PrefBlog

TXPR closed at 551.73, up 0.72% on the day. Volume today was 2.24-million, second-highest of the past 21 trading days.

CPD closed at 10.89, down 0.28% on the day. Volume was 165,340, highest of the past 21 trading days by a wide margin.

ZPR closed at 9.14, down 0.44% on the day. Volume was 287,130, second-highest of the past 21 trading days.

Five-year Canada yields were off a touch to 3.32% today.

Equities had a good day, attributed to the US PPI number:

U.S. and Canadian main stock indexes gained on Tuesday, shaking off an unconfirmed report of Russian missiles crossing into Poland that sparked volatility, as investors seized on softer-than-expected inflation data that raised hopes of a pullback in rate hikes by the U.S. Federal Reserve. Energy and tech stocks led the advance in Toronto.

Equities were boosted by Tuesday’s inflation report that showed producer prices rising 8% in the 12 months through October against an estimated 8.3% rise.

The gains built on a rally that kicked off late last week by a cooler-than-expected report on consumer prices.

Criticism of COVID spending is mounting, together with that of loose fiscal policy:

The most important source of Canada’s inflation is simple: Starting in 2020, the government borrowed more than $700-billion, and mostly handed it out. People spent it, driving up prices.

It was, of course, proper for the government to help people and businesses gravely hurt during the COVID-19 pandemic. And debts and deficits do not automatically cause inflation – Canada can borrow an immense amount without an impact on the price level if the government has a believable plan for repayment.

But the government had gone too far in borrowing and spending, without such a plan. People try to get rid of public debt, pushing up prices until its real value is back to what people think the government will repay.

Fiscal and monetary policy are related. The key to untangling the current mess is acknowledging that the government cannot borrow more without causing more inflation.

The COVID boost in bank deposits will be remembered:

Some of Canada’s major banks have pegged excess savings over the past two years – that is, savings above typical levels – at roughly $300-billion.
…
But there’s a difference between excess savings and available cash. The latter sum is much smaller. After all, people have put large chunks of their savings to work in various ways. Some of the money has gone toward reducing non-mortgage debt, some toward homes that have soared in price, and some toward stocks that, until recently, were also riding a dizzying rally.

Where the leftover money will be spent, and how quickly, is anyone’s guess. The Bank of Canada estimates that $40-billion in excess savings will be spent by the end of 2024, but doesn’t attach much confidence to that forecast. There is undeniable upside to higher spending, but also risk. For instance, if Canadians splash out in the coming months, that could give an unhelpful boost to inflation, already running at a three-decade high.

But housing continues to cool:

The number of resales rose 1.3 per cent from September to October, according to the Canadian Real Estate Association (CREA). That was the first rise in monthly sales since February, when Canada’s central bank was about to embark on its campaign to slash the supply of cheap money.

At the same time, the national home price index fell 1.2 per cent to $777,200 from September to October after removing seasonal influences, according to CREA. That was the smallest monthly drop since June, though the eighth consecutive month of price declines.

Over all, October’s activity was 15 per cent below the prepandemic monthly average.

It’s tough to make money nowadays! Even the ability to print money ain’t what it used to be:

The Bank of Canada will report its first financial loss in its 87-year history in the coming weeks, a development that risks further denting the central bank’s reputation and inviting more political scrutiny over its purchases of government bonds during the COVID-19 pandemic.

In recent months, the bank’s aggressive push to increase interest rates has created a mismatch on its balance sheet. It is now paying a higher interest rate on its liabilities – mostly deposits by Bay Street banks held at the central bank – than it is earning on its assets. That’s generating net interest losses, which will begin showing up in the bank’s third-quarter financial statements, expected later this month.

The central bank is expecting total losses of between $5-billion and $6-billion over the next few years, spokesperson Paul Badertscher said in an e-mail. “Roughly estimated, the bank should return to positive net interest income sometime in 2024 or 2025,” he added.
…
In the spring of 2020, the Bank of Canada began buying massive quantities of government bonds from investors, first to help shore up financial markets, then as part of a QE program aimed at lowering interest rates to stimulate the economy during the pandemic.

