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[music] >> Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
Every day, I'll be joined by guests from across TD, many of whom you will only see here.
We are gonna take you there with moving the markets and answer questions about investing.
Coming up on today show, we are going to take a look at the latest Canadian inflation report and talk about what it means for the passive rates with Alex Gorewicz.
Money talks Anthony Okolie joins us to talk about whether consumer headwinds are impacting retail sales.
And in today's WebBroker education segment, Bryan Rogers will take a look at how you can research fixed income investments using the platform.
Here's how you get in touch with us. Email moneytalklive@td.com or float that viewer response box under the video player on WebBroker.
Before he gets all that, let's get you an update on the markets. Not a good start to the shortened trading week. We were off yesterday, the Family Day holiday shutdown trading on Bay Street.
We are back at it and it doesn't look great.
The TSX is down a full percent, 217 points to start the week.
Shopify,reported last week the market was not pleased with the forecast.
they are down and almost 5%.
Saw some money moving toward Cenovus Energy earlier in the session.
Let's see if it's still hanging in there.
Indeed, 25 bucks and change, that stock is up to and 1/3%. South of the border, we've got bond yields moving higher.
The US bug has been strengthening against a basket of international currencies.
Put it all together in some corporate earnings, you got a 1.6% pullback on the S&P 500, that broader read of the US market.
Let's hone in on the NASDAQ, the tech heavy NASDAQ, down to the tune of 1.
9%.
You are seeing some of the mega-cap tech names under pressure today, including Microsoft. They are at 252 bucks, down $6.06 or 2.3%.
That's your market update.
Cost of living pressures continue to ease in Canada with headline inflation coming in at 5.9% in January, but with the labour market and consumers continuing to show resilience, what does it all mean for the path of rate?
Joining us now with more is Alex Gorewicz, portly manager for active fixed income with TD Asset Management.
Great to have you back.
> Great to be here.
>> Let's talk about this report today.
Headline inflation has been moving in the right direction for a while. But we have a few other things that leave at least me, I don't know about you, scratching my head a little bit about what impact rate hikes have had so far.
How do you read it?
>> Headline a 5.9, we are seeing high food inflation still but this is into a Canadian story. This is globally, we continue to see food prices rise at pretty decent clips. If we look at core, that excludes energy and food prices, core is absolutely continuing the disinflation area trends that we have seen for several months now.
The problem is may be the pace at which it's decelerating is a little bit slower than what we would have anticipated and not just us, probably the Bank of Canada as well. On top of that, we did see some revisions to the upside for prior months core numbers. That's probably not what you want to see.
This time of the year is known to have pretty strong seasonal upside surprises in core inflation. But if we look through the numbers and see which components are strong and which ones are weaker, housing -related ones are the ones that are resilient. We expect to see that in rent, mortgage servicing costs, those are all higher versus last year.
And we know that they respond much slower to monetary policy tightening.
So I think but we are seeing right now is not surprising. And it does nothing to really change the BOC's outlook.
>> You got the headline inflation coming off. You dug under the headline there. But we also got the retail sales report.
We spent in December, that is traditionally the month we do spend.
StatCan said we kept it up in January. The labour market has been strong.
The BOC said, we are going to pause and see how this plays out through the economy. It's interesting lately in the conversation has gone from when will they start cutting to will they hike again?
What are we seeing in the data?
>> Mixed data, that's effectively what you're pointing at, and the fact that the labour market in particular has been so resilient and we continue to add jobs at a really high clips suggest that consumption while slowing versus the prior year will still remain let's call it resilient enough perhaps even help us avoid or eke out a small positive economic growth for the first quarter of this year.
But it doesn't change the fact that the trend continues to show deceleration in consumption, in housing -related components, which are a big contributor to the Canadian economy, and this is before we have seen the full effect of the rate hikes that the Bank of Canada has delivered over the last 12 months.
So when we think about what's really necessary here, it's time.
We need to see the full effect of the Bank of Canada's tightening through the next couple of months, maybe the next couple of quarters, at the current level of interest rate. That's one of the reasons why the BOC said, we are comfortable to pause here and wait.
>> Let's talk south of the border. The Fed seem to be changing some expectations there in the market as to what we are going to get from them, the world's most powerful central bank. People are throwing her and 50 basis points the next hike.
>> Very similar to Canada in the sense of the deceleration in inflation or the disinflation area process, what Chairman Powell said repeatedly in his most recent speech, he referred to disinflation several times, that process is still underway.
Is it happening at a slower pace than what we would have anticipated?
Yes. But we have known for quite some time that the road from 8%headline inflation to about 4% inflation would be relatively quick and we can still get there by the end of this first quarter.
So let's say End of March, April.
But with how the data has come through,particularly around service BMIs, labour market, obviously, continuing to show a lot of resilience.
Not just resilience, perhaps there could be a real acceleration though it's too early to call it that.
All of dad is pointing to the fact that the road from 4% inflation to the feds target 2% inflation is probably going to be more of a grind. It will be slower. And what that really means to the bond market is that they have to price with the fed has said which is we are not going to cut rates this year.
Does it mean that the Fed needs to go higher?
I don't think that the data is supporting the thesis that the economy is real acceleration but rather that the deceleration is it decelerating.
>> It's interesting you say that. The bond market has to price with the Fed is saying. We went into this year, definitely last year, with a disagreement between the feds, saying, we are doing this, and the market was like, yeah, come on.
If I look at the US 10 year bond, 3.9%.
It's been creeping higher.
>> It has, but is plus or minus where we started the year. We saw interest rates fall noticeably in January.
They have since come back particularly on the back of strong labour prints.
But this notion of anticipating that the pivot from the Fed which means they will cut rates in the second half of the year, none of the economic data in the last couple of weeks have supported that narrative so the bond market has had to take fall in interest rates back so we are plus or minus where we started the year.
Again, from our perspective, it just means that it supports this notion that the Fed's right to say we are not going to cut rates this year. But do they really need to hike further?
Are we going to split hairs here?
It's 5 1/4 they should hike to 5 1/2? The reality is again time is what we need at this level of policy rates to work its way through the systemand see the full impact of monetary policy tightening on the economy.
>> Could this change the thesis about how bondslave this year?
With the aggressive rate hikes, bond portfolio is looking great. Now there are those yields being hikes and perhaps even a pause.
What are bonds going to do this year?
>> It depends which bonds we are talking about. If we think about shorter bonds, let's say two year, one year, those can still move higher and those should move higher if we are going to price the full extent of the Fed, including the get to five in a corner, beyond pause for the rest of the year.
But if we think about further out in the yield curve, we look at tenure interest rates, 30 year interest rates, the real question we have to ask ourselves is do we think the Fed will ever cut rates again?
If the answer is yes, then you have to answer, to what level?
If we think that 10 year rates at 4% is aggressive relative to where the Fed has continually communicated an intense longer rate interest rate for the US economy to be an equilibrium which is about 2 1/2%, that 4% today is quite high relative to that longer term policy rate that the Fed intends to get to.
So that's just a long way of saying that there is room, as time goes on and the economy continues to decelerate, for longer dated interest rates to come down.
That fascinating stuff and a great start to the show. We are going to get your questions about fixed income for Alex Gorewicz in a moment, including how bonds stack up against equities for income, corporate versus government bonds and what a recession could mean for the space. A reminder that you can get in touch with us at any time. Just email moneytalklive@td.com were still at the viewer response box under the video player and Whataburger.
Let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
Two US retail giants providing disappointing sales forecast for the year, although Walmart had a strong holiday quarter, expect same-store salesto rise in the low single digits this year. That is consumers struggling with inflationary pressures at home are buying fewer discretionary items.
