PrefBlog

There were no surprises in the BOC rate decision:

The Bank of Canada today increased its target for the overnight rate to 1½%, with the Bank Rate at 1¾% and the deposit rate at 1½%. The Bank is also continuing its policy of quantitative tightening (QT).

Inflation globally and in Canada continues to rise, largely driven by higher prices for energy and food. In Canada, CPI inflation reached 6.8% for the month of April – well above the Bank’s forecast – and will likely move even higher in the near term before beginning to ease. As pervasive input price pressures feed through into consumer prices, inflation continues to broaden, with core measures of inflation ranging between 3.2% and 5.1%. Almost 70% of CPI categories now show inflation above 3%. The risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored.

The increase in global inflation is occurring as the global economy slows. The Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation. The war has increased uncertainty and is putting further upward pressure on prices for energy and agricultural commodities. This is dampening the outlook, particularly in Europe. In the United States, private domestic demand remains robust, despite the economy contracting in the first quarter of 2022. US labour market strength continues, with wage pressures intensifying. Global financial conditions have tightened and markets have been volatile.

Canadian economic activity is strong and the economy is clearly operating in excess demand. National accounts data for the first quarter of 2022 showed GDP growth of 3.1 percent, in line with the Bank’s April Monetary Policy Report (MPR) projection. Job vacancies are elevated, companies are reporting widespread labour shortages, and wage growth has been picking up and broadening across sectors. Housing market activity is moderating from exceptionally high levels. With consumer spending in Canada remaining robust and exports anticipated to strengthen, growth in the second quarter is expected to be solid.

With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further. The policy interest rate remains the Bank’s primary monetary policy instrument, with quantitative tightening acting as a complementary tool. The pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation, and the Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.

As usual, there is no listing of who voted for and against, nor a summary of contrary arguments. The governors aren’t good enough at their jobs to risk being seen in an occasional minority.
The Globe notes:

Higher interest rates won’t do much to deal with international sources of inflation, which include persistent supply-chain bottlenecks, COVID-19 lockdowns in China, and surging commodity prices following Russia’s invasion of Ukraine.

But higher interest rates do dampen demand in the economy. That can impact domestic sources of inflation tied to the service sector, housing market and ultra-tight labour market. In practice, this happens by increasing the cost of borrowing money, which shows up in things such as interest rates on mortgages, business loans and car loans.

I think they just cribbed that from a recent comment by Assiduous Reader baffled.

Rob Carrick puts a little blame on real estate speculators:

Behaviour in the housing market is a concern to the Bank of Canada because it suggests inflation is becoming entrenched in the economy.
…
But without the influence of investors buying up homes, these rate increases might have been less of a burden.

Imagine you and your young kids bought a first home five years ago, when a well-discounted five-year fixed rate mortgage could be had for 2.25 per cent. You bought the place to live in, not to flip or rent. You made improvements in your property and the community benefited from your presence.

Flash ahead to 2022 – you must now renew at mortgage rates around 4.2 per cent for the same five-year fixed rate. A substantial increase in mortgage payments is coming, brought to you in part by real estate investors and speculators.

The point of low interest rates is to get free market traders to borrow money to invest in long term assets, which includes houses. One may quibble that it would be better if this investing were performed on productive assets rather than depreciating ones – I’ve done so for years – but the fact is that people like real estate, can touch real-estate, think they understand real-estate and therefore invest in real estate. I’ve known that for years and so has the Bank of Canada.

Don’t blame speculators. I have a feeling that they lose a lot more money than they ever make in the long run and, more importantly, they did exactly what the BoC wanted them to do.

Assiduous Reader TS sends me a copy of an eMail he sent to BCE:

Dear Sir or Madame,

I believe that the dividend on BCE.PR.B and similar prime rate preferred shares for record date May 31, 2022 were calculated incorrectly.

On the website it states that the dividend is $0.06215

The prime rate for the entire month of May was 3.2% so $25 x 3.2% / 12 mths = $0.06667

You still have time to change that as payment date is Jun 13, 2022.

Please correct as soon as possible.

Thank you.

The complaints I get about dividends are usually based on a misunderstanding of the issue terms, but after reading the prospectus:

The holders of the Series AB Preferred Shares will be entitled to receive floating adjustable cumulative preferred cash dividends, as and when declared by the board of directors of BCE Inc., which will be payable on the twelfth day of each Month commencing with the Month immediately following the date of issue of the Series AB Preferred Shares.

The annual floating dividend rate for the first Month will be equal to 80% of Prime. The dividend rate will float in relation to changes in Prime and will be adjusted upwards or downwards on a monthly basis by an adjustment factor (the ‘‘Adjustment Factor’’) whenever the Calculated Trading Price of the Series AB Preferred Shares is $24.875 or less or $25.125 or more respectively. The maximum monthly adjustment for changes in the Calculated Trading Price will be +/-4.00% of Prime. The annual floating dividend rate applicable for a Month will in no event be less than 50% of Prime or be greater than Prime.

