PrefBlog

TXPR closed at 528.59, up 0.73% on the day. Volume today was 590,440, lowest of the past 21 trading days.

CPD closed at 10.47, up 0.38% on the day. Volume was 43,220, near the median of the past 21 trading days.

ZPR closed at 8.80, up 0.46% on the day. Volume was 97,000, below the median of the past 21 trading days.

Five-year Canada yields were down to 3.72%.

US consumer spending was down:

Consumer spending slowed sharply last month — good news for policymakers worried about inflation, but also a sign that a crucial engine of the economic recovery could finally be losing steam.

U.S. consumers spent just 0.1 percent more in May than the month before, the Commerce Department said Friday. That was down from 0.6 percent growth in April, which was revised down from an earlier estimate of 0.8 percent. Adjusted for inflation, spending in May was flat.

Eurozone inflation news was mixed:

Inflation across most economies in Europe eased this month, but concerns about continuing price increases in sectors like services and food are likely to prompt the European Central Bank to raise interest rates yet again despite slowing growth and the risk of higher unemployment.

Consumer prices in the 20 countries that use the euro as their currency rose at an annual rate of 5.5 percent in June, down from 6.1 percent in May, the statistical office of the European Commission reported on Friday.

The increase in what is known as core inflation, which strips out the volatile categories of food and energy and is a more reliable measure of underlying price pressures, will be of particular concern to central bankers. That rate was 5.4 percent over the year through June, up from 5.3 percent in May.

But US PCE inflation was mixed:

The inflation index showed that prices rose 3.8 per cent in May from 12 months earlier, down sharply from a 4.4 per cent year-over-year surge in April. And from April to May, prices ticked up just 0.1 per cent.

Still, last month’s progress in easing overall inflation was tempered by an elevated reading of “core” prices, a category that excludes volatile food and energy costs. The increase underscored the Fed’s belief that it will need to keep raising interest rates to conquer high inflation.

Core prices rose 4.6 per cent in May from a year earlier, down slightly from the annual increase of 4.7 per cent in April. It was the fifth straight month that the core figure was either 4.6 per cent or 4.7 per cent – a sign that the Fed’s streak of 10 rate hikes over the past 15 months hasn’t subdued all categories of prices. From April to May, core prices increased 0.3 per cent, a pace that, if it lasts, would keep inflation well above the Fed’s 2-per-cent target.

The BoC has released a Staff Working Paper by Temel Taskin and Franz Ulrich Ruch titled Global Demand and Supply Sentiment: Evidence from Earnings Calls:

This paper quantifies global demand, supply and uncertainty shocks and compares two major global recessions: the 2008–09 Great Recession and the COVID-19 pandemic. We use two alternate approaches to decompose economic shocks: text mining techniques on earnings calls transcripts and a structural Bayesian vector autoregression model. The results highlight sharp contrast in the size of supply and demand shocks over time and across sectors. While the Great Recession was characterized by demand shocks, COVID-19 caused sizable disruptions to both demand and supply. These shocks were broad-based with varying relative importance across major sectors. Furthermore, certain sub-sectors, such as professional and business services, internet retail, and grocery/department stores, fared better than others during the pandemic.

And IMF First Deputy Managing Director Gita Gopinath had Three Uncomfortable Truths For Monetary Policy:

This is, of course, no easy task. This evening, I will focus on how to contend with high inflation by confronting what I will call three uncomfortable truths for monetary policy.

The first uncomfortable truth is that inflation is taking too long to get back to target. This means that central banks, including the ECB, must remain committed to fighting inflation despite risks of weaker economic growth.

The second uncomfortable truth is that financial stresses could generate tensions between central banks’ price and financial stability objectives. Achieving “separation” through additional tools is possible, but not a fait accompli.

The third uncomfortable truth is that going forward, central banks are likely to experience more upside inflation risks than before the pandemic. Monetary policy strategies and the use of tools like forward guidance and quantitative easing must accordingly be refined.

Let’s begin by exploring the first uncomfortable truth: inflation is taking too long to get back to target.

Uncomfortable Truth #1: Inflation is taking too long to get back to target.