Home-improvement retailer Home Depot is forecasting virtually flat sales this year after missing revenue expectations in its most recent quarter. Teck Resources is planning to spin off its steelmaking coal business, a move that would separate tag into two publicly listed companies. Teck metals Corporation will focus on metals while the Elk Valley Resources will bully you the home of the coal business.
The plan is subject to regulatory and shareholder approval.
Teck is up modestly today. This was rumoured last week.
Take a look at Suncor naming a new CEO.
Former Imperial oil CEO Rich Kruger will assume the top job on April 3.
In making the announcement, Suncor noted Kruger's record of leading a safety culture. At least a dozen workers have died at Suncor's oilsands operations since 2014.
A quick check in on the markets, we will start on Bay Street with the TSX Composite Index. At first trading day of the week after coming off the three-day weekend.
Down 217 points, little more than 1%.
South of the border, the S&P 500 down to the tune of 1.6%.
We are back now with Alex Gorewicz taking your questions about fixed income. Let's get them.
First question here, we are not going to rank them in terms of importance, how do government bonds stack up against corporate bonds in this environment?
>> Look, when I talk about our expectation for continued deceleration of economic growth and economic activity, it suggests that our assessment is that we are at the late stage of the business cycle or the economic cycle. At this point, you really want Max liquidity and Max safety where liquidity generally means having the ability in a cost-effective manner to get in and out of positions, electives… You have to favourite government bonds over corporate bonds in that scenario, if that's the relative analysis we are doing.
And then from the safety perspective, you do want to move up in quality in the sense of avoiding lower rated issuers that may not make it through the cycle. Is there some level of default risk?
Is there some level of free pricing of the business strategy or of the ability of the issuer to give money back?
And you know, when we make that kind of consideration, obviously governance, as long as they have the willingness to give us our money back, have the ability to do so because they control the printing press. So again, based on the stage of the cycle, we give more… We put more emphasis on government bonds.
>> If someone was looking into the corporate space and hearing a recession, what kind of homework are you doing? You talked about the credit rating but beyond that, you are looking at their ability to repay.
>> that's right. At the moment, although you have touched on corporate earnings and about how there have been some misses,most of those Mrs. in the last couple of quarters have been a concentrated Intact and to some extent retail,but we expect that abroad and in other quarters to other sectors of the economy and to the extent that's true, it puts more pressure on corporations. So as a bond manager, we care about, is through those pressures and earnings, will the company stick to their deleveraging strategies and you want to invest with corporations were girls of their credit quality that are emphasizing deleveraging because it's more likely that you will get your money back.
Do we have any eminent concerns about let's say default? No. But what we do know through recessions over the last 30, 40 years we have analysed is that corporate spreads generally, and almost indiscriminately, regardless of sector or credit quality, tend to tighten in the first couple of quarters of a recession.
They don't really start to widen, in other words underperform government bonds in a significant way until closer to the end of a recession. I think part of the reason here is that companies in general have all kinds of abilities to manage costs and they will try to use all of those strategies before they rely on raising new money and capital markets. To the fact that new issues supplying in the corporate bonds base, whether it's IG or high yield has been relatively low has actually been a big supporter of why credit spreads are so tight right now or still low.
But we think that that changes as companies exhaust all their cost-cutting abilities in coming quarters.
>> Interesting stuff. This next question in a nice follow-on. Come get your guests outlook for high yield?
You're getting a higher yield because there is a higher risk.
>> Correct.
High yield spreads our pricing… We call it the immaculate disinflation. They are not pricing in a recession. In fact, if you look at the last 15 years, and we've had a couple of cycles of spreads widening and then tightening through the last 15 years, high yield spreads are pretty much in line with what we consider normal economic growth.
But if that's not the environment we expect in the coming quarters for the coming months, then they look like they are a little bit rich and perhaps there is opportunity for them to widen.
And part of that is also the implied default probability.
So that's an important consideration when trading high-yield bonds versus investment grade bonds. The implied default rate at the moment is about 4 to 4 1/2%, maybe 4% now.
In a typical recession, it's north of six.
So there is still some room for spreads to widen. I would add one more thing which is really important and that is bank lending standards are tightening and we can't discount how important this is for the real economy. There are a lot of businesses who don't get their capital or their money needs from capital markets.
They get it to the bank channel. And the fact that lending standards are tightening as quickly as they are right now suggests to us that a recession is probably unavoidable.
>> I've heard some commentary and probably even from you over conversations we've had in recent months about the fact that when money was next to free,the companies are looking pretty good. But as it cost more money, that will make a difference.
>> That's a losing combination.
When the Fed is raising rates and banks are tightening lending standards, the combination of those two things, we have never avoided a recession. It will put a lot of pressure on access to capital, as you qualified it.
>> Let's take another question now. Lots coming in.
A viewer wants to know with the current inverted yield curve and assuming an investment horizon greater than five years, doesn't make sense to invest solely in the front-end and roll at maturity?
>> That's a great question.
The answer here is actually something we touched on earlier.
If your investment horizon is greater than five years, states 10, so let's use the 10 year interest rate. In the US at 3.9% today. Over the next 10 years, do you think that the Fed will end up having to cut interest rates from current 5%? If you think the answer is yes, then you have to answer how much do you think they can cut.
So if you look at what is currently priced in the market, it's expected that the Fed will cut may be about 150 basis points from current levels.
That means you go to 3 1/2%. 3 1/2% as a policy rate is still in what the Fed would consider restrictive territory because the Fed has repeatedly told us that they think their neutral rate or the rate that's compatible with an economy in equilibrium is somewhere between two and 3%.
So if the bond market is only expecting that the Fed will eventually cut to 3 1/2%, that doesn't seem like the Fed would do if a recession hit. It seems like they would cut even more. So that means there is actually room for that 3.9% that we see today in the 10 year rate to be a lot lower. That means that as an investor, you're probably not better off by investing in the 5% one year T-bill and then rolling that every year. You are probably better off buying the tenure today. But again, it depends on how you answer this question.
>> What's your view going forward.
>> What's your view going forward.
Ask yourself those questions, and you will know what the right answer.
You think the Fed will cut again and if so how much?
>> Fascinating stuff. At home, do your own research before making investment decisions. We will get back to your questions for Alex Gorewicz on fixed income in a moment.
You can get in touch with us anytime.
Email moneytalklive@td.com.
Nazca to our educational segment of the day.
If you're looking for ways to play the fixed income space, WebBroker has tools which can help you find financial options.
joining us now with Maurice Bryan Rogers, Senior client education instructor with TD Direct Investing. Great to see. Let's jump right into it.
>> All right. Well I know the topic today is really popular right now, it's fixed income.
Rightly so, as interest rates have gone up more recently.
Investors should consider it all the time as part of a diversified portfolio. Many investors over the last decade are focused on diversifying the portfolio with stocks but they may be now considering more fixed income. An element you can add is for the preservation of capital is possibly looking at fixed income mutual funds and ETFs.
Going to jump to WebBroker and show you that there are some ways you can search for this within the mutual fund category.
So what we want to do is go to research and then we are going to select mutual funds. You go to ETFs as well. Find similar step. You can start with mutual funds.
And then you're gonna want to go to the section that is categories. They are going to be listed on the first tab here but this will narrow it down a bit. You can narrow it down further if you want to go with Canadian bond or international bond and so on.
I often times I will do is just control F and type fixed income and it will show me the selections that are here.
To narrow it down quickly right away if you are looking for some exposure to the Canadian bond market and you don't want to buy an individual bond yourself, maybe don't have the know-how or time to learn this, we have classes where you can learn there, but if this is something where you are saying, hey, I don't want to pick an individual bond, I'm not sure if I have enough skill to figure out how to do that or have the time, you can look at these funds and you can see there are quite a few numbers here.
