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[music] [music] >>Hello I'm Greg Bonnell and 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 will take you through its moving the markets and answer questions about investing.
Coming up on today's show, we get a reaction to the Bank of Canada raising rate hikes to the highest level since 2001. TD Securities Andrew Kelvin joins us.
MoneyTalk's Anthony Okolie will have a look at how small businesses are handling the current environment. And in today's education segment, Caitlin Cormier will walk us through the retirement platform with planning tools available.
You can get in touch with us any time by emailing moneytalklive@td.com or fewer fill out the viewer response box on WebBroker. We'll start with the TSX, sit on Bay Street. Some green on the screen.
Hundred and four point gain a little shy of three quarters of a percent.
Some of the most actively traded names include Laurentian Bank. They say they are exploring Strategic options following some media reports they were mulling a sale and putting together a team to deliver some potential bidders. You are seeing the stock of about 26% right now. A bit of a higher pop out of the open.
Trading around 42 or $43 range for the past hour or so.
We also want to take a look at Aritzia.
It did so well during the pandemic. Latest results coming out, stocks down 19 1/2%.
Higher cost squeezing their margins. The S&P 500 of course, a lot going on today.
Slowing down and taking it all in.
At 28 point rise in the S&P 500 a little more than 1/2%. Another inflation print articulator over the month over month and year-over-year in the market was anticipating.
Piercing a bit of momentum to the upside.
The tech heavy NASDAQ. Hundred and 12 points to the upside. Almost a full percent.
One of the names in the spotlight today is Nvidia. Doing pretty well so far with all the AI excitement and today it's putting on another 2%, 432 bucks and change for that name and that to market update.
The Bank of Canada has delivered yet another 25 basis point hike bumping its trendsetting rate of 5%.
The highest level since 2001. They are also saying it's going to take longer than first expected to get inflation back to target.
Joining us now to discuss Andrew Kelvin, head of Canadian and global rate strategies with TD Securities. A great day to have you here on the program.
>> Great to be here.
>> A lot to unpack. Another hike, rates we have not seen since before I was a homeowner, before I was a Father. A long time ago, 2001.
This will take longer to get to the end game.
What is the big take away?
>> The big take away is that rates are 25 basis points higher.
I look at today's rate hike is really a recognition of the resiliency showed in the economy through the first half of 2023.
The next half of 2023 will be, I think, a little bit bumpier for the economy.
Because there will be some signs of the Bank, perhaps, didn't pay as much attention as they expected but there are some early signs that rate hikes are starting to bring some balance into the labour market.
Households are in a pinch just a little bit more than they were, perhaps, in March. But, for the Bank of Canada, they look at the three month trend of the core inflation metrics. That has not been moving lower for the last little while.
We are stuck between three to half and 4%.
They had a line in the communiqué suggesting that given the lack of downward momentum and core inflation, the path back to 2% was jeopardized.
I am paraphrasing just a little bit but they did use the word "jeopardized" which really popped to me.
They are cognizant that there needs to be a balance between over and under tightening, they are, just a little bit more worried about being able to achieve that price mandate and they are a little bit concerned that they have not done enough to bring inflation lower as evidenced by the fact that they don't expect inflation to hit 2% until mid-2025.
So at the end of the day, as much as they might be uncomfortable for the pendulum affects of the rate hikes already in the system, they did feel that they need to hike.
>> That was the same as even this prepared statement before the government started taking questions after the decision, words popping out to me were "stubborn and persistent" imagine them pushing out the target to the middle of 2025. They needed to see demand, growth slowing, rate wage pressures moderating it and corporate pricing behaviour normalizing.
Let's unpack that.
>> I think we are certainly on the way to wage pressures.
We have seen the unemployment rate decrease in the last two reports.
The most recent labour force survey showed a little bit of a moderation in average hourly wages.
More than was expected. When the Bank of candidate talks about that, 45%, I really emphasize that it's closer to the four than the five now. We are seeing broader measures show some moderation so that's a good sign. Now, on the corporate pricing behaviour, most businesses do expect to see slower output pricing with inflation in the coming years. Based on the Bank of candidates on surveys. The past years. But they also acknowledge that some businesses have not fully passed on some of the recent cost increases through to consumers. Therefore, business will be operating in an environment of higher than normal output costs. Good house cost increases so the Bank is watching that.
But again, we are seeing, if we believe these surveys, signs of progress there.
On the demand side, this has to come back to the household sector. Service ratios in the most recent readings in the first quarter are sharply sharply higher.
The Bank of Canada is watching this.