It paid for these assets, previously owned by commercial banks and other investors, by creating “settlement balances” – a type of electronic money similar to reserves in other central banking systems. These settlement balances are essentially deposits that belong to commercial banks, and the Bank of Canada pays interest on them equal to its benchmark overnight rate.

These transactions radically transformed the bank’s balance sheet. At first the arrangement was profitable. The bank was bringing in revenue from its expanded bond holdings while only paying 0.25 per cent to commercial banks on their deposits. It made around $4.7-billion in profit over the past two fiscal years, which it sent to the federal government.

However, the calculus changed dramatically as the bank increased its overnight rate to fight inflation. It is now paying an overnight rate of 3.75 per cent on roughly $200-billion worth of settlement balances. Meanwhile, the weighted-average yield of government bonds the bank bought during the pandemic is only 0.65 per cent, according to Mr. Badertscher. That’s a money-losing formula.

And the New York Fed’s Center for Microeconomic Data published the Quarterly Report on Household Debt and Credit:

Total household debt rose by $351 billion, or 2.2 percent, to reach $16.51 billion in the third quarter of 2022, according to the latest Quarterly Report on Household Debt and Credit. Mortgage balances—the largest component of household debt—climbed by $282 billion and stood at $11.67 trillion at the end of September. The 15 percent year-over-year increase in credit card balances marked the largest in more than twenty years. The share of current debt transitioning into delinquency increased for nearly all debt types, following two years of historically low delinquency transitions.

Mortgage balances shown on consumer credit reports increased by $282 billion during the third quarter of 2022 and stood at $11.67 trillion at the end of September, up by $1 trillion since the previous year. Balances on home equity lines of credit (HELOC) increased by $3 billion, the second consecutive quarterly increase after years of declining balances; the outstanding HELOC balance stands at $322 billion. Credit card balances saw a $38 billion increase since the second quarter, a 15% year-over-year increase marked the largest in more than 20 years. Credit card balances are nearing their pre-pandemic levels, after sharp declines in the first year of the pandemic. Auto loan balances increased by $22 billion in the third quarter, continuing the upward trajectory that has been in place since 2011. Other balances, which include retail cards and other consumer loans, increased by $21 billion, following the $25 billion increase last quarter. Offsetting these increases, student loan balances contracted slightly, and now stand at $1.57 trillion, down from the second quarter of 2022. In total, non-housing balances grew by $66 billion.

I expected some entertainment value from the Musk takeover of Twitter, but reality is surpassing expectations!:

Mr. Musk’s team was asked to comb through messages in Twitter’s internal chat platform and make a list of employees who were insubordinate, people briefed on the plan said. They also sorted through employees’ tweets, looking for criticism. Those deemed rule breakers received emails around 1:30 a.m. Pacific time on Tuesday, notifying them that they were fired, according to emails viewed by The Times.

Several Twitter employees who shared news of Mr. Frohnhoefer’s firing in internal chats were cut, said six people familiar with events. They were told that they had been terminated for “violating company policy,” according to emails seen by The Times.

TXPR closed at 547.78, down 1.14% on the day. Volume today was 1.51-million, above the median of the past 21 trading days.

CPD closed at 10.92, down 1.09% on the day. Volume was 57,530, third-lowest of the past 21 trading days.

ZPR closed at 9.18, down 1.40% on the day. Volume was 231,860, well above the median of the past 21 trading days.

Five-year Canada yields were fairly steady at 3.35% today.

There doesn’t appear to be an obvious trigger for this, but the pundits tried:

Wall Street’s main indexes ended lower on Monday, with real estate and discretionary sectors leading broad declines, as investors digested comments from U.S. Federal Reserve officials about plans for interest rate hikes and looked for next catalysts after last week’s big stock market rally. Canada’s main stock index also closed down, pulling back from its highest level in more than 11 weeks, as lower oil prices weighed on energy shares.