Inflation forecasters have been optimistic that inflation will revert quickly to target ever since it spiked two years ago. As you can see, (slide 4) this includes the ECB and the IMF, whose forecasts are nearly indistinguishable. What we see in these charts is that inflation sits well above previous forecasts. This reminds me of Samuel Beckett’s famous play, Waiting for Godot. In the play, both the cast and audience await a mysterious character named Godot who never appears. Similarly, we are still waiting for low inflation to reappear. We hope, of course, that real life will have a different ending than the play. But as of now, the audience is still waiting.

Despite repeated forecast errors, markets remain particularly optimistic that inflation in the euro area and most advanced economies will recede to near-target levels relatively quickly (slide 5, left panel). These disinflation hopes—likely fueled by the sharp drop in energy prices—underpin expectations that policy rates will decline soon, despite central bank guidance to the contrary (right panel). Surveys of market analysts paint a similar picture and suggest that inflation is likely to come down without much of a hit to growth. It is useful to bear in mind that there is not much historical precedent for such an outcome.[1]

Setting aside forecasts, the fact is that inflation is too high and remains broad-based in the euro area, as in many other countries (slide 6). While headline inflation has eased significantly, inflation in services has stayed high, and the date by when it is expected to return to target could slip further.

This echoes a speech by Christine Lagarde, President of the European Central Bank, titled Breaking the persistence of inflation:

But the second phase of the inflation process is now starting to become stronger.

Workers have so far lost out from the inflation shock, seeing large real wage declines, which is triggering a sustained wage “catch-up” process as they try to recover their losses. This is pushing up other measures of underlying inflation that capture more domestic price pressures – particularly measures of wagesensitive inflation and domestic inflation.

And since wage bargaining in many European countries is multi-annual and inertial, this process will naturally play out over several years. In our latest projections, we expect wages to grow by a further 14% between now and the end of 2025 and to fully recover their pre-pandemic level in real terms.

While this “catch up” has long been factored into our inflation outlook, the effect on inflation from rising wages has recently been amplified by lower productivity growth than we had previously projected, which is leading to higher unit labour costs. Alongside past upward surprises, this is a key reason why we recently revised up our projections for core inflation, even though our expectations for wages remained broadly the same.

Two features of the current business cycle are contributing to this dynamic – and both could linger, too.

The first is the resilience of employment relative to GDP growth.

Typically, we would have expected slowing economic growth over the last year to have somewhat reduced employment growth. But for the last three quarters in particular, the labour market has been performing better than an “Okun’s law”-based regularity would suggest.

That disconnect partly reflects increased labour hoarding by firms in a context of labour shortages, which is visible in the current gap between total hours worked and average hours worked. This is weighing on productivity growth and, with unemployment expected to fall slightly further over the projection horizon, the motivation for firms to hoard labour may not disappear quickly.

The second feature contributing to weaker aggregate productivity is the composition of employment growth, which is concentrated in sectors with structurally low productivity growth.

Since the pandemic, employment has grown most in construction and the public sector, both of which have seen a decline in productivity, and in services, which has seen only meagre productivity growth.

These trends could also persist in some of these sectors over the next few years given the relative weakness of manufacturing and long-term shifts towards employment in services.

All this means that we will face several years of rising nominal wages, with unit labour cost pressures exacerbated by subdued productivity growth. And in this setting, monetary policy must achieve two key goals.

First, we must ensure that inflation expectations remain anchored as the wage catch-up process plays out. While we do not currently see a wage-price spiral or a de-anchoring of expectations, the longer inflation remains above target, the greater such risks become. That means we need to bring inflation back to our 2% medium-term target in a timely manner.

Second, for this to happen, we need to ensure that firms absorb rising labour costs in margins. If monetary policy is sufficiently restrictive, the economy can achieve disinflation overall while real wages recover some of their losses. But this hinges on our policy dampening demand for some time so that firms cannot continue to display the pricing behaviour we have recently seen.

Sensitivity analysis by ECB staff underlines the risks we would face if firms tried to defend their margins instead. For instance, if firms were to regain 25% of the lost profit margin that our projections foresee, inflation in 2025 would be substantially higher than the baseline – at almost 3%.

So, faced with a more persistent inflation process, we need a more persistent policy – one that not only produces sufficient tightening today, but also maintains restrictive conditions until we can be confident that this second phase of the inflation process has been resolved.

And the New York Fed released its Corporate Bond Market Distress Index:

Corporate bond market functioning remained close to historical norms over the month of June, with the end-of-month market-level CMDI around its historical median.

