October 22, 2014

With every day, the stock market’s gyrations grow:

U.S. stocks retreated, after the Standard & Poor’s 500 Index rose the most in a year yesterday, as energy shares led losses amid a drop in oil prices.

The S&P 500 slipped 0.7 percent to 1,927.11 at 4 p.m. in New York. The Dow Jones Industrial Average slid 153.49 points, or 0.9 percent, to 16,461.32. The Nasdaq Composite Index lost 0.8 percent. Crude oil slid 2.4 percent to $80.52 a barrel, the lowest level on a closing basis in more than two years, after a U.S. report showed inventories increased by 7.11 million barrels last week.

Four consecutive advances in the S&P 500 through yesterday pushed the gauge up 4.2 percent since Oct. 15, recouping half the losses from a selloff that began in mid-September. The equity index surged 2 percent yesterday, its best day since October 2013, as speculation the European Central Bank will boost stimulus to spur growth in the region.

The cost of living in the U.S. barely rose in September, leaving inflation below the Federal Reserve’s goal as fuel prices plunge this month. The consumer-price index climbed 0.1 percent after decreasing 0.2 percent in August, a Labor Department report showed.

… and there is chatter about currency wars:

Weak price growth is stifling economies from the euro region to Israel and Japan. Eight of the 10 currencies with the biggest forecasted declines through 2015 are from nations that are either in deflation or pursuing policies that weaken their exchange rates, data compiled by Bloomberg show.

“This beggar-thy-neighbor policy is not about rebalancing, not about growth,” David Bloom, the global head of currency strategy at London-based HSBC Holdings Plc, which does business in 74 countries and territories, said in an Oct. 17 interview. “This is about deflation, exporting your deflationary problems to someone else.”

Bloom puts it in these terms because, when one jurisdiction weakens its exchange rate, another’s gets stronger, making imported goods cheaper. Deflation is a both a consequence of, and contributor to, the global economic slowdown that’s pushing the euro region closer to recession and reducing demand for exports from countries such as China and New Zealand.

Hungary and Switzerland entered deflation in the past two months, while Swedish central-bank Deputy Governor Per Jansson last week blamed his country’s falling prices partly on rate cuts the ECB used to boost its own inflation. A policy response may be necessary, he warned.

But there will be no deflation in North America … will there?

The cost of living in the U.S. barely rose in September, restrained by decelerating prices for a broad array of goods and services that signal the Federal Reserve can keep interest rates low well into 2015.

The consumer-price index climbed 0.1 percent after decreasing 0.2 percent in August, a Labor Department report showed today in Washington. Over the past year, costs increased 1.7 percent, the same as in the 12 months through August.

While plunging fuel costs are one reason for the restraint in pricing, clothing retailers, medical-care providers and airlines are also among those keeping a lid on charges. With inflation falling short of the Fed’s goal, policy makers need not rush to raise rates even as the world’s largest economy shows no sign of succumbing to a slowdown in global growth.

… so the Bank of Canada is maintaining its policy rate:

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Inflation in Canada is close to the 2 per cent target. Core inflation rose more rapidly than was expected in the Bank’s July Monetary Policy Report (MPR), mainly reflecting unexpected sector-specific factors. Total CPI inflation is evolving broadly as expected, as the pickup in core inflation was largely offset by lower energy prices. Underlying inflationary pressures are muted, given the persistent slack in the economy and the continued effects of competition in the retail sector.

In this context, Canada’s exports have begun to respond. However, business investment remains weak. Meanwhile, the housing market and consumer spending are showing renewed vigour and auto sales have reached record highs, all fuelled by very low borrowing rates. The lower terms of trade will have a tempering effect on income.

Canada’s real GDP growth is projected to average close to 2 1/2 per cent over the next year before slowing gradually to 2 per cent by the end of 2016, roughly the estimated growth rate of potential output. As global headwinds recede, confidence in the sustainability of domestic and global demand should improve and business investment should pick up. Together with a moderation in the growth of household spending, this is expected to gradually return Canada’s economy to a more balanced growth path. As the economy reaches its full capacity in the second half of 2016, both core and total CPI inflation are projected to be about 2 per cent on a sustained basis.

Weighing all of these factors, the Bank judges that the risks to its inflation projection are roughly balanced. Meanwhile, the financial stability risks associated with household imbalances are edging higher. Overall, the balance of risks falls within the zone for which the current stance of monetary policy is appropriate and therefore the target for the overnight rate remains at 1 per cent.

The Monetary Policy Report highlighted housing:

Housing starts have remained broadly in line with demographic demand in recent months (Chart 24). However, sales of existing homes have picked up noticeably since the beginning of the year, to a four-year high (Chart 25). This is contributing to sizable increases in house prices, although the national picture continues to mask important regional divergences (Chart 26 and Chart 27). In general, with historically low price increases and sales volumes, markets in Eastern Canada appear to show signs consistent with a soft landing. This contrasts with major cities in Ontario, Alberta and British Columbia, where housing markets are generally robust and much tighter.

