PrefBlog

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

The main findings from the August 2022 Survey are:

Inflation

• Median one- and three-year-ahead inflation expectations continued their steep declines in August: the one-year measure fell to 5.7% from 6.2% in July, while the three-year measure fell to 2.8% from 3.2%. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) increased to a new series high at the one-year horizon but decreased at the three-year horizon.
• Median five-year-ahead inflation expectations, which have been elicited in the monthly SCE core survey on an ad-hoc basis since the beginning of this year and were first published in July 2022, also declined to 2.0% from 2.3%. Disagreement across respondents in their five-year-ahead inflation expectations also declined in August.
• Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—decreased at the short-term horizon and was unchanged at the medium-term horizon.
• Median home price expectations declined sharply by 1.4 percentage points to 2.1%, its lowest reading since July 2020, and falling below pre-pandemic levels. The decline was broad based across demographic groups and geographic regions. Home price expectations have now fallen by nearly two-thirds since the April 2022 reading of 6.0%.
  Expectations about year-ahead price changes fell by 1.4 percentage points for gas (to 0.1%), 0.8 percentage point for food (to 5.8%), and 0.3 percentage point for rent (to 9.6%). The median expected change in the cost of medical care rose by 0.1 percentage point (to 9.3%) and was unchanged for college education at 8.4%.

The New York Fed also published a piece on how quantitative tightening works:

Consistent with the plans announced in May, the Fed is reducing its balance sheet by redeeming securities up to certain monthly limits, known as caps (redemption is the process of allowing securities to mature without reinvestment). The caps ensure that runoff occurs in a predictable manner over time. For the first three months of runoff from June to August, caps allowed for runoff of up to $30 billion in Treasury securities and up to $17.5 billion in agency mortgage-backed securities (MBS) and agency debt each month. Starting this month, the caps increase to levels of $60 billion and $35 billion, respectively. In other words, the Fed had been reducing its securities holdings by up to a total of $47.5 billion each month from June through August, and starting in September, the maximum monthly reduction will be $95 billion. The Fed will reinvest any maturing amounts above the monthly caps by reinvesting at auctions for Treasury securities or by purchasing securities in the secondary market in the case of agency MBS.
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In most months, coupon securities will make up most of the redemptions (dark blue bars). Periodically, Treasury bills (dark red bars) will also be redeemed when aggregate coupon maturities are less than the cap. Proceeds from maturing Treasury securities (light blue and light red bars) in excess of the cap will continue to be reinvested into new securities at U.S. Treasury auctions.

The Fed’s treasury holdings can be tracked with the weekly H.4.1 release, which currently shows a balance of 8,393-billion, compared to the 2019 year-end figure of 3,745-billion. The difference in 4,648-billion, so at a rate of 100-billion per month, they’ll be tightening for the next 4-years-odd. At that rate, the gnomes of monetary policy will have repaired the pandemic damage long before the clowns of fiscal policy!

And here’s a Facebook comment on UK yields:

A full point on a long bond. In a week. That’s a loss in excess of 20%. In a week.

Reuters provides a bit more colour:

Yields on British government debt surged to new multi-year highs on Tuesday, led by 20 and 30-year bonds, adding to their steep climb since finance minister Kwasi Kwarteng announced sweeping tax cuts last week.

Thirty-year gilt yields soared to their highest since 2002, ending the session a whisker below 5%, roughly double their level in August and up by almost half a percentage point on Tuesday alone.

Yields on 20-year gilts were up by 35 basis points while the 10-year gilt extended its climb and remained on course for its biggest rise in any month since at least 1957.

Returns demanded by investors from holding government bonds in many rich economies have risen swiftly in recent weeks on worries about surging inflation.”

But the jump has been particularly sharp in Britain where new Prime Minister Liz Truss has promised to end the economic policy “orthodoxy” by cutting taxes in an attempt kick-start growth, adding to the country’s already high debt levels.