Market functioning in both the high-yield and investment-grade sectors remained roughly flat over the course of the month.

Rates, schmates. The US economy doesn’t care:

The United States economy grew faster early this year than previously believed.

Gross domestic product, adjusted for inflation, expanded at an annual rate of 2 percent in the first three months of the year, the Commerce Department said Thursday. That was a significant upward revision from the 1.1 percent growth rate in preliminary data released in April. (An earlier revision, released last month, showed a slightly stronger rate of 1.3 percent.)

An alternative measure of growth, based on income rather than production, painted a different picture, showing that the economy contracted for the second quarter in a row. That measure was also revised upward from the prior estimate.
…
Consumers are powering the recovery through their spending, which increased at a 4.2 percent rate in the first quarter, up from a 1 percent rate in late 2022 and faster than the 3.7 percent rate initially reported in April. That spending, fueled by a strong job market and rising wages, helped offset declines in other sectors of the economy like business investment and housing.

The BoC has released a Staff Discussion Paper by Marc-André Gosselin and Temel Taskin titled What Can Earnings Calls Tell Us About the Output Gap and Inflation in Canada?:

We construct new indicators of the imbalance between demand and supply for the Canadian economy by using natural language processing techniques to analyze earnings calls of publicly listed firms. The results show that the text-based indicators are highly correlated with official inflation data and estimates of the output gap and improve the accuracy of inflation forecasts. This suggests that these indicators could help central banks foresee inflationary pressures in the economy. Our examination of other topics in earnings calls, such as supply chain disruptions and capacity constraints, points to the potential benefits of using textual data to quickly draw insights on a range of relevant topics. We conclude that text-based measures of economic slack should be included in central banks’ monitoring and forecasting toolkits.
…
Canada’s estimate of the output gap in before the COVID-19 pandemic. However, these measures stop moving in tandem beginning in 2020. Specifically, the Bank’s measure of the output gap indicates a persistent state of excess supply since the start of the COVID-19 pandemic. In contrast, our novel estimate points to a sharp transition from excess supply to excess demand that coincides with the emergence of disruptions in global supply chains. This result is important because it shows that our text-based indicator can help provide more accurate forecasts of inflation. In addition, our estimate of slack is available to policy-makers in real time, whereas traditional measures of the output gap are available with a delay given the publication lag of two months for Canada’s gross domestic product (GDP). Moreover, our examination of other topics in earnings calls, such as supply chain disruptions and capacity constraints, shows the potential benefits of using textual data to draw timely insights on a broad range of relevant topics. We conclude that text-based measures of economic slack should be included in central banks’ toolkits for monitoring and forecasting inflation.

And the clown show continues:

Independent Bay Street investment bank Canaccord Genuity Inc. is facing a potentially “significant penalty” related to its wholesale market-making business.

The warning was disclosed in one of several regulatory documents Canaccord filed Wednesday evening. In a separate filing, the company also said board chair David Kassie would step down from his executive management role following Canaccord’s Aug. 4 annual general meeting and would step down as chair one year later.

PerpetualDiscounts now yield 6.89%, equivalent to 8.96% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.10% on 2023-6-16 and since then the closing price has changed from 15.09 to 15.11, an increase of 13bp in price, with a Duration of 12.35 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decrease in yield of about 1bp since 6/16 to 5.09%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has gapped upward to about 385bp from the 360bp reported June 21.

Inflation fell today, but not uniformly:

Canada’s inflation rate fell to 3.4 per cent in May – the lowest it’s been since June 2021.
…
Statistics Canada reported Tuesday the slowdown was largely due to lower gasoline prices compared to a year ago.

However, the long-awaited decline in food inflation has yet to come through in Canada. Grocery prices were up nine per cent on an annual basis, showing little improvement from April.

And so the markets were dovish:

The annual rate, which benefited from a comparison to last May’s strong price increases, is the slowest since June 2021 and broadly in line with the Bank of Canada’s expectation that inflation would cool to around 3% by mid-2023.

The average of two of the Bank of Canada’s core measures of underlying inflation, CPI-median and CPI-trim, came in at 3.9% compared with 4.3% in April.

