PrefBlog

Jobs, jobs, jobs (US Version)!

The economy in March continued its descent from dizzying heights, with employment growing at a healthy rate but one that nonetheless signifies employers are pulling back as steadily rising interest rates take their toll.

Employers added 236,000 jobs last month, the Labor Department reported on Friday, while the unemployment rate decreased to 3.5 percent, from 3.6 percent in February.

The range of industries beginning to fade has widened, as warehousing, retail, manufacturing, construction and financial activities — those more sensitive to borrowing costs — either lost jobs or stayed flat over the month.
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• Year-over-year growth in average hourly earnings slowed slightly in March, to 4.2 percent, a sign the Federal Reserve has been looking for as it seeks to quell inflation. The report reflected a labor market that is gently decelerating, a sign of the kind of soft economic landing that the Fed has been shooting for.
• The U.S. labor force added nearly half a million workers in March and the share of Americans considered in their prime working age rose to 80.7 percent, the highest rate since 2001. So much for “nobody wants to work anymore.”
• The report delivered welcome news for President Biden, who has said that the job market needed to cool to tame high inflation. But analysts warn that the outbreak of banking sector turmoil means that the coming months could bring a more rapid deceleration in hiring.
• Bond yields jumped in response to the fresh data, as investors added to bets that interest rates would rise. Stock markets were closed on Friday for the Easter holiday but the bond market opened for a shortened session, during which yields continued to record unusually big swings.

So this year’s tussle is between the economists and the players! Who will win?

The Bank of Canada will keep its key interest rate steady at 4.50 per cent through 2023, according to most economists polled by Reuters, with an even smaller minority now expecting an interest-rate cut by year-end than a poll taken a month ago.

Markets still expect more than 50 basis points of cuts, pricing fuelled by fears last month over stresses in the U.S. and European banking sector, despite Canada’s economy and labour market performing better than expected.
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In March, the BoC was the first major central bank to stop its aggressive hiking cycle and is on what it calls a conditional pause. So all 33 economists polled March 31-April 6 said it will hold its overnight rate at 4.50 per cent on April 12.

A majority of forecasters, 23 of 31, said the rate would remain unchanged for the rest of 2023. Only seven expected at least one 25-basis-point rate cut by end-year, down from 13 in a survey taken about a month ago.

The IMF has released its Global Financial Stability Report which includes a chapter on Geopolitics and Financial Fragmentation: Implications for Macro-Financial Stability:

Rising geopolitical tensions among major economies have intensified concerns about global economic and financial fragmentation, which could have potentially important implications for global financial stability. Fragmentation induced by geopolitical tensions could affect the cross-border allocation of capital, international payment systems, and asset prices. This could pose macro-financial stability risks by increasing banks’ funding costs, reducing their profitability, and lowering the provision of credit to the private sector. Greater financial fragmentation could also exacerbate capital flow and macro-financial volatility by limiting international risk diversification. Policymakers need to be aware of potential financial stability risks associated with a rise in geopolitical tensions and assess and quantify geopolitical shock transmission to financial institutions. Financial institutions may need to hold adequate capital and liquidity buffers against rising geopolitical risks. The global financial safety net also needs to be buttressed through adequate levels of international reserves held by countries, central bank liquidity swap arrangements, and precautionary credit lines from international financial institutions.

One grudge the private-school boys at the major dealers have against market-making hedge funds is that they pull their capital out of the market when things get hairy. So, it turns out, do private mortgage lenders:

Private mortgage lenders are refusing to renew loans to their existing borrowers, leaving indebted homeowners without a source of funding.

Canadian Mortgages Inc., CMLS Financial, New Haven Mortgage Corp. and individual private lenders are some of those who have turned down requests to renew some of their borrowers’ loans after home prices tanked over this past year.

This is taking place in areas where home prices have dropped significantly. That includes Owen Sound, Bowmanville, Orillia, Timmins, Hamilton and Brampton in Ontario and Prince Rupert in British Columbia.

Private lenders are nervous they won’t be able to recoup their capital if borrowers are unable to make their monthly payments. Private lending is typically determined using a metric called the loan-to-value (LTV) ratio, which measures how much the homeowner owes relative to the appraised value of the property.
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Currently, many private lenders are only willing to lend up to 75 per cent of the property’s value – also known as an LTV ratio of 75 per cent. When home prices were soaring in 2021, private lenders were willing to offer loans with an LTV ratio of 90 per cent.

Now that home prices have dropped, that has increased the risk to the lender and they are no longer willing to renew loans. When borrowers try to renew their mortgage, the lender is either refusing to renew their loan or telling borrowers that their properties need to be reappraised. And when the property is reappraised, it has a much lower value.

The New York Fed has released its Survey of Consumer Expectations:

Inflation

• Median inflation expectations increased by 0.5 percentage point at the one-year-ahead horizon to 4.7%, marking the first increase in the series since October 2022. Median inflation expectations increased by 0.1 percentage point at the three-year-ahead horizon to 2.8%, but decreased by 0.1 percentage point at the five-year-ahead horizon to 2.5%. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) increased at all three horizons.
• Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—increased at the one-year-ahead horizon, decreased at the three-year-ahead horizon, and remained unchanged at the five-year-ahead horizon.
• Median home price growth expectations increased by 0.4 percentage point to 1.8% in March, remaining far below the 12-month trailing average of 3.0% as well as their pre-pandemic levels. The increase was most pronounced among respondents with no more than a high school education and for those who live in the Midwest Census region.
• Median year-ahead expected price changes declined by 0.1 percentage point for gas (to 4.6%), 1.4 percentage point for food (to 5.9%), 0.1 percentage point for the cost of medical care (to 9.3%), and 0.2 percentage point for the cost of rent (to 9.2%). Median year-ahead expected cost of college education increased by 0.8 percentage point (to 8.9%). All commodity price expectations remain well above their pre-pandemic (March 2020) levels.