Losses accelerated toward the end of the up-and-down session, with focus turning to Tuesday’s U.S. producer price index report and what it may say about the inflation picture.

Earlier on Monday, Fed Vice Chair Lael Brainard signaled that the central bank would will likely soon slow its interest rates hikes. Her comments somewhat buoyed sentiment for equities that had been dampened after Federal Reserve Gov. Christopher Waller on Sunday said the Fed may consider slowing the pace of increases at its next meeting but that should not be seen as a “softening” in its commitment to lower inflation.

The New York Fed published the Survey of Consumer Expectations:

Median one- and three-year-ahead inflation expectations increased to 5.9 percent and 3.1 percent from 5.4 percent and 2.9 percent, respectively. The median five-year-ahead inflation expectations, meanwhile, rose by 0.2 percentage point to 2.4 percent. Household income growth expectations touched a series high of 4.3 percent, up from 3.5 percent in September, while households’ expectations about credit access one year from now worsened. Median home price growth expectations were unchanged at 2.0 percent, the measure’s lowest reading since July 2020. Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—increased to its highest reading since April 2020 of 42.9 percent.

But, you might well ask, what’s that got to do with the price of lettuce?:

The cost of lettuce is spiking amid a shortage that’s leading some restaurants to temporarily stop offering leafy greens on their menus.

Wholesale produce distributors say demand is exceeding supply of iceberg and romaine lettuce, and pricing pressures are expected to continue throughout the month.

Restaurants Canada COO Kelly Higginson said a major lettuce-growing area in California was hit by some kind of virus, after a year that’s already been rife with difficulties thanks to heat and drought.
…
That’s because not only is lettuce in short supply, but the available product has in some cases quadrupled in price, she said.

TXPR closed at 554.08, up 1.04% on the day. Volume today was 1.65-million, well above the median of the past 21 trading days.

CPD closed at 11.05, up 1.00% on the day. Volume was 138,780, second-highest of the past 21 trading days.

ZPR closed at 9.30, up 0.87% on the day. Volume was 563,620, highest of the past 21 trading days and more than double that of the second-highest.

Five-year Canada yields were down precipitously to 3.34% today.

Equities had an even hotter day:

Investors stampeded back into stocks Thursday, and sent bond yields to their biggest daily decline in more than a decade, after U.S. consumer price data suggested the Federal Reserve may be reaching a turning point in its battle against stubborn inflation.
…
Both Wall Street and Bay Street saw their biggest advance since April 2020. The S&P 500 jumped 5.5% and the Dow Jones Industrial Average rose just over 1,200 points. The tech-heavy Nasdaq, which is particularly sensitive to the path of interest rates, rallied 7.3%. The Canadian benchmark stock index rose 3.3%, closing at its highest level since Aug. 25.

Even bitcoin surged, recovering nearly all its losses from Wednesday when a failed buyout for a troubled cryptocurrency exchange sent shockwaves through the sector.
…
For the next Bank of Canada policy meeting on Dec. 7, the market is now pricing in a 73% probability of a 25-basis-point hike in its overnight rate, versus 54% odds prior to the data, as bets of a larger 50-basis-point hike declined, according to Refinitiv Eikon data.

The U.S. 10-year Treasury yield dropped about 30 basis points to a five-week low of 3.813%, its largest daily fall since March 2009. Canada’s five-year government bond – influential in the setting of mortgage rates – fell 26 basis points to 3.336%. The U.S. dollar plummeted, sending the Canadian dollar up 1.2% to a seven-week high of 74.79 cents US.

Lower bond yields and expectations central banks are nearly at the end of their rate-hiking cycle provided a shot of confidence to market bulls who have been arguing the recovery in equity markets is only in its early stages. But most agreed several more months of declining inflation numbers would be needed to confirm the trend.

So, yes, there was an encouraging US inflation number:

Consumer Price Index data released on Thursday showed that inflation cooled more than expected in October, welcome news for the Federal Reserve and White House after months of limited progress on bringing down inflation.