They think that most households have more in the way of liquid assets to buffer against increases in interest costs and inflation and these sorts of things. It fits that excess savings discussion we have had but I think if you put most Canadian households, they would not tell you they are sitting on a whole bunch of excess savings and I do think with debt services, costs rising, we will start to see households be a little bit more cautious in their spending behaviour.
Through the latter part of this year.
> I will ask you a question, is the Bank done raising interest rates or will rates need to go higher to relieve price pressures? Short answer is: meeting by meeting and decision by a decision. Do you think they are done at 5%?
> I do think they are done at 5%.
The onus is on the banks. If the economy and the demand starts to show signs of slowing the next few months, the Bank of Canada may be comfortable taking in an approach of wait and see. When it comes time to make the decision in September.
In an environment where high interest rates will have increasing impacts on the economy, I am of the view that the next pause, whenever that comes, will be the last pause as it were.
Our view is that with growth likely to slow, the Bank of Canada will probably be able to be on hold to stay on hold in the mid of September and once we get to the latter part of the year, it is our expectation that will see inflation, a little more quickly.
It will still take a long time at 2% but we think it will be before the middle part of 2025.
We think ultimately the BOC will be comfortable with the idea that rates of 5% are enough but what I would suggest is that just because the Bank of Canada may be done hiking here, that doesn't mean rate cuts are around the corner.
>> I wanted to ask you about that.
If they don't think they can get inflation back to 2% by mid-2025, do they need to see it and it hit 2%?
… >> It doesn't hit to but it has to be clear on the path to two. I go back to this idea of the trend underlining inflation between 3 1/2 and four. That needs to be at two.
So you need to get a very clear path to 2% if you have underlying inflation pressures.… One or two quarter. And you have headline inflation that is hauling rapidly.
It would have to be below 3% for the Bank of Canada to be able to credibly ease in an environment we have been overshooting the 2% target for so long. I think it will be very difficult for the Bank to say "okay, I know inflation is running around 3 1/2%. But look, we are sure it's going to two single cut rates". That is very difficult.
The other thing that needs to happen is we need to see that slowing and demanded they talk about.
We need to see a higher unemployment rate.
We need to see more slack in the labour market for the Bank of Canada to be able cut rates.
>> A lot going on in this. We are talking central banks.
We are talking inflation at the core of all this and got the latest read on US consumer Price pressures this morning.
How did you read through that?
>> It was a little bit softer than expected, certainly. I do think another fed hike is still the table here.
I think this speaks that we are quite still in the cycle. The fact that we are seeing a little bit more moderation of inflation in the US is consistent with the idea that this hike in July could be the last from the Fed and I would put forward that the Fed does not have some of the same demand drivers facing them that the Bank of Canada has. So when we do start talking about rate cuts, whatever that may be, we think it will be March for the Fed I should say. It will come more quickly.
>> March 2024.
>> Yes it will happen in the past.
>> I want to make sure we are not talking about 2025.
>> I will confuse dates all day. That's going to happen. More quickly in the US than in Canada. I think that's the point I want to emphasize here. In a way that doesn't require me to actually recite dates.
>> Excellent indeed in a great start the program. Lots to talk about with Andrew Kelvin. The economy, interest rates and everything happening. A reminder of course that you can get in touch with any time by emailing moneytalklive@td.
com or Philip the response on WebBroker.
Right now let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
Shares of Laurentian banker in the spotlight today, that is the Montréal-based lender confirms its conducting a quote Strategic review to maximize shareholder and stakeholder value". Laurentian made the comments in a release following a Globe and Mail report the lender was considering a sale and planned to approach potential buyers.
Aritzia says higher costs hit the bottom line in its most recent quarter, the Vancouver-based retailer net revenue was nearly cut in half compared to the same period last year as margins were squeezed by inflationary pressures. Aritzia is also planning to warn customer traffic slowed at the beginning of June as consumers shift their spending patterns in a high interest rate environment.
Shares of Domino's are getting a lift today amid news the pizza chain is partnering with UBER Eats. Customers will be able to order through the gloom wrap in for a US pilot markets this fall and Domino's says it plans to expand the partnership with UBER Eats to several countries later this year including Canada. Let's check in on the markets with the TSX Composite Index.
Green on the screen on both Bay and Wall Street right now in 149 points, three quarters of a percent.
South of the border, US inflation is quickly a tick lighter than expectations.
We are seeing a movement into stocks. 27 points to the upside. Good for a gain of almost 2/3 of a percent.
All right.
We are back with Andrew Kelvin taking your questions about the economy and interest rates.
Let's get to them.
Here's an interesting one.
What's the potential impact on the part of the Vancouver strike?
>> It's a really difficult thing to quantify in the short term because the impacts won't be linear.