Labor Market

• Median one-year-ahead expected earnings growth remained unchanged at 3.0% in March. The series has been moving between a narrow range of 2.8% to 3.0% since September 2021; March marked the fourth consecutive month it remained at 3.0%.
• Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—increased by 1.3 percentage point to 40.7%. The increase was more pronounced for respondents with at least some college education, those between the ages of 40 and 60, and those with annual household incomes between $50k and $100k.
• The mean perceived probability of losing one’s job in the next 12 months decreased by 0.4 percentage point to 11.4%. The mean probability of leaving one’s job voluntarily in the next 12 months also declined by 1.5 percentage point to 19.3%.
• The mean perceived probability of finding a job (if one’s current job was lost) declined by 0.3 percentage point to 57.6% in March. The series has been moving between a narrow range of 57.2% to 58.2% since August 2022.

Something peculiar is happening at Emerge Canada Inc.:

Regulators have slapped the entire family of exchange-traded funds from Emerge Canada Inc. with a trading halt because the company has failed to find an auditor to review its financial statements.

Toronto-based Emerge revealed in mid-December that, nearly six weeks earlier, BDO Canada LLP had resigned as the auditors of the Emerge Funds. At the time, Emerge said it was “working expeditiously to appoint a successor auditor.”

Monday, Emerge acknowledged it has yet to find a new auditor. Lacking one, it failed to file audited annual financial statements for its funds by a March 31 deadline. As a result, the Ontario Securities Commission issued a cease-trade order on Thursday for all the Emerge funds.
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In its December 14 filing, Emerge said BDO “resigned, on its own initiative” on Nov. 3. Emerge said BDO Canada LLP had no reservations in its reports for the Emerge Funds for the two most recently completed financial years, which were 2020 and 2021. Also, there no were no “reportable events,” which are types of disagreements with auditors or other accounting issues that are defined in securities law.

The next day, in a filing to all provincial securities regulators, BDO said “We agree with the statements made in the Change of Auditor Notice pertaining to our firm.”

And we should all Raise a glass to Bing Newcomb:

Mr. Newcomb, who co-founded the company E*Trade and wrote the computer code that made it work, died on Jan. 29 at his home in Palo Alto, Calif. He was 79.
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In 1980, Mr. Newcomb and William A. Porter were introduced by a mutual friend at a Halloween party in Palo Alto. Mr. Porter, a onetime cowboy turned electronics whiz, had just purchased an Apple II personal computer, the company’s first model aimed at consumers. How, he wondered, could he and other individuals use the new technology to buy and sell stocks from home?

Mr. Newcomb, who had been working as a freelance computer programmer, hiring himself out to banks and other businesses that needed a guide to emerging digital technologies, provided the answers.

In 1982, with $15,000 in capital, the partners started TradePlus, one of the first electronic trading platforms. Its first trade was made on July 11, 1983, by a Michigan dentist.
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By 1994, revenues had risen geometrically, from $850,000 only two years earlier to nearly $11 million. A business journal proclaimed the firm to be the fastest-growing private company in Silicon Valley. It went public as the E*Trade Group in 1996.

Mr. Newcomb, who had been the company’s chief system architect and vice president for research and development, retired with 2.4 million shares of the company in 1997, when the price per share was about $23.

Jobs, jobs, jobs!

The Canadian economy added more jobs than expected in March and the unemployment rate remained near a record low for a fourth straight month, data on Thursday showed, a sign of economic resilience ahead of a central bank policy meeting next week.

The economy gained a net 34,700 jobs, almost entirely in the private sector, and the unemployment rate held steady at 5.0 per cent, Statistics Canada reported.
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Thursday’s jobs figures as well as robust GDP data released last week are likely to complicate the central bank’s plans to avoid further rate moves. The average hourly wage for permanent employees rose 5.2 per cent in March on a year-over-year basis, down from 5.4 per cent in February.

The bank’s next rate decision is due on Wednesday.
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The employment gains last month were driven by the services sector, which added a net 75,500 jobs, mostly in transportation and warehousing as well as support services. Those additions more than offset the decline of 40,900 jobs in the goods sector, which was dragged down by job losses in construction as well as natural resources.

The New York Fed has updated the Global Supply Chain Pressure Index:

• Global supply chain pressures decreased again in March, falling from .28 to 1.06 standard deviations below the index’s historical average.
• There were significant downward contributions by many of the factors, with the largest negative contributions from European Area delivery times, European Area backlogs, and Taiwanese purchases.
• The GSCPI’s recent movements suggest that global supply chain conditions have largely normalized after experiencing temporary setbacks around the turn of the year.

