Canadian inflation came in hotter than expected:
Statistics Canada said Tuesday the annual pace of inflation rose in April for the first time since it peaked in June last year.
The agency said its consumer price index was up 4.4 per cent compared with a year ago, up from a year-over-year increase of 4.3 per cent in March.
Statistics Canada said the first tick higher in the annual rate since it peaked at 8.1 per cent in June 2022 was driven by higher mortgage interest costs which were up 28.5 per cent compared with a year ago due to higher interest rates. A 6.1 per cent increase in rent prices also helped push the overall rate up.
Meanwhile, grocery prices, which have been closely watched, were up 9.1 per cent compared with a year ago, but that increase was smaller than the 9.7 per cent year-over-year jump in March.
And rents are ridiculous:
Rent costs across Canada stormed higher in April, with the average monthly rental cost in Toronto hitting $2,526, according to a new report.
A Monday release by Rentals.ca and Urbanation found that when compared with the pandemic lows they hit in April, 2021, rents for condos and purpose-built apartments recorded their largest increases in Vancouver, up 47 per cent, followed by Toronto, up 41 per cent.
The National Rent Report – which measured the overall Canadian rental market between April, 2021 and April, 2023 using listings from the Rentals.ca network – showed average monthly rent has jumped by $340 in that period. Year over year, national average rents were up 9.6 per cent since April, 2022, the report finds.
Canada’s smaller urban centres also saw a notable surge in numbers. In April, Ottawa rents climbed 15-per-cent year over year, while Edmonton saw an 11.8-per-cent climb and Montreal logged a 10.7-per-cent increase.
…
Among Canada’s biggest cities, Calgary recorded the highest year-over-year monthly rent increase at 22.9 per cent. Canada’s most expensive city, Vancouver, led the way in terms of the highest average monthly rent with one-bedroom units across condo rentals and apartments going for $2,787 and two-bedroom homes listing at $3,741 – a year-over-year climb of 16.8 per cent. In Toronto, that growth was 21.2 per cent, with average rents for condo rentals and apartments sitting at $2,822.
… and this got the bond market excited:
Before release:
… and after:
Added to this were some rumblings from the Fed:
Federal Reserve Bank of Cleveland President Loretta Mester said on Tuesday that she does not think the U.S. central bank is at a point yet where it can hold interest rates steady for a period of time.
“The approach I’m taking is that I would like the policy rate to get to a point where, when I’m thinking about what would the next policy change be, I want it to be equally a potential increase versus a decrease,” Mester told a conference in Dublin.
“When we get the policy to that rate, I think we’re going to be holding for a while in order to make sure that the interest rate is coming back down. So I don’t put it in terms of a pause, I put it in terms of a hold. Have we gotten to that rate yet? At this point, given the data we’ve gotten so far, I would say no.”
There’s a nice piece in the Globe about commercial real-estate, a bit more revealing than usual:
A year into the fastest campaign to hike interest rates in decades, the commercial real estate sector is deadlocked.
In one corner, the world’s most sophisticated private real estate investors, including Canadian pension plans, say scores of properties they own are worth hundreds of millions of dollars each and have held most of their value. In the other, investors are dumping shares of publicly-traded real estate investment trusts (REITs), particularly those that own skyscrapers, because they don’t think such lofty values still make sense. In Canada, the national vacancy rate of office towers just hit an all-time high, and in New York, there are enough empty offices to fill 26 Empire State Buildings.
Who’s right? That’s the trillion-dollar question looming over private investors in particular as they gauge whether to start marking down the value of their property portfolios more aggressively.
…
Valuing real estate portfolios is tricky work, and private owners – as well as the outside experts they hire to vet their numbers – have leeway in how they appraise properties. By design, most private investors are patient owners with long-term leases who look not only at what a property would fetch today, but its future potential based on cash flows, replacement costs and the values of comparable buildings.Over time, that makes their results less volatile. But it also raises eyebrows when markets plunge and private valuations don’t follow. The $21.2-billion real estate division of OMERS returned 13.6 per cent in 2022. Ivanhoé Cambridge, the Caisse de dépôt et placement du Québec’s real estate arm that manages $48-billion worth of properties globally, was not far behind with a 12.4-per-cent gain last year.
Well, of course. I’ve never been involved with private equity. Nobody has every let me get into the guts of a large privately owned and review its valuation for the owners. So I can’t speak definitively.
