The BoC kept the policy rate steady:
The Bank of Canada today held its target for the overnight rate at 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is also continuing its policy of quantitative tightening.
Inflation in many countries is easing in the face of lower energy prices, normalizing global supply chains, and tighter monetary policy. At the same time, labour markets remain tight and measures of core inflation in many advanced economies suggest persistent price pressures, especially for services.
Global economic growth has been stronger than anticipated. Growth in the United States and Europe has surprised on the upside, but is expected to weaken as tighter monetary policy continues to feed through those economies. In the United States, recent stress in the banking sector has tightened credit conditions further. US growth is expected to slow considerably in the coming months, with particular weakness in sectors that are important for Canadian exports. Meanwhile, activity in China’s economy has rebounded, particularly in services. Overall, commodity prices are close to their January levels. The Bank’s April Monetary Policy Report (MPR) projects global growth of 2.6% this year, 2.1% in 2024, and 2.8% in 2025.
In Canada, demand is still exceeding supply and the labour market remains tight. Economic growth in the first quarter looks to be stronger than was projected in January, with a bounce in exports and solid consumption growth. While the Bank’s Business Outlook Survey suggests acute labour shortages are starting to ease, wage growth is still elevated relative to productivity growth. Strong population gains are adding to labour supply and supporting employment growth while also boosting aggregate consumption. Housing market activity remains subdued.
As more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year. Softening foreign demand is expected to restrain exports and business investment. Overall, GDP growth is projected to be weak through the remainder of this year before strengthening gradually next year. This implies the economy will move into excess supply in the second half of this year. The Bank now projects Canada’s economy to grow by 1.4% this year and 1.3% in 2024 before picking up to 2.5% in 2025.
CPI inflation eased to 5.2% in February, and the Bank’s preferred measures of core inflation were just under 5%. The Bank expects CPI inflation to fall quickly to around 3% in the middle of this year and then decline more gradually to the 2% target by the end of 2024. Recent data is reinforcing Governing Council’s confidence that inflation will continue to decline in the next few months. However, getting inflation the rest of the way back to 2% could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize. As it sets monetary policy, Governing Council will be particularly focused on these indicators, and the evolution of core inflation, to gauge the progress of CPI inflation back to target.
In light of its outlook for growth and inflation, Governing Council decided to maintain the policy rate at 4½%. Quantitative tightening continues to complement this restrictive stance. Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target. The Bank remains resolute in its commitment to restoring price stability for Canadians.
Mark Rendell comments in the Globe:
The bank’s updated inflation forecast is little changed from January. It expects the annual rate of inflation to drop to around 3 per cent by the middle of the year, from 5.2 per cent in February. Inflation is then expected to decline gradually to 2 per cent by the end of 2024.
Meanwhile, the bank revised its GDP growth forecast to reflect the resilience of the Canadian economy at the start of the year. It now expects 1.4 per cent GDP growth in 2023, up from 1 per cent forecast in January. It downgraded its 2024 GDP growth forecast to 1.3 per cent from 1.8 per cent.
…
The annual rate of consumer price index inflation peaked at a four-decade high of 8.1 per cent last June. It has fallen steadily since then, thanks to lower energy prices and a slowdown in durable goods inflation as global transportation costs have receded.Service price inflation is proving stickier. This is closely tied to the ongoing tightness in labour markets, which is pushing up wages.
…
“The limited tightening in financial conditions due to the recent banking sector stress has been embedded into the base case,” the bank said in its Monetary Policy Report, published Wednesday.“However, if global banking stresses intensify further, global credit conditions could tighten significantly. If this risk materializes, a more severe global slowdown and sharply lower commodity prices could follow.”
The Office of the Comptroller of the Currency (OCC) has released its Interest Rate Risk Statistics Report:
This report provides statistics for different bank populations. The OCC calculated exposures and risk
limits for the most commonly modeled target accounts in different interest rate stress scenarios. The
OCC also calculated key NMD assumptions for different NMD types. This report provides tables with
statistics on
- • projected changes in 12-month net interest income (NII) in parallel interest rate shock scenarios ranging from –200 basis points to +400 basis points.
- • projected changes in economic value of equity (EVE) in parallel interest rate shock scenarios ranging from –200 basis points to +400 basis points.
- • banks’ policy limits for changes in NII and EVE in parallel interest rate shock scenarios ranging from –200 basis points to +400 basis points.
- • NMD repricing rates and average lives for different account types.
…
The statistics in this report are based on data from 899 banks. The as-of date of the data ranges from March 31, 2021, to December 31, 2022.
Andrew Bailey, Governor of the Bank of England, gave a speech:
Moving on, let me now point to an area where we are at risk of contradicting ourselves. I said that assured value was a key principle of digital money. How does this fit with the idea that we could resolve failed banks and allow deposits (inside money) to take a haircut? One answer is that it depends on the size of the deposit above a certain threshold. The idea behind deposit protection is to set a level below which the assurance of value holds, and above which it does not. Practice, I would suggest, points to the difficulty of this principle.