BIS has released a working paper titled Big techs and the credit channel of monetary policy:

Focus
Big techs are lending to small and medium-sized enterprises and vendors on their e-commerce platforms, thus encroaching on financial markets. These changes in financial intermediation could affect monetary policy transmission in at least two ways. First, the business model of big techs depends on using vast amounts of data instead of collateral to solve agency problems between borrowers and lenders. By using machine learning and big data to generate credit scores, big techs can assess a company’s creditworthiness more accurately than traditional credit bureau ratings can. As a result, this may decrease the relevance of the “collateral channel” and, simultaneously, increase the responsiveness of credit to changes in firms’ business conditions. Second, the threat of reputational damage, or of being excluded from the e-commerce platform, serves as an extra-legal but highly effective means of contract enforcement for big tech firms.

Contribution
We view big tech credit through the lens of a model where big techs facilitate matching on the e-commerce platform and extend loans. While bank credit is backed by collateral, big techs reinforce credit repayment by threatening to exclude borrowers from the platform. The most significant difference between big tech credit and bank credit lies in the borrowers’ cost of default. If a firm defaults on bank credit, it loses its collateral, usually real estate. In contrast, if a company defaults on big tech credit, it loses access to the e-commerce platform, thereby jeopardising future profits.

Findings
We find that, first, an improvement in big techs’ matching efficiency on the e-commerce platform raises the value for firms of trading on the platform and accessing big tech credit. Higher future profits ease financing constraints and increase firms’ production, driving aggregate output closer to the efficient level. Second, the response of credit and output to a monetary policy shock depends on how sensitive the firms’ opportunity cost of default on big tech credit (ie the stream of future profits from operating on the big tech platform) is compared with the cost of defaulting on bank credit (ie the value of physical collateral). In our baseline calibration, the introduction of big tech credit mitigates the initial responses of aggregate credit and output to a monetary shock. However, it increases the persistence of the effect of monetary policy on the macroeconomy. Third, big techs’ macroeconomic efficiency gains are limited by the distortionary nature of the fees collected from their users.

Abstract
We document some stylized facts on big tech credit and rationalize them through the lens of a model where big techs facilitate matching on the e-commerce platform and extend loans. The big tech reinforces credit repayment with the threat of exclusion from the platform, while bank credit is secured against collateral. Our model suggests that: (i) a rise in big techs’ matching efficiency increases the value for firms of trading on the platform and the availability of big tech credit; (ii) big tech credit mitigates the initial response of output to a monetary shock, while increasing its persistence; (iii) the efficiency gains generated by big techs are limited by the distortionary fees collected from users.
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Our paper aims to shed some light on the effects of big techs’ entry into finance on the macroeconomy and on monetary policy transmission. We develop a model that can replicate two key empirical facts about big techs. First, using macro data for China and the US, and extending previous evidence based on Chinese micro data, we show that big tech credit does not react to changes in asset prices and local economic conditions, unlike bank credit. Second, we use local projections to shed light on the importance of the physical collateral channel relative to the network collateral channel for the transmission of monetary policy. Key drivers of the strength of these channels is the sensitivity of commercial property prices and e-commerce sales to monetary policy. We show that commercial property prices respond more strongly than e-commerce sales to a monetary policy shock, although less persistently.
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The crucial difference between big tech credit and bank credit relates to borrowers’ opportunity cost of default. Firms that default on bank credit lose their collateral (real estate). In contrast, those that default on big tech credit lose access to big techs’ e-commerce platform, and hence their future profits. An incentive compatible contract thus limits the total amount of credit to the sum of physical and network collateral. Nominal wages are sticky, and monetary policy affects the real economy. When search frictions in the goods markets and credit frictions in the financial markets are set to zero, the model collapses to the basic New Keynesian model with sticky wages.3

We obtain three sets of results. First, an expansion in big techs, as captured by an increase in matching efficiency on the commerce platform, raises the value for firms of trading in the platform and the availability of big tech credit. This in turn relaxes financing constraints and increases firms’ production, driving aggregate output closer to the efficient level. Second, the reaction of credit and output to a monetary policy shock crucially depends on the sensitivity of firms’ opportunity cost of default on big tech credit (the stream of future profits from operating on the big tech platform) compared to that of defaulting on bank credit (the value of physical collateral). In our baseline calibration, the introduction of big tech credit mitigates the initial responses of aggregate credit and output to a monetary shock, but increases the persistence of the effect of monetary policy on the macroeconomy. Third, big techs’ macroeconomic efficiency gains are limited by the distortionary nature of the fees collected from their users.

AIMCo beat its benchmarks:

Alberta Investment Management Corp. reported a 3.4-per-cent loss last year as falling values for publicly traded stocks and bonds outweighed strong returns from investments in infrastructure and renewable resources.
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AIMCo’s 2022 returns were still 1.8-per-cent higher than its internal benchmark in spite of the loss, demonstrating how difficult it was to be an investor last year as high inflation and rapid interest-rate increases shook global markets. Like many of its peers, AIMCo suffered from a rare simultaneous dive in public equities and fixed income markets, which make up a large share of the plan’s assets.

Aimia is facing a shareholder revolt:

Mithaq Capital SPC, a family office based in Saudi Arabia that owns nearly 20 per cent of Toronto-based Aimia, announced plans Thursday to vote against the re-election of the company’s entire board of directors.
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In a statement, Mithaq said it has lost confidence in the board and the management team, and that “it would be in the best interests of Aimia to reconstitute the board.”

The reasons underlying Mithaq’s opposition “include concerns previously raised with Aimia regarding capital allocation decisions relating to acquisitions,” the statement said.

