PrefBlog

Rates, schmates. The US economy doesn’t care:

The United States economy grew faster early this year than previously believed.

Gross domestic product, adjusted for inflation, expanded at an annual rate of 2 percent in the first three months of the year, the Commerce Department said Thursday. That was a significant upward revision from the 1.1 percent growth rate in preliminary data released in April. (An earlier revision, released last month, showed a slightly stronger rate of 1.3 percent.)

An alternative measure of growth, based on income rather than production, painted a different picture, showing that the economy contracted for the second quarter in a row. That measure was also revised upward from the prior estimate.
…
Consumers are powering the recovery through their spending, which increased at a 4.2 percent rate in the first quarter, up from a 1 percent rate in late 2022 and faster than the 3.7 percent rate initially reported in April. That spending, fueled by a strong job market and rising wages, helped offset declines in other sectors of the economy like business investment and housing.

The BoC has released a Staff Discussion Paper by Marc-André Gosselin and Temel Taskin titled What Can Earnings Calls Tell Us About the Output Gap and Inflation in Canada?:

We construct new indicators of the imbalance between demand and supply for the Canadian economy by using natural language processing techniques to analyze earnings calls of publicly listed firms. The results show that the text-based indicators are highly correlated with official inflation data and estimates of the output gap and improve the accuracy of inflation forecasts. This suggests that these indicators could help central banks foresee inflationary pressures in the economy. Our examination of other topics in earnings calls, such as supply chain disruptions and capacity constraints, points to the potential benefits of using textual data to quickly draw insights on a range of relevant topics. We conclude that text-based measures of economic slack should be included in central banks’ monitoring and forecasting toolkits.
…
Canada’s estimate of the output gap in before the COVID-19 pandemic. However, these measures stop moving in tandem beginning in 2020. Specifically, the Bank’s measure of the output gap indicates a persistent state of excess supply since the start of the COVID-19 pandemic. In contrast, our novel estimate points to a sharp transition from excess supply to excess demand that coincides with the emergence of disruptions in global supply chains. This result is important because it shows that our text-based indicator can help provide more accurate forecasts of inflation. In addition, our estimate of slack is available to policy-makers in real time, whereas traditional measures of the output gap are available with a delay given the publication lag of two months for Canada’s gross domestic product (GDP). Moreover, our examination of other topics in earnings calls, such as supply chain disruptions and capacity constraints, shows the potential benefits of using textual data to draw timely insights on a broad range of relevant topics. We conclude that text-based measures of economic slack should be included in central banks’ toolkits for monitoring and forecasting inflation.

And the clown show continues:

Independent Bay Street investment bank Canaccord Genuity Inc. is facing a potentially “significant penalty” related to its wholesale market-making business.

The warning was disclosed in one of several regulatory documents Canaccord filed Wednesday evening. In a separate filing, the company also said board chair David Kassie would step down from his executive management role following Canaccord’s Aug. 4 annual general meeting and would step down as chair one year later.

PerpetualDiscounts now yield 6.89%, equivalent to 8.96% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.10% on 2023-6-16 and since then the closing price has changed from 15.09 to 15.11, an increase of 13bp in price, with a Duration of 12.35 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decrease in yield of about 1bp since 6/16 to 5.09%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has gapped upward to about 385bp from the 360bp reported June 21.

Inflation fell today, but not uniformly:

Canada’s inflation rate fell to 3.4 per cent in May – the lowest it’s been since June 2021.
…
Statistics Canada reported Tuesday the slowdown was largely due to lower gasoline prices compared to a year ago.

However, the long-awaited decline in food inflation has yet to come through in Canada. Grocery prices were up nine per cent on an annual basis, showing little improvement from April.

And so the markets were dovish:

The annual rate, which benefited from a comparison to last May’s strong price increases, is the slowest since June 2021 and broadly in line with the Bank of Canada’s expectation that inflation would cool to around 3% by mid-2023.

The average of two of the Bank of Canada’s core measures of underlying inflation, CPI-median and CPI-trim, came in at 3.9% compared with 4.3% in April.

The Canadian dollar and bond markets had minimal reaction to the 830 am ET inflation data, with the five-year government bond yield last quoted at 3.723%, well below the 15-year high of 3.896% last week. The five-year bond yield influences fixed mortgage rates as well as some guaranteed investment certificate terms. The Canadian dollar dipped slightly against its U.S. counterpart following the data but soon recovered.