While inflation is still rapid, it slowed notably last month. Consumer prices picked up by 7.7 percent in the year through October, less than the 7.9 percent that analysts had expected, and down from 8.2 percent in the year through September. On a monthly basis, price gains climbed by 0.4 percent between September and October, matching the previous month.

After stripping out food and fuel, both of which jump around in price, a “core” inflation index decelerated to 6.3 percent on an annual basis, down from 6.6 percent in the prior reading.
…
Market expectations for where interest rates will move to next year dropped from a peak of over 5 percent to around 4.9 percent, as investors dialed back expectations of the number of interest rate increases to come.

The two-year Treasury yield, which is sensitive to changes in Fed policy, plummeted by more than 0.2 percent, to around 4.4 percent. The dollar also fell swiftly, down 1 percent against a basket of currencies that represent America’s major trading partners.
…
Food prices continued to grow in October, inflating grocery bills for American households, though at a slightly slower pace than in previous months. The price of food rose 0.6 percent last month, down from 0.8 percent growth in September.

While prices of some items have retreated after spiking earlier this year, others are reaching fresh highs. The price of cereals and bakery products climbed 0.8 percent from the previous month, driven by a 2 percent increase in the price of flour. Lunch meats rose 3.4 percent from September and lettuce increased by 3.3 percent. The price of eggs, which have been inflated this year because of an outbreak of avian flu, soared 10.1 percent on the month.

But the price of some products began to fall after peaking earlier this year. The price of frankfurters fell 2.3 percent. Whole milk fell 0.9 percent, and fresh fruits declined 2.4 percent.

On an annual basis, the food index rose 10.9 percent, down slightly compared with the pace of growth last month.

Some support for the official numbers was provided by the Fed’s Underlying Inflation Gauge:

• The UIG “full data set” measure for October is currently estimated at 4.2%, a 0.3 percentage point decrease from the current estimate of the previous month.
• The “prices-only” measure for October is currently estimated at 5.7%, a 0.3 percentage point decrease from the current estimate of the previous month.
• The twelve-month change in the October CPI was +7.7%, a 0.5 percentage point decrease from the previous month.
• -For October 2022, trend CPI inflation is estimated to be in the 4.2% to 5.7% range, a similar range to September, with a 0.3% decrease on its lower and upper bounds.

The “prices-only” underlying inflation gauge (UIG) is derived from a large number of disaggregated price series in the consumer price index (CPI), while the “full data set” measure incorporates additional macroeconomic and financial variables. For a list of the series employed, see the data appendix.

But Tiff Macklem was not so sunny:

Bank of Canada governor Tiff Macklem said that unemployment needs to rise in order to slow down inflation, although elevated levels of job vacancies could soften the blow.

In a speech in Toronto hosted by the Public Policy Forum, Mr. Macklem said that Canada’s labour market is overheating, with unemployment near a record low and businesses struggling to find workers. This is feeding through into inflation, as companies bid up wages to compete for employees.

“We need to rebalance the labour market,” Mr. Macklem said. “This will be a difficult adjustment. We want to do this in the best way possible for Canadian workers and businesses.”

Mr. Macklem’s comments come on the heels of a blowout jobs report last Friday. Employment jumped by 108,000 in October, recouping all of the jobs lost during the summer slowdown. Average hourly wages were up 5.6 per cent that month compared to the previous year, while the rate of unemployment remained steady at 5.2 per cent as work force participation rose.
…
“The unemployment rate in June hit a record low – and while that seems like a good thing, it is not sustainable,” Mr. Macklem said. “The tightness in the labour market is a symptom of the general imbalance between demand and supply that is fuelling inflation and hurting all Canadians.”

And it appears that troubles in the construction & development industry are worsening:

Romspen, one of Canada’s biggest private mortgage lenders, with $3.2-billion in assets under management, is freezing investor redemptions, citing some trouble with loan repayments.

The act of freezing redemptions, known as “gating” in the investment industry, prevents investors from taking their money out of the fund. Because Romspen is a private lender, a preset mechanism for redemptions normally permits a certain amount to be paid back to investors each month.

The company has not said how long the freeze will last. Instead, it told investors this week that it will “temporarily defer payment of unit redemptions requests until there is more clarity with respect to the fund’s timetable for borrower loan repayments and the receipt of proceeds of collateral and asset monetizations.”

Romspen’s portfolio largely comprises construction and predevelopment loans, and it lends to borrowers across the United States and Canada. In its letter to investors, the company warned that “if redemption demands continue at high levels, the trustees may be compelled to institute other temporary liquidity management measures.”

TXPR closed at 548.39, down 0.56% on the day. Volume today was 1.72-million, fourth-highest of the past 21 trading days.

CPD closed at 10.94, down 0.36% on the day. Volume was 63,550, well below the median of the past 21 trading days.

ZPR closed at 9.22, unchanged on the day. Volume was 275,640, highest of the median of the past 21 trading days.

Five-year Canada yields were down to 3.63% today.

And bitcoin got absolutely hammered today, which may be related to troubles at FTX:

The near-collapse of FTX, a dominant cryptocurrency exchange once seen as a trustworthy oasis in a sketchy industry, is ricocheting through the crypto sector at alarming speed, sending the prices of multiple cryptocurrencies plummeting and raising serious doubts about the business model for all crypto assets.

The potential for contagion is only growing following the news late Wednesday that Binance, a rival exchange, is walking away from its potential takeover of FTX, citing concerns about FTX’s finances and a new regulatory probe of the exchange.

I’ve thought for a long time that being a small-time landlord is one of the worst jobs in the world. Many disagree:

New data published by Statistics Canada suggests that while the share of Canadians reporting rental income has grown modestly since 2000, thanks to the growing population the net number of small landlords is up about 32 per cent just since 2008.

In a report published online, Statistics Canada says it obtained data from tax filings that showed 1,356,650 households reported income from rentals.
…
In total about 7.9 per cent of Canadian households reported a median rental income of $2,750 (up from 2000 when 7.4 per cent reported a median rental income of $790).

Statcan’s data shows landlord life has also gotten more lucrative: In 2000, 65 per cent of landlord households reported their rental income was net positive (in other words, profitable), by 2020 with vastly more landlords to compete against 76.3 per cent reported profitable rental income. (The low point in that stretch came during the 2008 financial crisis when only 63 per cent reported profits.)

There’s also a significant wealth gap between those with rental income and those without: Artisinal landlords had a median annual income of $113,030, nearly double that of the 15,751,670 families with no rental income ($63,040).

I’m actually impressed that so many are cash-flow-positive; but I’ll bet that changes a bit when the mortgages get renewed!

Unfazed by the Republicans’ lack of wholesale success in the US mid-terms, the Junior Republicans are practicing their use of the victim card:

Unlike other party leaders, Mr. Poilievre does not routinely take questions from journalists, who are members of the press gallery, on Parliament Hill. The Parliamentary Press Gallery consists of 302 members from 48 agencies and outlets, including national and international organizations, not counting freelance journalists.

“It’s not just the Parliamentary Press Gallery that controls the agenda, and I think that’s what’s going on here. The Parliamentary Press Gallery believes it should dominate political discourse. I believe we have a big country, with people who are not necessarily part of the press gallery,” Mr. Poilievre told journalists.

Hey, it’s easier than answering questions!

PerpetualDiscounts now yield 6.82%, equivalent to 8.87% interest at the standard equivalency factor of 1.3x. Long corporates continue to yield 5.49%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has gaped wider to 340bp from the 305bp reported November 2. However, I suspect that the “Weighted Average Yield to Maturity” reported by BMO on their ZLC page is not kept current; anything to withhold information from the masses is good business for the banks! I’ve sent an inquiry; we’ll just see what kind of answer I get!