Mithaq is not planning to nominate any replacement candidates and declined to comment further on what exactly motivated it, though Aimia has recently made its two largest acquisitions since pivoting away from loyalty programs.

In January, Aimia bought Tufropes Pvt. Ltd. for $253-million. India-based Tufropes makes synthetic fibre ropes and netting for the aquaculture and maritime industries. Then last month, the company paid $332-million for Italian chemical company Giovanni Bozzetto SpA.
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Mithaq has amassed a significant portion of its stake in Aimia very recently. While the family office holds 19.9 per cent of Aimia’s outstanding common shares, that figure was only 12.6 per cent as of Feb 1.

Over the course of its transformation, Aimia’s work force has shrunk dramatically to about 20 people as of late 2020 from roughly 450. In its most recent quarter, Aimia reported a net loss of $23.3-million, which was roughly 60-per-cent wider than the $14.6-million loss the company reported during the same period a year earlier.

… and the company is fighting back:

Hours later, the company fired back, alleging what Mithaq really wanted was for Aimia to support its own investments.

“Many of the investments [Mithaq] recommended would have resulted in substantial losses to Aimia (including one target that subsequently filed for bankruptcy),” the company said in a statement released early Thursday afternoon.

Aimia also said Mithaq had “previously lobbied the company to invest in public securities, including some in which they hold an interest.” An unnamed former insider of an Amia affiliate – who the company claimed was recently terminated for allegedly misusing confidential information – lobbied alongside Mithaq for those investments, the statement said.

TXPR closed at 542.00, down 0.72% on the day. Volume today was 1.19-million, slightly above the median of the past 21 trading days.

CPD closed at 10.82, down 0.28% on the day. Volume was 54,850, below the median of the past 21 trading days.

ZPR closed at 8.88, down 0.45% on the day. Volume was 92,420, third-lowest of the past 21 trading days.

Five-year Canada yields down slightly to 2.90% today.

The Globe claims this is all due to recession fears:

The TSX, S&P 500 and the Nasdaq ended lower on Wednesday after a growing wave of weak economic data deepened worries that the Federal Reserve’s rapid interest rate hikes might tip the U.S. economy into a recession.
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Driving the recession fears, the ADP National Employment report showed U.S. private employers hired far fewer workers than expected in March. That followed Tuesday’s weak job openings data.

As well, the Institute for Supply Management’s survey showed the services sector slowed more than expected last month on cooling demand, while a measure of prices paid by services businesses fell to a near three-year low.

Earlier this week data showed falling factory orders and soft manufacturing activity.
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Reflecting worries about the economy and recent turmoil in the banking sector, interest rate futures imply 61% odds that the Fed will cut interest rates from current levels by the end of its July meeting, according to CME Group’s Fedwatch tool.

Money markets are currently pricing in only a 16% chance the Bank of Canada will cut interest rates at its April 12 meeting, but they are fully pricing in at least a quarter-point cut by September, according to Refinitiv Eikon data late Wednesday.

Gabriel Makhlouf, Governor of the Central Bank of Ireland and Member of the Governing Council of the European Central Bank, gave a speech titled Staying the course: monetary policy to avoid persistentinflation:

To achieve this, the Governing Council decided last month to increase the three key ECB interest rates by 50 basis points. The interest rate applied to our Deposit Facility is now at 3 per cent, up from minus 0.5 per cent last July. This represents a significant tightening of the monetary policy stance, commensurate with the challenges to price stability we have been facing.

The scale and pace of interest rate increases – up 3.5 percentage points in just nine months – is unprecedented. For comparison, previous rate hiking cycles in the euro area in 1999-2000 and 2005-07 saw rates rise by 2.25 and 2 percentage points over a 13 and 21 month period, respectively.
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The euro area economy slowed in the fourth quarter of 2022, with economic growth stagnant in the face of falling private domestic demand. High inflation, prevailing uncertainties and tighter financing conditions dented private consumption and investment, which fell by 0.9 per cent and 3.6 per cent respectively. However, the ECB staff March macroeconomic projections envisage a recovery in the next few quarters as supply conditions improve further, confidence recovers, and firms work off large order backlogs. Rising nominal wages and falling energy prices will partly offset the loss of purchasing power that many households are experiencing as a result of high inflation. This, in turn, will support consumer spending.

Looking ahead, with record low unemployment expected to hold steady at 6.7 per cent, the ECB staff’s current projections embed a significant degree of real wage catch-up, with wages returning to 2022 levels in real terms by end2025. Nominal wage growth projections of 5.0, 4.4 and 3.6 per cent in 2023, 2024 and 2025 are significantly above historic averages.

For wage developments, much will depend on ongoing levels of labour market tightness. While the number of job vacancies in the euro area have started to recede gradually since the turn of this year, the number of job openings relative to unemployed remains at a historic high. Meanwhile, despite the weaker PMI (Purchasing Managers’ Index) data we saw towards the end of 2022, employment expectations remained in significant positive territory (Chart 2, left panel). This suggests that some degree of labour hoarding is taking place, likely reflecting firms’ expectations of a transitory weakness in demand, as well as their ability to absorb higher costs through increased mark-ups (a point I will return to).
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There is potential for profit margins to absorb some of this near-term higher wage growth. As Chart 3 shows, labour costs have not risen by anything close to the same extent as profits in most sectors. For some sectors, the gap between growth in unit profits and unit labour costs during 2022 is very large, for example in agriculture, manufacturing and contact intensive services.
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While price and wage-setting will contain a backward-looking element, especially after a supply-driven surge in inflation, it is important that the forward-looking component remains close to our inflation target in order to avoid an entrenchment of higher inflation in expectations amongst the public. So far, there has been no indication that expectations have become de-anchored from our inflation target. This is true for both survey and market-based measures of longer-term inflation expectations.