Canadian corporate fixed income, Canadian fixed income, there is a big number. Let's do this first one is an example. It will give you a list that you can now sort bya number of different ways but MorningStar rating, management expense ratio and so on.
Just a quick view of some of the funds that are available and if you continue to click downward, you can see more details on what's available to possibly add to your portfolio.
>> What I always enjoy in WebBroker when I'm going through different kinds of investment options is filtering through things.
Let's talk about using filtering functions for fixed income may be based on some criteria.
>> Yeah, I love the filters as well. It's great to be able to take a huge amount of information and narrow it down to something more specific that you are looking for.
If we jump back into WebBroker again, we can go to the research tab once more and you're gonna go to screeners. So you go to the screeners having what you want to do now is go to mutual funds or ETFs, let's start with mutual funds.
I have a screen that I've used in the past that I want to show you. I want to show you the steps really quickly.
We will go through them all but if you see here, go to create a custom screen.
That's where you're gonna want to click on right there and then you're going to actually set up from all these different categories, that's where you are going to look forward to add different things, management expense ratio or the fund type.
As an example, we will go to fund type. We will click to add the criteria and then it's gonna go down to the bottom and we are going to look for in this drop-down we can say Canadian bond door anything that's more fixed income related like international bond funds and so on.
But if I go back and we go back to the screener tool here again, I'm in a go from the very beginning to show you where I was going, if I go to research, screeners and then mutual funds, this is what I've created. These are the categories that I've added on.
If I go to new matches, I can see that there is an option. Fund type, looking for Canadian bond or an international bond fund, got a lot of criteria added. If I go to view matches, you can filter this and it does default to show TD mutual funds for so you can check that off if you don't want to necessarily see those on top. But then you can sort any of these columns were you can say, okay, these are some Canadian and international bond funds.
Here is the MorningStar rating.
We can see the management expense fee.
They are usually very low, is a low maintenance fund essentially.
Their 10 year, five-year returns and so on.
Returns are gonna be great because you know fixed income is that more flight to safety or preservation of capital and that element of your portfolio that you are trying to achieve that with.
But then the last thing you can do is select a number of these and click on compare and you can do a quick comparison of all the different elements of these funds you may be looking at.
>> Great stuff as always. Thanks for that.
>> Thanks, Greg.
>> Bryan Rogers, Senior client education instructor with TD Direct Investing. Make sure to check out the learning centre in WebBroker for more educational videos, live interactive master classes and upcoming webinars. Before you back to your questions on fixed income for Alex Gorewicz, a reminder about hiking and touchless.
You a question about investing or was driving the markets? Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us. You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here in WebBroker. Just writing your question and hit send.
We will see if one of our guests can get you the answer right here on MoneyTalk Live.
We are back with Alex Gorewicz taking your questions about fixed income. Let's get back to them. Lots coming in.
What areas of fixed income, long-term or short-term bonds, variable or fixed rate preferred shares, etc., does your guest like for potential Building?
>> So I don't hear anything about investment horizon and there so I'm going to assume we are talking about 12 to 24 months out.
Now… Again, it comes back to how you would answer the questions that I had mentioned earlier.
Do you think the central bank will cut rates again, and if so to what level?
And you can do multiple scenarios.
I'm going to try to throw a balanced mix of scenarios… >> We like balance.
Balance is good.
>> Really talk about the returns cues.
If you take the feds dog plot, the 1 They Communicated in December, which shows they are going to continue to raise rates to 5 1/4, be on hold and then gradually bring that interest rate down over the coming years to about 2 1/2%. If you do that math and punch all the bond mass and run all the numbers, what you see is that in about a year from now, 10 year rates should be closer to a 2.8%.
And we are closer to 4% today.
So that fall in interest rates will give you a pretty nice capital gains return, positive capital gains return.
Call it low teens.
Annual still have some income and that, by the way.
You have about, call it… 4% of income and the rest will be capital gains.
So you do the same mass for longer bonds, and you end up with a total return of about 30% over the next year. That's in the Fed top plot scenario and it also assumes by the way that any uncertainty is that we have around the world about geopolitics or monetary policy risks or political risks in the US election cycle etc.
, all of those don't get really in the way of enabling rates to trade close to their fair values.
Now you do another scenario where you say, inflation is never coming back down. We are going to have 3 1/2% to 4% inflation indefinitely.
Then you assume that the Fed can only ever bring the policy rate back down to 4%, not 2 1/2%.
That same math would probably generate a loss, capital gains loss, of about call at 1%.
The outcome would probably be somewhere in the middle, right? The median distribution would be somewhere in the middle. But that returns Q is still highly positive and largely geared to capital gains.
Now, on a broader basis, so that means that I lik government, long government bonds, 10 years, 30 years, for the next 12 to 24 months.in general what is going to generate a positive capital return in bottomland is to look at discount bonds and a lot of corporate bonds, government bonds, even high-yield bonds,they are all trading at a really substantial discount because interest rates have come up and those coupons, outstanding coupons are so low.
So the possibility for generating positive capital gains and fixed income in the coming years is high, regardless of what you buy, short bonds, long bonds, corporate bonds, government bonds.
But in terms of where we see the best value, it would be longer government bonds.
>> Fascinating stuff. Let's take another question now.
this one has a pedal to it. Hunt for yield. Sound like a movie title. Hunt for yield: is it better to look in equities or fixed income?
>> This is not difficult to answer. You threw me off with the hunt for yield. Had me thinking that bonds are usually the unsexy asset class and we now have our 15 minutes of fame.
Everybody wants us to star in the movie which is great.
Look. Probably a couple of things I would say.
One, look at where the earnings yield is on S&P 500. It's 5%.
I can give you a high quality, very safe, well-capitalized bank and the US, your Goldman Sachs, your J.P. Morgan's, your Bank of America.
One year paper from them yields something like 5 1/2 to 6%.
I mean, even a two-year bill, no additional corporate spread, yields 5%, one euro T Bill yields 5% today.
What incentive do you have to put your money into equities for the next year versus, you know, clip your coupon, clip your safe return over the coming year in bond land?
More than that, it goes back to what I answered to the previous question which is look at the return distribution in fixed income for the coming year versus equities.
Equities, they have had a pretty solid start to the year, but if we look at earnings growth or deceleration, rather, we expect that to continue.
When you control the numbers on where earnings are expected to be and you probably end up with a flat issue maybe you could have a small positive gain but you end up with a flat-ish to negative type of return.
So the skewer is very much in favour of fixed income over equities for the coming year.
>> I think about the question, I think maybe interviewers had a little bit in the sense that people will be afraid they're going to miss some sort of run in equities.
We lay out the math, the yield is this, the coupon is this, and they worry about the market moving in another direction.
We are seeing some headwinds for corporations right now in terms of where we could be headed in the economy.
>> That's right, and that's a fundamental aspect.
But if you take a financial market lens, look at what has happened in the last couple weeks as the bond market has had to price in the higher for longer interest rate narrative, taking out those rate cuts for later this year. Stocks haven't done well in the last couple of weeks.
And I think there is a little bit, when I talked about, for example, bond spreads, pricing and immaculate disinflation, equities are doing the exact same thing.
So if the reality has to sink in and be priced in, equities will very likely struggle.
So I hear that narrative about fear of missing out but the reality is coming in with the opposite.
>> Great stuff. Here's one.
The picture changes. What would it take for central banks, what they need to see before they actually cut?
>> So… >> When will you and I be sitting here talking about central banks cutting rates?
