PrefBlog

PerpetualDiscounts now yield 6.81%, equivalent to 8.85% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.02% on 2023-6-30 and since then the closing price has changed from 15.15 to 14.96, a decrease of 125bp in price, with a Duration of 12.40 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 10bp since 6/30 to 5.12%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to about 375bp from the 385bp reported June 28.

TXPR closed at 528.59, up 0.73% on the day. Volume today was 590,440, lowest of the past 21 trading days.

CPD closed at 10.47, up 0.38% on the day. Volume was 43,220, near the median of the past 21 trading days.

ZPR closed at 8.80, up 0.46% on the day. Volume was 97,000, below the median of the past 21 trading days.

Five-year Canada yields were down to 3.72%.

US consumer spending was down:

Consumer spending slowed sharply last month — good news for policymakers worried about inflation, but also a sign that a crucial engine of the economic recovery could finally be losing steam.

U.S. consumers spent just 0.1 percent more in May than the month before, the Commerce Department said Friday. That was down from 0.6 percent growth in April, which was revised down from an earlier estimate of 0.8 percent. Adjusted for inflation, spending in May was flat.

Eurozone inflation news was mixed:

Inflation across most economies in Europe eased this month, but concerns about continuing price increases in sectors like services and food are likely to prompt the European Central Bank to raise interest rates yet again despite slowing growth and the risk of higher unemployment.

Consumer prices in the 20 countries that use the euro as their currency rose at an annual rate of 5.5 percent in June, down from 6.1 percent in May, the statistical office of the European Commission reported on Friday.

The increase in what is known as core inflation, which strips out the volatile categories of food and energy and is a more reliable measure of underlying price pressures, will be of particular concern to central bankers. That rate was 5.4 percent over the year through June, up from 5.3 percent in May.

But US PCE inflation was mixed:

The inflation index showed that prices rose 3.8 per cent in May from 12 months earlier, down sharply from a 4.4 per cent year-over-year surge in April. And from April to May, prices ticked up just 0.1 per cent.

Still, last month’s progress in easing overall inflation was tempered by an elevated reading of “core” prices, a category that excludes volatile food and energy costs. The increase underscored the Fed’s belief that it will need to keep raising interest rates to conquer high inflation.

Core prices rose 4.6 per cent in May from a year earlier, down slightly from the annual increase of 4.7 per cent in April. It was the fifth straight month that the core figure was either 4.6 per cent or 4.7 per cent – a sign that the Fed’s streak of 10 rate hikes over the past 15 months hasn’t subdued all categories of prices. From April to May, core prices increased 0.3 per cent, a pace that, if it lasts, would keep inflation well above the Fed’s 2-per-cent target.

The BoC has released a Staff Working Paper by Temel Taskin and Franz Ulrich Ruch titled Global Demand and Supply Sentiment: Evidence from Earnings Calls:

This paper quantifies global demand, supply and uncertainty shocks and compares two major global recessions: the 2008–09 Great Recession and the COVID-19 pandemic. We use two alternate approaches to decompose economic shocks: text mining techniques on earnings calls transcripts and a structural Bayesian vector autoregression model. The results highlight sharp contrast in the size of supply and demand shocks over time and across sectors. While the Great Recession was characterized by demand shocks, COVID-19 caused sizable disruptions to both demand and supply. These shocks were broad-based with varying relative importance across major sectors. Furthermore, certain sub-sectors, such as professional and business services, internet retail, and grocery/department stores, fared better than others during the pandemic.

And IMF First Deputy Managing Director Gita Gopinath had Three Uncomfortable Truths For Monetary Policy:

This is, of course, no easy task. This evening, I will focus on how to contend with high inflation by confronting what I will call three uncomfortable truths for monetary policy.

The first uncomfortable truth is that inflation is taking too long to get back to target. This means that central banks, including the ECB, must remain committed to fighting inflation despite risks of weaker economic growth.

The second uncomfortable truth is that financial stresses could generate tensions between central banks’ price and financial stability objectives. Achieving “separation” through additional tools is possible, but not a fait accompli.

The third uncomfortable truth is that going forward, central banks are likely to experience more upside inflation risks than before the pandemic. Monetary policy strategies and the use of tools like forward guidance and quantitative easing must accordingly be refined.

Let’s begin by exploring the first uncomfortable truth: inflation is taking too long to get back to target.

Uncomfortable Truth #1: Inflation is taking too long to get back to target.