Some of the numbers thrown around suggest that between 500 million and $750 million per day within the trade… If you were to analyse that over a whole year, it's about 20% of Canada straight. More or less.
That's pretty significant number.
In the short term, you put yourself in the position of manufacturer, it might be that you have three weeks worth of inputs on hand.
But the longer the port drags on, the port strike drags on, the longer you like to curtail production.
Conversely, you will only be producing so much if you were unable to get your exports to market if they are just going to be piling up at the port.
So, the longer it goes on, the more significant the impacts will be. It's something that would be short-term inflationary I would expect and something short-term negative for activity as it moves on. I think from a policy standpoint, this is a sort of shock is very easy for the Bank of Canada look through.
They will know there is a strike on GDP strangely weakened for the month of July.
They will be able to point to that port strike is a reason why. So I don't think it has much of the policy implication but it can have certainly significant near-term economic ones.
>> Interesting take on that. Let's talk about the hikes that we are seeing from the Bank of Canada. People want to know if they're doing more harm than good at this point?
It does make the cost of money more expensive.
>> The Bank of Canada is trying to walk a fine line between over and under tightening.
There is a point where it does more harm than good.
The truth is we are not going to be able to answer that question properly until we have the benefit of hindsight.
It is very difficult midcycle to look at where we are and say "this is now the number that is perfect for tightening" that's where the Bank of Canada thought they were in camp in January tightening 50 basis points. I'm very sympathetic to the base perspective that if three month trend core inflation is not moving back towards 2%, their job is to get 2% inflation.
And even if it implies a bit of a negative overshoot on what it's going to do to the economy, their job is to percent inflation and their tool is the overnight policy rate. So, we can certainly get to that point although the ponds we had in January suggest it's very sensitive about that and it may be the case in two or three or one year. Looking back at this saying "right, that last batch of rate hikes was unnecessary and punitive.
I think that's something we may wind up seeing in hindsight." Wherever the cycle ends.
I think in the moment, the Bank of Canada is weighing those risks and just given the fact that the economy was so resilient in the first half of the year, I think they had to sort of, take that resilience on board. I think it's a very dangerous thing for a central bike that is been, missing its inflation target for so long to just assume that resilience was going to stop with no action on their behalf.
>> The last Canadian inflation print, I know some pundits seized on that bit of information that if you stripped out mortgage interest costs which, of course, have moved higher and aggressive rate hike cycle. If you strip those out, inflation would be around 2.4%.
You thought maybe you ought to blame.
What's the counter for that idea?
>> We also have seen pretty negative impacts from energy prices right now.
Those core inflation metrics strip out the really extremely high and extremely low inflationary inputs.
So, that contribution from mortgage interest costs would be accounted for and implicitly discounted in some of these core metrics.
So the Bank of Canada is aware of that.
That would be the counterpoint.
I do think you forgot to cherry pick the things that are very inflationary, we should also look at the things that are outside of the Bank of Canada's control and deflationary. That's the other point I would make there in terms of how much time they can take to figure out if they are in fact, behind the curve.
The risk they face now is because we have been in this high inflation environment for so long, at some point, inflation expectations will become anchored.
If inflation doesn't get 2% for a very long period of time, >> You lose the faith of the public right?
>> Why would I believe, let's say you were seven years, if you fast-forward to the end of this decade, inflation has not hit 2% yet, why would I ever believe it can hit that in the future?
That reflects into corporate pricing behaviours and that will reflect into wage negotiations and it just helps entrench that inflation. So there is a time cost to them setting in the sidelines and waiting to see if they've done enough.
> Next question will follow nicely on that. A viewer wants to know when we will see wage growth starting to cool in this country?
>> I do think we are starting to see some signs of wage growth cooling.
It is still a tight labour market but we are seeing job vacancies become lower.
We are seeing survey reports of labour market type, tightness and show a little bit less intensity in the labour shortage which should fit with us lower wage growth. As the interest rates work their way through the economy, once growth does slow, if it doesn't affect slow later this year, that should be consistent with a better balance of the labour market and to see wage growth returning to more normal levels. So I would expect wage growth and start slowing within the next quarter or two.
But that's entirely predicated on the idea that you know, we see the economy start to slow.
>> Somewhat related to this because of the Bank of Canada took matters in the opening remarks mention the fact that rapid population growth is contributing to both supply and demand. Obviously, more Canadians, more people entering the labour force and easing labour shortages, but also spending an average demand for housing.
That one equation makes more sense in : perhaps wages come down with other effects.
> In the long term I think they just balance.
Supply increases demand and onward we go.
In the short term, I'm not so, it's not so clear to me that that is the case.
In the short term, when you think about people coming to this country, they need to adapt their skills to labour force.
Perhaps they are students.