The Canadian dollar and bond markets had minimal reaction to the 830 am ET inflation data, with the five-year government bond yield last quoted at 3.723%, well below the 15-year high of 3.896% last week. The five-year bond yield influences fixed mortgage rates as well as some guaranteed investment certificate terms. The Canadian dollar dipped slightly against its U.S. counterpart following the data but soon recovered.

Interest rate probabilities based on trading in swaps markets now show about a 57% chance that Bank of Canada will hike rates by another quarter of a percentage point at its next policy meeting on July 12. That’s down from about 64% prior to the data.

Pre-CPI

Post-CPI

After intensive calculations, the Toronto Exchange has determined the ex-Dividend date for BNS.PR.J:

So I guess they’ll be paying a lot of overtime:

TXPR closed at 528.29, down 0.56% on the day. Volume today was 1.20-million, near the median of the past 21 trading days.

CPD closed at 10.57, down 0.19% on the day. Volume was 29,500, below the median of the past 21 trading days.

ZPR closed at 8.85, up 0.11% on the day. Volume was 250,860, fourth-highest of the past 21 trading days.

Five-year Canada yields were up to 3.89%.

I’m going to go out on limb here and suggest that the recent updraft in the GOC-5 rate is due in part to Canadian retail sales:

Canadians have ramped up their retail spending in recent months, despite higher interest rates that are meant to slow their consumption and bring down the rate of inflation.

Retail sales rose by 1.1 per cent in April, after a 1.4-per-cent slide in March, Statistics Canada said in a report on Wednesday. The April result easily surpassed its previous estimate of a 0.2-per-cent gain. In volume terms, retail sales rose 0.3 per cent.

Further gains appear to be on the way: In its preliminary estimate on Wednesday, Statscan said retail sales rose an additional 0.5 per cent in May, although that number is subject to revision.
…
Statscan’s report showed a broad-based increase in retail spending. Sales rose 3.3 per cent at general merchandise retailers in April from March. Receipts were up 3.1 per cent at clothing retailers and by 1.5 per cent at food and beverage retailers.

There was, however, a decline at stores catering to the housing market. For instance, sales fell 1.3 per cent at electronics and appliance retailers in April.

… exacerbated by Powell’s June 21 remarks:

Jerome H. Powell, the chair of the Federal Reserve, told House lawmakers that the United States remains a “long way” away from low and stable inflation even 15 months into the central bank’s campaign to cool the economy and wrestle down rapid price increases.

Mr. Powell testified before the House Financial Services Committee on Wednesday. He told lawmakers that the labor market remained very tight and that inflation — while it has come down notably from its peak last summer — was still too fast. In light of that, the Fed could raise interest rates even higher than their current level of just above 5 percent.

“Inflation has moderated somewhat since the middle of last year,” Mr. Powell said. “Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go.”

… and reports of UK inflation:

Britain’s inflation rate held steady in May, frustrating expectations that price increases would slow down, according to data released Wednesday, the day before the country’s central bank is widely expected to raise interest rates again.

Consumer prices rose 8.7 percent from a year earlier, the same as in April, the Office for National Statistics said. Economists had forecast that prices would dip slightly. The data is likely to compound concerns that Britain’s cost-of-living crisis may intensify in the coming months as mortgage holders confront the burden of higher interest rates pushed through to tackle stubbornly strong inflation.

The Bank of England is expected to lift interest rates on Thursday for a 13th consecutive time, by a quarter-point to 4.75 percent, the highest since early 2008.

But the BoE went for a bigger hike:

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 21 June 2023, the MPC voted by a majority of 7–2 to increase Bank Rate by 0.5 percentage points, to 5%. Two members preferred to maintain Bank Rate at 4.5%.

At the time of the previous MPC meeting and May Monetary Policy Report, the market-implied path for Bank Rate averaged just over 4% over the next three years. Since then, gilt yields have risen materially, particularly at shorter maturities, now suggesting a path for Bank Rate that averages around 5½%. Mortgage rates have also risen notably. The sterling effective exchange rate has appreciated further.

PerpetualDiscounts now yield 6.73%, equivalent to 8.75% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.10% on 2023-6-16 and since then the closing price has changed from 15.09 to 15.01, a decrease of 53bp in price, with a Duration of 12.35 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 4bp since 6/16 to 5.14%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to about 360bp from the 350bp reported June 14.