Tuesday’s rise in British gilt yields accelerated around the time the Bank of England’s chief economist, Huw Pill, said the BoE was likely to deliver a “significant policy response” to the government’s huge tax cuts but should wait until its next scheduled meeting in November.

Some investors and economists have said the British central bank should hold an emergency meeting now and deliver a big interest rate hike to prop up the value of the pound and avoid further inflation pressure.

Interest rate swaps now price in only a modest chance of an emergency BoE rate hike in the next few weeks, but suggest the BoE will raise rates to 3.5% or even 3.75% at its next meeting, up from 2.25% now. Bank Rate is seen reaching 6% by March next year.

TXPR was down again today, but only by about 16bp. These days, I guess that counts as a win!

TXPR closed at 573.34, down 1.51% on the day. Volume today was 954,690, near the median of the past 21 trading days.

CPD closed at 11.35, down 1.48% on the day. Volume was 170,320, second-highest of the past 21 trading days.

ZPR closed at 9.55, down 1.75% on the day. Volume of 290,470 was second-highest of the past 21 trading days.

Five-year Canada yields were up sharply to 3.46% today.

Equities got hit again:

Confidence among stock traders was also shaken by dramatic moves in the global foreign exchange market as sterling hit an all-time low on worries that the new British government’s fiscal plan released Friday threatened to stretch the country’s finances.

That added an extra layer of volatility to markets, where investors are worried about a global recession amid decades-high inflation. The CBOE Volatility index, hovered near three-month highs.

The Dow is now down 20.5% from its record high close on Jan. 4. According to a widely used definition, ending the session down 20% or more from its record high close confirms the Dow has been in a bear market since hitting its January peak.

The S&P 500 has yet to drop below its intra-day low on June 17. It is down about 23% so far in 2022.

U.S. Treasury yields hit fresh highs on Monday, rising in tandem with euro zone and British government debt yields amid concerns that central banks globally will keep tightening monetary policy to curb stubbornly high inflation.
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Canada’s S&P/TSX Composite Index closed down 153.94 points, or 0.83%, at 18,327.04 – the lowest since March 4, 2021.

The economically-sensitive energy sector was once again ground zero for a lot of the selling, losing about 3%. Oil prices fell $2 a barrel, settling at nine-month lows in choppy trade, pressured by a strengthening U.S. U.S. West Texas Intermediate crude for November delivery dropped to US$76.71, the lowest since Jan. 6.

The UK has a talent for shooting itself in the foot on a grand scale. My baptism of fire as a portfolio manager was the Exchange Rate Mechanism withdrawal of 1992; since then has come Brexit and now:

On Monday, prices for British government bonds plummeted, and yields surged, sending borrowing costs to new highs. The 10-year yield, which influences mortgages, business loans and other types of debt, hit its highest level in more than a decade. It traded at around 4.15 percent on Monday, double where it was a month and a half ago.

As traders dumped British assets, analysts have said the government’s plan to quickly grow the economy through deregulation and tax cuts, which will require tens of billions of pounds in additional borrowing at a time of rising interest rates and high inflation, was a gamble.

On Friday, Kwasi Kwarteng, who has been chancellor of the Exchequer for about three weeks in prime minister Liz Truss’s new government, announced a series of cuts to income taxes, reduced levies on home purchases and scrapped a plan to increase the corporate tax rate. There were dozens of other policy measures, which come on top of an expansive, costly plan to cap the cost of electricity and gas for households and businesses.

Despite the breadth of new measures, the government did not have the Office for Budget Responsibility, an independent watchdog, assess the polices and provide updated economic and fiscal forecasts.

In particular:

Ms. Truss won the race to succeed Boris Johnson as leader of the Conservative Party, and prime minister, on Sept. 5. She ran on a free-enterprise platform that focused on lowering taxes and reducing the role of government. After a 10-day pause because of the death of the Queen on Sept. 8, Ms. Truss and Kwasi Kwarteng, the new Chancellor of the Exchequer, have come out swinging.