Huw Pill, Chief Economist and Executive Director for Monetary Analysis of the Bank of England, gave a speech titled Inflation persistence and monetary policy:

In this speech Huw Pill discusses the outlook for the economy, including how lower energy prices might push down on inflation in the short term, but could also boost demand and therefore impact inflation in the medium term. He stresses that the MPC must continue to monitor how these external shocks to inflation might become embedded in the economy, and therefore risk persistently high domestically driven inflation. He goes into detail about the Monetary Policy Committee’s role in controlling inflation, and the potential impact of its recent significant increases to interest rates. He outlines how the Monetary Policy Committee carefully assesses the impact of interest rate rises that have yet to feed through, with the need to address current inflationary pressures.
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Let me start with some stark and uncomfortable facts. Annual UK CPI inflation was 10.4% in February. That is unacceptably high. The Bank of England’s Monetary Policy Committee (MPC) is committed to returning inflation to its 2% target on a sustainable basis.
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The MPC has tightened monetary policy over the past eighteen months to achieve the 2% inflation target. Bank Rate has been increased from its effective lower bound of 0.1% to today’s level of 4.25%. Quantitative easing (QE) has been halted and replaced with a programme of quantitative tightening (QT), involving the sale of gilts and corporate bonds held as a result of the Bank’s earlier asset purchase schemes.[1] And the MPC’s communication about the outlook for monetary policy has shifted significantly.
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For data series that exhibit ‘mean reversion’ – in other words series that return to some average level after being shocked away from it – persistence is typically understood in terms of how long it takes to get back to that average level.[7]

Given the MPC’s mandate, CPI inflation will revert to 2% over time. But it is taking longer to return to target than was originally expected, and longer than is desirable. From a policy perspective, we want to understand why this persistence in inflation has emerged. In thinking about that, it is helpful to distinguish between different sources of persistence.[8]

One reason for inflation to have risen above target is that there have been a series of inflationary shocks to the economy, each of which was transitory in itself but – by dint of coming one after the other and operating in the same direction – led to greater persistence in headline inflation overall.

I label this a form of extrinsic inflation persistence.

Such an account resonates with the way the MPC has described the inflation process over the past couple of years.[9] Inflation first rose on account of bottlenecks in international goods markets that emerged from the interaction of disruption to global supply chains and changes in the pattern of consumer demand, both stemming from the lockdowns triggered by the onset of the Covid pandemic. Then, just as these bottlenecks were easing as the pandemic receded, UK energy prices rose dramatically following the Russian invasion of Ukraine and the resulting dramatic increase in wholesale European natural gas prices. And now, just as those wholesale gas prices have fallen substantially in recent months, we are seeing another inflationary impulse coming from rises in food prices driven, at least in part, by unexpectedly weak crop yields in southern Europe and north Africa.[10]

Understood in this way, the persistence of UK inflation is largely a manifestation of ‘bad luck’ – a ‘series of unfortunate events’. It reflects a sequence of fundamentally transitory shocks – each of which monetary policy can do little about, for reasons I have already explained – that have cumulated through time into a more long-lasting elevation of headline inflation.

There is much truth in that narrative. But we have to guard against complacency in interpreting recent inflation developments in this way. I recognise that this is potentially both a self-serving and an incomplete view of recent inflation developments in the UK.

For one thing, we need to assess whether the surprises we have been confronted with over recent years could have been anticipated by better analysis and research: for example, could we have forecast the vulnerabilities in global supply chains once the pandemic had struck? Or could we have foreseen the dynamics in food prices given agricultural
ommodity prices? These challenges deserve further research – although it is naïve to believe that there are easy solutions to such formidable analytical problems.

And – in particular, from today’s perspective – we should recognise that persistent deviations of inflation from target, even if stemming from what are fundamentally a series of transitory inflation shocks, might prompt changes in behaviour that generate more long lasting inflationary dynamics.

For example, we might see a shift in long-term inflation expectations or the emergence of ‘second round effects’ in price setting behaviour that threaten to create momentum in inflation even after the original impulse has receded.[11]

This naturally leads to what I label intrinsic persistence in headline inflation. Rather than being driven by a series of external shocks, greater intrinsic inflation persistence emerges when the economy’s response to the same fundamental inflationary shock changes in a way that implies headline inflation takes longer to return to target.
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Of course, the evolution of inflation persistence against the background of the terms of trade
shock stemming from Russia’s invasion of Ukraine is only one of many challenges facing monetary policy makers at present. It needs to be seen in the context of other economic disturbances, not least the recent turmoil in the financial sector. We have been told by our colleagues in the Financial Policy Committee that the UK financial system remains robust and resilient. Nonetheless, those of us on the MPC need to remain vigilant to signs of tightening financial conditions and be prepared to respond to the macro implications of any dislocation to credit markets to the extent that they influence the outlook for inflation.