In seeking to solve too big to fail we have tackled this problem by requesting an additional slice of subordinated liabilities which can explicitly bear losses by being converted into equity in the event of a resolution. I’m not talking here about AT1 securities, but what comes further up the hierarchy – what in Europe we call ‘Eligible Liabilities’. The point is that for large banks we have reinforced the assurance of deposits by requiring a bigger cushion of loss absorbing liabilities.
But smaller banks find it harder to issue marketable long-term debt securities that can count as Eligible Liabilities. I think the answer here lies in the world of deposit insurance.
The US authorities have announced a review of their deposit insurance system. In the UK, the Bank is also considering improvements to our approach to depositor pay-outs for smaller banks which do not have Eligible Liabilities. Our work has thus far focused on the speed of pay-outs. Going further and considering increasing deposit protection limits could have cost implications for the banking sector as a whole. As with all things relating to bank resolution, there is no free lunch.
…
Given the increase in bank regulation required in the aftermath of the financial crisis, it is not surprising that the last decade has seen a relative and absolute increase in non-bank finance.Continuing the theme developed earlier, one important way to look at the bank versus
non-bank world is that in the former there is assurance on the value of money as the main liability of banks, while in the latter the value of investments explicitly and deliberately is not assured.This is important, but we also have to recognise that the growth of non-bank finance has led to the significant expansion of the landscape of systemic risk since the crisis.
In other words, we have seen that the non-bank world can transmit risk into the bank world, and other parts of the core of the financial system, like central counterparties. Consequently, the relative focus of our financial stability work has shifted to the risks posed by non-bank financial institutions (NBFIs).
Moreover, we have seen a common theme running through incidents that have occurred – the dash for cash in 2020, the Archegos Collapse, the LDI pension fund issue, the nickel metals case – namely that for firms to understand and respond to the full risk implications they would have had to observe and respond to a much larger picture of risks than they did observe, and from that came potentially larger risks.
There is a challenge of breadth and depth in the NBFI world. It is a very large and disparate landscape with many activities and entities. As a result, we have to survey a lot of ground to look out for risks. But in order to understand these risks, we need to get into the detail, hence the depth issue. LDI was a good case study of this. The LDI fund world comprised 85% of the larger so-called segregated funds, and 15% of the smaller pooled funds. Our stress testing work focussed on the 85%, but the problem arose in the 15%.
In some ways the issues around NBFI bear a striking resemblance to ages old challenges in finance, such as leverage, and inter connectivity with other parts of the financial system, creating the scope for spill-overs and systemic consequences. But the heterogeneity of the landscape means that there is no single magic number for leverage as we have with banks, and the inter connectivity can be hard to map, reflecting the recent incidents.
And the New York Fed updated the Underlying Inflation Gauge:
- The UIG “full data set” measure for March is currently estimated at 4.3%, a 0.5 percentage point decrease from the current estimate of the previous month.
- The “prices-only” measure for March is currently estimated at 3.6%, a 0.3 percentage point decrease from the current estimate of the previous month.
- The twelve-month change in the March CPI was +5.0%, a 1.0 percentage point decrease from the previous month.
- -For March 2023, trend CPI inflation is estimated to be in the 3.6% to 4.3% range, a lower and slightly narrower range than February, with a 0.3 percentage point decrease on its lower bound and a 0.5 percentage point decrease on its upper bound.
PerpetualDiscounts now yield 6.24%, equivalent to 8.11% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.95% on 2023-4-6 and since then the closing price has changed from 15.32 to 15.25, a decrease of 46bp in price, with a Duration of 12.42 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 4bp since 3/31 to 4.99%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to about 310bp from the 305bp reported April 5.