But everything I’ve ever seen convinces me that the purpose of private equity is to lie about its valuation. Same as the purpose of Historical Cost Accounting is to lie about those valuations. It’s a total shell game; every now and then there’s a small reckoning and sooner or later there will be a big one.
As noted on May 4, the TD takeover of First Horizon was terminated … the reason for the termination doesn’t look good on TD:
Toronto-Dominion Bank’s handling of “suspicious” customer transactions was behind regulators’ refusal to approve the lender’s $13.4-billion deal to buy First Horizon, the Wall Street Journal reported on Monday, citing people familiar with the matter.
The reluctance by the Office of the Comptroller of the Currency and the Federal Reserve to give TD a clean bill of health on its anti-money-laundering practices proved to be the biggest obstacle, according to the report.
TD had pledged to regulators that it would make its anti-money-laundering policies more comprehensive and timely, but the assurances were not enough to sway regulators, the WSJ reported.
Prof Claudia Buch, Vice-President of the Deutsche Bundesbank, gave a speech titled Resilient retail banking: Setting the course towards a robust financial sector:
Last week, US supervisory authorities outlined the lessons they had learned, whilst in Switzerland, the repercussions of current developments are under intense discussion. In other countries, too, supervisors and regulators will respond.
This is because these developments in global markets are a reflection of how the financial system has become more vulnerable in recent years. The macroeconomic environment has changed considerably – higher interest rates and heightened uncertainty are likely to stick around for some time to come. The economy and the financial system have been able to cope with the major shocks of recent years relatively well, due not least to comprehensive fiscal and monetary policy measures. Credit risk and insolvencies in the corporate sector have so far been low. However, this harbours the danger that future risks will be underestimated. These vulnerabilities affect retail banking, too. In Germany and Europe, small and medium-sized enterprises in particular benefit from direct contact with local banks. At present, loans are being granted against stricter criteria – this is a reflection of higher interest rates, rising credit risk, and heightened uncertainty. In times of uncertainty, it is precisely better information on the ground that can be a stabilising factor when it comes to lending.
…
Since 2008, the average tier 1 capital ratio of German banks has risen from less than 10% to around 17%. The non-risk-weighted ratio has gone up, too. At around 8%, this ratio is almost twice as high among smaller banks focusing on retail banking than it is among large, systemically important banks.
…
Enterprises, too, built up financial buffers during this period. Since 2008, equity ratios among German enterprises have risen from around 25% to slightly more than 30%. By historical standards, enterprises’ liquidity was very good and the financing situation was stable.Overall, during this period, the greater resilience of the financial system and stable economic developments went hand in hand. Credit supply has not been negatively impacted by the post-crisis reforms – quite the opposite, in fact: lending to households and enterprises has risen consistently and grown dynamically in relation to economic expansion.
…
Scenarios that were once considered “adverse” have now become a reality. Inflation in Germany, which stood at 6.9% last year and, most recently, 7.6% in April, remains considerably too high. In the past year alone, interest rates have risen by around 300 basis points. For the sake of comparison, the calculation of the Basel interest rate coefficient assumes an increase in interest rates of 200 basis points.In the short term, the German economy appears relatively robust. Germany’s GDP is expected to record a slight increase of 0.4% in 2023. The pandemic and the energy crisis have barely dented the financial situation of enterprises. This is true even of energyintensive sectors – thanks to an array of economic policy measures and, more
recently, energy prices dropping back again. Corporate profits rose significantly last year.
…
Lending has risen sharply in recent years. Loans to the private sector stood at around 82% of GDP at the beginning of the pandemic, compared with 87% today. The stock of housing loans peaked at almost 42% of GDP in 2020, although the pace of new lending has recently slackened significantly, in keeping with higher market interest rates.
Banks’ capitalisation actually rose during this period. By recent counts, German banks have surplus capital of around €165 billion in CET1 – that’s around €36 billion more than at the start of the pandemic. With vulnerabilities
having built up in the system at the same time, the Federal Financial Supervisory Authority (BaFin) announced a package of measures at the start of 2022 that, from February 2023, will conserve just under €23 billion (surplus capital) in the form of macroprudential buffers.
