent market-timing trades in their funds.
…
The class action includes any investors who held money in AIC funds from Jan. 1, 1999, to Sept. 30, 2003, or CI Mutual funds from Sept. 1, 1998, to Sept. 30, 2003. Counsel for the plaintiffs estimate damages to investors could total as much as $674-million.

“There was ample evidence before me to demonstrate that the standard of care during the class period required the defendants to be aware of the dangers of frequent trading in and out of their funds and take reasonable steps to prevent it,” Justice Koehnen said in the court decision. “The harm that frequent trading causes to long-term unitholders has been known for decades.”
…
Justice Koehnen said in his decision that mutual fund prospectuses – documents that are provided to investors upon purchasing a fund – warned that frequent trading caused harm to funds and could result in fees of up to 2 per cent being charged to participants.

Despite the contents of their prospectuses, the defendants not only failed to take steps to prevent frequent trading or charge the fees set out in their prospectuses when it occurred, they facilitated the practice by entering into “switch agreements” that allowed certain investors to switch in and out of funds for a much lesser fee of only 0.2 per cent.

The press always gets the issue wrong. The issue isn’t frequent trading, per se, but allowing trades based on stale prices. The fund companies were either crooked or stupid: I don’t care which, I’m just hoping they get bankrupted by the judgement.

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

• Global supply chain pressures decreased considerably in February and are now below the historical average.
• There were significant downward contributions by the majority of the factors, with the largest negative contribution from European Area delivery times.
• The GSCPI’s recent movements suggest that global supply chain conditions have returned to normal after experiencing temporary setbacks around the turn of the year.

BIS has released a working paper by Sonya Zhu titled Volume dynamics around FOMC announcements:

Focus
From 1994 to 2011, about 80% of excess returns in the equity market could be obtained in the 24 hours before scheduled Federal Open Committee (FOMC) announcements. In the standard economic paradigm, price is determined through trading between buyers and sellers. The 1987 market crash demonstrated that the mechanics of trading can significantly affect market prices. To shed light on the price formation process, this paper studies the volume dynamics around FOMC announcements.

Contribution
I quantify the volume changes in the stock market around FOMC announcements using intraday data. Most studies that analyse the impact of FOMC announcements on the stock market concentrate on price dynamics. In comparison, the evidence on volume dynamics is scant. I also link the FOMC volume dynamics to a theory of discretionary liquidity trading. Lastly, I examine the FOMC volume dynamics for individual stocks and link it to firm characteristics.

Findings
Turnover volume in the stock market decreases before FOMC announcements and increases afterward. Additionally, absolute order imbalance increases ahead of FOMC announcements, especially when the announcements are accompanied by policy rate changes. These findings are consistent with a theory in which some liquidity traders strategically choose to avoid trading at times when private information is present in the market. The FOMC volume dynamics are also found to be more pronounced for stocks that are more exposed to discretionary liquidity trading. On average, one third of the pre-FOMC price drift can be attributed to the volume dynamics and liquidity shocks.

Abstract
The stock market volume decreases in anticipation of FOMC announcements and increases afterward. I develop a stylized model and attribute the volume dynamics to discretionary liquidity trading resulting from the presence of private information. Consistent with the model’s prediction, I find information asymmetry increases ahead of FOMC announcements, especially before policy rate changes. Using firm-level high-frequency data, I also find, in the cross-section, that volume changes around these events are particularly stronger for stocks that are more exposed to discretionary liquidity trading. Volume dynamics and liquidity shocks can explain around one third of the pre-FOMC price drift

The Boston Fed has released a Research Department Working Paper by Lara Loewenstein and Paul S. Willen titled House Prices and Rents in the 21st Century:

This paper introduces a framework for interpreting fluctuations in house prices using a new data set of transactions involving single-family and small multifamily homes. The data set includes information on owner- and renter-occupied properties, and it includes sale and rent transactions. The data enable the authors to measure price growth on both types of properties and to calculate a price-to-rent ratio using only renter-occupied properties—properties that are explicitly comparable.

The authors look at the potential drivers of house-price and rent movements during their sample period of 2001 through 2021. These include increases in preferences for housing (preference shocks) and beliefs about future house-price price growth (expectation shocks). Expectation shocks, which generate self-fulfilling price increases, are often the cause of housing bubbles.

While each of the shocks that the authors examine can increase house prices, their implications for the prices of renter-occupied housing, owner-occupied housing, and rent differ. By examining changes in rent, in the price-to-rent ratio, and in the ratio between the prices of owner-occupied houses and renter-occupied houses (the price-to-price ratio), the authors assess which type of shock can best explain the house-price booms of the early 2020s and the early 2000s.

Key Findings

The sources of growth in house prices varied during the sample period. Early in the period, the price-to-rent ratio and the price-to-price ratio determined house-price growth, while rent growth was relatively minimal. But in the latter years, rent growth became more important and was the main driver of house-price growth during the boom at the start of this decade.

According to theory, positive expectation shocks raise the price-to-rent ratio as households and investors buy houses partly in anticipation of future capital gains. Expectation shocks are a plausible explanation for the boom of the 2000s but not for the boom of the 2020s.

An increase in preferences for housing raises both rents and houses prices, according to theory, leaving the price-to-rent ratio unchanged. As noted above, rent growth was the main driver of house-price growth at the start of this decade. The authors find that of the 15 percentage point growth in house prices in 2021, about two-thirds came from nominal rent growth and only about one-quarter came from growth in the price-to-rent ratio. They therefore conclude that a preference shock is a plausible explanation for the boom.

US factory orders fell, but but by less than expected:

Factory orders dropped 1.6% after increasing 1.7% in December. Economists polled by Reuters had forecast orders declining 1.8%. Orders rose 4.3% on a year-on-year basis in January.
…
The drop in factory orders in January mostly reflected a 13.3% decline in transportation equipment, which followed a 15.8% jump in December. Transportation equipment orders were weighed down by a 54.5% tumble in orders for civilian aircraft. Motor vehicle orders increased 1.3%.

Orders for machinery shot up 1.6%, while bookings for computers and electronic products rose 0.6%. Orders for electrical equipment, appliances and components surged 1.3%. There were also gains in orders for primary metals, fabricated metal products, as well as defense aircraft.

Shipments of manufactured goods increased 0.7%, the biggest gain since August, after falling 0.6% in December. The stock of manufactured goods at factories was unchanged after rising 0.4% in December. While that bodes well for future production, that could chip at gross domestic product this quarter.

Unfilled orders at factories were unchanged as a jump in unfinished work for computers and related products were offset by decreases in consumer goods.