>> The answer there is probably an unfortunate one.
It would be when more people start losing their jobs. We've seen some job losses in the tax sector in the last couple of months or last couple of quarters, but they've been largely offset by very strong gains in leisure and hospitality and and other service-based sectors.
Lower income service space I should qualify two. Part of the problem here is that lower income workers have a higher propensity to spend.
So for every dollar they make, they are more likely to go out and spend it whereas higher income workers, the ones that work in IT that have been laid off, those individuals are more likely to save.
So the impact here with some call it nuanced views of the labour market still suggests that spending will remain pretty strong.
So realistically, the Fed wants to see an increase in unemployment that's more broad-based and probably skewed across the income distribution or the income segments of the labour market.
And in addition to that, I would say that there is the wealth effect. So if your house price is relatively elevated, if financial markets are relatively elevated, what ends up happening is people feel wealthy and they feel comfortable spending.
If financial markets don't perform well or if your house price continues to go down, and in the margin it has started doing that in the US and in Canada we are often to 11% peak as established in the first quarter of last year, to the extent that that trend continues, you're more likely to see people going to save more or rein in spending regardless of what their income levels are. So realistically, housing and the jobs market will be key for seeing rate cuts come through from central banks.
>> We will get back your questions for Al Gorewicz on fixed income in a moment.
Make sure you do your own research before you make any investment decisions.
A reminder that you get in touch with us at any time.
Do you have a question about investing or what's driving the markets? Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us. You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker.
Just writing your question and hit send.
We will see if one of our guest can get you the answer right here MoneyTalk Live.
We know we are living in a time of elevated inflation, borrowing costs have been going up aggressively before the Bank of Canada hit pause. Retail spending in the month of December continued to rise.
Anthony Okolie has been digging into this latest retail sales data and its indications for the economy.
>> Thanks very much. It seems to buck the trend that people were expecting but as you mentioned, Canadian retail sales rose .5% month over month in December. That matched expectations. When you adjust for the impact of inflation, volume sales were up 1.3% in January. Advance estimates by stats Canada indicate that sales are up .7% in January and the sort of aligns with TD forecasts based on their internal spending which suggests that spending continued to trend higher in January. When we break things up by sectors as the chart shows, sales were up in 7/11 categories.
Sales at car dealerships were actually quite strong, up 3.8%. That's the best result since January 2022. It was led by sales of new cars and of course we have been seeing improved auto production which has been clearing some backlogged orders for the past couple of years.
Traditionally, the end of December is when automakers offer most of the general sales incentives, cash rebates to meet their quotas. So it's not surprising to see strong numbers there. On the downside, we did see sales at gas stations slipped nearly 6% month over month. This was a bit of backdrop from...
when you look at core sales excluding gas and autos, they were up 4% in December.
Some other categories that did well in December, electronics and appliance stores.
dear sales rose for the second straight month in a row. Again, possibly reflecting a bit of a normalization in supply chains there.
Overall, TD Economics suggests that consumer spending picked up late last year and continues early into this year despite higher interest rates and persistent inflation. TD Economics says that if the upside data surprises continue, that could force the Bank of Canada to end their pause and return to the inflation battle.
Greg?
>> So we continue to open our wallets and then we got that inflation report showing the headline inflation continues to ease.
What does TD have to say about that?
>> They expect that core headline measures continue to decline over coming months amid the base effects. The first half of the price surges will continue to fall off.
They believe the Bank of Canada will still need to see the strength continuing for it to be comfortable staying on the sidelines.
So far, resilient Canadian consumers, we have seen an uptick in employment numbers, that seems to sort of complicate the need for inflation to lead to the 1 to 3% targeted but the improvement today in the inflation does give the BOC some breathing room to continue the rate pause.
> Very interesting. Thanks.
>> My pleasure.
>> Anthony Okolie.
A quick check in on the markets.
We just came in an awful long weekend on both sides of the border and we are having a down start to the trading week. At 209 Point Deficit in Toronto,about a full percent on the TSX Composite Index.
Air Canada is under some pressure today, at least when I checked them this morning.
Down to the tune of almost 5%.
The street sentiment is not too positive towards a name after last week's earnings came out from Air Canada.
First Quantum making some gains today, it was earlier in the session.
Highly leveraged to that space. It's a little bit more than 4%.
South of the border, you got the S&P 500 under some pressure today. All the big questions we have talked about during the show: where does the Fed had next, what is the size of the next rate hike, when do they stop and cut?
And then corporate earnings as well.
The S&P 500 down 1.7% we will call that.
The tech heavy NASDAQ, how is it stacking up against the broader market? It is down 2% at this hour.
I mentioned corporate earnings, Home Depot disappointing in its quarter and its forecast, it is down 5.
7%.
Back now with Alex Gorewicz from TD Asset Management talking fixed income. A viewer want to know what a recession would be in for corporate bonds?
>> That means that corporate bonds should underperform government bonds is a recession were to come through for the multitude of reasons that we have already discussed, weaker corporate earnings, higher for longer interest rates, the time that it takes to those interest rates to have an impact on spending or broader consumption and on the labour market.
And again, every recession over the last 30, 40 years has seen corporate bonds spreads, especially in the second half or in the latter part of an actual recession period,has seen spreads widen. Now the magnitude to which they widen will depend on way too many unknowns at the moment.
But one of the most important will be the reaction function of the central bank and the real question after the period that we have been inwith inflation not just volatility, but the level as well rising beyond anything we have experienced for a very long amount of time, since the 70s and 80s, the question is how much will central banks hesitate to throw the kitchen sink at the economy and financial markets the way that they have in more recent sessions? The latest of which was, you know, the early months of the pandemic.
>> We are going to squeeze one more question in here.
You talk about all the things that are unknown. Here's an interesting one. Is the debt ceiling a real risk to the markets or is it just noise?
>> For now, I think it is more of a noise than it is risk, but in the coming months, I think that risk materializes in probably two important things to point out.
One is the timeline. So by the Treasury's own estimate, they have a bunch of college extraordinary measures that they can enact, effectively cost-cutting measures, they could and sure even without the debt ceiling, they could continue paying their debt, their bills.
By the Treasury's estimate, they are going to run out of money or they are going to exhaust all of those extraordinary measures in June.
The Congressional Budget Office has said, no, we put the timeline further, July to September.
Either way, it tells you that second or third quarter is when this becomes a live event. But what is probably most interesting around this was even before it became an issue, the bond market or rather not the bond market but the sovereign CDS market, so this is credit default swap, it's effectively the purest way that we can look to see what is the probability that investors think the US would default, we saw that pop a little bit higher immediately after the messy and drawnout election of the speaker of the house, Kevin McCarthy.
And part of the reason is the Republicans have drawn a line in the sand and said, they expect any increase in debt ceiling to be accompanied by cost-cutting measures. The Democrats don't want to do that.
Etc.
By the fact that he was elected, the immediate pop higher for sovereign CDS in the US suggests investors are saying, now the probability has arisen. It's not a meaningful increase that we saw.
It was only several basis points. But it puts the US clearly as an outlier versus every other country that is actually seeing their sovereign CDS come down in the last couple of months.
Investors are saying, this is noise for now.
But come June, July, it could be become live.
>> Sound like we're going to have things to talk about during our summer shows.
I know you'll be back before that. It's always willing to have you here.
Brilliant performance. Thanks for that.
>> Thank you very much.
>> Our thanks to Alex Gorewicz, portfolio manager of active fixed income at TD Asset Management.
Stay tuned for tomorrow show, Brad Simpson, cheapo strategist Ed TD Wealth will be our guest taking were questions about market strategy.