…
When assessing future risks, it must be borne in mind that interest rates have already risen significantly. The higher interest rates are, the weaker the impact of a 200 basis point increase appears to be – in relative terms. That’s why the Basel coefficient is currently pointing to diminishing risks for many institutions. But the actual risks in the stock of loans certainly haven’t got any smaller. You see, the interest rate hikes that have already happened harbour risks and looming losses that are not yet fully reflected on balance sheets. And even if banks stand to benefit from rising interest rates in the longer term, interest margins could narrow initially. On the deposits side, there is mounting pressure from customers wanting higher interest rates. The increased use of online banking and digital comparison websites is stoking competition for deposit business. A study by the Single Supervisory Mechanism (SSM) shows that money held in online accounts is more volatile than in traditional accounts.On the lending side, with demand tending towards the weaker end of the scale, banks are finding they have less scope to pass on rising costs to customers.
Sufficient capital is the best safeguard against risks. And, looking to the future, many of the issues to be faced are not simply a case of risks that can be predicted, but rather of fundamental uncertainties.
…
We are facing challenging times. Banks are a central interface when there are changes in the economy and society. And good, traditional retail banking is precisely what is important; it is by no means “boring banking”, as Nobel Prize winner Paul Krugman called it.The economy is undergoing a period of upheaval, in which risks are rising and uncertainty is high. Sound, forward-looking management of interest rate risk and credit risk will help banks to guide the real economy smoothly through this phase. The use of new, innovative technologies may be of assistance, but should not be an end in itself.
After a long period of relatively stable underlying conditions, there is a danger that future risks will be underestimated.
| 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 | -2.5495 % | 2,130.6 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -2.5495 % | 4,086.5 |
| Floater | 10.58 % | 10.78 % | 53,127 | 8.88 | 2 | -2.5495 % | 2,355.1 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1896 % | 3,359.5 |
| SplitShare | 5.00 % | 7.33 % | 42,849 | 2.55 | 7 | 0.1896 % | 4,012.0 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1896 % | 3,130.3 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2679 % | 2,730.5 |
| Perpetual-Discount | 6.25 % | 6.32 % | 43,751 | 13.43 | 34 | -0.2679 % | 2,977.5 |
| FixedReset Disc | 5.96 % | 8.12 % | 86,188 | 11.53 | 63 | -0.2380 % | 2,089.0 |
| Insurance Straight | 6.09 % | 6.24 % | 59,886 | 13.51 | 19 | -0.1496 % | 2,953.4 |
| FloatingReset | 10.62 % | 11.23 % | 48,364 | 8.57 | 2 | -0.0688 % | 2,356.2 |
| FixedReset Prem | 6.97 % | 6.70 % | 321,409 | 12.66 | 1 | -0.3953 % | 2,318.2 |
| FixedReset Bank Non | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2380 % | 2,135.4 |
| FixedReset Ins Non | 6.05 % | 7.52 % | 78,393 | 11.86 | 11 | 0.1620 % | 2,306.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| POW.PR.B | Perpetual-Discount | -3.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 21.07 Evaluated at bid price : 21.07 Bid-YTW : 6.44 % |
| BN.PR.K | Floater | -3.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 11.00 Evaluated at bid price : 11.00 Bid-YTW : 10.95 % |
| TRP.PR.G | FixedReset Disc | -2.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 15.60 Evaluated at bid price : 15.60 Bid-YTW : 9.04 % |
| BN.PR.B | Floater | -2.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 11.17 Evaluated at bid price : 11.17 Bid-YTW : 10.78 % |
| CU.PR.C | FixedReset Disc | -1.89 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 18.15 Evaluated at bid price : 18.15 Bid-YTW : 7.65 % |
| BMO.PR.S | FixedReset Disc | -1.75 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 16.88 Evaluated at bid price : 16.88 Bid-YTW : 8.16 % |
| PWF.PF.A | Perpetual-Discount | -1.73 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 18.18 Evaluated at bid price : 18.18 Bid-YTW : 6.26 % |
| FTS.PR.H | FixedReset Disc | -1.51 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 12.00 Evaluated at bid price : 12.00 Bid-YTW : 8.93 % |
| BMO.PR.F | FixedReset Disc | -1.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 22.51 Evaluated at bid price : 23.02 Bid-YTW : 7.26 % |
