The Bank of Canada policy rate announcement was no surprise:
The Bank of Canada today maintained its target for the overnight rate at 1 ¾ percent. The Bank Rate is correspondingly 2 percent and the deposit rate is 1 ½ percent.
The outlook for the global economy has weakened further since the Bank’s July Monetary Policy Report (MPR). Ongoing trade conflicts and uncertainty are restraining business investment, trade, and global growth. A growing number of countries have responded with monetary and other policy measures to support their economies. Still, global growth is expected to slow to around 3 percent this year before edging up over the next two years. Canada has not been immune to these developments. Commodity prices have fallen amid concerns about global demand. Despite this, the Canada-US exchange rate is still near its July level, and the Canadian dollar has strengthened against other currencies.
Growth in Canada is expected to slow in the second half of this year to a rate below its potential. This reflects the uncertainty associated with trade conflicts, continuing adjustment in the energy sector, and the unwinding of temporary factors that boosted growth in the second quarter. Business investment and exports are likely to contract before expanding again in 2020 and 2021. At the same time, government spending and lower borrowing rates are supporting domestic demand, and activity in the services sector remains robust. Employment is showing continuing strength and wage growth is picking up, although with some variation among regions. Consumer spending has been choppy, but will be supported by solid income growth. Meanwhile, housing activity is picking up in most markets. The Bank continues to monitor the evolution of financial vulnerabilities in light of lower mortgage rates and past changes to housing market policies.
The Bank projects real GDP will grow by 1.5 percent this year, 1.7 percent in 2020 and 1.8 percent in 2021. This implies that the current modest output gap will narrow over the projection horizon. Measures of inflation are all around 2 percent. CPI inflation likely will dip temporarily in 2020 as the effect of a previous spike in energy prices fades. Overall, the Bank expects inflation to track close to the 2 percent target over the projection horizon.
All things considered, Governing Council judges it appropriate to maintain the current level of the overnight rate target. Governing Council is mindful that the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist. In considering the appropriate path for monetary policy, the Bank will be monitoring the extent to which the global slowdown spreads beyond manufacturing and investment. In this context, it will pay close attention to the sources of resilience in the Canadian economy – notably consumer spending and housing activity – as well as to fiscal policy developments.
Still no reporting of the voting and any reasons for dissent. Drives me crazy.
David Parkinson of the Globe reports:
The Canadian dollar fell immediately after the bank’s decision, to 76 US cents from 76.45 US cents prior to the announcement. It closed the day’s trading at 76 US cents. Bond market pricing also indicated that traders now see a nearly 30-per-cent chance of a quarter-point cut at the Bank of Canada’s next rate-setting decision, in December, up from 13 per cent a day earlier.
The Federal Reserve’s Open Market Committee also met and cut their policy rate by 25bp:
Information received since the Federal Open Market Committee met in September indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against this action were: Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range at 1-3/4 percent to 2 percent.
Jeanna Smialek of the New York Times reports:
The Fed chair, Jerome H. Powell, said that while “there’s plenty of risk left,” there are signs that some challenges are subsiding, including the possibility of a limited trade deal between the United States and China and a negotiated exit for Britain from the European Union.
This week’s decision to lower rates was intended to “provide some insurance against ongoing risks,” Mr. Powell said, adding that the United States economy remains strong. “Over all, we see the economy as having been resilient to the winds that have been blowing this year,” he said.
…
The Fed has now reduced its policy rate by a cumulative 0.75 percentage point this year, just as it did during two mid-business-cycle interest rate adjustments in the 1990s. While those insurance cut cycles were eventually reversed — the Fed returned to interest rate increases — Mr. Powell indicated that increases were not on the table unless inflation showed signs of moving higher. Price gains have been falling short of the Fed’s 2 percent target for years, making that unlikely.
PerpetualDiscounts now yield 5.38%, equivalent to 6.99% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.43%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed slightly (and perhaps spuriously) to 355bp from the 360bp reported October 23.