… and the Globe chimed in with:

According to the Teranet-National house price index, home prices in Canada rose 0.3 per cent in September from August and 4.9 per cent from a year earlier.

Notably, Calgary, Toronto and Vancouver were well above the national average, at 9.5 per cent, 7.4 per cent and 6.5 per cent, respectively.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 10bp, FixedResets winning 13bp and DeemedRetractibles gaining 2bp. Volatility was average. Volume was low.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 3.15 % 3.15 % 20,898 19.34 1 0.0000 % 2,649.2
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.5452 % 3,987.9
Floater 2.99 % 3.15 % 65,125 19.35 4 0.5452 % 2,677.7
OpRet 4.04 % 2.26 % 101,617 0.08 1 0.0000 % 2,735.7
SplitShare 4.29 % 3.90 % 82,216 3.81 5 -0.0582 % 3,152.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,501.5
Perpetual-Premium 5.48 % -0.15 % 73,560 0.08 18 -0.0437 % 2,457.4
Perpetual-Discount 5.30 % 5.14 % 95,792 15.15 18 0.0953 % 2,601.2
FixedReset 4.22 % 3.60 % 167,507 16.73 75 0.1301 % 2,551.5
Deemed-Retractible 5.02 % 2.49 % 103,051 0.34 42 0.0200 % 2,562.3
FloatingReset 2.55 % -6.10 % 60,705 0.08 6 -0.0719 % 2,545.5
Performance Highlights
Issue Index Change Notes
CIU.PR.C FixedReset -1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-10-22
Maturity Price : 20.40
Evaluated at bid price : 20.40
Bid-YTW : 3.53 %
TRP.PR.B FixedReset 1.51 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-10-22
Maturity Price : 18.80
Evaluated at bid price : 18.80
Bid-YTW : 3.64 %
PWF.PR.A Floater 1.93 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-10-22
Maturity Price : 20.00
Evaluated at bid price : 20.00
Bid-YTW : 2.61 %
FTS.PR.J Perpetual-Discount 1.98 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-10-22
Maturity Price : 23.76
Evaluated at bid price : 24.15
Bid-YTW : 4.97 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.K Deemed-Retractible 131,289 Scotia crossed 40,000 at 26.05; Nesbitt crossed blocks of 35,000 and 50,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-11-25
Maturity Price : 25.50
Evaluated at bid price : 26.03
Bid-YTW : -8.09 %
NA.PR.W FixedReset 67,325 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-10-22
Maturity Price : 23.09
Evaluated at bid price : 24.85
Bid-YTW : 3.63 %
TD.PF.B FixedReset 64,463 Scotia crossed 51,000 at 25.15.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-10-22
Maturity Price : 23.23
Evaluated at bid price : 25.15
Bid-YTW : 3.54 %
BAM.PR.R FixedReset 53,235 RBC crossed 46,800 at 25.25.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-10-22
Maturity Price : 23.74
Evaluated at bid price : 25.18
Bid-YTW : 3.74 %
GWO.PR.N FixedReset 39,397 Nesbitt crossed 35,000 at 21.82.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.75
Bid-YTW : 4.47 %
ENB.PF.G FixedReset 34,284 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-10-22
Maturity Price : 23.14
Evaluated at bid price : 25.08
Bid-YTW : 4.07 %
There were 19 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
W.PR.H Perpetual-Premium Quote: 25.02 – 25.35
Spot Rate : 0.3300
Average : 0.2080

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-10-22
Maturity Price : 24.80
Evaluated at bid price : 25.02
Bid-YTW : 5.53 %

TRP.PR.B FixedReset Quote: 18.80 – 19.20
Spot Rate : 0.4000
Average : 0.2881

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-10-22
Maturity Price : 18.80
Evaluated at bid price : 18.80
Bid-YTW : 3.64 %

CGI.PR.D SplitShare Quote: 25.25 – 25.68
Spot Rate : 0.4300
Average : 0.3357

YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2023-06-14
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 3.68 %

FTS.PR.H FixedReset Quote: 20.11 – 20.40
Spot Rate : 0.2900
Average : 0.2130

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-10-22
Maturity Price : 20.11
Evaluated at bid price : 20.11
Bid-YTW : 3.64 %

TD.PR.S FixedReset Quote: 25.07 – 25.34
Spot Rate : 0.2700
Average : 0.1991

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.07
Bid-YTW : 3.16 %

TRP.PR.C FixedReset Quote: 20.92 – 21.19
Spot Rate : 0.2700
Average : 0.2047

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-10-22
Maturity Price : 20.92
Evaluated at bid price : 20.92
Bid-YTW : 3.63 %

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