PrefBlog

A day enlivened by the CrowdStrike-Microsoft Outage:

Wall Street’s main indexes fell on Friday, deepening a sell-off driven by tech stocks and mixed earnings, while investors assessed the impact of a global cyber outage that knocked down CrowdStrike’s shares to an over two-month low.

Cybersecurity firm CrowdStrike slumped 11.2 per cent after an update to one of its products appeared to trigger an outage that affected customers using Microsoft’s Windows Operating System, disrupting businesses across sectors.

Major U.S. airlines ordered ground stops citing communication issues, with the Euronext exchange and London Stock Exchange Group’s Workspace news and data platform also facing issues. LSEG later said its data and services were back online.

Microsoft slipped 0.7 per cent to an over one-month low, on track for a four-day decline, driven by a rout in tech stocks.

I’m beginning to think that legislation making software providers with a market share greater than X liable for screw-ups via class actions would be a good idea. Cap the potential liability because otherwise nobody in their right mind would write software, but, by golly, make it hurt! They won’t notice, otherwise.

The culture of not caring about the quality of one’s work is becoming pervasive. I believe it’s related to the growing lack of trust in institutions, but I’ll have to wait until I’m reincarnated with a new career to look into that one properly.

PerpetualDiscounts now yield 6.48%, equivalent to 8.42% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.12% on 2024-6-30 (sic! That was a Sunday. I am assuming 2024-6-28) and since then the closing price of ZLC has changed from 14.82 to 15.10, an increase of 189bp in price, implying a decrease of yields of 15bp (BMO reports a duration of 12.33, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 4.97%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained steady at the 345bp reported July 10.

Canadian inflation came in low:

The Consumer Price Index rose 2.7 per cent in June on an annual basis, down from 2.9 per cent in May, Statistics Canada said Tuesday in a report. Financial analysts were expecting the inflation rate to ease to 2.8 per cent.

This is the sixth consecutive month that inflation has fallen within the Bank of Canada’s target range of 1 per cent to 3 per cent. Moreover, it’s the fifth out of six months this year that headline inflation has proven soft, relative to expectations on Bay Street.

On a month-to-month basis, consumer prices fell 0.1 per cent in June, without adjustments for seasonality.

There were several contributors to the weaker reading. For example, gasoline prices fell 3.1 per cent in June from May, while prices for travel tours tumbled by 11.1 per cent.

… this had an immediate effect on the money market:

Pre-announcement

Post-announcement

But the IMF warns us not to expect too much:

The International Monetary Fund has warned that stubborn inflation could keep interest rates higher for longer than expected, increasing fiscal and financial risks around the world.

Persistently high prices for services — which include haircuts, hotels and restaurants — as well as escalating trade tensions are propping up inflation and raising the prospect that interest rates will stay high for a while yet, the IMF cautioned Tuesday in its latest World Economic Outlook.

The warning highlights that the global economy is not yet in the clear when it comes to inflation, which explains the caution on the part of central banks in cutting interest rates. High borrowing costs, in turn, are prolonging the squeeze on household and business finances.
…
The agency blamed sticky services price inflation for “holding up progress” on reducing overall inflation. “Risks of persistent inflation in the services sector are tied to both wage- and price-setting, given that labor accounts for a high share of the costs in that sector,” it noted.

“The escalation of trade tensions could further raise near-term risks to inflation by increasing the cost of imported goods.”

So: when in doubt – shop!

Wall Street is cheering after fresh data showed American consumers aren’t tapping out quite yet, despite a disappointing few months for retailers.

US retail spending has been mostly flat since the beginning of the year, holding steady in June, the Commerce Department reported Tuesday. Consumer spending is American’s main economic engine, powering two-thirds of the US economy. Retail sales, which capture spending on goods and food services, make up a big chunk of overall spending.

June’s reading was better than the outright decline economists projected in a FactSet poll — a shift from prior months when retail sales consistently came in worse than expected. The figures are adjusted for seasonal swings but not inflation.

US consumers’ surprising show of resilience helped send stocks higher on Tuesday, with the Dow reaching a new record.

Sales at gas stations declined the most last month, dropping 3% from May. Spending at car dealerships and on automotive parts also fell markedly in June, reflecting the cyberattack on CDK Global, a software provider for dealerships. Excluding spending at gas stations and on cars, sales were up a solid 0.8% in June.

Meanwhile, online sales were up a healthy 1.9% in June. The strength from that category could persist in July due to Amazon’s annual deal event known as Prime Day. Sales at home improvement stores were also robust last month, rising 1.4%

So, there was good inflation news from the US:

Inflation in the United States cooled in June for a third straight month, a sign the worst price spike in four decades is steadily fading and may soon usher in interest-rate cuts by the Federal Reserve.

In a better-than-expected report, consumer prices declined 0.1 per cent from May to June after having remained flat the previous month, the Labour Department said Thursday. It was the first monthly decline in overall inflation since May, 2020, when the economy was paralyzed by the pandemic.

And measured from one year earlier, prices were up 3 per cent in June, cooler than the 3.3-per-cent annual rate in May.
…
Also on Thursday, Mary Daly, a key Fed official, suggested the central bank should cut rates soon. Ms. Daly, president of the Fed’s San Francisco branch, said she believed slowing inflation and a cooling job market justify a reduction in interest rates. She did not address the specific timing of any rate cut.

“I see it as likely that some policy adjustments will be warranted,” Ms. Daly said on a conference call with reporters.

Five-year Canadas are now at 3.44%.

I’ve updated the EQB LRCN post again.

PerpetualDiscounts now yield 6.52%, equivalent to 8.48% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.12% on 2024-6-30 (sic! That was a Sunday. I am assuming 2024-6-28) and since then the closing price of ZLC has changed from 14.82 to 14.94, an increase of 81bp in price, implying a decrease of yields of 7bp (BMO reports a duration of 12.33, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 5.05%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slighly (and perhaps spuriously) to 345bp from the 340bp reported July 3.