The Adjustment Factor for a Month will be based on the Calculated Trading Price of the Series AB Preferred Shares for the preceding Month determined in accordance with the following table:

If the Calculated Trading Price for the Preceding Month is	The Adjustment Factor as a Percentage of Prime shall be
$25.50 or more******************************************	–4.00%
$25.375 and less than $25.50.******************************	–3.00%
$25.25 and less than $25.375.******************************	–2.00%
$25.125 and less than $25.25.******************************	–1.00%
Greater than $24.875 and less than $25.125 ******************	nil
Greater than $24.75 to $24.875. ****************************	1.00%
Greater than $24.625 to $24.75. ****************************	2.00%
Greater than $24.50 to $24.625. ****************************	3.00%
$24.50 or less*******************************************	4.00%

The maximum Adjustment Factor for any Month will be
4.00% of Prime.
If in any Month there is no trade of at least a board lot of the Series AB Preferred Shares on the Exchange, the
Adjustment Factor for the following Month will be nil.
The annual floating dividend rate for a Month will be calculated by BCE Inc. as promptly as practicable, and
notice thereof will be given to each stock exchange on which the Series AB Preferred Shares are listed for trading.

I can’t see anything in there to contradict him. Stay tuned!

PerpetualDiscounts now yield 5.67%, equivalent to 7.37% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.88%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 250bp from the 260bp reported May 25.

TXPR closed at 653.68, up 1.31% on the day. Volume today was 2.82-million, highest of the past 21 trading days.

CPD closed at 12.89, up 0.86% on the day. Volume was 90,270, above the median of the past 21 trading days.

ZPR closed at 10.75 up 0.66% on the day. Volume of 288,710 was well above the median of the past 21 trading days.

Five-year Canada yields were up to 2.76% today.

Canadian GDP disappointed:

Canada’s economic growth slowed in the first quarter of 2022, but an acceleration in demand showed why the Bank of Canada is unlikely to deviate from its course of rapid interest rate hikes.

After adjusting for inflation, gross domestic product grew at an annualized pace of 3.1 per cent, slowing from 6.6 per cent in the fourth quarter of 2021, Statistics Canada said on Tuesday. While that growth was in line with the central bank’s expectations, it fell short of the median estimate from Bay Street analysts, who called for growth of 5.2 per cent.
…
Compensation of employees rose 3.8 per cent in the first quarter in nominal terms, following a 2-per-cent rise in the fourth quarter. It was the largest growth in compensation since 1981, excluding the third quarter of 2020, when the country was rebounding from the first wave of COVID-19.

Canadians also hung on to more of their money. The household savings rate rose to 8.1 per cent from 6.9 per cent – and far above the quarterly average of 3.4 per cent during the 2010s.
…
This cycle of monetary policy tightening has already led to weaker sales and falling prices in many of Canada’s exuberant housing markets.

However, that shift hadn’t yet materialized in Tuesday’s GDP report. Investment in residential real estate jumped by 18 per cent, on an annualized basis, driven by expenditures on renovations and costs associated with home purchases.

TXPR closed at 645.24, up 1.06% on the day. Volume today was 1.68-million, above the median of the past 21 trading days.

CPD closed at 12.78, up 0.79% on the day. Volume was 28,790, lowest of the past 21 trading days.

ZPR closed at 10.68 up 0.85% on the day. Volume of 88,010 was third-lowest of the past 21 trading days.

Five-year Canada yields were up to 2.70% today.

There is concern about real wages in Canada:

Yet while wages for Canadian workers appear to be rising – average hourly pay climbed 3.3 per cent in April from the year before – that’s before soaring consumer prices take their bite. In real (inflation-adjusted) terms, wages in April were down more than 3 per cent from the same period a year ago.

Explanations for the wage lag vary. Some argue real wage stagnation is because of a delay in employment contracts reflecting the rise in consumer prices. Businesses that rely on low-paid workers may also have been holding off raising wages in anticipation that Ottawa would ease access to temporary foreign workers, which it did last month in a move that critics warned could suppress wages.

This is well illustrated by a 2015 OECD publication:

Nevertheless, the picture that emerges from focusing on the private sector is rather similar to the results obtained for the whole economy (Figure 4). The cross-country average labour share in the private sector, excluding agriculture, mining, fuel and real estate, was 69.8 per cent in the G20 countries for which data are available in the early 1990s and 65.9 per cent in 2007. On average the contraction over the period was 0.24 percentage points per year. None of the countries for which data are available experienced a significant trend increase. By contrast, the labour share contracted significantly in more than three-quarters of the countries. Very large falls in the labour share were observed in Australia, Canada and Italy where the decline in the private sector labour share exceeded 5 percentage points. The implication is that, in these countries, labour is obtaining an increasingly smaller share of the priate-sector’s pre-tax revenue.

I’ve mentioned in the past – but can’t find it – that the increase in capital’s share of GDP relative to labour is thought to have boosted stock market returns considerably since 1970. If this reverses, that will be a stiff headwind indeed for the next few decades of equity market returns.

I mentioned a new LRCN issued by iA Financial yesterday, but had no further information. A press release has been issued; Assiduous Reader skeptical has kindly provided the text.

The LRCN is a FixedReset, 6.611%+400, paid as interest, which is the equivalent of a dividend paying FixedReset, 5.085%+308 240. That’s a wider spread than the soon to be redeemed IAF.PR.G, which had been scheduled to reset at +285; but on the other hand it moves the liability to higher up on the capital structure (to the holdco from the opco) as well as diversifying the firm’s funding base … and issuers like to diversify their funders as much as funders like to diversify their issuers!

Of course, in the present case, a lot of the new funders will have been put in that position by sleazy or ignorant portfolio management firms, eager to stuff preferred shares (there is no meaningful difference between a preferred share and a LRCN – only technicalities of tax law, which won’t help much when the shit hits the fan) into a bond portfolio, thanks to the naivety of gullible clients with a badly written mandate … but who cares? OSFI wants gullible bond investors to take unsuspected risks, because, um, Canada.