| 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 | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -1.6700 % | 1,955.7 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -1.6700 % | 3,588.7 |
| Floater | 6.18 % | 6.38 % | 47,850 | 13.32 | 4 | -1.6700 % | 2,068.2 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0394 % | 3,386.8 |
| SplitShare | 4.65 % | 4.65 % | 46,470 | 3.90 | 7 | -0.0394 % | 4,044.5 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0394 % | 3,155.7 |
| Perpetual-Premium | 5.51 % | -19.85 % | 58,577 | 0.09 | 8 | 0.0294 % | 3,028.1 |
| Perpetual-Discount | 5.36 % | 5.38 % | 66,162 | 14.73 | 25 | 0.0171 % | 3,236.5 |
| FixedReset Disc | 5.61 % | 5.82 % | 182,212 | 14.24 | 66 | -0.2956 % | 2,095.0 |
| Deemed-Retractible | 5.20 % | 5.74 % | 63,116 | 7.81 | 27 | 0.0157 % | 3,175.9 |
| FloatingReset | 6.21 % | 6.73 % | 91,385 | 12.85 | 2 | -1.0677 % | 2,456.2 |
| FixedReset Prem | 5.13 % | 3.83 % | 159,110 | 1.65 | 20 | 0.0607 % | 2,611.0 |
| FixedReset Bank Non | 1.96 % | 4.12 % | 91,365 | 2.18 | 3 | 0.2207 % | 2,695.9 |
| FixedReset Ins Non | 5.42 % | 8.42 % | 114,971 | 7.73 | 21 | -0.1834 % | 2,130.8 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.B | Floater | -2.95 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 10.87 Evaluated at bid price : 10.87 Bid-YTW : 6.44 % |
| MFC.PR.I | FixedReset Ins Non | -2.20 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.68 Bid-YTW : 8.26 % |
| BAM.PR.X | FixedReset Disc | -1.77 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 13.33 Evaluated at bid price : 13.33 Bid-YTW : 6.29 % |
| BAM.PR.C | Floater | -1.71 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 10.91 Evaluated at bid price : 10.91 Bid-YTW : 6.42 % |
| HSE.PR.A | FixedReset Disc | -1.65 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 10.72 Evaluated at bid price : 10.72 Bid-YTW : 7.69 % |
| BAM.PR.R | FixedReset Disc | -1.57 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 15.01 Evaluated at bid price : 15.01 Bid-YTW : 6.47 % |
| TRP.PR.B | FixedReset Disc | -1.48 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 11.29 Evaluated at bid price : 11.29 Bid-YTW : 6.47 % |
| TD.PF.J | FixedReset Disc | -1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 19.65 Evaluated at bid price : 19.65 Bid-YTW : 5.64 % |
| MFC.PR.J | FixedReset Ins Non | -1.23 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.47 Bid-YTW : 8.42 % |
| BMO.PR.Y | FixedReset Disc | -1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 19.07 Evaluated at bid price : 19.07 Bid-YTW : 5.76 % |
| BAM.PR.T | FixedReset Disc | -1.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 15.11 Evaluated at bid price : 15.11 Bid-YTW : 6.48 % |
| PWF.PR.A | Floater | -1.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 12.00 Evaluated at bid price : 12.00 Bid-YTW : 5.77 % |
| SLF.PR.J | FloatingReset | -1.11 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 13.35 Bid-YTW : 10.76 % |
| RY.PR.Z | FixedReset Disc | -1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 16.96 Evaluated at bid price : 16.96 Bid-YTW : 5.62 % |
| TD.PF.E | FixedReset Disc | -1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 19.29 Evaluated at bid price : 19.29 Bid-YTW : 5.82 % |
| PWF.PR.P | FixedReset Disc | -1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 13.27 Evaluated at bid price : 13.27 Bid-YTW : 6.00 % |
| TRP.PR.F | FloatingReset | -1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 13.52 Evaluated at bid price : 13.52 Bid-YTW : 6.73 % |
| TRP.PR.C | FixedReset Disc | -1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 11.83 Evaluated at bid price : 11.83 Bid-YTW : 6.61 % |
| TRP.PR.G | FixedReset Disc | 1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 17.75 Evaluated at bid price : 17.75 Bid-YTW : 6.51 % |
| SLF.PR.G | FixedReset Ins Non | 1.43 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 13.44 Bid-YTW : 10.54 % |
| HSE.PR.E | FixedReset Disc | 2.31 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 17.70 Evaluated at bid price : 17.70 Bid-YTW : 7.42 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BAM.PR.R | FixedReset Disc | 113,200 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 15.01 Evaluated at bid price : 15.01 Bid-YTW : 6.47 % |
| BMO.PR.F | FixedReset Disc | 67,800 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 23.04 Evaluated at bid price : 24.56 Bid-YTW : 5.23 % |
| RY.PR.R | FixedReset Prem | 63,266 | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-08-24 Maturity Price : 25.00 Evaluated at bid price : 25.80 Bid-YTW : 3.48 % |
| EMA.PR.C | FixedReset Disc | 55,228 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 17.82 Evaluated at bid price : 17.82 Bid-YTW : 6.30 % |
| BAM.PF.B | FixedReset Disc | 43,245 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-10-30 Maturity Price : 17.95 Evaluated at bid price : 17.95 Bid-YTW : 6.08 % |
| W.PR.K | FixedReset Prem | 36,600 | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-01-15 Maturity Price : 25.00 Evaluated at bid price : 25.52 Bid-YTW : 3.68 % |