And Rogers got downgraded two notches:

DBRS Limited (DBRS Morningstar) resolved the Under Review with Negative Implications status of Rogers Communications Inc.’s (Rogers or the Company) by downgrading the Issuer Rating and Senior Unsecured Notes rating to BBB (low) from BBB (high). All trends are Stable. The resolution of the Under Review status reflects the completion of the $26 billion acquisition of Shaw Communications Inc. (the Shaw transaction) concurrently with the divestiture of Shaw’s Freedom Mobile to Videotron Ltd. (the Freedom transaction), a wholly owned subsidiary of Quebecor Media Inc. (not rated by DBRS Morningstar). The rating downgrades reflect the increase in gross leverage required to finance the Shaw transaction and anticipated challenges related to network, cultural, and operations integration amid an intensely competitive landscape, while acknowledging the long-term competitive benefits for Rogers as it enhances its national footprint and competitive positioning, particularly in Western Canada. The Stable trends reflect DBRS Morningstar’s expectation of a multiyear deleveraging path toward the Company’s long-term leverage target, as earnings are expected to benefit from a strong market position of the combined entity.

PerpetualDiscounts now yield 6.22%, equivalent to 8.09% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.06% on 2023-3-31 and since then the closing price has changed from 15.14 to 15.19, an increase of 33bp in price, with a Duration of 12.36 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decrease in yield of about 3bp since 3/31 to 5.03%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained constant at about 305bp since reported March 29.

BIS has released a paper by Claudio Borio, Marco Jacopo Lombardi, James Yetman and Egon Zakrajšek titled The two-regime view of inflation:

Focus

The global surge of inflation that started in 2021 took most observers by surprise. While unforeseen shocks played a key role, the surprise also highlighted limitations of the analytical frameworks typically used to understand and forecast inflation.

Contribution

This study provides a new view of the inflation process. It characterises the process as two regimes – a low- and a high-inflation regime – with self-reinforcing transitions from the low- to the high-inflation one. The value added of this view is to highlight those elements that standard models downplay and to draw new implications for monetary policy.

Findings

First, inflation tends to be self-stabilising in a low-inflation regime but loses that property as it shifts to the high-inflation one. This reflects systematic differences in the co-movement of individual prices and in the behaviour of wage and price setters that determines them. As inflation increases above very low levels, it becomes a more focal point for workers and firms. This increases the likelihood of wage-price spirals.

Second, monetary policy has a smaller impact on inflation in a low-inflation regime, where individual price changes co-move little. It also operates through a quite narrow set of sectoral prices, typically in the services sectors that are more sensitive to economic activity.

As a result, when inflation has settled at a low level, monetary policy can afford to accept moderate, even if persistent, deviations from narrowly defined inflation targets. But it has to respond in a timely and forceful way when transitions to a high-inflation regime threaten.

Abstract

This study provides a view of the inflation process that is complementary to the one captured in standard models, such as those based on the Phillips curve. It characterises the process as two regimes – a low- and a high-inflation regime – with self-reinforcing transitions from the low- to the high-inflation one. The study documents the stylised facts describing the two regimes and the transitions between them based on disaggregated price dynamics and the joint behaviour of wages and prices. Two implications for monetary policy stand out. First, the desirability of conducting monetary policy in a flexible manner in a low-inflation regime, tolerating moderate, even if persistent, deviations from narrowly defined targets. Second, the importance of being pre-emptive when the risk of a transition to the high-inflation regime increases, even though assessing this transition in real time remains challenging.

BIS has also released a Committee on the Global Financial System paper from a Working Group co-chaired by Margarita Delgado (Banco de España) and Toni Gravelle (Bank of Canada) titled Central bank asset purchases in response to the Covid-19 crisis:

Large-scale asset purchases by central banks in response to the Covid-19 pandemic were broadly successful in addressing disruptions in monetary policy transmission and providing additional stimulus. In this report, the CGFS examines the experience of central banks in many small open and emerging market economies that conducted asset purchases for the first time during the Covid-19 crisis as well as in large advanced economies that expanded or reintroduced purchases.

The impact of asset purchases and relative importance of various transmission channels differed across time and economies. The liquidity channel, whereby purchases improved financial market liquidity, was particularly important during the early weeks of the Covid-19 crisis, when markets were stressed.

The signalling channel, whereby purchases foreshadowed the future stance of monetary policy, was less important than the portfolio rebalancing channel, through which purchases altered the duration and credit risk in private investors’ portfolios. The signalling channel contributed more to the easing of financial conditions in countries where policy rates were near the effective lower bound.

In many countries a strong economic rebound and surge in inflation prompted central banks to stop asset purchases within a year or two and to start raising policy rates. The report notes that the relatively short time span of the purchases thereby reduced the risk of unintended side effects.
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As functioning in markets continued to rapidly deteriorate throughout March 2020, for the first time in its history, the BoC unveiled a wide range of large-scale AP programmes across various government and non-government securities markets. Each programme had its own size and scope in order to address dysfunction in a specific market. Similar to other programmes, the government bond purchase programme (GBPP) was introduced with a focus on addressing severe market dysfunctions, but it was the only asset purchase programme to subsequently shift its primary objectives. As market functioning in the government of Canada bond market returned closer to normal levels, the primary objective of the GBPP shifted from supporting market functioning to monetary policy objectives. Specifically, with the BoC’s policy rate at its effective lower bound, the GBPP became a tool for implementing quantitative easing with dual objectives of supporting the economy and achieving the inflation target.