Inflation forecasters have been optimistic that inflation will revert quickly to target ever since it spiked two years ago. As you can see, (slide 4) this includes the ECB and the IMF, whose forecasts are nearly indistinguishable. What we see in these charts is that inflation sits well above previous forecasts. This reminds me of Samuel Beckett’s famous play, Waiting for Godot. In the play, both the cast and audience await a mysterious character named Godot who never appears. Similarly, we are still waiting for low inflation to reappear. We hope, of course, that real life will have a different ending than the play. But as of now, the audience is still waiting.

Despite repeated forecast errors, markets remain particularly optimistic that inflation in the euro area and most advanced economies will recede to near-target levels relatively quickly (slide 5, left panel). These disinflation hopes—likely fueled by the sharp drop in energy prices—underpin expectations that policy rates will decline soon, despite central bank guidance to the contrary (right panel). Surveys of market analysts paint a similar picture and suggest that inflation is likely to come down without much of a hit to growth. It is useful to bear in mind that there is not much historical precedent for such an outcome.[1]

Setting aside forecasts, the fact is that inflation is too high and remains broad-based in the euro area, as in many other countries (slide 6). While headline inflation has eased significantly, inflation in services has stayed high, and the date by when it is expected to return to target could slip further.

This echoes a speech by Christine Lagarde, President of the European Central Bank, titled Breaking the persistence of inflation:

But the second phase of the inflation process is now starting to become stronger.

Workers have so far lost out from the inflation shock, seeing large real wage declines, which is triggering a sustained wage “catch-up” process as they try to recover their losses. This is pushing up other measures of underlying inflation that capture more domestic price pressures – particularly measures of wagesensitive inflation and domestic inflation.

And since wage bargaining in many European countries is multi-annual and inertial, this process will naturally play out over several years. In our latest projections, we expect wages to grow by a further 14% between now and the end of 2025 and to fully recover their pre-pandemic level in real terms.

While this “catch up” has long been factored into our inflation outlook, the effect on inflation from rising wages has recently been amplified by lower productivity growth than we had previously projected, which is leading to higher unit labour costs. Alongside past upward surprises, this is a key reason why we recently revised up our projections for core inflation, even though our expectations for wages remained broadly the same.

Two features of the current business cycle are contributing to this dynamic – and both could linger, too.

The first is the resilience of employment relative to GDP growth.

Typically, we would have expected slowing economic growth over the last year to have somewhat reduced employment growth. But for the last three quarters in particular, the labour market has been performing better than an “Okun’s law”-based regularity would suggest.

That disconnect partly reflects increased labour hoarding by firms in a context of labour shortages, which is visible in the current gap between total hours worked and average hours worked. This is weighing on productivity growth and, with unemployment expected to fall slightly further over the projection horizon, the motivation for firms to hoard labour may not disappear quickly.

The second feature contributing to weaker aggregate productivity is the composition of employment growth, which is concentrated in sectors with structurally low productivity growth.

Since the pandemic, employment has grown most in construction and the public sector, both of which have seen a decline in productivity, and in services, which has seen only meagre productivity growth.

These trends could also persist in some of these sectors over the next few years given the relative weakness of manufacturing and long-term shifts towards employment in services.

All this means that we will face several years of rising nominal wages, with unit labour cost pressures exacerbated by subdued productivity growth. And in this setting, monetary policy must achieve two key goals.

First, we must ensure that inflation expectations remain anchored as the wage catch-up process plays out. While we do not currently see a wage-price spiral or a de-anchoring of expectations, the longer inflation remains above target, the greater such risks become. That means we need to bring inflation back to our 2% medium-term target in a timely manner.

Second, for this to happen, we need to ensure that firms absorb rising labour costs in margins. If monetary policy is sufficiently restrictive, the economy can achieve disinflation overall while real wages recover some of their losses. But this hinges on our policy dampening demand for some time so that firms cannot continue to display the pricing behaviour we have recently seen.

Sensitivity analysis by ECB staff underlines the risks we would face if firms tried to defend their margins instead. For instance, if firms were to regain 25% of the lost profit margin that our projections foresee, inflation in 2025 would be substantially higher than the baseline – at almost 3%.

So, faced with a more persistent inflation process, we need a more persistent policy – one that not only produces sufficient tightening today, but also maintains restrictive conditions until we can be confident that this second phase of the inflation process has been resolved.

And the New York Fed released its Corporate Bond Market Distress Index:

Corporate bond market functioning remained close to historical norms over the month of June, with the end-of-month market-level CMDI around its historical median.

Market functioning in both the high-yield and investment-grade sectors remained roughly flat over the course of the month.