If your student you're not contributing necessarily a lot of labour but your demanding food, shelter and transportation and all these other things that go along with living here.
So in the short term, I do think it probably is more of a demand driver than a supply driver and you can really see that in the impact on the housing market and rental prices.
We don't build houses quickly enough in this country to accommodate our rapidly growing population.
That's only gonna put up upward pressure on renter prices and I think it's really going to the downward pressure that we saw on house prices on this very sharp increase in interest rates we've seen over the last year or so now.
I think you for getting back to December 2021 or January 2022 and tell people that you're going to be at 5% by 2023, people would have been predicting absolute mayhem in the housing market.
That is not materialized.
In part because this population growth drives shelter demand and, you know, if you open up a textbook of economics what's the first thing that gets hit when interest rates drop go up? House price will be pretty high on that list.
So with the population growth, it will help sort of blunt the impact of high policy rates and contribute to the resilience we've seen in the economy.
>> If you told me that back in the end of 2021 or 2022, I might've made some different choices.
>> I might've sold my house.
>> But here we are today.
As always make sure you do your own research for making investment decisions.
We will get right back with Andrew Kelvin and a reminder that you can email us anytime with your questions at moneytalklive@td.com.
Now let's get to our educational segment of the day. In today's segment were having a look at the retirement planning tools with the WebBroker platform. Caitlin Cormier, Client Education Instructor with TD investing has more.
>> Have you ever wondered how much you need to save in order to retire? Maybe you want to know if you're saving enough or maybe you need to up your contributions.
Tools on WebBroker can help you figure out whether that's the case or not.
Let's go ahead and hop into WebBroker and see what this tool can do.
We're going to click on the "goals " tool at the top menu of this screen.
Once we get here, were just going to go ahead and delete the previous goals so we can get started.
Once were here, we can choose what we like to say for.
We can choose retirement, major purchase or for my money to grow.
You can put in your current age as well as the current income that you are earning.
And what age you would like to retire at.
You can also choose what you would like to have at retirement for income.
We can choose either 60% of our current encumber or 80% or another amount we have chosen. Let's just choose 80% for today and we do have a note saying that on average, people need about 60 to 80% of their current income to maintain a similar lifestyle in retirement.
All right. Now we get to name her goal.
Name our goal.
Let's let savings continue. Next up we will choose our investor profile. If you need some help with choosing which investor profile has the most appropriate look for you, you can do some comparisons and watch a video. Because we have a long time frame, for today's process I will go ahead and choose the aggressive portfolio.
Lastly, we get to say what money we are using towards our retirement goal.
So we are going to click whichever direct investing accounts we have. Any money that we have sitting aside towards this goal and any contributions we are currently making. So I'm just going to put some information in there.
Now, here we have what our actual projection will be as well as how much money we do we need in order to hit our goal. We can see here that we are a bit short of our goal based on our current savings. We can make some changes to get closer to that goal.
We can either increase our retirement age or decrease the income we need or increase our contribution amount. Let's just go ahead and start by increasing our contribution amount.
So we will get a little closer. Still a little bit short… We can also come in and choose maybe to retire a couple of years later.
Again, where getting a little bit closer and then maybe let's just increase our contribution warmer time and see if we can get pretty close. All right. We are pretty close there on our goal.
Another thing that we can also do is we can click to view assumptions and we can put in, for example, if were going to have rental income or a pension or something like that, as far as other income coming in, we are not including in the previous calculation, we can actually put it in here. Click "save" and then we will see, at this point our goal is reduced because of that additional income and our projection is for us to actually be eating our goal. Ready to start, we can stick we can click on starting this plan and go to our dashboard. This is where we can see whether we are on track for our goal or maybe need to make some adjustments along the way. You can even make this page your homepage so you're able to come in and check on it anytime you like. So hopefully this tool will help you with your retirement planning and making sure you are on track.
>> Our thanks to Caitlin Cormier, Client Education Instructor at TD Direct Investing.
Sure to check at the learning centre and WebBroker for more educational videos, live interactive master classes and upcoming webinars.
Now before we get back to your questions about the economy and interest rates for Andrew Kelvin, a reminder of how you can get in touch with us.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live!
Okay, we are back with Andrew Kelvin taking your questions about the economy and interest rates.
In a coming in the last couple of moments.
Let's start getting to them.
Decisions based on data… (Greg reads the question) >> Great question.
One of the really tricky things with Canadian data is it is quite lagged actually.
We will be waiting for quite some time to have a complete read on what happened in Q2. We will not have that until closer to the end of Q3. The most timely piece of data in Canada is the labour force survey.
The jobs data.
The jobs data, the standard error on that report is somewhat within the vicinity of 30,000 jobs.
