PrefBlog

TXPR closed at 560.23, up 2.32% on the day. Volume today was 1.64-million, below the median of the past 21 trading days.

CPD closed at 11.12, up 2.96% on the day. Volume was 130,080, below the median of the past 21 trading days.

ZPR closed at 9.28, up 2.88% on the day. Volume was 294,780, above the median of the past 21 trading days.

Five-year Canada yields were down a bit to 3.30% today.

The pundits tell us the Fed Minutes played a role today:

The S&P 500 finished higher on Wednesday but below its session peak after volatile trading following the release of minutes from the Federal Reserve’s last meeting, which showed officials laser-focused on controlling inflation even as they agreed to slow their interest rate hiking pace. Canada’s main stock index rose to its highest closing level in nearly three weeks, helped by gains for gold mining shares.

Officials at the Fed’s Dec. 13-14 policy meeting agreed the U.S. central bank should continue increasing the cost of credit to control the pace of price increases, but in a gradual way intended to limit the risks to economic growth.
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Also on Wednesday, Minneapolis Fed President Neel Kashkari stressed the need for continued rate hikes, setting out his own forecast that the policy rate should initially pause at 5.4%.
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Market participants now see a 68.8% chance of a 25 basis points rate hike from the Fed in February, but still see rates peaking just below 5% by June. They are also placing better than 50% odds that the Bank of Canada will hike rates in this country by a further 25 basis points later this month.

Earlier in the day, data showed U.S. job openings falling less than expected in November as the labour market remains tight, giving the Fed cover to stick to its monetary tightening campaign for longer. Other data showed manufacturing contracted further in December.

The Toronto Stock Exchange’s S&P/TSX composite index ended up 145.06 points, or 0.75%, at 19,588.83, its highest closing level since Dec. 15.
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The Dow Jones Industrial Average rose 133.4 points, or 0.4%, to 33,269.77; the S&P 500 gained 28.83 points, or 0.75%, to 3,852.97; and the Nasdaq Composite added 71.78 points, or 0.69%, to 10,458.76.

PerpetualDiscounts now yield 6.47%, equivalent to 8.41% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.30% on 2022-12-30 and since then the closing price has changed from 14.72 to 14.92, an increase of 136bp in price, with a Duration of 12.15 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decline in yield of about 11bp since 12/30 to 5.19%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has been steady at about the 330bp reported December 28.

TXPR closed at 547.53, up 0.58% on the day. Volume today was 748,240, second-lowest of the past 21 trading days.

CPD closed at 10.795, up 0.42% on the day. Volume was 85,560, second-lowest of the past 21 trading days.

ZPR closed at 9.02, down 0.22% on the day. Volume was 117,180, second-lowest of the past 21 trading days.

Five-year Canada yields were down to 3.33% today.

Equities were mostly boring:

Wall Street’s main indexes closed lower on the first trading day of 2023 with big drags from Tesla and Apple, while investors worried about the Federal Reserve’s interest-rate hiking path as they awaited minutes from its December meeting. The Canadian benchmark index ended the session with a modest gain, thanks partly to a rally in the gold sector.
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The S&P/TSX Composite Index closed up 58.85 points, or 0.30%, to 19,443.77. Despite Wall Street’s losses, the Toronto market saw most sectors gain – with the notable exception of energy, which lost 5.8%. Oil prices settled 4.1% lower at US$76.93 a barrel, pressured by weak demand data from China, a gloomy economic outlook and a stronger U.S. dollar.

But there was one area of excitement:

Tesla Inc. TSLA-Q -12.24%decrease
shares kicked off 2023 with a thud, plunging more than 12 per cent on Tuesday on growing worries about weakening demand and logistical problems that have hampered deliveries for the world’s most valuable automaker.

Once worth more than $1 trillion, Tesla lost more than 65 per cent in market value in a tumultuous 2022 that saw it increasingly challenged by other automakers and face production issues stemming from COVID lockdowns in China.

Tuesday’s slide knocked off nearly $50 billion in market value, roughly equal to the valuation of rival Ford Motor Co, which last year sold three times as many cars as Tesla.