| TRP.PR.A | FixedReset Disc | -1.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 13.33 Evaluated at bid price : 13.33 Bid-YTW : 9.48 % |
| GWO.PR.Y | Insurance Straight | -1.35 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 18.25 Evaluated at bid price : 18.25 Bid-YTW : 6.27 % |
| SLF.PR.C | Insurance Straight | -1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 19.10 Evaluated at bid price : 19.10 Bid-YTW : 5.92 % |
| BMO.PR.E | FixedReset Disc | -1.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 20.05 Evaluated at bid price : 20.05 Bid-YTW : 7.41 % |
| ELF.PR.G | Perpetual-Discount | -1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 18.61 Evaluated at bid price : 18.61 Bid-YTW : 6.47 % |
| BN.PF.J | FixedReset Disc | 1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 21.43 Evaluated at bid price : 21.70 Bid-YTW : 7.40 % |
| IFC.PR.G | FixedReset Ins Non | 1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 19.65 Evaluated at bid price : 19.65 Bid-YTW : 7.52 % |
| FTS.PR.K | FixedReset Disc | 1.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 15.85 Evaluated at bid price : 15.85 Bid-YTW : 8.31 % |
| BN.PF.H | FixedReset Disc | 1.46 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 20.90 Evaluated at bid price : 20.90 Bid-YTW : 8.46 % |
| BN.PF.I | FixedReset Disc | 1.72 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 20.11 Evaluated at bid price : 20.11 Bid-YTW : 8.39 % |
| MFC.PR.I | FixedReset Ins Non | 2.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 22.07 Evaluated at bid price : 22.60 Bid-YTW : 6.83 % |
| BN.PF.D | Perpetual-Discount | 3.39 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 18.61 Evaluated at bid price : 18.61 Bid-YTW : 6.70 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BMO.PR.S | FixedReset Disc | 98,615 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 16.88 Evaluated at bid price : 16.88 Bid-YTW : 8.16 % |
| MIC.PR.A | Perpetual-Discount | 47,100 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 21.00 Evaluated at bid price : 21.00 Bid-YTW : 6.54 % |
| MFC.PR.K | FixedReset Ins Non | 33,500 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 17.88 Evaluated at bid price : 17.88 Bid-YTW : 7.79 % |
| SLF.PR.D | Insurance Straight | 30,921 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 19.05 Evaluated at bid price : 19.05 Bid-YTW : 5.93 % |
| MFC.PR.J | FixedReset Ins Non | 20,852 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 21.68 Evaluated at bid price : 22.05 Bid-YTW : 6.88 % |
| MFC.PR.Q | FixedReset Ins Non | 17,850 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-16 Maturity Price : 19.86 Evaluated at bid price : 19.86 Bid-YTW : 7.46 % |
| There were 8 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BMO.PR.W | FixedReset Disc | Quote: 16.22 – 18.35 Spot Rate : 2.1300 Average : 1.4044 YTW SCENARIO |
| IFC.PR.C | FixedReset Disc | Quote: 16.50 – 18.49 Spot Rate : 1.9900 Average : 1.4085 YTW SCENARIO |
| CU.PR.C | FixedReset Disc | Quote: 18.15 – 19.54 Spot Rate : 1.3900 Average : 0.9150 YTW SCENARIO |
| POW.PR.B | Perpetual-Discount | Quote: 21.07 – 21.80 Spot Rate : 0.7300 Average : 0.4312 YTW SCENARIO |
| TD.PF.J | FixedReset Disc | Quote: 21.55 – 21.99 Spot Rate : 0.4400 Average : 0.2583 YTW SCENARIO |
| BNS.PR.I | FixedReset Disc | Quote: 20.67 – 21.40 Spot Rate : 0.7300 Average : 0.5524 YTW SCENARIO |
“But everything I’ve ever seen convinces me that the purpose of private equity is to lie about its valuation. Same as the purpose of Historical Cost Accounting is to lie about those valuations. It’s a total shell game; every now and then there’s a small reckoning and sooner or later there will be a big one.”
Well, this has been batted around in comments here many times before. It is true that Mark-to-Market (liquidation) valuations and Mark-to-Model (or Make believe some say) valuations vary, and under stress may vary by a wide margin. Small (do we call SVB small?) reckonings happen regularly and they should because dubious actors always push the limit of what is possible/reasonable. Big reckonings are a failure of the “system” that allows actors to stretch beyond the willingness AND ability to hold financial instruments for periods long enough to match their models. Mark-to-Model isn’t always a lie and, I think, can sometimes be used appropriately to benefit of certain actors. Sometimes though, it is just a big fat lie.