PrefBlog

TXPR closed at 531.55, up 0.64% on the day. Volume today was 2.20-million, above the median of the past 21 trading days.

CPD closed at 10.65, up 0.85% on the day. Volume was 177,840, second-highest of the past 21 trading days.

ZPR closed at 9.06, up 1.00% on the day. Volume was 197,730, above the median of the past 21 trading days.

Five-year Canada yields were down to 3.36%.

Thank the Fed:

Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.

The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. 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; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Adriana D. Kugler; Lorie K. Logan; and Christopher J. Waller.

other markets did well:

U.S. and Canadian stocks surged to a sharply higher close on Wednesday and Treasury yields tumbled in both countries after the Federal Reserve signaled that its interest rate-hiking policy is at an end and that it sees lower borrowing costs in 2024.

The Dow Jones Industrial Average rose more than 500 points and notched a record closing high, confirming the blue-chip industrial average has been in a bull market since Sept. 30, 2022, by common definition.

Canada’s main stock index rose about 2% to a ten-month high in a broad-based rally. The U.S. 2-year Treasury yield, which is particularly sensitive to Fed policy moves, fell a hefty 30 basis points.

The Federal Open Markets Committee (FOMC) left its fed funds target rate unchanged at 5.25%-5.50%. In its accompanying statement, the Fed acknowledged that inflation has eased and implied that the rate tightening cycle might be over. Its dot plot, which forecasts the potential path forward for monetary policy, hinted that lower borrowing costs could be in the cards in 2024.
…
Economic data showed U.S. producer prices (PPI) were unchanged in November, further evidence that inflation continues to meander down toward the Fed’s average annual 2% target.
…
The small-cap Russell 2000 index shot up 3.5%.

The Dow Jones Industrial Average rose 512.3 points, or 1.4%, to 37,090.24, the S&P 500 gained 63.39 points, or 1.37%, to 4,707.09 and the Nasdaq Composite added 200.57 points, or 1.38%, to 14,733.96.

The S&P 500 and Nasdaq hit fresh closing highs for the year. The S&P 500 is now up 22.6% for the year to date, while the Nasdaq is up 40.7% in that period and the Dow is up 11.9%.

PerpetualDiscounts now yield 7.10%, equivalent to 9.21% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.03% on 2023-12-8 and since then the closing price has changed from 15.18 to 15.43, an increase of 165bp in price, with a Duration (BMO doesn’t specify Modified or Macaulay – I will assume the former) of 12.41 implying a decrease of 13bp in yield to 4.90%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 430bp from the 400bp reported December 6.

TXPR closed at 531.75, down 0.93% on the day. Volume today was 2.71-million, third-highest of the past 21 trading days.

CPD closed at 10.58, down 0.94% on the day. Volume was 207,270, highest of the past 21 trading days.

ZPR closed at 8.995, down 0.61% on the day. Volume was 89,610, third-lowest of the past 21 trading days.

Five-year Canada yields were down to 3.43%.

Given the volume and the direction, this might be due to tax-loss selling. 2022 was, of course, an awful year and prices are still down a tick from year-end 2022.

The BoC stood pat on the policy rate:

The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is continuing its policy of quantitative tightening.

The global economy continues to slow and inflation has eased further. In the United States, growth has been stronger than expected, led by robust consumer spending, but is likely to weaken in the months ahead as past policy rate increases work their way through the economy. Growth in the euro area has weakened and, combined with lower energy prices, this has reduced inflationary pressures. Oil prices are about $10-per-barrel lower than was assumed in the October Monetary Policy Report (MPR). Financial conditions have also eased, with long-term interest rates unwinding some of the sharp increases seen earlier in the autumn. The US dollar has weakened against most currencies, including Canada’s.

In Canada, economic growth stalled through the middle quarters of 2023. Real GDP contracted at a rate of 1.1% in the third quarter, following growth of 1.4% in the second quarter. Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year. Exports and inventory adjustment subtracted from GDP growth in the third quarter, while government spending and new home construction provided a boost. The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly. Even so, wages are still rising by 4-5%. Overall, these data and indicators for the fourth quarter suggest the economy is no longer in excess demand.

The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices. Combined with the drop in gasoline prices, this contributed to the easing of CPI inflation to 3.1% in October. However, shelter price inflation has picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs. In recent months, the Bank’s preferred measures of core inflation have been around 3½-4%, with the October data coming in towards the lower end of this range.

With further signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed. Governing Council wants to see further and sustained easing in core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

At 3.42% the five year Canada rate has now retreated to the high-end of what I think should be a stable range of 3.00-3.50%.

PerpetualDiscounts now yield 6.92%, equivalent to 9.00% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.40% on 2023-11-24 and since then the closing price has changed from 14.58 to 15.30, an increase of 493bp in price, with a Duration (BMO doesn’t specify Modified or Macaulay – I will assume the former) of 12.15 implying a decrease of 41bp in yield to 4.99%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 400bp from the 375bp reported November 29.

Sorry this is so late!