Which is a lot in the context of a sort of, breakeven rate for the Canadian economy of about 30,000 jobs.
Quite often, we can't say with any tremendous confidence if at any given month, jobs increase or decrease in Canada.
Which is not incredibly helpful.
When we are trying to make decisions on a month-to-month basis.
Over a longer time horizon, these metrics tend to be a bit more reliable. But, a rule of thumb, I think, is generally the more lagged of the data is, the more reliable it will be.
I do think the Canadian GDP figures are quite reliable. In the CPI data is quite reliable as well.
It's just that the jobs numbers in Canada, you need to take with a little bit of a grain of salt or lot of a grade of salt given the volatility there.
> Given the fact that it can be that volatile the margin of error, when people say "look at the longer-term trend we can see where we are really headed" I remember month-to-month you thought this, this, this, somewhere within all that there must be some kind of truth.
>> I try to use six-month trends.
It means I'm looking at quite lagged data though if I'm looking all the way to six months in the past. The other thing which is I think a bit more difficult, is if you think about the way the Central Bank thinks about these things, they have this model and they have an expectation for growth and what that translates to inflation.
Those things can change as the world around us just.
They are estimated and calibrated based on the state of the world that we may not be relevant today.
The world is a very different place now than it was in 2018 or 2019.
So there may be some uncertainty in terms of how economies of all going forward compared to what we were used to.
So I think central bankers need to be a little bit more humble than they have been in the past.
Something I think the Gov.
mackerel referred to in his press conference today given the amount of uncertain Sheri there is about how the economy will function in the face of the future.
How Gov.
Mackel referred.
>> (Greg reads the question) if this is inflationary, wise to present magic?
> Two pieces to that question. I don't think it's an unreasonable target.
When you think about the way the initial cloak, as I said, in the long run, it was quite a balance.
It really is acceleration in immigration that tends to be, in my view, short-term inflationary.
That rate of change on the rate of change.
As we see immigration numbers start to stabilize, one thing we have seen recently is a makeup from some of the may very low migration years during the pandemic.
People think about the lifecycle of a foreign student.
A cohort enters in a cohort leaves rather by permanent residency or by migrating. A couple of years more deriving.
Now of course, arriving without the same… It's created a little bit more of an overshoot there. So I don't expect to be growing the population at the same pace as we have going forward.
I would make that point. Now, in terms of actually being able to hit the 2% target, if we have a short-term inflationary shock coming from the acceleration of population growth, it just implies that you might need a higher overnight rate to hit that 2% target.
It's a calibration in some sense. So I don't think it makes it an invalid target I think it might make it a little bit harder hit but I don't think it invalidates it as a target.
The other piece you mentioned about 2% being magical, I don't know if there's anything magical about 2%. I think it's just sort of a nice balance between not eroding savings too much but avoiding the risk of deflationary episodes.
I think what's difficult and sort of improving is the ability to move off of an inflation target. Potentially to the upside. Because, I talked a little bit early about the difficulty within inflation expectations and you want to keep them quite anchored because once you become unanchored it's very hard to get that genie back in the bottle.
I can imagine a scenario where if you were in, Canada, wherever, if the government were to decide they wanted to raise their inflationary target, it's not obvious to me that they could do that without it spillover to inflation expectations.
>> A wider message being sent out to the public.
>> If the government of Canada says a 3% target is okay, you couldn't hit the last target so why would I believe you would hit this target?
I think his value and stability ran inflation target.
It should be extremely high to move it.
The bar should be.
2% in the past… It should be 2% of the future.
>> Let's get to know the question now.
(Greg reads the question) >> So, I would first speak of tail risk scenarios in the long term inflation remains about target. The higher the bar is for the BOC TEs before inflation hits 2%. The other point I make is all the scenarios mentioned, those are scenarios where I would expect inflation to hit 2% in short order because they imply really really significant demand impacts.
So these scenarios do exist. There's always a so-called "Black Swan" events.
It could happen and be really negative.
The pandemic would've been a great example. That certainly was not on my radar in 2019.
I would stress that the Bank of Canada would be moving lower in these circumstances because there's an overwhelming amount of added evidence to suggest that we are likely to be running into a deflationary environment pretty soon.
It needs to be a shock big enough to drive the economy from persistently high inflation to persistently below target inflation with high degree of certainty.
I think this is why some people in my position were sort of watching what happened in the United States in the spring very closely because had there been more widespread financial contagion in the United States in the spring, that might've been a scenario that would have meant that threshold because Canada, obviously is part of the global economy. A scenario where there is a very deep recession in the United States would have undoubtedly implications here.
That might be a scenario I would look at.