| 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 | 0.2077 % | 2,318.0 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2077 % | 4,446.0 |
| Floater | 9.72 % | 9.84 % | 53,980 | 9.68 | 2 | 0.2077 % | 2,562.2 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1769 % | 3,356.2 |
| SplitShare | 5.01 % | 7.16 % | 42,225 | 2.64 | 7 | -0.1769 % | 4,008.0 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1769 % | 3,127.2 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0298 % | 2,760.5 |
| Perpetual-Discount | 6.18 % | 6.24 % | 53,244 | 13.57 | 34 | -0.0298 % | 3,010.2 |
| FixedReset Disc | 5.79 % | 7.59 % | 88,675 | 12.16 | 63 | 0.2523 % | 2,128.6 |
| Insurance Straight | 6.08 % | 6.13 % | 75,042 | 13.72 | 19 | 0.2585 % | 2,958.6 |
| FloatingReset | 10.43 % | 10.96 % | 35,613 | 8.84 | 2 | 0.0340 % | 2,391.1 |
| FixedReset Prem | 6.92 % | 6.45 % | 297,776 | 12.97 | 1 | -0.0394 % | 2,336.6 |
| FixedReset Bank Non | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2523 % | 2,175.9 |
| FixedReset Ins Non | 6.00 % | 7.51 % | 70,652 | 11.97 | 11 | -0.0157 % | 2,301.3 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.G | Perpetual-Discount | -1.89 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 23.03 Evaluated at bid price : 23.30 Bid-YTW : 6.34 % |
| TRP.PR.E | FixedReset Disc | -1.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 15.17 Evaluated at bid price : 15.17 Bid-YTW : 8.67 % |
| ELF.PR.G | Perpetual-Discount | -1.39 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 18.50 Evaluated at bid price : 18.50 Bid-YTW : 6.46 % |
| MFC.PR.L | FixedReset Ins Non | -1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 16.10 Evaluated at bid price : 16.10 Bid-YTW : 8.04 % |
| TRP.PR.A | FixedReset Disc | 1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 14.05 Evaluated at bid price : 14.05 Bid-YTW : 8.63 % |
| CU.PR.C | FixedReset Disc | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 18.85 Evaluated at bid price : 18.85 Bid-YTW : 7.27 % |
| FTS.PR.K | FixedReset Disc | 1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 16.00 Evaluated at bid price : 16.00 Bid-YTW : 8.02 % |
| BIP.PR.E | FixedReset Disc | 1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 21.55 Evaluated at bid price : 21.55 Bid-YTW : 7.11 % |
| IFC.PR.K | Perpetual-Discount | 1.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 21.29 Evaluated at bid price : 21.58 Bid-YTW : 6.13 % |
| FTS.PR.M | FixedReset Disc | 1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 16.61 Evaluated at bid price : 16.61 Bid-YTW : 8.19 % |
| BN.PF.J | FixedReset Disc | 1.40 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 21.47 Evaluated at bid price : 21.75 Bid-YTW : 7.17 % |
| BN.PF.I | FixedReset Disc | 1.43 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 19.82 Evaluated at bid price : 19.82 Bid-YTW : 8.27 % |
| BN.PF.G | FixedReset Disc | 1.52 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 14.72 Evaluated at bid price : 14.72 Bid-YTW : 9.35 % |
| TD.PF.J | FixedReset Disc | 1.86 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 21.60 Evaluated at bid price : 21.95 Bid-YTW : 6.57 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.H | FixedReset Disc | 45,037 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 17.33 Evaluated at bid price : 17.33 Bid-YTW : 7.59 % |
| NA.PR.W | FixedReset Disc | 41,600 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 16.45 Evaluated at bid price : 16.45 Bid-YTW : 7.81 % |
| BMO.PR.E | FixedReset Disc | 37,055 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 20.56 Evaluated at bid price : 20.56 Bid-YTW : 7.07 % |
| NA.PR.C | FixedReset Prem | 37,042 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 23.32 Evaluated at bid price : 25.40 Bid-YTW : 6.45 % |
| MFC.PR.I | FixedReset Ins Non | 34,453 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 22.16 Evaluated at bid price : 22.74 Bid-YTW : 6.58 % |
| RY.PR.S | FixedReset Disc | 31,359 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-04-12 Maturity Price : 19.83 Evaluated at bid price : 19.83 Bid-YTW : 6.94 % |
| There were 19 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| SLF.PR.D | Insurance Straight | Quote: 18.84 – 19.89 Spot Rate : 1.0500 Average : 0.7612 YTW SCENARIO |
| BMO.PR.W | FixedReset Disc | Quote: 17.04 – 18.00 Spot Rate : 0.9600 Average : 0.6923 YTW SCENARIO |
| BN.PR.X | FixedReset Disc | Quote: 14.70 – 15.47 Spot Rate : 0.7700 Average : 0.5869 YTW SCENARIO |
| PWF.PF.A | Perpetual-Discount | Quote: 18.26 – 18.92 Spot Rate : 0.6600 Average : 0.4821 YTW SCENARIO |
| CU.PR.I | FixedReset Disc | Quote: 22.35 – 23.00 Spot Rate : 0.6500 Average : 0.4728 YTW SCENARIO |
| PWF.PR.E | Perpetual-Discount | Quote: 21.90 – 22.45 Spot Rate : 0.5500 Average : 0.4066 YTW SCENARIO |
[…] PerpetualDiscounts now yield 6.21%, equivalent to 8.07% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.10% on 2023-4-14 and since then the closing price has changed from 15.00 to 15.10, an increase of 67bp in price, with a Duration of 12.31 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decrease in yield of about 5bp since 4/14 to 5.05%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to about 300bp from the 310bp reported April 12. […]