The elevated uncertainty surrounding the impact of the pandemic on economic activity created an enormous demand for liquidity from practically all sectors of the economy that could not readily be accommodated by the financial system. As a result, there was a significant deterioration in market functioning across many markets and a relatively large and rapid rise in risk premia. The AP programmes were rolled out to first address this broad deterioration in market functioning. Reflecting the broad market dysfunction in fixed income markets that are critical to the Canadian financial system and economy, AP programmes spanned government (federal and provincial), mortgage and corporate fixed income markets. Each AP programme had its own individual size and scope of assets purchased. Programmes with multiple eligible issuers were set with outright issuer limits, a target relative to some measure (such as each province’s share of Canada’s GDP), or both. AP programmes in the credit markets specified a relatively high minimum credit rating for eligible assets.

By their end, the BoC’s APs totalled 23.6% of Canada’s 2019 nominal GDP (CAD 1.814 trillion). These purchase programmes were novel for the BoC and the largest in its history – a reflection of the unprecedented nature of the Covid pandemic and crisis. The largest share of purchases consisted of high quality public sector debt and the majority of assets purchased had a relatively short term to maturity. Government of Canada bonds purchased through the GBPP accounted for the largest share of purchased assets (Graph A2).
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When sequencing the exit from quantitative easing, the BoC began to tighten only after net purchases were halted, and balance sheet reduction then took place. The pace of purchases gradually reduced during 2021 until October, when the BoC announced an end to quantitative easing and a move into the reinvestment phase. Well into the reinvestment phase, in March 2022 the BoC lifted its policy rate from the ELB. In April 2022, the BoC announced the beginning of quantitative tightening, whereby maturing government of Canada bonds on the BoC’s balance sheet would no longer be replaced.

The decision to conduct QT passively was influenced by the duration of purchased assets. In the case of Canada, the assets purchased by the BoC had a relatively short average term to maturity and thus the expected relatively fast material decline in asset holdings was not viewed as requiring additional outright sales to achieve the desired balance sheet decline. As information on the holdings of the BoC was publicly available, the passive approach taken towards QT benefited from a predictable transparent tightening for all market participants, limiting unnecessary volatility in markets and complementing increases in the policy interest rate – the primary monetary policy instrument.

The IMF has published a piece by Markus Brunnermeier titled Rethinking Monetary Policy in a Changing World:

Following a lengthy period of low interest rates and low inflation, the global economy is entering a phase characterized by high inflation and high levels of both public and private debt. Fifteen years ago, central banks saw an urgent need to incorporate financial stability and deflation concerns into their traditional modeling of the economy and developed unconventional tools to deal with both.

Although financial stability remains an important concern, there are important differences between the current environment and the one that followed the global financial crisis:

• Public debt is now high, so any interest rate increase to fend off inflation threats makes servicing the debt more expensive—with immediate and large adverse fiscal implications for the government. Since the beginning of the COVID-19 crisis in early 2020, it is also evident that fiscal policy can be a significant driver of inflation.
• Instead of deflationary pressures, most countries are experiencing excessive inflation. That means there is now a clear trade-off between a monetary policy that tries to reduce aggregate demand by raising interest rates and one that aims to ensure financial stability.
• The nature and frequency of shocks have changed. Historically shocks were mostly from increases or decreases in demand—with the prominent exception of the supply shocks during the so-called stagflation of the 1970s. Now there are many shocks: demand vs. supply, specific risks vs. systemic risks, transitory vs. permanent. It is difficult to identify the true nature of these shocks in time to respond. Central bankers need to be more humble.

Bond market volatility has some portfolios changing parameterizations (“Look, Mummy, I got a spreadsheet!”):

But the Treasury market volatility of March 2023 could have lasting consequences as investors may demand higher premiums across the bond yield curve and across the asset spectrum – preferring lighter positions than they would have otherwise.

Investors will now have to factor into their future models a past event that nobody predicted, even though the likelihood of it repeating is equally minimal.

Pim van Vliet, head of quantitative equities at Robeco, notes that investors with shorter-term horizons measured in days, weeks or months will almost certainly see an increase in their risk metrics, such as “Value-at-Risk”, or VaR.

VaR measures the potential maximum loss on a portfolio of investments over a given period of time, and is calculated using historical returns, current market conditions, and measures of past and expected volatility.
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Using data going back to the mid-1980s, markets research and advisory firm Exante Data calculates that the two-year yield’s slide on March 13 was a 6.1 standard deviation move, and the one-week fall on March 15 was a 7.3 standard deviation move.

The statistical probability of a 6 standard deviation, or 6-sigma event, is around one in a billion, and the chance of a 7-sigma event occurring in any given day is 0.000000000129%.

This level of risk would barely be acceptable for investors trading a penny stock, crypto token, or distressed emerging market currency, never mind the asset widely considered to be one of the least volatile in the world.

Canadians expect higher than policy inflation:

Business sentiment in Canada continues to worsen with companies expecting sales growth to slow over the coming year and inflation to remain elevated until at least 2025, according to the Bank of Canada’s quarterly business survey.
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The average respondent to the business survey expects inflation to be 3.9 per cent in two years’ time. That’s nearly twice the Bank of Canada’s 2-per-cent target.