A reminder that you can get a head start on those questions, just email moneytalklive@td.com.
That's all the time we have for the show today.
Thanks for watching. We will see you tomorrow.
[music]
Every day, I'll be joined by guests from across TD, many of whom you will only see here.
We are gonna take you there with moving the markets and answer questions about investing.
Coming up on today show, we are going to take a look at the latest Canadian inflation report and talk about what it means for the passive rates with Alex Gorewicz.
Money talks Anthony Okolie joins us to talk about whether consumer headwinds are impacting retail sales.
And in today's WebBroker education segment, Bryan Rogers will take a look at how you can research fixed income investments using the platform.
Here's how you get in touch with us. Email moneytalklive@td.com or float that viewer response box under the video player on WebBroker.
Before he gets all that, let's get you an update on the markets. Not a good start to the shortened trading week. We were off yesterday, the Family Day holiday shutdown trading on Bay Street.
We are back at it and it doesn't look great.
The TSX is down a full percent, 217 points to start the week.
Shopify,reported last week the market was not pleased with the forecast.
they are down and almost 5%.
Saw some money moving toward Cenovus Energy earlier in the session.
Let's see if it's still hanging in there.
Indeed, 25 bucks and change, that stock is up to and 1/3%. South of the border, we've got bond yields moving higher.
The US bug has been strengthening against a basket of international currencies.
Put it all together in some corporate earnings, you got a 1.6% pullback on the S&P 500, that broader read of the US market.
Let's hone in on the NASDAQ, the tech heavy NASDAQ, down to the tune of 1.
9%.
You are seeing some of the mega-cap tech names under pressure today, including Microsoft. They are at 252 bucks, down $6.06 or 2.3%.
That's your market update.
Cost of living pressures continue to ease in Canada with headline inflation coming in at 5.9% in January, but with the labour market and consumers continuing to show resilience, what does it all mean for the path of rate?
Joining us now with more is Alex Gorewicz, portly manager for active fixed income with TD Asset Management.
Great to have you back.
> Great to be here.
>> Let's talk about this report today.
Headline inflation has been moving in the right direction for a while. But we have a few other things that leave at least me, I don't know about you, scratching my head a little bit about what impact rate hikes have had so far.
How do you read it?
>> Headline a 5.9, we are seeing high food inflation still but this is into a Canadian story. This is globally, we continue to see food prices rise at pretty decent clips. If we look at core, that excludes energy and food prices, core is absolutely continuing the disinflation area trends that we have seen for several months now.
The problem is may be the pace at which it's decelerating is a little bit slower than what we would have anticipated and not just us, probably the Bank of Canada as well. On top of that, we did see some revisions to the upside for prior months core numbers. That's probably not what you want to see.
This time of the year is known to have pretty strong seasonal upside surprises in core inflation. But if we look through the numbers and see which components are strong and which ones are weaker, housing -related ones are the ones that are resilient. We expect to see that in rent, mortgage servicing costs, those are all higher versus last year.
And we know that they respond much slower to monetary policy tightening.
So I think but we are seeing right now is not surprising. And it does nothing to really change the BOC's outlook.
>> You got the headline inflation coming off. You dug under the headline there. But we also got the retail sales report.
We spent in December, that is traditionally the month we do spend.
StatCan said we kept it up in January. The labour market has been strong.
The BOC said, we are going to pause and see how this plays out through the economy. It's interesting lately in the conversation has gone from when will they start cutting to will they hike again?
What are we seeing in the data?
>> Mixed data, that's effectively what you're pointing at, and the fact that the labour market in particular has been so resilient and we continue to add jobs at a really high clips suggest that consumption while slowing versus the prior year will still remain let's call it resilient enough perhaps even help us avoid or eke out a small positive economic growth for the first quarter of this year.
But it doesn't change the fact that the trend continues to show deceleration in consumption, in housing -related components, which are a big contributor to the Canadian economy, and this is before we have seen the full effect of the rate hikes that the Bank of Canada has delivered over the last 12 months.
So when we think about what's really necessary here, it's time.
We need to see the full effect of the Bank of Canada's tightening through the next couple of months, maybe the next couple of quarters, at the current level of interest rate. That's one of the reasons why the BOC said, we are comfortable to pause here and wait.
>> Let's talk south of the border. The Fed seem to be changing some expectations there in the market as to what we are going to get from them, the world's most powerful central bank. People are throwing her and 50 basis points the next hike.
>> Very similar to Canada in the sense of the deceleration in inflation or the disinflation area process, what Chairman Powell said repeatedly in his most recent speech, he referred to disinflation several times, that process is still underway.
Is it happening at a slower pace than what we would have anticipated?
Yes. But we have known for quite some time that the road from 8%headline inflation to about 4% inflation would be relatively quick and we can still get there by the end of this first quarter.
So let's say End of March, April.
But with how the data has come through,particularly around service BMIs, labour market, obviously, continuing to show a lot of resilience.
Not just resilience, perhaps there could be a real acceleration though it's too early to call it that.
All of dad is pointing to the fact that the road from 4% inflation to the feds target 2% inflation is probably going to be more of a grind. It will be slower. And what that really means to the bond market is that they have to price with the fed has said which is we are not going to cut rates this year.
Does it mean that the Fed needs to go higher?
I don't think that the data is supporting the thesis that the economy is real acceleration but rather that the deceleration is it decelerating.
>> It's interesting you say that. The bond market has to price with the Fed is saying. We went into this year, definitely last year, with a disagreement between the feds, saying, we are doing this, and the market was like, yeah, come on.
If I look at the US 10 year bond, 3.9%.
It's been creeping higher.
>> It has, but is plus or minus where we started the year. We saw interest rates fall noticeably in January.
They have since come back particularly on the back of strong labour prints.
But this notion of anticipating that the pivot from the Fed which means they will cut rates in the second half of the year, none of the economic data in the last couple of weeks have supported that narrative so the bond market has had to take fall in interest rates back so we are plus or minus where we started the year.
Again, from our perspective, it just means that it supports this notion that the Fed's right to say we are not going to cut rates this year. But do they really need to hike further?
Are we going to split hairs here?
It's 5 1/4 they should hike to 5 1/2? The reality is again time is what we need at this level of policy rates to work its way through the systemand see the full impact of monetary policy tightening on the economy.
>> Could this change the thesis about how bondslave this year?
With the aggressive rate hikes, bond portfolio is looking great. Now there are those yields being hikes and perhaps even a pause.
What are bonds going to do this year?
>> It depends which bonds we are talking about. If we think about shorter bonds, let's say two year, one year, those can still move higher and those should move higher if we are going to price the full extent of the Fed, including the get to five in a corner, beyond pause for the rest of the year.
But if we think about further out in the yield curve, we look at tenure interest rates, 30 year interest rates, the real question we have to ask ourselves is do we think the Fed will ever cut rates again?
If the answer is yes, then you have to answer, to what level?
If we think that 10 year rates at 4% is aggressive relative to where the Fed has continually communicated an intense longer rate interest rate for the US economy to be an equilibrium which is about 2 1/2%, that 4% today is quite high relative to that longer term policy rate that the Fed intends to get to.
So that's just a long way of saying that there is room, as time goes on and the economy continues to decelerate, for longer dated interest rates to come down.
That fascinating stuff and a great start to the show. We are going to get your questions about fixed income for Alex Gorewicz in a moment, including how bonds stack up against equities for income, corporate versus government bonds and what a recession could mean for the space. A reminder that you can get in touch with us at any time. Just email moneytalklive@td.com were still at the viewer response box under the video player and Whataburger.