You have a very, very sharp recession for whatever reason, could push the Bank of Canada into easing, because I'm sure that's bad in that scenario, would probably be highly tempted to cut rates right?
That would just be an example. Purely hypothetical.
But those scenarios exist.
I would want to emphasize that you would need to have a very large piece of evidence that you could say with a high degree of certainty that deflation is coming.
That's what would be, that's what it would take for the BOC to start aggressively cutting before there are 2%.
>> We will get back to your questions for Andrew Kelvin on the economy and just moments time and as always make sure you do your own research before making any investment decisions.
A reminder you can get in touch with us at any time.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live!
US small business optimism continued its momentum in June, however owners are still troubled by inflation and labour concerns.
Joining us now with more details and at TD Economics take on it is Anthony Okolie.
>> Thanks very much Greg. US small business optimism Index jumped in June talking market expectations that came in.
1.6 point tired and 91 in June. That marked the highest level since November.
Also representing the 18th consecutive month index has fallen below its 49 year average of 98 points.
Now, small businesses remain broadly pessimistic about the state of the US economy.
But June didn't see a modest turnaround in future expectations.
As the economic index hit its highest level since February 2022.
The biggest gains in expectations for the economy to improve, it was up 10 points to -40%. As well as expectations for higher real sales in six months time. That was up seven points to -14.
Now, current earnings trends also prove slightly up about two points. While reports of insufficient inventory as well as plans to increase inventory, both dipped slightly by about one point last month.
Now, firms are still clearly worried about inflation and labour.
They continue to remain concerns for small businesses but a majority of small businesses in the US still report their intention to increase employment and this lines up with the resilience that we've seen in the US labour market in recent months.
Meanwhile, the share of firms with unfulfilled job openings stay elevated but it did fall slightly to two points to about 42%. The quality of labour concerns were unchanged. At about 24% of business owners identifying this is a top business problem.
Interesting, inflationary prices fell in June and they are now tied with quality labour concerns to be the top issues facing small businesses in the US. Greg?
>> Interesting for the timing of the report because businesses are concerned about inflation.
We have a fresh read on consumer prices in the US. What are they saying about that?
>> Aspects of the survey related showed a mix sign in June.
For example tensions raised compensation fell to the lowest level in two years, plants raising prices in the future hitting a seven-month high in June. So a bit of a mixed picture.
But today's June CPI print shows inflation is moving in the right direction.
Now, TD Economics cautions that progress should not be confused with mission accomplished.
Core inflation is still running at multiple at a 2% inflation target.
TD Economics warns that if the future path of disinflation decelerates materially, that would likely be additional upside risks to interest rates.
That of course could read an increase in inflationary concerns among small businesses in the United States. Greg?
>> Interesting stuff thanks Anthony.
>> My pleasure.
>> MoneyTalk Live Anthony Okolie. Now for an update on the markets.
>> This is td's advanced dashboard. Of course the heat map function, viewing market movers. Let's take a look at the 660 by price and by volume. Let's start with the green on the screen. Clearly it is in the material space. Names like Kinross, the K almost up 5%. You have Barrick Gold up about 4 1/2%.
And First Quantum, about 3 1/2%. You saw a big pullback in the US dollar today with a slightly softer than expected US inflation playing into the commodities trade and in the energy space, a bit of a mixed bag is in it? You have Imperial oil down to the tune of about 2%, Chenault was down to the tune of 1/2% but Enbridge modestly positive.
Now, we can use a lot of different screens here. It could be the S&P 100, let's take a look at what's happening here.
Definitely some strength in tech today.
You have nameless like Nvidia up to .6%, Meta up almost 3%, Cisco down about 2 1/2.
You can get more information on the dashboard by visiting here.
Back with Andrew Kelvin. A pretty busy day. Somebody wants to talk about the state of the Canadian housing market.
Another 25 basis point from the Bank of Canada.
>> So I come back to the basics of supply and demand here.
Obviously another rate hike from the Bank of Canada will have negative impacts on the housing market. That's by design on some level.
The Baker candidate did know that the housing market proved more resilient than expected because of a very strong population growth. I would just put forward that as long as there is a generalized shortage of housing in this country, we are unlikely to see very large scale declines in house prices absent a very large employment shock.
As things stand today, I don't think this does much to change the disposition of supply and demand in the housing market.
I'm not necessarily incredibly optimistic of the housing market from here but Norm I especially pessimistic.
>> When you talked about, obviously, it's been a long-standing thought of the housing market, underpinning the fact that I have a job and I can make a mortgage payment. I'm not forced to sell.
The Bank of Canada today putting the rates… They do not see a recession.
How do we square them with them slowing things without even sacrificing growth the most part marked its lower growth but not negative.