Interest rate probabilities based on trading in swaps markets now show about a 57% chance that Bank of Canada will hike rates by another quarter of a percentage point at its next policy meeting on July 12. That’s down from about 64% prior to the data.

Pre-CPI

Post-CPI

After intensive calculations, the Toronto Exchange has determined the ex-Dividend date for BNS.PR.J:

So I guess they’ll be paying a lot of overtime:

TXPR closed at 528.29, down 0.56% on the day. Volume today was 1.20-million, near the median of the past 21 trading days.

CPD closed at 10.57, down 0.19% on the day. Volume was 29,500, below the median of the past 21 trading days.

ZPR closed at 8.85, up 0.11% on the day. Volume was 250,860, fourth-highest of the past 21 trading days.

Five-year Canada yields were up to 3.89%.

I’m going to go out on limb here and suggest that the recent updraft in the GOC-5 rate is due in part to Canadian retail sales:

Canadians have ramped up their retail spending in recent months, despite higher interest rates that are meant to slow their consumption and bring down the rate of inflation.

Retail sales rose by 1.1 per cent in April, after a 1.4-per-cent slide in March, Statistics Canada said in a report on Wednesday. The April result easily surpassed its previous estimate of a 0.2-per-cent gain. In volume terms, retail sales rose 0.3 per cent.

Further gains appear to be on the way: In its preliminary estimate on Wednesday, Statscan said retail sales rose an additional 0.5 per cent in May, although that number is subject to revision.
…
Statscan’s report showed a broad-based increase in retail spending. Sales rose 3.3 per cent at general merchandise retailers in April from March. Receipts were up 3.1 per cent at clothing retailers and by 1.5 per cent at food and beverage retailers.

There was, however, a decline at stores catering to the housing market. For instance, sales fell 1.3 per cent at electronics and appliance retailers in April.

… exacerbated by Powell’s June 21 remarks:

Jerome H. Powell, the chair of the Federal Reserve, told House lawmakers that the United States remains a “long way” away from low and stable inflation even 15 months into the central bank’s campaign to cool the economy and wrestle down rapid price increases.

Mr. Powell testified before the House Financial Services Committee on Wednesday. He told lawmakers that the labor market remained very tight and that inflation — while it has come down notably from its peak last summer — was still too fast. In light of that, the Fed could raise interest rates even higher than their current level of just above 5 percent.

“Inflation has moderated somewhat since the middle of last year,” Mr. Powell said. “Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go.”

… and reports of UK inflation:

Britain’s inflation rate held steady in May, frustrating expectations that price increases would slow down, according to data released Wednesday, the day before the country’s central bank is widely expected to raise interest rates again.

Consumer prices rose 8.7 percent from a year earlier, the same as in April, the Office for National Statistics said. Economists had forecast that prices would dip slightly. The data is likely to compound concerns that Britain’s cost-of-living crisis may intensify in the coming months as mortgage holders confront the burden of higher interest rates pushed through to tackle stubbornly strong inflation.

The Bank of England is expected to lift interest rates on Thursday for a 13th consecutive time, by a quarter-point to 4.75 percent, the highest since early 2008.

But the BoE went for a bigger hike:

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 21 June 2023, the MPC voted by a majority of 7–2 to increase Bank Rate by 0.5 percentage points, to 5%. Two members preferred to maintain Bank Rate at 4.5%.

At the time of the previous MPC meeting and May Monetary Policy Report, the market-implied path for Bank Rate averaged just over 4% over the next three years. Since then, gilt yields have risen materially, particularly at shorter maturities, now suggesting a path for Bank Rate that averages around 5½%. Mortgage rates have also risen notably. The sterling effective exchange rate has appreciated further.

PerpetualDiscounts now yield 6.73%, equivalent to 8.75% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.10% on 2023-6-16 and since then the closing price has changed from 15.09 to 15.01, a decrease of 53bp in price, with a Duration of 12.35 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 4bp since 6/16 to 5.14%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to about 360bp from the 350bp reported June 14.

TXPR closed at 532.23, down 0.51% on the day. Volume today was 1.15-million, near the median of the past 21 trading days.

CPD closed at 10.62, down 0.66% on the day. Volume was 65,390, above the median of the past 21 trading days.

ZPR closed at 8.88, down 0.67% on the day. Volume was 149,620, above the median of the past 21 trading days.

Five-year Canada yields were up a bit to 3.73%.