Let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
Two US retail giants providing disappointing sales forecast for the year, although Walmart had a strong holiday quarter, expect same-store salesto rise in the low single digits this year. That is consumers struggling with inflationary pressures at home are buying fewer discretionary items.
Home-improvement retailer Home Depot is forecasting virtually flat sales this year after missing revenue expectations in its most recent quarter. Teck Resources is planning to spin off its steelmaking coal business, a move that would separate tag into two publicly listed companies. Teck metals Corporation will focus on metals while the Elk Valley Resources will bully you the home of the coal business.
The plan is subject to regulatory and shareholder approval.
Teck is up modestly today. This was rumoured last week.
Take a look at Suncor naming a new CEO.
Former Imperial oil CEO Rich Kruger will assume the top job on April 3.
In making the announcement, Suncor noted Kruger's record of leading a safety culture. At least a dozen workers have died at Suncor's oilsands operations since 2014.
A quick check in on the markets, we will start on Bay Street with the TSX Composite Index. At first trading day of the week after coming off the three-day weekend.
Down 217 points, little more than 1%.
South of the border, the S&P 500 down to the tune of 1.6%.
We are back now with Alex Gorewicz taking your questions about fixed income. Let's get them.
First question here, we are not going to rank them in terms of importance, how do government bonds stack up against corporate bonds in this environment?
>> Look, when I talk about our expectation for continued deceleration of economic growth and economic activity, it suggests that our assessment is that we are at the late stage of the business cycle or the economic cycle. At this point, you really want Max liquidity and Max safety where liquidity generally means having the ability in a cost-effective manner to get in and out of positions, electives… You have to favourite government bonds over corporate bonds in that scenario, if that's the relative analysis we are doing.
And then from the safety perspective, you do want to move up in quality in the sense of avoiding lower rated issuers that may not make it through the cycle. Is there some level of default risk?
Is there some level of free pricing of the business strategy or of the ability of the issuer to give money back?
And you know, when we make that kind of consideration, obviously governance, as long as they have the willingness to give us our money back, have the ability to do so because they control the printing press. So again, based on the stage of the cycle, we give more… We put more emphasis on government bonds.
>> If someone was looking into the corporate space and hearing a recession, what kind of homework are you doing? You talked about the credit rating but beyond that, you are looking at their ability to repay.
>> that's right. At the moment, although you have touched on corporate earnings and about how there have been some misses,most of those Mrs. in the last couple of quarters have been a concentrated Intact and to some extent retail,but we expect that abroad and in other quarters to other sectors of the economy and to the extent that's true, it puts more pressure on corporations. So as a bond manager, we care about, is through those pressures and earnings, will the company stick to their deleveraging strategies and you want to invest with corporations were girls of their credit quality that are emphasizing deleveraging because it's more likely that you will get your money back.
Do we have any eminent concerns about let's say default? No. But what we do know through recessions over the last 30, 40 years we have analysed is that corporate spreads generally, and almost indiscriminately, regardless of sector or credit quality, tend to tighten in the first couple of quarters of a recession.
They don't really start to widen, in other words underperform government bonds in a significant way until closer to the end of a recession. I think part of the reason here is that companies in general have all kinds of abilities to manage costs and they will try to use all of those strategies before they rely on raising new money and capital markets. To the fact that new issues supplying in the corporate bonds base, whether it's IG or high yield has been relatively low has actually been a big supporter of why credit spreads are so tight right now or still low.
But we think that that changes as companies exhaust all their cost-cutting abilities in coming quarters.
>> Interesting stuff. This next question in a nice follow-on. Come get your guests outlook for high yield?
You're getting a higher yield because there is a higher risk.
>> Correct.
High yield spreads our pricing… We call it the immaculate disinflation. They are not pricing in a recession. In fact, if you look at the last 15 years, and we've had a couple of cycles of spreads widening and then tightening through the last 15 years, high yield spreads are pretty much in line with what we consider normal economic growth.
But if that's not the environment we expect in the coming quarters for the coming months, then they look like they are a little bit rich and perhaps there is opportunity for them to widen.
And part of that is also the implied default probability.
So that's an important consideration when trading high-yield bonds versus investment grade bonds. The implied default rate at the moment is about 4 to 4 1/2%, maybe 4% now.
In a typical recession, it's north of six.
So there is still some room for spreads to widen. I would add one more thing which is really important and that is bank lending standards are tightening and we can't discount how important this is for the real economy. There are a lot of businesses who don't get their capital or their money needs from capital markets.
They get it to the bank channel. And the fact that lending standards are tightening as quickly as they are right now suggests to us that a recession is probably unavoidable.
>> I've heard some commentary and probably even from you over conversations we've had in recent months about the fact that when money was next to free,the companies are looking pretty good. But as it cost more money, that will make a difference.
>> That's a losing combination.
When the Fed is raising rates and banks are tightening lending standards, the combination of those two things, we have never avoided a recession. It will put a lot of pressure on access to capital, as you qualified it.
>> Let's take another question now. Lots coming in.
A viewer wants to know with the current inverted yield curve and assuming an investment horizon greater than five years, doesn't make sense to invest solely in the front-end and roll at maturity?
>> That's a great question.
The answer here is actually something we touched on earlier.
If your investment horizon is greater than five years, states 10, so let's use the 10 year interest rate. In the US at 3.9% today. Over the next 10 years, do you think that the Fed will end up having to cut interest rates from current 5%? If you think the answer is yes, then you have to answer how much do you think they can cut.
So if you look at what is currently priced in the market, it's expected that the Fed will cut may be about 150 basis points from current levels.
That means you go to 3 1/2%. 3 1/2% as a policy rate is still in what the Fed would consider restrictive territory because the Fed has repeatedly told us that they think their neutral rate or the rate that's compatible with an economy in equilibrium is somewhere between two and 3%.
So if the bond market is only expecting that the Fed will eventually cut to 3 1/2%, that doesn't seem like the Fed would do if a recession hit. It seems like they would cut even more. So that means there is actually room for that 3.9% that we see today in the 10 year rate to be a lot lower. That means that as an investor, you're probably not better off by investing in the 5% one year T-bill and then rolling that every year. You are probably better off buying the tenure today. But again, it depends on how you answer this question.
>> What's your view going forward.
>> What's your view going forward.
Ask yourself those questions, and you will know what the right answer.
You think the Fed will cut again and if so how much?
>> Fascinating stuff. At home, do your own research before making investment decisions. We will get back to your questions for Alex Gorewicz on fixed income in a moment.
You can get in touch with us anytime.
Email moneytalklive@td.com.
Nazca to our educational segment of the day.
If you're looking for ways to play the fixed income space, WebBroker has tools which can help you find financial options.
joining us now with Maurice Bryan Rogers, Senior client education instructor with TD Direct Investing. Great to see. Let's jump right into it.
>> All right. Well I know the topic today is really popular right now, it's fixed income.
Rightly so, as interest rates have gone up more recently.
Investors should consider it all the time as part of a diversified portfolio. Many investors over the last decade are focused on diversifying the portfolio with stocks but they may be now considering more fixed income. An element you can add is for the preservation of capital is possibly looking at fixed income mutual funds and ETFs.
Going to jump to WebBroker and show you that there are some ways you can search for this within the mutual fund category.
So what we want to do is go to research and then we are going to select mutual funds. You go to ETFs as well. Find similar step. You can start with mutual funds.
And then you're gonna want to go to the section that is categories. They are going to be listed on the first tab here but this will narrow it down a bit. You can narrow it down further if you want to go with Canadian bond or international bond and so on.
I often times I will do is just control F and type fixed income and it will show me the selections that are here.
