PrefBlog

TXPR closed at 598.14, down 0.68% on the day. Volume today was 1.33-million, second-highest of the past 21 trading days.

CPD closed at 11.935, down 0.95% on the day. Volume was 51,800, fourth-highest of the past 21 trading days.

ZPR closed at 10.02, down 0.89% on the day. Volume of 198,720 was second-highest of the past 21 trading days.

Five-year Canada yields were up to 3.36% today.

PerpetualDiscounts now yield 6.26%, equivalent to 8.14% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.99%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained at the 315bp reported September 7.

The US inflation number came in higher than expected:

Prices rose 8.3 percent from a year earlier, a rapid pace of increase for consumers and not as much of a slowdown as economists had expected, even as gas prices dropped and weighed on the overall numbers. At the same time, so-called core inflation re-accelerated notably in August. That measure strips out volatile food and fuel prices to give a better sense of underlying trends, and it tracks products like clothing and furniture along with an array of services.

The core gauge climbed by 6.3 percent in the year through August, compared with 5.9 percent in July. That pickup came partly because the August price gains are being measured against a relatively weak reading from the same month in 2021. When inflation is measured against a lower year-ago number, or “base,” it tends to appear faster.

But the report’s details also offered signs that underlying inflation pressures remain significant. While gas prices and used car and truck costs have begun to dip, other prices are rising fast enough to fully offset those declines: Prices climbed by 0.1 percent on a headline basis over the course of the past month as prices for meals at restaurants, rents and new vehicles picked up.

The market was flabbergasted:

The Dow Jones Industrial Average fell 1276.37 points, or 3.9 per cent, marking its worst one-day sell-off in more than two years. Canada’s S&P/TSX Composite Index fell nearly 1.8 per cent.

Bond yields jumped and gold prices fell, battering typical investing havens when stocks turn volatile. And the Canadian dollar slipped below 76 US cents, touching its lowest level since November 2020.
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U.S. financials fell 3.8 per cent and industrials fell 3.8 per cent. The tech-heavy Nasdaq Composite Index fell 5.2 per cent, with Apple Inc. down 5.9 per cent.

In Canada, Toronto-Dominion Bank fell 2.3 per cent and Shopify Inc. fell 5.8 per cent.

The yield on the 10-year U.S. Treasury bond rose above 3.4 per cent, or close to its recent multiyear high of 3.48 per in mid-June (bond yields and bond prices move in opposite directions), which signals market expectations that the Fed’s battle with inflation isn’t over.

The New York Fed released the August 2022 Survey of Consumer Expectations:

The main findings from the August 2022 Survey are:

Inflation

Median one- and three-year-ahead inflation expectations continued their steep declines in August: the one-year measure fell to 5.7% from 6.2% in July, while the three-year measure fell to 2.8% from 3.2%. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) increased to a new series high at the one-year horizon but decreased at the three-year horizon.

Median five-year-ahead inflation expectations, which have been elicited in the monthly SCE core survey on an ad-hoc basis since the beginning of this year and were first published in July 2022, also declined to 2.0% from 2.3%. Disagreement across respondents in their five-year-ahead inflation expectations also declined in August.

Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—decreased at the short-term horizon and was unchanged at the medium-term horizon.

Median home price expectations declined sharply by 1.4 percentage points to 2.1%, its lowest reading since July 2020, and falling below pre-pandemic levels. The decline was broad based across demographic groups and geographic regions. Home price expectations have now fallen by nearly two-thirds since the April 2022 reading of 6.0%.

Expectations about year-ahead price changes fell by 1.4 percentage points for gas (to 0.1%), 0.8 percentage point for food (to 5.8%), and 0.3 percentage point for rent (to 9.6%). The median expected change in the cost of medical care rose by 0.1 percentage point (to 9.3%) and was unchanged for college education at 8.4%.

The hit to Canadian wealth has been quantified:

Canadians saw their collective net worth fall by the most on record in the second quarter as financial markets and residential real estate hit a rough patch, ending a streak of massive wealth generation during the previous two years of the pandemic.

Household net worth fell by $990-billion in the second quarter to $15.2-trillion, a decline of 6.1 per cent from the first quarter, Statistics Canada said Monday in a report. Despite the drop, household wealth was still nearly $3-trillion higher than before the pandemic.
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At the same time, Canadians packed on loads of debt, a perennial concern for the domestic economy. That remained the case in the second quarter as households added a near record $56.3-billion in debt, taking total borrowing to $2.8-billion [sic – I’m sure they mean ‘trillion’], mostly in mortgages.

Canadians now owe $1.82 for every dollar of disposable income, just shy of a record.
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The credit tightening cycle hit Canadian real estate quickly. The value of residential real estate fell by 5 per cent in the second quarter, according to Monday’s report. Even so, it remained more than $2.3-trillion (or 41 per cent) higher than at the end of 2019. Home prices have continued to decline since the end of Statscan’s reporting period, further eroding wealth.

Similarly, the value of household financial assets dropped by 5.7 per cent in the second quarter as both equities and bonds tumbled. Major stock indices in Canada and the U.S. fell by double-digit percentages between April and June, while bond prices – which move inversely to yields – also fell. “The second quarter marked a less common occurrence when both bond and equity markets declined substantially,” Statscan said in its report.

The Junior Republicans have enthusiastically embraced the role of ‘party of stupid’:

And if this Conservative leadership race was a fight for the soul of the party, as former Progressive Conservative activist and senator Marjory LeBreton recently posited, well, the results are in. Reform is back, baby. Moderate conservatism is dead, and the harder-right, angrier, rougher edge will live the life everlasting. In the end, it wasn’t even close.

Self-described centrists in the party have certainly been angered by Mr. Poilievre’s online rhetoric and pro-crypto appeals, not to mention his sympathy for the anti-mandate freedom convoy. Some of them were so perturbed by the prospect of Mr. Poilievre’s ascension that they organized under the title of Centre Ice Conservatives, a dust cloud of respectability meant to form itself into the nucleus of a new party.
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The centrists may yet prove to be Cassandras. Mr. Poilievre’s campaign may indeed foreshadow a far darker track: a destructive populism that plays on World Economic Forum conspiracy theories and undermines trust in long-standing institutions like the Bank of Canada in favour of a politics rooted in narcissism and grievance.

I’m not one of those ‘self-described centrists’, by the way, having quit the party (and my position on the local riding executive) the day after Harper’s ascension. But I would happily join a fiscally responsible party that embraced pragmatism over ideology … where’s Bill Davis when we need him?. Until we get one, however, I’ll just have to learn to endure being sneezed on in the name of freedom, bitcoin advertisements and a steady diet of resentment and claims of victimhood. Can’t wait.