Last Friday, Mr. Kwarteng unveiled a mini-budget that included the biggest tax cuts in 50 years. Among the measures announced were plans to lower the top tax rate to 40 per cent from 45 per cent, scrap a planned increase in corporate tax and eliminate a cap on bonuses paid to bank executives. And over the weekend, Mr. Kwarteng signalled that the government will go even further in a coming budget.

Mr. Kwarteng and Ms. Truss said the measures would spur economic growth and free up businesses to expand. They have yet to spell out in detail how to pay for everything, but government borrowing is expected to climb by as much as £100-billion ($147-billion).

The scale of Friday’s announcement and the level of borrowing have roiled financial markets. On Friday, the pound sank 3 per cent in value against the U.S. dollar, the biggest single-day drop in two years.

Doctrinaire trickle-downism! At a time when gas prices are putting more pressure on household and government finances and nobody’s even thought about paying for the pandemic. Ridiculous.

On a lighter note, charges have been laid in an absurd stock manipulation scheme:

The Securities and Exchange Commission today charged Peter L. Coker Sr., Peter L. Coker Jr., and James T. Patten for their roles in orchestrating fraudulent manipulative securities trading schemes. These schemes included artificially inflating the share price of Hometown International, which operated a New Jersey deli producing less than $40,000 in annual revenue, from approximately $1 per share in October 2019 to nearly $14 per share by April 2021, leading to a grossly inflated market capitalization of $100 million.

According to the SEC’s complaint, Patten, Coker Sr., and Coker Jr., who was the former Chairman of the Board of Hometown International, took control of the outstanding shares of Hometown International and a separate shell company, E-Waste Corp., artificially inflated the price of both issuers’ stock through manipulative trading, and used the entities to acquire privately-held companies in reverse mergers, with the intent to thereafter dump their shares at grossly inflated prices. Before the defendants were able to reap the intended profits of the schemes, as alleged, numerous news articles were published discussing the issuers’ inflated stock prices.

TXPR closed at 582.15, down 1.20% on the day. Volume today was 1.60-million, highest of the past 21 trading days. The market actually rallied a bit in the extended session – TXPR was at 580.27 at 4:00pm.

CPD closed at 11.52, down 2.29% on the day. Volume was 193,120, by far the highest of the past 21 trading days.

ZPR closed at 9.72, down 2.02% on the day. Volume of 327,260 was by far the highest of the past 21 trading days.

Five-year Canada yields were down slightly to 3.34% today.

Equities got hammered:

Global stocks fell sharply on Friday, sending the Dow Jones Industrial Average to a new low for the year as economic developments raised fresh concerns of a deteriorating global economy that may be teetering on the edge of recession.

The S&P/TSX Composite Index fell nearly 2.8 per cent, to 18,480.98, its worst performance in more than three months. The Canadian benchmark is now just 152 points above its 2022 low close in mid-July.

The broader S&P 500 index fell 1.7 per cent, to 3,693.23, putting it within 26 points of its recent low in mid-June. The Dow ended the day down 1.6 per cent.

The declines followed the release of business surveys from France, Germany and Britain, which showed that manufacturing activity contracted sharply in all three countries in September, as Europe confronts soaring energy prices and geopolitical instability from the war in Ukraine.
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An attempt on Friday by the British government under Liz Truss, the new Prime Minister, to support economic growth appeared to trigger further disorder in financial markets.

The government’s sweeping tax cuts in its mini-budget pushed up British borrowing costs dramatically as bond yields soared and sent the pound tumbling more than 3 per cent to a new 37-year low against the U.S. dollar.
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The latest sentiment survey from the American Association of Individual Investors, for the week ended Sept. 21, showed that 60.9 per cent of respondents felt bearish about the stock market over the next six months.

