PrefBlog

TXPR closed at 601.46, up 1.02% on the day. Volume today was 1.49-million, well above the median of the past 21 trading days.

CPD closed at 12.00, up 1.61% on the day. Volume was 42,290, well below the median of the past 21 trading days.

ZPR closed at 9.99, up 0.91% on the day. Volume of 103,910 was below the median of the past 21 trading days.

Five-year Canada yields were down sharply to 2.64% today. I find this all very peculiar. It seems that the market has decided that since the central banks have huffed and puffed, inflation has been blown down and we can start worrying about new things. Well, it may be true, but I’m not as sanguine as all that – they haven’t even finished hiking their policy rates yet! Another factor, I think, is that fourteen years of financial repression has convinced many players that sub-1% interest rates are completely normal. This is another thing I have difficulty swallowing. We’ll see!

US GDP was down a bit:

A key measure of economic output fell for the second straight quarter, raising fears that the United States could be entering a recession — or perhaps that one had begun.

Gross domestic product, adjusted for inflation, fell 0.2 percent in the second quarter, the equivalent of an 0.9 percent annual rate of decline, the Commerce Department said Thursday.

The 0.2 percent decline followed a contraction of 0.4 percent in the first three months of the year — meaning that by one common but unofficial definition, the U.S. economy has entered a recession a mere two years after it emerged from the last one.

Most economists still don’t think the economy meets the formal definition of a recession, which is based on a broader set of indicators including measures of income, spending and employment. The G.D.P. data itself will also be revised several times in the months ahead.

There were no big surprises in the FOMC announcement of a 75bp policy hike:

Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.

The NYT commented:

Mr. Powell’s comments were precisely what stock investors wanted to hear.
Investors have worried about the Fed tipping the American economy into recession, so Wall Street on Wednesday honed in on signals that the Fed could slow its pace of interest rate increases in the future and that Mr. Powell is aware of early signs of a slowdown in the economy.

The S&P 500 stock index ended the day up 2.6 percent, and the Nasdaq Composite posted its best day since April 2020. Markets can quickly change their tune, though, especially with new data on growth coming out Thursday. The last two times the Fed raised rates, the S&P 500 rallied on the day of the announcement but fell sharply the day after.

And there is good news from US politicians, at last. I’ve been hoping for this for years:

Dozens of former Republican and Democratic officials will announce on Wednesday a new national political third party to appeal to millions of voters they say are dismayed with what they see as America’s dysfunctional two-party system.

The new party, called Forward, will initially be co-chaired by former Democratic presidential candidate Andrew Yang and Christine Todd Whitman, the former Republican governor of New Jersey. They hope the party will become a viable alternative to the Republican and Democratic parties that dominate U.S. politics, founding members told Reuters.

Party leaders will hold a series of events in two dozen cities this autumn to roll out its platform and attract support. They will host an official launch in Houston on Sept. 24 and the party’s first national convention in a major U.S. city next summer.

Whether or not it gains any traction is another matter, of course, what with Americans so fond of hating each other. But we can hope!

PerpetualDiscounts now yield 6.19%, equivalent to 8.05% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.84%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has skyrocketted to 320bp from the 265bp reported July 20.

US PMI contracted:

The S&P Global flash composite purchasing managers output index slid 4.8 points to 47.5, the weakest reading since May 2020, the group reported Friday. Outside of the early months of the pandemic, the July figure is the weakest in data back to 2009. Readings below 50 indicate contraction. The new orders gauge expanded modestly after contracting the previous month.
…
Similar results were seen in Europe. The group’s index of activity in the euro area unexpectedly shrank for the first time since early 2021. Output worsened among manufacturers, while growth in the service sector came close to stalling.

The US contraction was led by a steep decline in service-sector activity. The group’s services gauge slid to 47, the lowest print since May 2020. Excluding the pandemic, the July figure was the weakest in records back to 2009. Even so, firms continued to add jobs at a solid pace.

Meantime, the group’s manufacturing index eased to a two-year low of 52.3 in July. New orders shrank for a second month and employment growth slowed. Export orders also contracted as a stronger dollar and grimmer global picture weighed on foreign demand.

Lagarde now says the ECB Terminal Rate is whatever it takes:

The European Central bank will raise its interest rates until inflation falls back to its 2% target, the ECB’s President Christine Lagarde said in an interview with Germany’s Funke Mediengruppe published on Friday.

It was Lagarde’s strongest commitment to date to fighting inflation, which hit 8.6% in the euro zone last month, despite growing fears of a recession in the bloc as a result of Russia’s invasion of Ukraine.

“We will raise interest rates for as long as it takes to bring inflation back to our target,” she told the German network of newspapers.

From yesterday’s reporting, I thought the “Terminal Rate” was an ECB forecast, but it turns out that it’s just a calculated market number: