PrefBlog

The December US inflation number was released:

Inflation continued to slow on an annual basis in December, providing welcome relief for American households and a positive development for policymakers at the Federal Reserve and White House.

The Consumer Price Index climbed by 6.5 percent in the year through last month, down from 7.1 percent in the November reading, as prices declined slightly on a monthly basis. The annual inflation rate was the slowest since October 2021, a pullback that came as gas prices dropped and airfares declined.

Economists and Fed officials are more acutely focused on a so-called core inflation measure, which removes food and fuel prices to get a sense of underlying price trends. That measure climbed by 5.7 percent in December from a year earlier, compared with 6.0 percent previously and in line with what forecasters had expected.
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Services costs could help to keep inflation higher than normal. Wage gains are rapid, and Federal Reserve officials are worried that this will prompt service providers — like hotels and day-care centers — to keep raising prices. December’s report showed increases in prices including sporting event admissions and pet services.

But overall real wages are still in decline:

Real average hourly earnings for all employees increased 0.4 percent from November to December, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This result stems from an increase of 0.3 percent in average hourly earnings combined with a decrease of 0.1 percent in the Consumer Price Index for All Urban Consumers (CPI-U).

Real average weekly earnings increased 0.1 percent over the month due to the change in real average hourly earnings combined with a decrease of 0.3 percent in the average workweek.

Real average hourly earnings decreased 1.7 percent, seasonally adjusted, from December 2021 to December 2022. The change in real average hourly earnings combined with a decrease of 1.4 percent in the average workweek resulted in a 3.1-percent decrease in real average weekly earnings over this period.

The Cleveland Fed reminds me that they have a Center for Inflation Research.

And the Newn York Fed published its Underlying Inflation Gauge:

• The UIG “full data set” measure for December is currently estimated at 5.4%, a 0.3 percentage point decrease from the current estimate of the previous month.
• The “prices-only” measure for December is currently estimated at 4.5%, a 0.5 percentage point decrease from the current estimate of the previous month.
• The twelve-month change in the December CPI was +6.5%, a 0.6 percentage point decrease from the previous month.
  • -For December 2022, trend CPI inflation is estimated to be in the 4.5% to 5.4% range, a slightly wider range than November, because of a larger decrease in its lower bound than in its upper bound.

TXPR closed at 580.54, up 0.76% on the day. Volume today was 1.82-million, well above the median of the past 21 trading days.

CPD closed at 11.55, up 0.78% on the day. Volume was 92,520, well below the median of the past 21 trading days.

ZPR closed at 9.59, up 0.63% on the day. Volume was 205,840, below the median of the past 21 trading days.

Five-year Canada yields were down 10bp to 3.16% today.

The omniscient pundits tell us:

U.S. stocks ended up sharply on Wednesday, with the S&P 500 and Nasdaq gaining more than 1% each as investors were optimistic ahead of an inflation report that could give the Federal Reserve room to dial back on its aggressive interest rate hikes. The TSX rose to its highest level in more than five weeks, led by a 2% jump in the real estate sector, attracting buyers as U.S. and Canadian bond yields declined.

The much-anticipated report due on Thursday is projected by economists polled by Reuters to show U.S. consumer prices grew 6.5% year-on-year in December, moderating from a 7.1% rise in November.

Benchmark stock indexes are up this year after falling sharply last year. Hopes that the Fed could soon ease back on its aggressive tightening after raising the federal funds rate seven times in 2022 have boosted the market in recent sessions, even as comments by some Fed officials have supported the view that the central bank needs to remain vigilant about raising rates to fight inflation.
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Canadian and U.S. government bond yields fell across a flatter curve. The 10-year was down 11.2 basis points at 3.008%, its lowest level since Dec. 21. That helped to give a boost to the real estate sector, made up of relatively high yielding securities that struggle when yields rise on competing investments in the bond market.

PerpetualDiscounts now yield 6.21%, equivalent to 8.07% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.11% on 2023-1-6 and since then the closing price has changed from 15.04 to 15.19, an increase of 100bp in price, with a Duration of 12.24 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decline in yield of about 8bp since 1/6 to 5.05%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has declined to about 300bp from the 330bp reported January 4.

TXPR closed at 576.15, up 0.78% on the day. Volume today was 932,390, well below the median of the past 21 trading days.

CPD closed at 11.455, up 1.01% on the day. Volume was 72,370, lowest of the past 21 trading days.

ZPR closed at 9.53, up 0.42% on the day. Volume was 259,590, above the median of the past 21 trading days.

Five-year Canada yields were up a bit to 3.26% today.

All eyes remain on the Fed:

U.S. stocks ended solidly higher on Tuesday, led by a 1% gain in the Nasdaq, on relief that Federal Reserve Chair Jerome Powell refrained in a speech from commenting on rate policy. The Canadian stock market also rose, as recent weakness in the U.S. dollar helped lure investors to gold mining shares.

In his first public appearance of the year, Powell said at a forum sponsored by the Swedish central bank that the Fed’s independence is essential for it to battle inflation.

Recent comments by other Fed officials have supported the view that the central bank needs to remain aggressive in raising interest rates to control inflation. Fed Governor Michelle Bowman said on Tuesday the bank will have to raise interest rates further to combat high inflation.
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Investors anxiously awaited the U.S. consumer prices index report Thursday, which is expected to show some moderation in year-on-year prices in December.

Traders are betting on a 25-basis point rate hike at the Fed’s upcoming policy meeting in February.

TXPR closed at 571.70, up 0.94% on the day. Volume today was 924,710, well below the median of the past 21 trading days. The TXPR Price Index is now above its September 30, 2023, close of 571.13.

CPD closed at 11.34, up 0.44% on the day. Volume was 217,780, third-highest of the past 21 trading days.

ZPR closed at 9.49, up 0.64% on the day. Volume was 351,230, well above the median of the past 21 trading days.

Five-year Canada yields were down a bit to 3.24% today.

The pundits don’t have much to say:

Investors are awaiting comments Tuesday from Fed Chair Jerome Powell, who some strategists expect could say more time is needed to show inflation is under control.
Canada’s main stock index rose on Monday to its highest closing level in nearly four weeks as investors snapped up stocks in some of the most depressed sectors of the market amid hopes that central banks would ease the pace of interest rate hikes.
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Money market bets were showing 77% odds of a 25-basis point hike in the Fed’s February policy meeting.

A U.S. consumer prices report due Thursday could be key for rate expectations, said Quincy Krosby, chief global strategist, LPL Financial in Charlotte, North Carolina. “The CPI report this week is going to be essential for fine-tuning the Fed funds futures market.”

The New York Fed released the December 2022 Survey of Consumer Expectations:

which shows that inflation expectations continued to decline in the short term and were unchanged over the medium term. Longer-term inflation expectations edged up slightly. Household spending expectations fell sharply in December, while income growth expectations rose to a new series high. Home price expectations rose slightly, but remain below their pre-pandemic levels. Households’ perceptions about their current financial situation and their expectations about their future financial situation one year from now improved in December.

The main findings from the December 2022 Survey are:

Inflation

• Median one-year-ahead inflation expectations continued to decline in December, falling by 0.2 percentage point to 5.0%, its lowest reading since July 2021. In contrast, three-year-ahead inflation expectations were unchanged in December at 3.0%. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at the one-year horizon and was unchanged at the three-year horizon.
• Median five-year-ahead inflation expectations increased by 0.1 percentage point to 2.4%. Disagreement across respondents in their five-year-ahead inflation expectations was unchanged in December.
• Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—was unchanged at the short-term horizon and decreased at the medium-term horizon.
• Median home price growth expectations increased by 0.3 percentage point to 1. 3%. The increase was driven by those in the South census region. Despite this increase, home price growth expectations remain subdued relative to their pre-pandemic levels.
• Expectations about year-ahead price changes declined by 0.7 percentage point for both gas (to 4.1%) and food (to 7.6%) , and 0.2 percentage point for both college education (to 9.2%) and rent (to 9.6%). The median expected change in the cost of medical care, on the other hand, rose by 0.1 percentage point (to 9.7%) .

And a management buy-out of Canaccord Genuity Inc. has been proposed:

Senior leaders of Canaccord Genuity Inc. are seeking to take the independent Canadian investment bank private, though a special committee of the company’s own board of directors thinks the price is too low

The management team of Canaccord Genuity Inc. Inc. announced an all-cash takeover bid of $11.25 per share early Monday, valuing the financial services company at roughly $1.13-billion. New York-based HPS Investment Partners LLC, Canaccord’s largest individual shareholder, has agreed to provide up to $825-million in financing to support the deal.

In response, Canaccord’s board of directors has formed a special committee to consider the proposal from the management group that includes board chair David Kassie. The committee, which is composed of three board members who are not part of the offeror group, has not agreed to support the offer, it said in a statement, as it is awaiting the results of a formal valuation being prepared by Royal Bank of Canada.

Nothing is yet known about how the preferred will be treated if the buy-out goes through, but it’s my bet that:

• The preferred would remain outstanding
• They will continue to trade on the Toronto Exchange
• This will be credit negative for CF

TXPR closed at 566.37, up 1.08% on the day. Volume today was 900,180, well below the median of the past 21 trading days.