>> I think you get per capita terms.
The Bank of Canada saw GDP growth (…) I would expect to see population growth above 1.2% next year.
I think GDP per capita will be negative this year as well. So that's how you square that.
It's not a recession and every term because the economy is still growing.
We are adding households.
Really we are growing at a pace that is not bringing more slack into the economy.
I think that's how you sort of square that circle of growth.
But as we have this very strong drive for population growth it avoids us falling into a technical recession and I think there is a state of the world where a long way from a technical recession but a lot of people feel like we might be in one.
> We can squeeze one more question and for Andrew.
[Greg reads the question] >> Our expectation is Government of Canada bond yields will be lower by the end of this year.
As it becomes evident that central banks are done with hikes. That's our expectation for bond yields. You know, to the extent to the extent that GICs follow.
That's the direction I would expect GICs to move. In the short term it's a question of if central banks are finished with rates after the month of July.
Not just in Canada, the US matters to.
Because the US bond market really matters for Canadian bond market. We have seen really extreme volatility in government bond yields in both Canada and the United States.
So, I guess, from that perspective, I wouldn't be confident to say we definitely at the top on yields. I would not want to make that statement here.
But we do think that by the time we hit the end of 2023, by the time we had 2024, we do expect government bond yields to move lower and I would expect that would have a drag on fixed income products very broadly.
> Always great insights and great conversation especially in a day like this.
>> Thank you.
>> Our thanks to Andrew Kelvin from TD Securities.
Be sure of Canadian and global rate strategy with TD Securities. And be sure to always do your own research before making any investment decisions. Stay tuned on Thursday, Juliana Faircloth, Industrials Analyst with TD Asset Management will be our guest taking your questions what industrial stocks meaning rails, airlines, auto stocks and more. A reminder you can email us anytime with your questions@moneytalkliveht.com.
That's all the time for today. Thanks for watching and take care.
[music]
[music] [music] >>Hello I'm Greg Bonnell and 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 will take you through its moving the markets and answer questions about investing.
Coming up on today's show, we get a reaction to the Bank of Canada raising rate hikes to the highest level since 2001. TD Securities Andrew Kelvin joins us.
MoneyTalk's Anthony Okolie will have a look at how small businesses are handling the current environment. And in today's education segment, Caitlin Cormier will walk us through the retirement platform with planning tools available.
You can get in touch with us any time by emailing moneytalklive@td.com or fewer fill out the viewer response box on WebBroker. We'll start with the TSX, sit on Bay Street. Some green on the screen.
Hundred and four point gain a little shy of three quarters of a percent.
Some of the most actively traded names include Laurentian Bank. They say they are exploring Strategic options following some media reports they were mulling a sale and putting together a team to deliver some potential bidders. You are seeing the stock of about 26% right now. A bit of a higher pop out of the open.
Trading around 42 or $43 range for the past hour or so.
We also want to take a look at Aritzia.
It did so well during the pandemic. Latest results coming out, stocks down 19 1/2%.
Higher cost squeezing their margins. The S&P 500 of course, a lot going on today.
Slowing down and taking it all in.
At 28 point rise in the S&P 500 a little more than 1/2%. Another inflation print articulator over the month over month and year-over-year in the market was anticipating.
Piercing a bit of momentum to the upside.
The tech heavy NASDAQ. Hundred and 12 points to the upside. Almost a full percent.
One of the names in the spotlight today is Nvidia. Doing pretty well so far with all the AI excitement and today it's putting on another 2%, 432 bucks and change for that name and that to market update.
The Bank of Canada has delivered yet another 25 basis point hike bumping its trendsetting rate of 5%.
The highest level since 2001. They are also saying it's going to take longer than first expected to get inflation back to target.
Joining us now to discuss Andrew Kelvin, head of Canadian and global rate strategies with TD Securities. A great day to have you here on the program.
>> Great to be here.
>> A lot to unpack. Another hike, rates we have not seen since before I was a homeowner, before I was a Father. A long time ago, 2001.
This will take longer to get to the end game.
What is the big take away?
>> The big take away is that rates are 25 basis points higher.
I look at today's rate hike is really a recognition of the resiliency showed in the economy through the first half of 2023.
The next half of 2023 will be, I think, a little bit bumpier for the economy.
Because there will be some signs of the Bank, perhaps, didn't pay as much attention as they expected but there are some early signs that rate hikes are starting to bring some balance into the labour market.
Households are in a pinch just a little bit more than they were, perhaps, in March. But, for the Bank of Canada, they look at the three month trend of the core inflation metrics. That has not been moving lower for the last little while.
We are stuck between three to half and 4%.