The sell-off came after Tesla missed market expectations for fourth-quarter deliveries despite shipping a record number of vehicles.
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At a value of about $341 billion, Tesla is still the world’s most valuable automaker, even though its production is a fraction of rivals such as Toyota Motor Corp.

I bet Bill Gates is happy!

Bill Gates’ $500 million Tesla short position is a bit awkward in terms of his own pledges to help with climate change. Tesla is a trillion-dollar company with a focus on accelerating the transition to sustainability. It’s also the only company that has had massive success beating the odds stacked against it while pushing electric vehicles and making them more commonplace. Tesla is essentially the loudest advocate for sustainability and has shaken up the automotive industry.

Yet, the author of How To Avoid A Climate Disaster put his money on the failure of a company that is aligned with that book’s message, according to screenshots of a message between Gates and Tesla CEO Elon Musk.

The quoted argument is infantile, obviously. Whether or not you like a company’s products has very little to do with whether or not you own the stock – that decision is determined by whatever gap you might deduce between price and value. Tesla’s a great company and I hope it does well. Do I think it ever deserved to be worth half of the entire global auto industry? No.

German inflation news was indecisive:

German inflation eased for a second month in a row in December due to falling energy prices and the government’s one-off payment of household energy bills, coming in below expectations even as analysts warn that a continued slowdown is not a given.

German consumer prices, harmonised to compare with other European Union countries, rose by 9.6% on the year in December, preliminary data from the Federal Statistics Office showed on Tuesday. Analysts polled by Reuters predicted prices would rise by 10.7% year-on year in December.

October saw the highest reading since comparable data going back to 1996, with harmonized price index up 11.6% on the year. November saw a slight easing, with an increase of 11.3%.

A one-off payment for household energy bills in December, part of government efforts to shield consumers, had a downward effect on prices, according to the statistics office.

Compared with November, December prices fell by 1.2%. Analysts had expected a drop of 0.5% on the previous month.

But 2022 was good for pension plans!

Soaring interest rates helped push more pension plans into surplus in 2022, offsetting market losses as pensions brace for another volatile year in 2023, according to two reports that measure the funding status of Canadian plans.

Consulting company Mercer Canada Ltd. said its quarterly pension health pulse, which tracks the median solvency ratio of nearly 500 Canadian defined benefit (DB) pension plans that are Mercer clients, increased to 113 per cent as of Dec. 31, up from 103 per cent at the start of the year.

And professional services firm Aon PLC said the aggregate solvency of DB pension plans of companies in the S&P/TSX Composite Index, as measured by its pension risk tracker, increased to 100.8 per cent at the end of 2022, up from 96.9 per cent a year earlier.
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At the end of the fourth quarter, 79 per cent of plans tracked by Mercer were estimated to be in surplus on a solvency basis, and another 12 per cent had ratios between 90 per cent and 100 per cent. Four per cent of plans had solvency ratios between 80 per cent and 90 per cent, and 5 per cent were below 80 per cent, according to Mercer’s data.
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The main factor that helped boost solvency levels for many Canadian pension plans in 2022 was the rapid rise in interest rates as central banks tried to beat back surging inflation. The Bank of Canada raised its benchmark rate seven times in 2022, from 0.25 per cent to 4.25 per cent.
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With more plans in surplus and continuing headwinds in markets, some pension fund managers could take steps to reduce risk in their portfolios, shifting more assets to fixed income – which now offers higher yields – or contracting with insurance companies to buy annuities to pay future benefits.

TXPR closed at 544.36, up 0.52% on the day. Volume today was 556,320, lowest of the past 21 trading days.

CPD closed at 10.75, up 0.19% on the day. Volume was 90,700, second-lowest of the past 21 trading days.

ZPR closed at 9.04, up 0.22% on the day. Volume was 111,880, lowest of the past 21 trading days.

Five-year Canada yields were up a bit to 3.43% today.

Equities were down a bit today, but the annual figures got more attention:

U.S. and Canadian stocks ended the final trading session of 2022 lower on Friday, capping a year of sharp losses driven by aggressive interest rate hikes to curb inflation, recession fears, the Russia-Ukraine war and rising concerns over COVID cases in China.

Wall Street’s three main indexes booked their first yearly drop since 2018 as an era of loose monetary policy ended with the Federal Reserve’s fastest pace of rate hikes since the 1980s.