To narrow it down quickly right away if you are looking for some exposure to the Canadian bond market and you don't want to buy an individual bond yourself, maybe don't have the know-how or time to learn this, we have classes where you can learn there, but if this is something where you are saying, hey, I don't want to pick an individual bond, I'm not sure if I have enough skill to figure out how to do that or have the time, you can look at these funds and you can see there are quite a few numbers here.
Canadian corporate fixed income, Canadian fixed income, there is a big number. Let's do this first one is an example. It will give you a list that you can now sort bya number of different ways but MorningStar rating, management expense ratio and so on.
Just a quick view of some of the funds that are available and if you continue to click downward, you can see more details on what's available to possibly add to your portfolio.
>> What I always enjoy in WebBroker when I'm going through different kinds of investment options is filtering through things.
Let's talk about using filtering functions for fixed income may be based on some criteria.
>> Yeah, I love the filters as well. It's great to be able to take a huge amount of information and narrow it down to something more specific that you are looking for.
If we jump back into WebBroker again, we can go to the research tab once more and you're gonna go to screeners. So you go to the screeners having what you want to do now is go to mutual funds or ETFs, let's start with mutual funds.
I have a screen that I've used in the past that I want to show you. I want to show you the steps really quickly.
We will go through them all but if you see here, go to create a custom screen.
That's where you're gonna want to click on right there and then you're going to actually set up from all these different categories, that's where you are going to look forward to add different things, management expense ratio or the fund type.
As an example, we will go to fund type. We will click to add the criteria and then it's gonna go down to the bottom and we are going to look for in this drop-down we can say Canadian bond door anything that's more fixed income related like international bond funds and so on.
But if I go back and we go back to the screener tool here again, I'm in a go from the very beginning to show you where I was going, if I go to research, screeners and then mutual funds, this is what I've created. These are the categories that I've added on.
If I go to new matches, I can see that there is an option. Fund type, looking for Canadian bond or an international bond fund, got a lot of criteria added. If I go to view matches, you can filter this and it does default to show TD mutual funds for so you can check that off if you don't want to necessarily see those on top. But then you can sort any of these columns were you can say, okay, these are some Canadian and international bond funds.
Here is the MorningStar rating.
We can see the management expense fee.
They are usually very low, is a low maintenance fund essentially.
Their 10 year, five-year returns and so on.
Returns are gonna be great because you know fixed income is that more flight to safety or preservation of capital and that element of your portfolio that you are trying to achieve that with.
But then the last thing you can do is select a number of these and click on compare and you can do a quick comparison of all the different elements of these funds you may be looking at.
>> Great stuff as always. Thanks for that.
>> Thanks, Greg.
>> Bryan Rogers, Senior client education instructor with TD Direct Investing. Make sure to check out the learning centre in WebBroker for more educational videos, live interactive master classes and upcoming webinars. Before you back to your questions on fixed income for Alex Gorewicz, a reminder about hiking and touchless.
You a question about investing or was driving the markets? Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us. You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here in WebBroker. Just writing your question and hit send.
We will see if one of our guests can get you the answer right here on MoneyTalk Live.
We are back with Alex Gorewicz taking your questions about fixed income. Let's get back to them. Lots coming in.
What areas of fixed income, long-term or short-term bonds, variable or fixed rate preferred shares, etc., does your guest like for potential Building?
>> So I don't hear anything about investment horizon and there so I'm going to assume we are talking about 12 to 24 months out.
Now… Again, it comes back to how you would answer the questions that I had mentioned earlier.
Do you think the central bank will cut rates again, and if so to what level?
And you can do multiple scenarios.
I'm going to try to throw a balanced mix of scenarios… >> We like balance.
Balance is good.
>> Really talk about the returns cues.
If you take the feds dog plot, the 1 They Communicated in December, which shows they are going to continue to raise rates to 5 1/4, be on hold and then gradually bring that interest rate down over the coming years to about 2 1/2%. If you do that math and punch all the bond mass and run all the numbers, what you see is that in about a year from now, 10 year rates should be closer to a 2.8%.
And we are closer to 4% today.
So that fall in interest rates will give you a pretty nice capital gains return, positive capital gains return.
Call it low teens.
Annual still have some income and that, by the way.
You have about, call it… 4% of income and the rest will be capital gains.
So you do the same mass for longer bonds, and you end up with a total return of about 30% over the next year. That's in the Fed top plot scenario and it also assumes by the way that any uncertainty is that we have around the world about geopolitics or monetary policy risks or political risks in the US election cycle etc.
, all of those don't get really in the way of enabling rates to trade close to their fair values.
Now you do another scenario where you say, inflation is never coming back down. We are going to have 3 1/2% to 4% inflation indefinitely.
Then you assume that the Fed can only ever bring the policy rate back down to 4%, not 2 1/2%.
That same math would probably generate a loss, capital gains loss, of about call at 1%.
The outcome would probably be somewhere in the middle, right? The median distribution would be somewhere in the middle. But that returns Q is still highly positive and largely geared to capital gains.
Now, on a broader basis, so that means that I lik government, long government bonds, 10 years, 30 years, for the next 12 to 24 months.in general what is going to generate a positive capital return in bottomland is to look at discount bonds and a lot of corporate bonds, government bonds, even high-yield bonds,they are all trading at a really substantial discount because interest rates have come up and those coupons, outstanding coupons are so low.
So the possibility for generating positive capital gains and fixed income in the coming years is high, regardless of what you buy, short bonds, long bonds, corporate bonds, government bonds.
But in terms of where we see the best value, it would be longer government bonds.
>> Fascinating stuff. Let's take another question now.
this one has a pedal to it. Hunt for yield. Sound like a movie title. Hunt for yield: is it better to look in equities or fixed income?
>> This is not difficult to answer. You threw me off with the hunt for yield. Had me thinking that bonds are usually the unsexy asset class and we now have our 15 minutes of fame.
Everybody wants us to star in the movie which is great.
Look. Probably a couple of things I would say.
One, look at where the earnings yield is on S&P 500. It's 5%.
I can give you a high quality, very safe, well-capitalized bank and the US, your Goldman Sachs, your J.P. Morgan's, your Bank of America.
One year paper from them yields something like 5 1/2 to 6%.
I mean, even a two-year bill, no additional corporate spread, yields 5%, one euro T Bill yields 5% today.
What incentive do you have to put your money into equities for the next year versus, you know, clip your coupon, clip your safe return over the coming year in bond land?
More than that, it goes back to what I answered to the previous question which is look at the return distribution in fixed income for the coming year versus equities.
Equities, they have had a pretty solid start to the year, but if we look at earnings growth or deceleration, rather, we expect that to continue.
When you control the numbers on where earnings are expected to be and you probably end up with a flat issue maybe you could have a small positive gain but you end up with a flat-ish to negative type of return.
So the skewer is very much in favour of fixed income over equities for the coming year.
>> I think about the question, I think maybe interviewers had a little bit in the sense that people will be afraid they're going to miss some sort of run in equities.
We lay out the math, the yield is this, the coupon is this, and they worry about the market moving in another direction.
We are seeing some headwinds for corporations right now in terms of where we could be headed in the economy.
>> That's right, and that's a fundamental aspect.
But if you take a financial market lens, look at what has happened in the last couple weeks as the bond market has had to price in the higher for longer interest rate narrative, taking out those rate cuts for later this year. Stocks haven't done well in the last couple of weeks.
And I think there is a little bit, when I talked about, for example, bond spreads, pricing and immaculate disinflation, equities are doing the exact same thing.
So if the reality has to sink in and be priced in, equities will very likely struggle.
So I hear that narrative about fear of missing out but the reality is coming in with the opposite.
>> Great stuff. Here's one.