That was the survey’s most dour reading since 2009 during the financial crisis.

Retail spending also appears to be taking a hit. Canadian retail sales in July fell 2.5 per cent, according to a report released on Friday.

The decline was significantly greater than the 2 per cent drop that economists had been expecting. Though falling gasoline prices explained a big part of the decline, sales fell in nine of 11 categories, suggesting a broader downturn amid rising borrowing costs.

Meanwhile, at the BoC:

Union leaders are calling on the Bank of Canada to halt further interest-rate hikes, arguing that the brunt of a potential recession will be borne by Canadian workers whose wages are already lagging behind inflation.

A group of top labour leaders recently met with BoC Governor Tiff Macklem to make the case for restraint. The central bank has increased interest rates five times since March, and union leaders are concerned that it is not paying enough attention to the damage that further monetary policy tightening could do to employment.

“It can take a year or more to see the full impact of the bank’s actions and that’s why we recommended to them a wait-and-see approach,” said Mark Hancock, national president of the Canadian Union of Public Employees, who attended the virtual meeting on Sept. 16.

TXPR closed at 589.22, down 1.04% on the day. Volume today was 1.51-million, highest of the past 21 trading days.

CPD closed at 11.79, down 0.51% on the day. Volume was 58,350, third-highest of the past 21 trading days.

ZPR closed at 9.915, down 0.35% on the day. Volume of 153,080 was fourth-highest of the past 21 trading days.

Five-year Canada yields were up to 3.36% today.

Equities got hurt today:

Major U.S. and Canadian stock indexes ended lower on Thursday, falling for a third straight session as investors reacted to the Federal Reserve’s latest aggressive move to rein in inflation by selling growth stocks, including technology companies. Benchmark U.S. Treasury yields hit an 11-year high and a key part of the U.S. yield curve was the most inverted in at least two decades, further raising concerns of a looming recession.

The Fed lifted rates by an expected 75 basis points on Wednesday and signaled a longer trajectory for higher policy rates than markets had priced in. The U.S. central bank’s projections for economic growth released on Wednesday were also eye-catching, with growth of just 0.2% this year, rising to 1.2% for 2023.
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The Dow Jones Industrial Average fell 107.1 points, or 0.35%, to 30,076.68, the S&P 500 lost 31.94 points, or 0.84%, to 3,757.99 and the Nasdaq Composite dropped 153.39 points, or 1.37%, to 11,066.81.
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In bond markets, the yield curve between U.S. two-year and 10-year notes inverted as far as minus 58 basis points, the most inverted level since at least 2000, indicating rising concerns about an impending recession. It was last at minus 41 basis points.

Two-year yields reached 4.163%, the highest since October 2007. Five-year yields hit 3.942%, the highest since November 2007 and benchmark 10-year yields jumped to 3.716%, the highest since February 2011.

Canadian government bond yields were higher across a steeper curve, tracking the move in U.S. Treasuries.

The 10-year Canadian bond yield rose 7.7 basis points to 3.119% but fell 10.5 basis points further below the equivalent U.S. rate to a gap of 57.5 basis points.

The Canadian dollar was trading 0.2% lower at 1.3490 to the greenback, or 74.13 U.S. cents, after touching its weakest intraday level since July 2020.

The Fed hiked 75bp to 3.00%:

Recent indicators point to modest growth in spending and production. 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 3 to 3-1/4 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.

Their projection for the Fed Funds Rate in 2023 increased to 4.6%, up sharply from the June projection of 3.8%. However the post-2025 ‘longer-run’ projection remains at 2.5%. It should be noted that the projections for 2024 from the FOMC participants are all over the map, from a low of 2.625% to a high of 4.625%.

Powell was asked about housing prices:

Federal Reserve Chair Jerome Powell on Wednesday said the U.S. housing market will probably go through a “correction” after a period of “red hot” price increases that have put home ownership out of reach for many Americans.