This also marked their biggest yearly declines since the 2008 financial crisis, largely driven by growth shares as the Fed’s rate hikes boosted U.S. Treasury yields and made stocks less attractive.

The TSX’s 2022 losses were less sharp, but the Canadian index still lost more than 8% this year, also its first annual decline since 2018.

Bond yields popped up today:

The yield on the benchmark U.S. 10-year Treasury rose for a third straight day on Wednesday, reversing an earlier decline, as investors attempted to navigate the impact of China’s reopening policy on the path of interest rate hikes by the U.S. Federal Reserve.

While China has quickly reversed course on its previous “zero-COVID” policy this month, which is likely to benefit the global economy, the change has come with a surge in cases that could hamper the economy in the short-term.

The yield on 10-year Treasury notes was up 2.5 basis points to 3.883% after hitting a six-week high of 3.89%. On Tuesday, the 10-year jumped 11.1 basis points, its biggest one-day rise since Oct. 19.

Five year Canadas are now at 3.40%.

An op-ed in the Globe looked at Marginal Effective Tax Rates:

Parents across the country may be thinking about taking on an extra shift or an extra job to pay off bills from the holiday season or keep up with the rising costs of day-to-day items. What these hard working parents pocket from extra work not only depends on the taxes they pay on that additional income, but also on how much their income-tested government benefits such as the Canada Child Benefit or the Canada Workers Benefit will be reduced or “clawed back.”

In a recent C.D. Howe Institute study, we calculate the total impact of taxes and benefit clawbacks on families with children, giving us what we call “effective” tax rates. We found that parents in low-income families in particular face high effective tax rates. For instance, more than one-in-three face the prospect of bringing home less than 50 cents of every dollar they earn from extra work. High effective rates reduce the incentive to take on more work and get ahead.

They propose four different measures to address the issue:

• Avoid Very High Rates by Better Integrating New Benefit Programs
• Benefit Shields
• Income Averaging
• Childcare Subsidization

What’s a benefit shield? I’m glad you asked:

In 2016, the Quebec government, following through on a key recommendation from the 2015 Quebec Taxation Review Committee chaired by Luc Godbout, instituted a “benefit shield”11 partly compensating workers for the loss of certain income-tested tax credits – but only in the first year after they take on more work. On the assumption that work decisions are mostly influenced by short-term financial considerations, the shield approach enables governments to provide relief from high effective tax rates at a low fiscal cost (because relief is only offered for one year after taking on extra work) while maintaining the same level of generosity of targeted cash benefits.

More than 274,000 Quebecers took advantage of the shield in 2018, for a cost of only $49 million. Originally, the credit ceiling was set at $2,500 per worker, but has since been increased to $4,000 in successive budgets (CRFFP 2019).

However, I was disappointed by the absence of a Guaranteed Annual Income as a suggested policy measure.

PerpetualDiscounts now yield 6.60%, equivalent to 8.58% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.86% on 2022-12-16 and since then the closing price has changed from 15.46 to 14.67, a decline of 511bp in price, with a Duration of 12.42 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 41bp since 12/16 to 5.27%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 330bp from the 355bp reported December 21.

Yields popped up again:

U.S. Treasury yields rose on Friday after data showed that personal income rose more than expected in November while inflation data for October was revised upward, supporting the view that the Federal Reserve will continue to hike rates as it battles stubbornly high price pressures.

Personal income rose by 0.4% in the month, beating economists’ expectations for a 0.3% gain.

The personal consumption expenditures (PCE) price index rose 0.1% last month and its October gain was revised upward to 0.4%, from 0.3%. In the 12 months through November, the PCE price index increased 5.5% after advancing 6.1% in October.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, also edged up 0.1% in November, while data for October was revised upward to show spending surging 0.9% instead of 0.8% as previously reported.
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Other data on Friday showed that U.S. consumers expect price pressures to moderate notably in the next year, with a benchmark survey on Friday showing their one-year inflation outlook dropping to the lowest in 18 months in December.

Benchmark 10-year yields rose 9 basis points to 3.749%, and two-year yields gained 7 basis points to 4.330%.

Merry Christmas, everybody!