Consumers, meanwhile, think that inflation will still be running at 4.27 per cent in two years. Most respondents blamed supply chain disruptions for high inflation, the Bank of Canada said, although many also pointed to high government spending.
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“Firms indicated that it has become easier to find the workers they need. They attribute this to less competition for labour and an improved labour supply,” the Bank of Canada said, pointing to increased immigration.

“For the first time in several quarters, businesses no longer expect labour costs to put upward pressure on their output price growth,” the bank added.

Even with less competition for workers, businesses still expect to raise wages quickly this year, by an average of 4.7 per cent. That’s down from a peak of 5.8 per cent in the second-quarter 2022 survey, but well above the prepandemic average of around 3 per cent.

The jobs market in the States is cooling, but still hot:

Demand for workers in the United States eased in February, a sign that the red-hot labor market continues to cool off somewhat.

There were 9.9 million job openings, compared with 10.8 million on the last day of January, the Labor Department reported Tuesday in the Job Openings and Labor Turnover Survey, known as JOLTS.

A drop in open positions is a signal that the labor market is slowing down, but the report also showed that it remains healthy: Four million workers quit their jobs during the month, a slight increase relative to January, and the number of layoffs decreased slightly to 1.5 million.

There were 1.7 jobs open for every unemployed worker in February, compared with 1.9 in January, a measure the Federal Reserve has been paying close attention to as it looks to cool hiring, part of its effort to contain inflation.

BIS has released a working paper by Andrej Sokol, Michael Kumhof, Marco Pinchetti and Phurichai Rungcharoenkitkul titled CBDC policies in open economies:

Focus
Central banks are currently considering issuing digital money to the general public, known as central bank digital currency (CBDC). Much attention so far has focused on the microeconomic benefits of CBDC, while the implications for macroeconomic and financial stability remain less well understood. What are the macroeconomic gains and risks associated with CBDC, particularly if it could be transferred across borders? And how should the central bank set its CBDC policy in the light of these potential benefits and costs?

Contribution
We study the macroeconomic and monetary policy implications of CBDC issuance in a rich quantitative framework. We introduce CBDC into a carefully calibrated and estimated two-country DSGE environment, featuring a realistic financial system, monetary policy (via the conventional policy interest rate and a separate CBDC policy) and fiscal policy. We use the model to examine: (i) the consequences of transitioning to a CBDC economy; (ii) the design of optimal simple rules for CBDC policy, in terms of interest rate or quantity; and (iii) the open economy effects of introducing CBDC.

Findings
Transitioning to a CBDC economy brings about substantial welfare gains, worth over 2% of steady state consumption in the long run. By counteracting financial shocks, CBDC policy would also help stabilise aggregate demand and inflation. For example, the optimised CBDC interest rule that responds systematically to the credit gap improves welfare by over 1% of steady-state consumption. Finally, when countries adopt optimal CBDC policies, they reduce volatilities of cross-border banking exposures and exchange rates by about a third.

Abstract
We study the consequences for business cycles and welfare of introducing an interest-bearing retail CBDC, competing with bank deposits as medium of exchange, into an estimated 2-country DSGE environment. According to our estimates, financial shocks account for around half of the variance of aggregate demand and inflation, and for the bulk of the variance of financial variables. CBDC issuance of 30% of GDP increases output and welfare by around 6% and 2%, respectively. An aggressive Taylor rule for the interest rate on reserves achieves welfare gains of 0.57% of steady state consumption, an optimized CBDC interest rate rule that responds to a credit gap achieves additional welfare gains of 0.44%, and further gains of 0.57% if accompanied by automatic fiscal stabilizers. A CBDC quantity rule, a response to an inflation gap, CBDC as generalized retail access to reserves, and especially a cash-like zero-interest CBDC, yield significantly smaller gains. CBDC policies can substantially reduce the volatilities of domestic and cross- border banking flows and of the exchange rate. Optimal policy requires a steady state quantity of CBDC of around 40% of annual GDP.
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We adopt the calibrated and estimated parameters of the pre-CBDC model in a post-CBDC model that is mostly identical, except for the presence of CBDC. We show that the introduction of CBDC equal to 30% of GDP by a single economy is highly beneficial, yielding long run output gains in that economy of just under 6% and long run welfare gains of around 2%. This is because the introduction of CBDC into a large economy like the US can lower real interest rates due to a reduction in the stock of defaultable debt combined with the funding cost advantage of CBDC over defaultable debt, lower distortionary tax rates due to the budgetary space created by lower real interest rates, and lower monetary frictions due to a reduction in tax-like monetary wedges that represent a move of the economy towards the ideal of the Friedman (1969) rule. Bank balance sheets grow significantly in the long run, while banks’ average cost of funding remains approximately constant, countering the notion that introducing a CBDC inevitably leads to bank disintermediation.
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2. In a contractionary episode the CBDC interest rate should, ceteris paribus, increase rather than decrease. The reason is that increasing the CBDC interest rate relative to the rate on reserves lowers the opportunity cost of holding CBDC. This increases the overall quantity of money and thereby stimulates the economy.

3. A countercyclical CBDC interest rate rule can partly share the burden of a countercyclical Taylor rule for the interest rate on reserves in stabilizing inflation and output, while also stabilizing financial variables. The reason is that the CBDC interest rate works through a money supply channel that complements the intertemporal substitution channel of the interest rate on reserves.