The picture changes. What would it take for central banks, what they need to see before they actually cut?
>> So… >> When will you and I be sitting here talking about central banks cutting rates?
>> The answer there is probably an unfortunate one.
It would be when more people start losing their jobs. We've seen some job losses in the tax sector in the last couple of months or last couple of quarters, but they've been largely offset by very strong gains in leisure and hospitality and and other service-based sectors.
Lower income service space I should qualify two. Part of the problem here is that lower income workers have a higher propensity to spend.
So for every dollar they make, they are more likely to go out and spend it whereas higher income workers, the ones that work in IT that have been laid off, those individuals are more likely to save.
So the impact here with some call it nuanced views of the labour market still suggests that spending will remain pretty strong.
So realistically, the Fed wants to see an increase in unemployment that's more broad-based and probably skewed across the income distribution or the income segments of the labour market.
And in addition to that, I would say that there is the wealth effect. So if your house price is relatively elevated, if financial markets are relatively elevated, what ends up happening is people feel wealthy and they feel comfortable spending.
If financial markets don't perform well or if your house price continues to go down, and in the margin it has started doing that in the US and in Canada we are often to 11% peak as established in the first quarter of last year, to the extent that that trend continues, you're more likely to see people going to save more or rein in spending regardless of what their income levels are. So realistically, housing and the jobs market will be key for seeing rate cuts come through from central banks.
>> We will get back your questions for Al Gorewicz on fixed income in a moment.
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We know we are living in a time of elevated inflation, borrowing costs have been going up aggressively before the Bank of Canada hit pause. Retail spending in the month of December continued to rise.
Anthony Okolie has been digging into this latest retail sales data and its indications for the economy.
>> Thanks very much. It seems to buck the trend that people were expecting but as you mentioned, Canadian retail sales rose .5% month over month in December. That matched expectations. When you adjust for the impact of inflation, volume sales were up 1.3% in January. Advance estimates by stats Canada indicate that sales are up .7% in January and the sort of aligns with TD forecasts based on their internal spending which suggests that spending continued to trend higher in January. When we break things up by sectors as the chart shows, sales were up in 7/11 categories.
Sales at car dealerships were actually quite strong, up 3.8%. That's the best result since January 2022. It was led by sales of new cars and of course we have been seeing improved auto production which has been clearing some backlogged orders for the past couple of years.
Traditionally, the end of December is when automakers offer most of the general sales incentives, cash rebates to meet their quotas. So it's not surprising to see strong numbers there. On the downside, we did see sales at gas stations slipped nearly 6% month over month. This was a bit of backdrop from...
when you look at core sales excluding gas and autos, they were up 4% in December.
Some other categories that did well in December, electronics and appliance stores.
dear sales rose for the second straight month in a row. Again, possibly reflecting a bit of a normalization in supply chains there.
Overall, TD Economics suggests that consumer spending picked up late last year and continues early into this year despite higher interest rates and persistent inflation. TD Economics says that if the upside data surprises continue, that could force the Bank of Canada to end their pause and return to the inflation battle.
Greg?
>> So we continue to open our wallets and then we got that inflation report showing the headline inflation continues to ease.
What does TD have to say about that?
>> They expect that core headline measures continue to decline over coming months amid the base effects. The first half of the price surges will continue to fall off.
They believe the Bank of Canada will still need to see the strength continuing for it to be comfortable staying on the sidelines.
So far, resilient Canadian consumers, we have seen an uptick in employment numbers, that seems to sort of complicate the need for inflation to lead to the 1 to 3% targeted but the improvement today in the inflation does give the BOC some breathing room to continue the rate pause.
> Very interesting. Thanks.
>> My pleasure.
>> Anthony Okolie.
A quick check in on the markets.
We just came in an awful long weekend on both sides of the border and we are having a down start to the trading week. At 209 Point Deficit in Toronto,about a full percent on the TSX Composite Index.
Air Canada is under some pressure today, at least when I checked them this morning.
Down to the tune of almost 5%.
The street sentiment is not too positive towards a name after last week's earnings came out from Air Canada.
First Quantum making some gains today, it was earlier in the session.
Highly leveraged to that space. It's a little bit more than 4%.
South of the border, you got the S&P 500 under some pressure today. All the big questions we have talked about during the show: where does the Fed had next, what is the size of the next rate hike, when do they stop and cut?
And then corporate earnings as well.
The S&P 500 down 1.7% we will call that.
The tech heavy NASDAQ, how is it stacking up against the broader market? It is down 2% at this hour.
I mentioned corporate earnings, Home Depot disappointing in its quarter and its forecast, it is down 5.
7%.
Back now with Alex Gorewicz from TD Asset Management talking fixed income. A viewer want to know what a recession would be in for corporate bonds?
>> That means that corporate bonds should underperform government bonds is a recession were to come through for the multitude of reasons that we have already discussed, weaker corporate earnings, higher for longer interest rates, the time that it takes to those interest rates to have an impact on spending or broader consumption and on the labour market.
And again, every recession over the last 30, 40 years has seen corporate bonds spreads, especially in the second half or in the latter part of an actual recession period,has seen spreads widen. Now the magnitude to which they widen will depend on way too many unknowns at the moment.
But one of the most important will be the reaction function of the central bank and the real question after the period that we have been inwith inflation not just volatility, but the level as well rising beyond anything we have experienced for a very long amount of time, since the 70s and 80s, the question is how much will central banks hesitate to throw the kitchen sink at the economy and financial markets the way that they have in more recent sessions? The latest of which was, you know, the early months of the pandemic.
>> We are going to squeeze one more question in here.
You talk about all the things that are unknown. Here's an interesting one. Is the debt ceiling a real risk to the markets or is it just noise?
>> For now, I think it is more of a noise than it is risk, but in the coming months, I think that risk materializes in probably two important things to point out.
One is the timeline. So by the Treasury's own estimate, they have a bunch of college extraordinary measures that they can enact, effectively cost-cutting measures, they could and sure even without the debt ceiling, they could continue paying their debt, their bills.
By the Treasury's estimate, they are going to run out of money or they are going to exhaust all of those extraordinary measures in June.
The Congressional Budget Office has said, no, we put the timeline further, July to September.
Either way, it tells you that second or third quarter is when this becomes a live event. But what is probably most interesting around this was even before it became an issue, the bond market or rather not the bond market but the sovereign CDS market, so this is credit default swap, it's effectively the purest way that we can look to see what is the probability that investors think the US would default, we saw that pop a little bit higher immediately after the messy and drawnout election of the speaker of the house, Kevin McCarthy.
And part of the reason is the Republicans have drawn a line in the sand and said, they expect any increase in debt ceiling to be accompanied by cost-cutting measures. The Democrats don't want to do that.
Etc.
By the fact that he was elected, the immediate pop higher for sovereign CDS in the US suggests investors are saying, now the probability has arisen. It's not a meaningful increase that we saw.
It was only several basis points. But it puts the US clearly as an outlier versus every other country that is actually seeing their sovereign CDS come down in the last couple of months.
Investors are saying, this is noise for now.
But come June, July, it could be become live.
>> Sound like we're going to have things to talk about during our summer shows.
I know you'll be back before that. It's always willing to have you here.
Brilliant performance. Thanks for that.
>> Thank you very much.
>> Our thanks to Alex Gorewicz, portfolio manager of active fixed income at TD Asset Management.
Stay tuned for tomorrow show, Brad Simpson, cheapo strategist Ed TD Wealth will be our guest taking were questions about market strategy.
A reminder that you can get a head start on those questions, just email moneytalklive@td.com.
That's all the time we have for the show today.
Thanks for watching. We will see you tomorrow.
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