“There was a big imbalance … housing prices were going up at an unsustainably fast level,” Powell said at a news conference following the Fed’s decision to raise its policy rate by another 75 basis points. “For the longer term what we need is supply and demand to get better aligned so housing prices go up at a reasonable level, at a reasonable pace and people can afford houses again. We probably in the housing market have to go through a correction to get back to that place.”

In the end, equities were down and bonds were flat:

After seesawing in the afternoon, the S&P 500 closed 1.7 percent lower for the day, as investors reacted to policymakers forecasts for higher interest rates in the future.
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However, bond traders took a more muted view of the Fed’s guidance. The two-year Treasury yield, sensitive to changes in Fed policy, only inched higher, to 4.02 percent. Futures prices that show where investors expect rates to be at the end of the year barely budged, despite a marked increase to the Fed’s own rate forecasts.

PerpetualDiscounts now yield 6.32%, equivalent to 8.22% interest at the standard equivalency factor of 1.3x. Long corporates now yield 5.06%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained at the 315bp reported September 14.

Today’s Canada inflation release didn’t cause any problems:

Canada’s annual inflation rate slowed to 7.0 per cent in August largely driven by the price of gasoline falling, but the cost of groceries continues to climb.

In its latest monthly consumer price index (CPI) report, Statistics Canada said grocery prices rose at the fastest rate since 1981, with prices up 10.8 per cent compared with a year ago.
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Statistics Canada said the 0.3 per cent decline in the CPI from July to August is the largest monthly decline since the early months of the pandemic.

The federal agency said transportation and shelter prices drove the deceleration in consumer prices.

Gas prices were up 22.1 per cent in August compared with a year ago, but down 18.8 per cent since June.

The Bank of Canada will be paying close attention to its preferred measures of core inflation, which tend to be less volatile and help the bank see through temporary changes in the consumer price index. Those measures all point to a slowdown in annual inflation in August as well.

The FDIC published a paper by Matthew D. Peppe and Haluk Unal titled Do Municipalities Pay More to Issue Unrated Bonds? :

Approximately 34% of local municipal bond issues were issued without ratings during 1998 to 2017. We study the circumstances that affect the decision to obtain a rating and whether unrated bonds, controlling for observable risk factors, are more expensive to issue than rated bonds. Results show that issuers are less likely to obtain ratings for smaller issues, negotiated offerings, and bonds with high proxies for risk such as coming from areas with low personal income. We estimate the effect of forgoing a rating on offering yields using a doubly-robust Inverse Probability Weighted Regression Adjustment that controls for confounding that arises from risk and other characteristics affecting both the choice to obtain a rating and the yield. We separately analyze revenue bonds, general obligation bonds, bank qualified, and not bank qualified bonds and find ratings decrease offering yields by 47, 49, 60, and 42 basis points respectively. The higher offering yields cost municipalities $22.5B in higher interest expense during our sample period. We find the choice of issuers to forgo ratings despite the substantial potential savings appears to be influenced by the dual underwriters who also work as advisors to the issuer. These underwriters benefit from not obtaining a rating because it lowers the price investors are willing to pay from the bond, but also lowers the price the underwriter must pay the issuer and thus increases the underwriter’s profit.

Gotta love that last line in the abstract!

Enbridge has issued some sub-debt – USD, 50-year term – I haven’t investigated further details.

TXPR closed at 598.14, down 0.68% on the day. Volume today was 1.33-million, second-highest of the past 21 trading days.

CPD closed at 11.935, down 0.95% on the day. Volume was 51,800, fourth-highest of the past 21 trading days.

ZPR closed at 10.02, down 0.89% on the day. Volume of 198,720 was second-highest of the past 21 trading days.

Five-year Canada yields were up to 3.36% today.

PerpetualDiscounts now yield 6.26%, equivalent to 8.14% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.99%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained at the 315bp reported September 7.