Markets are flat this morning as investors weigh the prospects of a slowdown in the pace of rate hikes in the U.S. against data that suggest tighter policy may be needed for longer. Economic data is showing that the U.S. economy remains resilient despite sticky inflation which may give the Fed more reason to be hawkish. The worries surrounding what the Fed will so has been countering optimism about a reopening in China.
Equities started the week with losses while bond yields climbed after U.S. services gauge unexpectedly rose, fueling speculation the Fed will keep its policy tight to tame inflation. The Institute for Supply Management reported its index unexpectedly accelerated in November to 56.5 from October’s 54.4 reading, leaving it comfortably above the expansion and contraction line of 50, suggesting the largest part of the economy remains resilient. Meanwhile, manufacturing contracted last month as the appetite for goods post pandemic continues to ease.
Some things never change, even if you want them to. A new report predicts that food prices in Canada will continue to escalate into the new year. Grocery costs are forecasted to rise 7% in 2023, meaning a family of four will now pay $16,288 annually for their groceries. Multiple factors could influence food prices next year, including climate change, geopolitical conflicts, rising energy costs, supply chain disruptions, and even currency fluctuations. Vegetables could see the biggest price spikes, with estimates of costs rising by as much as 8%. So maybe when your kids say they don’t want to eat their vegetables, you won’t be as upset.
Looking to upsize your home and bring that low mortgage rate you locked in pre-2022 with you? Think again. According to the Globe and Mail (paywall), National Bank is apparently notifying its mortgage clients that their mortgages are not portable, essentially meaning they cannot transfer their ultra-low interest rate to a new loan. For borrowers who were able to lock in a <2% mortgage before the BoC aggressive rate hikes, this is an unexpected turn of events. While National Bank mortgage customers are disappointed, it seems the other banks have not followed suit, with BMO, BNS, CIBC and RY still allowing their mortgages to be transferred as it is a standard feature in their loan docs (and not a random act of kindness).
Fewer people in Toronto are putting their homes up for sale, which has helped home prices fall by the smallest amount this year in November. The benchmark home price in Toronto slipped 0.8% to $1.09 million, the smallest monthly drop since prices began falling in April. Just 4,544 homes were sold during the month, down 49% from a year ago while fewer than 8,900 homes were brought to market. Home values have experienced a steep drop this year as the BoC rapidly raised interest rates, but with the economy now starting to show signs of stalling, officials have signaled its rate-hiking campaign could be nearing an end, prompting more prospective home sellers to delay listing their properties.
Better luck next year. High-yield borrowers who had to contend with rising rates may have to wait until next year to see things turn around. U.S. junk issuance is down almost 80% this year to roughly $110 billion, levels not seen since 2008. Junk companies tried to steer clear of bond markets this year as central banks lifted rates to combat rising inflation. Opportunities for refinancing which have inflated volumes in the past also disappeared after yields began to exceed average coupons. The one silver lining from all of this has been that lower volume helped prop up prices as rate hikes and recession worries battered credit markets, leading to better performance compared to high-grade debt.
President Joe Biden is joining the founder of Taiwan Semiconductor Manufacturing Co. to announce the opening of a second chip plant in Arizona, almost tripling the company’s investment in the state from $12 billion to $40 billion. This investment by TSMC is one of the largest foreign investments in U.S. history, and the largest in the state of Arizona. The announcement comes in wake of the passage of the CHIPS and Science Act which was signed into law in early August, allocating billions to lure manufacturers to produce the widely used chips domestically. Once the plants open, they will produce enough chips to meet the U.S. demand of about 600,000 wafers per year.
NRG Energy Inc. agreed to buy Vivint Smart Home Inc. for $2.8 billion in an all-cash deal, accelerating its consumer-focused growth strategy. The total enterprise value of the deal is $5.2 billion, including $2.4 billion of debt. NRG Energy has been pushing into the retail electricity business, with the latest deal a further step away from running power plants. The company agreed to buy Centrica Plc’s Direct Energy unit in a $3.6 billion deal in 2020.
Cenovus Energy Inc. announced its 2023 budget. Cenovus plans to deliver capital allocation and focused investment plans to progress opportunities across its integrated portfolio, holding oil sands and conventional operating costs flat, reducing downstream operating costs and positioning the company for continued growth in shareholder returns. They will invest between $4.0 billion and $4.5 billion in 2023, including about $2.8 billion of sustaining capital to maintain base production and support continued safe and reliable operations.
Oil prices are lower despite signs that China is moving away from its strict Covid Zero policy helping stem losses from a wider market slump. Sentiment is down as the weighs on the long-term impact of the latest round of restrictions placed on Russia by the EU and Group of Seven to punish Moscow for the war in Ukraine. These include limits on insurance and a $60-a-barrel cap on Russian oil. Also, the renewed price slide comes against a backdrop of ever-dwindling liquidity in the oil market. Brent open interest is at the lowest level since 2015, with traders paring back positioning in the final month of the year.
Australia, one of the world’s largest wheat exporters, is poised to harvest another record crop this season despite heavy rains hurting yields in the eastern states. Farmers are set to gather 36.6 million tons in 2022-23, a jump of almost 14% from its September forecast, driven by spring rains which helped areas in Western Australia and South Australia. It’s also an increase of 1% from the previous all-time high last season. Canola production is estimated at 7.3 million tons, the highest ever and 4% more than last season. This is good news for the inflation fight, as more wheat from Australia, ample supplies from Russia and the renewal of safe passage for Ukrainian exports through the Black Sea have helped drive benchmark futures in Chicago to the lowest intraday level since October last year. Prices have dropped about 45% from a record high in March, cooling fears over global food inflation and security.
Fixed income and economics
A quiet start in bond land sees both Treasuries and Canada’s both inching up modestly as the risk aversion trade from yesterday spills into this morning. The market’s favorite measures of recessionary prognostications lately have been the 2/10 benchmark spreads and we see both the U.S. (-81.4 bps) and Canada (-100.45 bps) both eclipsing fresh cycle (30+ years) levels of inversion. At this point it’s a question of “when” and not “if” we see negatively trending quarterly growth prints in the North American economy, but rather how long it will last. Underweighting duration remains a popular trade on the street for now but expect to see a tactical shift into bonds when rising unemployment combined with lowered output forces the hand of central banks. On the corporate credit side of the ledger, U.S. junk bonds broke their three-day rally yesterday to post the biggest single-day loss in weeks as yields jumped on the high yield spectrum. Average yields on speculative grade paper traded up to 8.52%, as equities sold off after data showed that the U.S. services index accelerated in November, fueling speculation that the Federal Reserve may persist with tightening monetary policy to tame inflation. Investors pulled cash out of high-yield exchange traded funds lately with $1.71 billion leaving ending last Friday. On the data front today we’ll receive a pair of trade balance updates in Canada and the U.S. that continue to show a surplus in the former and deficit in the latter ending October.
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Never confuse a single defeat with a final defeat. F. Scott Fitzgerald