| There were 46 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| HSE.PR.G | FixedReset Disc | Quote: 17.34 – 18.33 Spot Rate : 0.9900 Average : 0.6060 YTW SCENARIO |
| HSE.PR.E | FixedReset Disc | Quote: 17.70 – 18.37 Spot Rate : 0.6700 Average : 0.4513 YTW SCENARIO |
| MFC.PR.I | FixedReset Ins Non | Quote: 18.68 – 19.04 Spot Rate : 0.3600 Average : 0.2286 YTW SCENARIO |
| PWF.PR.T | FixedReset Disc | Quote: 17.00 – 17.40 Spot Rate : 0.4000 Average : 0.2721 YTW SCENARIO |
| BIP.PR.F | FixedReset Disc | Quote: 22.47 – 22.90 Spot Rate : 0.4300 Average : 0.3106 YTW SCENARIO |
| NA.PR.E | FixedReset Disc | Quote: 18.31 – 18.62 Spot Rate : 0.3100 Average : 0.2091 YTW SCENARIO |
Hi James – I’ve been wondering about the logic behind using the standard equivalency factor of 1.3X to generate the Seniority Spread (meticulously tracked and generously shared here at Prefblog). Given that tax equivalence is a rather personal matter and that institutional investors don’t gain the tax benefit, why not just track an unadjusted Seniority Spread? Today, for example, would read something like …
“PerpetualDiscounts now yield 5.38% while long corporates now yield 3.43%, so the “Seniority Spread” has narrowed slightly (and perhaps spuriously) to 195bp from the 199bp reported October 23.”
Wouldn’t all the inferences and insight that accompany the tracking be largely unchanged? Wouldn’t changes in the unadjusted Seniority Spread also then reveal influences such as changing ownership mix in the preferred share market? An example of the latter might be an influx of “GIC refugees” into the market which could drive the unadjusted Seniority Spread higher (all else being equal).
“An example of the latter might be an influx of “GIC refugees” into the market which could drive the unadjusted Seniority Spread higher (all else being equal).”
I mean “lower”, not higher, as any spread is worth more to them than to institutional investors.
I take the view that the preferred share market is dominated by retail investors and hence that the market level is dominated by their preferences. Most of these retail investors will be subject to tax on their dividends.
Therefore, the after-tax yield equivalent spread more meaningful to investors and has a bit more explanatory power.
Say, for instance, there is a fiddle with the Dividend Tax Credit and Gross Up that changes the equivalency factor from 1.3x to 1.2x. This, by itself, will affect the post-tax spread, but not the pre-tax spread – the former will decline substantially. In such an event, we would also expect the market to plummet, which would tend to restore the post-tax spread to its pre-fiddle level.
The pre-tax spread would remain unchanged after the fiddle and wider after the plummet; the behaviour of the post-tax spread appears to me to be preferable.
In addition, consider the situation in which the pre-tax spread declines to zero while (assuming both asset classes yield 5%) the post-tax spread narrows to 150bp. That 150bp post-tax provides a one-step explanation of why people are willing to assume more credit risk with preferreds, while the zero spread pre-tax does not – you have to tack on another explanation.
With respect to your final paragraph, it seems to me that the pre-tax and post-tax spreads will be affected similarly by an influx of GIC refugees, so I don’t see any major gain in explanatory or predictive power.
Still, it’s primarily a question of taste – it’s only the presentation of the data that’s being discussed, not anything fundamental. But my taste is to retain the current presentation.
Explanatory power is indeed the important bit here and I humbly leave it to you as the Chief Explainer at Prefblog to choose the best presentation.
Regarding the market being dominated by retail investors and their preferences, I sometimes wonder about this – at least the bit about retail preferences.
Take Tammy Tupperware-Lunch who gets packaged out after two decades or so from her job. She decides to manage her own money and thus takes the commuted value of her defined benefit pension (or transfers her defined contribution amounts) to her discount broker. All of her money is inside a LIRA, where the tax-tail does not wag the dog. Tammy will view the risk adjusted total return on preferred shares against all comers on an even basis.
Or take your Joe Lunchbox character who saves along the way, amassing funds in both registered and unregistered accounts. If Joe is paying attention, he is trying to place interest-bearing investments in the registered accounts and to realize capital gains and dividends in his unregistered accounts. However, opportunities to invest don’t hit him perfectly in line with where and when he has cash so Joe probably is not optimized and may or may not be perfectly expressing his view of the value of pre-tax returns.
I don’t know the answer to this, but isn’t there is an awful lot of retail money in registered accounts that might at least diminish the value of the dividend tax credit for retail investors?
And lets not forget those foreign stock holders who get no benefit of the tax credit !