PrefBlog

PerpetualDiscounts now yield 6.22%, equivalent to 8.09% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.91% on 2024-7-31 and since then the closing price of ZLC has changed from 15.24 to 15.21, a decrease of 20bp in price, implying an increase of yields of 2bp (BMO reports a duration of 12.43, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 4.93%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 315bp from the 325bp reported July 31.

TXPR closed at 604.21, down 0.63% on the day. Volume today was 1.25-million, lowest of the past 21 trading days.

CPD closed at 12.00, down 0.66% on the day. Volume was 70,520, near the median of the past 21 trading days.

ZPR closed at 10.19, down 0.78% on the day. Volume was 203,170, third-highest of the past 21 trading days.

Five-year Canada yields were up to 3.02%.

TXPR closed at 608.03, down 0.55% on the day. Volume today was 1.52-million, below the median of the past 21 trading days.

CPD closed at 12.08, down 0.74% on the day. Volume was 47,070, near the median of the past 21 trading days.

ZPR closed at 10.27, down 1.34% on the day. Volume was 220,840, second-highest of the past 21 trading days.

Five-year Canada yields were down to 2.92%.

Jobs, jobs … whoopsee!:

American employers reined in their hiring significantly in July, intensifying jitters that the economy is cooling faster than expected.

Payrolls grew by 114,000, the Labor Department reported on Friday, the second smallest gain in a 43-month period of consistent job growth. The unemployment rate rose to 4.3 percent, the highest level since October 2021, when anxiety about the pandemic was still elevated.
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Wage growth decelerated in July, with average hourly earnings up 0.2 percent from the previous month and 3.6 percent from a year earlier. The number of people working part time who would have preferred full-time employment also increased, while the number of hours worked per week ticked down slightly, both signals that the demand for workers is slackening.

Further underscoring weakness in the report, job growth was concentrated in a handful of sectors, including health care and social assistance, and construction, which has been surprisingly resilient despite high interest rates. Government employment, which had been helping to drive recent job gains, also increased, though at a slower pace than earlier this year.

But many other industries were largely flat or lost employment, including the information sector, which cut 20,000 jobs.

Overall, the private sector added fewer than 100,000 jobs. The total payroll figures for May and June were also revised lower by 29,000 jobs, bringing the labor market’s steady slowdown into sharper focus.

The market effect of this may have been exacerbated by the high profile trouble at Intel:

Intel INTC-Q -26.06%decrease
was set to erase nearly $25 billion in market value on Friday in what would be its worst selloff since 2000 after it suspended its dividend and slashed its workforce to fund a costly turnaround for its chip-making business.

Shares of the company were down about 20% in premarket trading after Intel late on Thursday forecast quarterly revenue below estimates and said it was cutting 15% of its workforce, raising worries about its ability to catch up to Taiwan’s TSMC and other chipmakers it has fallen behind in recent years.

The Santa Clara company was once the world’s leading chipmaker, with the “Intel Inside” logo a valuable marketing feature on personal computers in the 1980s and 90s.

Part of the dot-com era’s Four Horsemen – along with Cisco Systems, Microsoft and Dell – Intel’s stock market value peaked at nearly $500 billion in 2000 before slumping in that year’s market selloff and never fully recovering.

It continued to dominate in hefty PC chips, but was caught off foot by the launch of Apple’s iPhone in 2007 and other mobile devices that demanded lower power and less pricey processors.

If Friday’s losses hold, Intel’s market capitalization would fall to about $100 billion, equivalent to less than 5% of Nvidia’s and about 40% of Advanced Micro Devices’, the two PC chipmakers it heavily dominated for decades until recently.

So, yeah, we saw market reaction out the wazoo:

The U.S. two-year Treasury yield – which is particularly sensitive to Federal Reserve monetary policy – has plunged half a percentage point since just this past Wednesday, marking its largest weekly decline since March 2023. Both Canada’s two-year and five-year bond yields fell to their lowest in more than two years, signaling further downward pressure on fixed mortgage rates.
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Traders are now pricing in reasonable odds that both the U.S. Federal Reserve and the Bank of Canada may need to cut rates by more than 25 basis points at upcoming meetings.

The U.S. rate futures market is pricing in a 73% chance of a 50 basis point cut at the Fed’s September meeting, up from 20% late on Thursday, according to LSEG calculations. The market has also priced in about 120 bps of easing this year, from 75 bps on Thursday.

The Bank of Canada has already cut its trend-setting overnight rate by a quarter of a percentage point twice this year. Overnight index swap markets are now pricing in 100% odds of at least a further quarter point cut at the bank’s next policy meeting on Sept. 4, and about 27% odds that it could be a larger 50 basis point cut, according to LSEG data.
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On Friday, Canada’s main stock index posted its biggest decline in six months, as resource and technology shares paced a broad-based selloff. The S&P/TSX composite index ended down 495.58 points, or 2.2%, at 22,227.63.

The index has pulled back 3.8% since notching on Wednesday a record closing high at 23,110.81. For the week, the index was down 2.6%, after five straight weekly gains.
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The Dow Jones Industrial Average fell 610.71 points, or 1.51%, to 39,737.26, the S&P 500 lost 100.12 points, or 1.84%, to 5,346.56 and the Nasdaq Composite lost 417.98 points, or 2.43%, to 16,776.16.

Adding downward pressure was drop in Amazon, down 8.79%, and Intel, which plunged 26.06% after their quarterly results and disappointing forecasts.

The FOMC Release was no surprise:

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the Committee’s 2 percent inflation objective.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Austan D. Goolsbee; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Austan D. Goolsbee voted as an alternate member at this meeting.

The press conference was more interesting:

“If we do get the data that we hope, then a reduction in our policy rate could be on the table at the September meeting,” Jerome H. Powell, the Fed chair, said during a news conference on Wednesday. Mr. Powell also suggested that the Fed could make a string of reductions before the end of the year, depending on inflation and job market data.

“I can imagine a scenario in which there would be everywhere from zero cuts to several cuts, depending on the way the economy evolves,” Mr. Powell said. That remark was notable because it implied that three rate cuts were possible, which is in line with market expectations but more than the two the Fed had most recently forecast.

Mr. Powell spoke shortly after the Fed announced that it would hold rates at 5.3 percent for now — a two-decade high, where they have remained for a year.

Five-year Canadas are now at 3.11%.

PerpetualDiscounts now yield 6.30%, equivalent to 8.19% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.05% on 2024-7-26 and since then the closing price of ZLC has changed from 15.05 to 15.24, an increase of 126bp in price, implying a decrease of yields of 10bp (BMO reports a duration of 12.29, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 4.95%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 325bp from the 335bp reported July 24.