CPD closed at 11.29, up 0.80% on the day. Volume was 99,930, well below the median of the past 21 trading days.

ZPR closed at 9.43, up 0.86% on the day. Volume was 227,090, near the median of the past 21 trading days.

Five-year Canada yields were down a bit to 3.26% today.

Jobs, jobs, jobs!

Stock rose on Friday, after fresh data showed that the number of jobs added to the economy was a bit more than expected, keeping unemployment low, but wages did not accelerate as quickly as economists had forecast.
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Employers hired 223,000 people in December, more than economists expected but fewer than the previous month. Importantly for the Fed, average hourly earnings picked up by 4.6 percent, less than forecast and a slowdown from a revised-down 4.8 percent in November.
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Fed officials have also suggested that job growth should be slowing down. By the estimates they look at, the nation only needs to add about 100,000 jobs per month to accommodate population growth over time, Mr. Powell said late last year.

Meanwhile, up north:

The economy added 104,000 jobs in December, far more than the 5,000 that financial analysts were expecting, Statistics Canada said in a report Friday. As a result, the unemployment rate dropped to 5 per cent from 5.1 per cent. After a summer lull – employment fell for three consecutive months, from June to August – job creation has come roaring back.

The private sector accounted for the entirety of the new jobs last month, most of which had full-time hours.

Over the year, employment rose by 394,000 – entirely driven by full-time positions, which jumped by 401,000.
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The average hourly wage rose 5.1 per cent in December from a year earlier. That was the seventh consecutive month of wage gains above 5 per cent, but also marked a deceleration from November’s 5.6-per-cent growth. Furthermore, wage growth still lagged behind inflation, which was 6.8 per cent in November. This means the average worker is seeing their purchasing power decline.

and so:

Money markets are now pricing in even greater odds for a further 25 basis point rate hike by the Bank of Canada later this month, following stronger-than-expected jobs data this morning.

Positioning in credit markets now suggests a 75 per cent probability of a further rate hike at the bank’s next announcement on Jan. 25, according to Refinitiv Eikon data. Prior to the employment data at 830 am ET, it was at 62 per cent.

Just a month ago, credit markets were pricing in less than 50 per cent odds for a further rate hike – with bond traders positioned for a strong likelihood that the bank was finished with the current tightening cycle.

TXPR closed at 560.23, up 2.32% on the day. Volume today was 1.64-million, below the median of the past 21 trading days.

CPD closed at 11.12, up 2.96% on the day. Volume was 130,080, below the median of the past 21 trading days.

ZPR closed at 9.28, up 2.88% on the day. Volume was 294,780, above the median of the past 21 trading days.

Five-year Canada yields were down a bit to 3.30% today.

The pundits tell us the Fed Minutes played a role today:

The S&P 500 finished higher on Wednesday but below its session peak after volatile trading following the release of minutes from the Federal Reserve’s last meeting, which showed officials laser-focused on controlling inflation even as they agreed to slow their interest rate hiking pace. Canada’s main stock index rose to its highest closing level in nearly three weeks, helped by gains for gold mining shares.

Officials at the Fed’s Dec. 13-14 policy meeting agreed the U.S. central bank should continue increasing the cost of credit to control the pace of price increases, but in a gradual way intended to limit the risks to economic growth.
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Also on Wednesday, Minneapolis Fed President Neel Kashkari stressed the need for continued rate hikes, setting out his own forecast that the policy rate should initially pause at 5.4%.
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Market participants now see a 68.8% chance of a 25 basis points rate hike from the Fed in February, but still see rates peaking just below 5% by June. They are also placing better than 50% odds that the Bank of Canada will hike rates in this country by a further 25 basis points later this month.

Earlier in the day, data showed U.S. job openings falling less than expected in November as the labour market remains tight, giving the Fed cover to stick to its monetary tightening campaign for longer. Other data showed manufacturing contracted further in December.

The Toronto Stock Exchange’s S&P/TSX composite index ended up 145.06 points, or 0.75%, at 19,588.83, its highest closing level since Dec. 15.
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The Dow Jones Industrial Average rose 133.4 points, or 0.4%, to 33,269.77; the S&P 500 gained 28.83 points, or 0.75%, to 3,852.97; and the Nasdaq Composite added 71.78 points, or 0.69%, to 10,458.76.

PerpetualDiscounts now yield 6.47%, equivalent to 8.41% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.30% on 2022-12-30 and since then the closing price has changed from 14.72 to 14.92, an increase of 136bp in price, with a Duration of 12.15 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decline in yield of about 11bp since 12/30 to 5.19%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has been steady at about the 330bp reported December 28.