PrefBlog

No surprises from the BoC:

The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is continuing its policy of quantitative tightening.

Global economic growth continues to slow, with inflation easing gradually across most economies. While growth in the United States has been stronger than expected, it is anticipated to slow in 2024, with weakening consumer spending and business investment. In the euro area, the economy looks to be in a mild contraction. In China, low consumer confidence and policy uncertainty will likely restrain activity. Meanwhile, oil prices are about $10 per barrel lower than was assumed in the October Monetary Policy Report (MPR). Financial conditions have eased, largely reversing the tightening that occurred last autumn.

The Bank now forecasts global GDP growth of 2½% in 2024 and 2¾% in 2025, following 2023’s 3% pace. With softer growth this year, inflation rates in most advanced economies are expected to come down slowly, reaching central bank targets in 2025.

In Canada, the economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024. Consumers have pulled back their spending in response to higher prices and interest rates, and business investment has contracted. With weak growth, supply has caught up with demand and the economy now looks to be operating in modest excess supply. Labour market conditions have eased, with job vacancies returning to near pre-pandemic levels and new jobs being created at a slower rate than population growth. However, wages are still rising around 4% to 5%.

Economic growth is expected to strengthen gradually around the middle of 2024. In the second half of 2024, household spending will likely pick up and exports and business investment should get a boost from recovering foreign demand. Spending by governments contributes materially to growth through the year. Overall, the Bank forecasts GDP growth of 0.8% in 2024 and 2.4% in 2025, roughly unchanged from its October projection.

CPI inflation ended the year at 3.4%. Shelter costs remain the biggest contributor to above-target inflation. The Bank expects inflation to remain close to 3% during the first half of this year before gradually easing, returning to the 2% target in 2025. While the slowdown in demand is reducing price pressures in a broader number of CPI components and corporate pricing behaviour continues to normalize, core measures of inflation are not showing sustained declines.

Given the outlook, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation. Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

PerpetualDiscounts now yield 6.55%, equivalent to 8.52% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.99% on 2024-1-23 and since then the closing price has changed from 14.84 to 14.76, a decline of 54bp in price, with a Duration (BMO doesn’t specify Modified or Macaulay – I will assume the former) of 12.38 implying an increase of 4bp in yield to 5.03%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 350bp from the 340bp reported January 17.

Due to scheduled maintenance at the data centre where I rent my server, I am currently unable to produce the daily report. I’ll do it tomorrow morning, promise!

Update, the next morning:

TXPR closed at 565.07, up 0.68% on the day. Volume today was 7.12-million, highest by far of the past 21 trading days – which we may presume is due to the TXPR rebalancing reported by IrateAR and Lateralus Capital.

CPD closed at 11.18, up 0.45% on the day. Volume was 61,700, well below the median of the past 21 trading days.

ZPR closed at 9.52, up 0.85% on the day. Volume was 168,200, third-highest of the past 21 trading days.

Five-year Canada yields were up to 3.59%.

There were good markets everywhere:

The S&P 500 posted a record high close on Friday for the first time in two years, fueled by a rally in chipmakers and other heavyweight technology stocks on optimism around artificial intelligence. The TSX also ended solidly higher after a weak start, but remains more than 1,000 points away from its record high.

The benchmark’s close confirmed that the S&P 500 has been in a bull market since it closed at its low on Oct. 12, 2022, according to one measure which also puts that date as the end of a bear market.

In a selloff between its record high close of 4,796.56 on Jan. 3, 2022 and its low in October 2022, the S&P 500 tumbled 25%.

On Friday, the S&P 500 jumped 1.23% to end the session at 4,839.81 points.
…
The Nasdaq jumped 1.70% to 15,310.97 points, while Dow Jones Industrial Average rose 1.05% to 37,863.80 points.

The Toronto Stock Exchange’s S&P/TSX composite index ended up 149.79 points, or 0.7%, at 20,906.52. For the week, the index was down 0.4%, after posting last Friday its highest weekly closing level in 21 months.

TXPR closed at 561.27, up 0.50% on the day. Volume today was 2.87-million, highest of the past 21 trading days.

CPD closed at 11.13, up 0.27% on the day. Volume was 51,710, second-lowest of the past 21 trading days.

ZPR closed at 9.44, up 0.11% on the day. Volume was 206,980, highest of the past 21 trading days.

Five-year Canada yields were up to 3.57%.

The Globe notes:

The number of Americans filing new claims for unemployment benefits fell last week to the lowest level in nearly 1-1/2 years. The data added to strong retail sales growth in December in painting an upbeat picture of the economy, and could make it difficult for the Federal Reserve to start cutting interest rates in March as financial markets anticipate. Bond yields Thursday rose modestly across the curve in both Canada and the U.S.

Traders now see a 56% chance for a 25-basis-point rate cut in March at the Fed, compared with odds above 80% a month ago, according to the CME Group’s FedWatch Tool.

The chances of an interest rate cut by the Bank of Canada in the first half of this year have been on the decline as well, according to overnight swaps markets, which now see only about 60% odds the first cut will occur in April. Earlier this week, Canada released data showing unexpectedly stubborn core inflation.

Canadian retail sales data for November, due on Friday, could offer clues on the Bank of Canada’s policy outlook ahead of the central bank’s policy decision next week. Economists expect sales to decline 0.1% after rising 0.6% in October.

…
Atlanta Federal Reserve President Raphael Bostic said he was open to reducing rates sooner than he had anticipated if there is “convincing” evidence in coming months that inflation is falling faster than he expected. Bostic had previously said he expected it would be appropriate to cut rates in the second half of 2024.

Bonds got clobbered:

Bond yields rose after upbeat U.S. retail sales data eroded expectations the Fed will kick off its interest rate cutting campaign as soon as March. By late afternoon, the U.S. two-year bond yield was up 13 basis points to its highest in a week, while the Canada two-year was up an even larger 18 basis points.

Traders’ expectations of a 25-basis-point Fed rate cut in March dipped to 55%, from around 60% before the data was released. Overnight swaps markets for Canada, which capture bets for where monetary policy is heading and are influenced by both domestic and U.S. economic data, now suggest 58% odds that the first cut by the Bank of Canada will arrive in April. At the start of this week, those odds stood at 87%.

Reuters adds:

Speaking Tuesday, Fed Governor Christopher Waller said that recent data had made him more confident that inflation is on track to the Fed’s 2% goal, but that consumer spending would be a critical component as he looked to incoming data to confirm that outlook.

Futures that settle to the Fed’s policy rate on Wednesday pointed to a little under a 60% chance of a rate cut in March, versus about a 65% chance seen at the close of business on Tuesday.

PerpetualDiscounts now yield 6.59%, equivalent to 8.57% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.99% on 2024-1-5 and since then the closing price has changed from 15.23 to 14.93, a decline of 197bp in price, with a Duration (BMO doesn’t specify Modified or Macaulay – I will assume the former) of 12.38 implying an increase of 16bp in yield to 5.15%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed sharply (for the second successive week) to 340bp from the 350bp reported January 10.

Inflation isn’t quite dead yet:

Some closely watched measures of consumer price growth unexpectedly rose at an accelerated rate in December, showing that inflation is proving tough to tame and potentially complicating matters for the Bank of Canada as it considers when to lower interest rates.

The Consumer Price Index (CPI) rose at an annual pace of 3.4 per cent last month, up from 3.1 per cent in November, Statistics Canada said Tuesday in a report. This result was heavily influenced by what economists refer to as base effects: a tumble in gasoline prices a year ago created an unflattering base for year-over-year comparisons – hence the increase in the annual inflation rate.

Although this uptick was in line with expectations on Bay Street, several measures of core inflation – which strip out volatile movements in the CPI – raised eyebrows among financial analysts. The Bank of Canada’s preferred measures rose at an average annual rate of 3.65 per cent, from 3.55 per cent in November. Analysts were expecting a reading of 3.35 per cent.

In particular, housing prices continue to be a source of financial strain. They rose 6 per cent in December from a year earlier. Rents are generating lots of inflationary pressure, as people – including a surge of international students and other temporary residents – vie for units in short supply.

Shock and consternation followed:
Pre-inflation-announcement market:

Post-inflation-announcement market: