Tag Archives: inflation

Planning in uncertain times: How inflation is pressuring Canadian businesses to meet employee expectations

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By Elizabeth English, Mercer Canada 

Special to the Financial Independence Hub

The squeeze inflation is putting on businesses and their employees alike is being felt around the globe. As employees and their families deal with the increasing cost of living, employers are under pressure as they manage compensation budgets and salary expectations for the next year and beyond. Employees have heightened expectations of a commensurate pay increase with lower purchasing power. Employers must respond or risk losing talent.

As businesses grapple with the best ways to retain existing employees and attract new hires, Mercer released its 2023 Compensation Planning Survey, compiling data from more than 550 organizations of varying sizes across 15 industries. The survey reveals a number of insights for employers and employees alike.

Most companies are just beginning to think about increase budgets

With the price of everything from gas to groceries on the rise, there is an expectation from employees that their compensation should keep up with rising costs. Many organizations are in the early stages of deciding how to respond; the Survey shows that as of August, only 5 per cent of organizations had approved increased budgets, 11 per cent had proposed increases, and 84 per cent were still in preliminary stages.

Budgets continue to rise

Inflation is causing Canadian employers to increase their compensation budgets. Heading into the upcoming year, employers surveyed are budgeting an average of 3.4 percent for merit increases and 3.9 per cent for total increase budgets in 2023. This puts merit and total budget increases up from 3.1 per cent and 3.4 per cent, respectively, from 2022. However, even with these raises, merit and total increases fall short of year-over-year inflation, which hit a 40-year high of 8.1 per cent in June, moderating to 7.6 per cent in July and 7.0 per cent in August.

Across Canada, the highest increases in total budgets are in Montreal (4.5 per cent), Greater Edmonton (4.3 per cent), Saskatchewan (4.2 per cent) and Greater Calgary (4.1 per cent). With compensation budget increases falling well short of inflation, organizations across Canada will need to focus on managing employee expectations. This can be done through their internal communications, planning for multiple scenarios, as well as adopting a more comprehensive and broader total rewards perspective to attract and retain talent.

Off-cycle increases are being used for a variety of reasons

Historically, inflation isn’t the top metric for shaping compensation strategies. Still, in this high inflation environment, 34 per cent of organizations are considering ad-hoc, off-cycle wage reviews or adjustments to combat turnover. This is a significant hike from 19 percent considering the same in March of 2022. Continue Reading…

Defined Benefit pensions lagged in third quarter but continue to withstand volatile markets and historic inflation: Mercer

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Unlike the first half of 2022, the financial position of most defined benefit (DB) pension plans “decreased slightly” in the third quarter, as they were buffeted by inflation and volatile stock markets. Investment returns were mostly negative in the quarter, and yields on long-term bonds were lower at the end of the quarter than they were at the beginning, according to The Mercer Pension Health Pulse (MPHP), released on Monday.

The MPHP tracks the median solvency ratio of the DB pension plans in Mercer’s pension database, which decreased from 109% as at June 30, 2022, to 108% as at September 30, 2022.

Of the plans in Mercer’s pension database, at the end of Q3:

  • 72% of plans were estimated to be in a surplus position on a solvency basis,(vs. 73% at the end of Q2)
  • 17% of plans were estimated to have solvency ratios between 90% and 100%,(vs. 16% at the end of Q2)
  • 5% have solvency ratios between 80% and 90% (unchanged from Q2), and
  • 6% have solvency ratios less than 80%. (also unchanged from Q2).

In a press release, the Calgary-based Principal and leader of Mercer’s Wealth business, Ben Ukonga,  said that “In spite of the significant market volatility, the financial health of most DB plans would have experienced only a slight decline in the third quarter of 2022. As for what can be expected for the remainder of the year, plan sponsors should continue to expect significant volatility.”

Mercer says experts “urge caution and encourage plan sponsors to be prepared for anything, with more volatility on the horizon. Markets will most likely remain volatile in the short to medium term due to numerous risks such as the continued war in Ukraine, the upcoming US midterm elections, the potential confrontation between the US and China over the status of Taiwan, risks of a global energy supply shortfall, and of course, the ongoing inflationary environment.”

Continued short- and medium- term volatility

Markets will most likely continue to remain volatile in the short to medium term due to numerous global risks, including the war in Ukraine (and the Russian Government’s actions in response to Ukraine’s recent successes on the battlefront, such as the recent annexation of parts of Ukraine in violation of International Law, and the geo-political fallouts from these actions). Mercer is also cautious about the upcoming US mid-term elections, the increasing political gridlock and polarization in the US, and the potential for a confrontation between the US and China over the status of Taiwan. The recent volatility in the UK currency and bond markets and the risk of contagion to other markets.

Mercer also sees risks from a global energy supply shortfall, and the effect such a shortfall would have on the global economy: “… plan sponsors should pay attention to the risks associated with energy insecurity in Europe – such as the risk of the Russian Government using Russian gas supplies against Europe in retaliation to sanctions on Russia, and the effects on European economies if their energy supplies are curtailed.”

Inflation at levels not seen in 30 years

With inflation running at levels not seen in over 30 years, central banks globally are “on an aggressive monetary tightening mission in order to get inflation under control. Will they succeed without triggering a hard-landing global recession? Will higher interest rates make governments, corporations and households unable to meet the interest payments on debts they accumulated during the very long period of low interest rates? This could lead to an increase in bankruptcies and crowding out spending and investments, further exacerbating the risks of a hard landing global recession.”

As workers see a decline in the purchasing power of their wages, there will be increased pressures on employers for higher wages, Mercer says. “Sponsors of indexed DB plans will see increases in the cost of these arrangements, and sponsors of non-indexed DB plans may face pressure from their pensioner groups to provide ad hoc cost of living adjustments. Coupled with labour shortages, some employers may have no choice but to increase their labour costs. And companies that are unable to pass these increased costs to their customers will face profit margin pressures and reduced profitability, hurting their future economic outlook.”

Covid still poses macro risk

The global health landscape also poses a macro risk, Mercer says. “As the western hemisphere is entering the winter months, will a new vaccine-resistant strain of the COVID-19 virus appear? And how will governments and citizens deal with such a resurgence? Will the Chinese government continue with its zero-COVID policy? And how much of a negative impact will this policy, along with what some would call draconian lock down measures, have on the Chinese economy? And how deep will the negative knock-on effects be on China’s trading partners?” Continue Reading…

Avoid new issues but high-quality stocks likely to gain in value over next year

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The IPO or “Initial Public Offerings” market — more commonly known as the new issues market — has gone through an extraordinarily bad time this year. It’s been bad for all three of the groups that take part in this market. They are as follows:

Investors who put their money in new issues have lost substantial sums in the past year. On average, new stock issues tend to do worse than the rest of the market in their first few years of public trading. This past year, they performed much worse than ever.

Financial institutions that bring new issues to market for sale to investors have suffered, too, because demand for new issues has dried up. At this time of year in 2021, the new issues market had raised around $100 billion. So far this year, it has raised just $5 billion. In the past quarter century, the new issues market raised an average of $33 billion at this point in the year.

Companies that raise capital for themselves through the new issues market are suffering as well. When the new issues market began drying up as a source of corporate funding, many would-be issuers of new stocks found it was harder and more expensive than ever to find alternate sources of financing.

This will be worst year for IPOs since 2009

This will be the worst year for raising money in the new issues market since 2009, when the economy was struggling to pull out of the 2008/2009 recession.

As long-time readers know, we generally advise staying out of new stock issues. After all, there’s a random element in the success or failure of every business, especially when it’s just starting out. But new issues expose you to a special risk that you avoid with stocks that have been trading publicly for some time. That is, you can only invest in new issues when they come to market.

This is just one more example of a conflict of interest, which we’ve often referred to as the worst source of risk you face as an investor.

Companies only come to the new issue market to sell their stock when it’s a good time for the company and/or its insiders to sell. The insiders can’t predict the future, of course. However, they do know much more than outsiders do about their company. Continue Reading…

Canadians’ Debt grew to all-time high in second quarter: TransUnion

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Source: TransUnion Canada consumer credit database.

The double whammy of Inflation and rising interest rates are starting to be reflected in higher debt levels for Canadians, according to data released by TransUnion on Tuesday.

The  Q2 2022 Credit Industry Insights Report reveals that Canadians are vulnerable to payment shock as a result of high interest rates and inflation challenges: “While there have still been gains in GDP growth and low unemployment, they are being offset by higher interest rates and cost of living. This lead to higher credit balances and increased costs of mortgages and loans.”

The report shows total debt grew to an all-time high at $2.24 trillion, up 9.2% year-over-year (YoY) and up 16.4% from pre-pandemic levels observed at the end of 2019. The number of consumers with a credit balance has increased by 2.1% YoY to 27.6 million and is up 2.5% from pre-pandemic levels (Q4 2019).

You can find the full press release here.

Among the highlights:

  • Household finances were worse than planned for 41% of consumers, with 48% reporting they had cut back on discretionary spending. A startling 26% of consumers expect to be unable to repay their bills and loans.
  • Total debt grew to an all-time high at $2.24 trillion, up 9.2% from the same time in 2021 and up 16.4% from pre-pandemic levels at the end of 2019.
  • Consumer delinquency on personal loans has returned to pre-pandemic levels, up 19 base points (bps) YoY to 0.93%. Credit card delinquency is also up six bps from the prior year same quarter.
  • Increased balance growth was observed across all risk tiers, with super prime consumers continuing to build overall outstanding balances (+5.1% YoY).

In the release, TransUnion director of financial services research and consulting Matt Fabian says: “With the combination of higher cost of living and higher spend driving up credit balances, along with the recent surge in mortgages and auto loans, many Canadian consumers are under pressure from higher debt service obligations … We’ve seen an increase in miminum payment amounts of up to 10% in the first half of 2022, depending on the combination of products consumers hold, along with a slight deterioration in payment behaviours.”

As shown in the chart below, all major credit products saw an increase in average balance per borrower, which TransUnion says indicates the consumer need to leverage credit.

Fabian added that “During the pandemic we saw a decline in credit participation among below prime consumers, so this marks a re-engagement of this segment as potentially the effects of inflation and interest rates have driven demand, while lenders have increased their risk appetite in this space.”

The report shows that overall, consumer-level delinquencies (borrowers more than 90 days past due on any account) increased by four basis points (bps) over the prior year same quarter, but still remain below pre-pandemic levels. “Consumer delinquency on personal loans has returned to pre-pandemic levels, up 19 bps YoY, to 0.93%.” Credit card delinquency (90 days or more past due) is higher by six bps from the prior year same quarter.

TransUnion says the increase in consumer delinquencies is partially explained by accelerated lender origination activity, especially in the below-prime space: “The YoY rises in delinquencies are generally small and not a major concern, given the increased credit activity observed post pandemic. As credit activity recovers and grows further, consumer credit performance is expected to return to near pre-pandemic levels.”

Fed Pivot turned into a Divot

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It was a more than interesting week. Not much mattered until Jerome Powell (the U.S. Federal Reserve Chair) delivered comments on Friday. He came clean. Or at least he helped to reverse the delusion created by stock market enthusiasts that the Fed would ‘pivot’ and reverse course on the market-unfriendly series of rate hikes. Rates are going higher and they will stay higher. There will be some pain for consumers and business. Inflation must be crushed. They will do what it takes. The Fed pivot turned into a divot. The markets were not happy with the reality check.

In a Seeking Alpha article published just days before the Powell presser, Michael J Kramer of Cott Capital Management offered …

The futures, bond, and currency markets are already telling the world that there is no dovish pivot, and quite frankly, there probably never was a dovish pivot. The only market out there that hasn’t gotten the message appears to be the equity market.

If Powell can deliver a message that even a golden retriever (I own two goldens) can understand, then the equity markets’ day of reckoning will arrive in short order.

Also from Michael …

The futures knew it, bonds knew it, and the dollar knew it. Once again, the only market living on an alternate planet was equities …

Powell finally delivered a direct message

In his Jackson Hole speech, in the opening paragraph, he made it clear that his remarks would be shorter and the message would be more direct. That it was.

Very simply, rates still have further to rise, and once there, they will stay there for some time. In the following paragraphs, I have borrowed from Michael and others, I will avoid quotes for readability. My own commentary is in the mix.

Powell offered that reaching an estimate of the longer-run neutral rate is not a place to pause or stop. He said the June FOMC projections suggest rates would rise to just below 4% through the end of 2023 and that history warned against loosening policy too soon.

It’s evident that the Fed is aware of the mistakes made in the 1970s and 1980s with the stop-and-go monetary policy approach that led to even higher rates, and the Fed appears determined not to repeat those mistakes. There can be no 70’s show rerun.

Fed Chair Jay Powell said:

Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.

Powell noted that fighting inflation will take a sustained period of below-trend growth and a softening labor market, which could bring pain to households, and are the costs of reducing inflation. In the third paragraph of his speech, it’s right there. The Fed is willing to sacrifice growth and face rising unemployment to bring inflation down. He is telling the market there will be no “pivot” anytime soon.

Inflation is driving the bus

The Fed chair said central banks need to move quickly, warning historical episodes of inflation have shown that delayed reactions from central banks tend to come with steeper job losses.

“Our aim is to avoid that outcome by acting with resolve now,” Powell said.

The following image is not a live video, but an example of the headlines that ‘spooked’ the markets.

Federal Reserve Chairman Jerome Powell on Friday said the central bank’s job on lowering inflation is not done, suggesting that the Fed will continue to aggressively raise interest rates to cool the economy.

Get the inflation-killing job done

“We will keep at it until we are confident the job is done,” Powell said in remarks delivered at the Fed’s annual conference in Jackson Hole, Wyoming.

“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down,” Powell said Friday.

The central bank has delivered four consecutive interest rate hikes over the last six months, moving in June and July to raise rates by 0.75%, the Fed’s largest moves since 1994. By raising borrowing costs, the Fed hopes to dampen demand by making home buying, business loans, and other types of credit more expensive. Continue Reading…