They had a line in the communiqué suggesting that given the lack of downward momentum and core inflation, the path back to 2% was jeopardized.
I am paraphrasing just a little bit but they did use the word "jeopardized" which really popped to me.
They are cognizant that there needs to be a balance between over and under tightening, they are, just a little bit more worried about being able to achieve that price mandate and they are a little bit concerned that they have not done enough to bring inflation lower as evidenced by the fact that they don't expect inflation to hit 2% until mid-2025.
So at the end of the day, as much as they might be uncomfortable for the pendulum affects of the rate hikes already in the system, they did feel that they need to hike.
>> That was the same as even this prepared statement before the government started taking questions after the decision, words popping out to me were "stubborn and persistent" imagine them pushing out the target to the middle of 2025. They needed to see demand, growth slowing, rate wage pressures moderating it and corporate pricing behaviour normalizing.
Let's unpack that.
>> I think we are certainly on the way to wage pressures.
We have seen the unemployment rate decrease in the last two reports.
The most recent labour force survey showed a little bit of a moderation in average hourly wages.
More than was expected. When the Bank of candidate talks about that, 45%, I really emphasize that it's closer to the four than the five now. We are seeing broader measures show some moderation so that's a good sign. Now, on the corporate pricing behaviour, most businesses do expect to see slower output pricing with inflation in the coming years. Based on the Bank of candidates on surveys. The past years. But they also acknowledge that some businesses have not fully passed on some of the recent cost increases through to consumers. Therefore, business will be operating in an environment of higher than normal output costs. Good house cost increases so the Bank is watching that.
But again, we are seeing, if we believe these surveys, signs of progress there.
On the demand side, this has to come back to the household sector. Service ratios in the most recent readings in the first quarter are sharply sharply higher.
The Bank of Canada is watching this.
They think that most households have more in the way of liquid assets to buffer against increases in interest costs and inflation and these sorts of things. It fits that excess savings discussion we have had but I think if you put most Canadian households, they would not tell you they are sitting on a whole bunch of excess savings and I do think with debt services, costs rising, we will start to see households be a little bit more cautious in their spending behaviour.
Through the latter part of this year.
> I will ask you a question, is the Bank done raising interest rates or will rates need to go higher to relieve price pressures? Short answer is: meeting by meeting and decision by a decision. Do you think they are done at 5%?
> I do think they are done at 5%.
The onus is on the banks. If the economy and the demand starts to show signs of slowing the next few months, the Bank of Canada may be comfortable taking in an approach of wait and see. When it comes time to make the decision in September.
In an environment where high interest rates will have increasing impacts on the economy, I am of the view that the next pause, whenever that comes, will be the last pause as it were.
Our view is that with growth likely to slow, the Bank of Canada will probably be able to be on hold to stay on hold in the mid of September and once we get to the latter part of the year, it is our expectation that will see inflation, a little more quickly.
It will still take a long time at 2% but we think it will be before the middle part of 2025.
We think ultimately the BOC will be comfortable with the idea that rates of 5% are enough but what I would suggest is that just because the Bank of Canada may be done hiking here, that doesn't mean rate cuts are around the corner.
>> I wanted to ask you about that.
If they don't think they can get inflation back to 2% by mid-2025, do they need to see it and it hit 2%?
… >> It doesn't hit to but it has to be clear on the path to two. I go back to this idea of the trend underlining inflation between 3 1/2 and four. That needs to be at two.
So you need to get a very clear path to 2% if you have underlying inflation pressures.… One or two quarter. And you have headline inflation that is hauling rapidly.
It would have to be below 3% for the Bank of Canada to be able to credibly ease in an environment we have been overshooting the 2% target for so long. I think it will be very difficult for the Bank to say "okay, I know inflation is running around 3 1/2%. But look, we are sure it's going to two single cut rates". That is very difficult.
The other thing that needs to happen is we need to see that slowing and demanded they talk about.
We need to see a higher unemployment rate.
We need to see more slack in the labour market for the Bank of Canada to be able cut rates.
>> A lot going on in this. We are talking central banks.
We are talking inflation at the core of all this and got the latest read on US consumer Price pressures this morning.
How did you read through that?
>> It was a little bit softer than expected, certainly. I do think another fed hike is still the table here.
I think this speaks that we are quite still in the cycle. The fact that we are seeing a little bit more moderation of inflation in the US is consistent with the idea that this hike in July could be the last from the Fed and I would put forward that the Fed does not have some of the same demand drivers facing them that the Bank of Canada has. So when we do start talking about rate cuts, whatever that may be, we think it will be March for the Fed I should say. It will come more quickly.
>> March 2024.
>> Yes it will happen in the past.
>> I want to make sure we are not talking about 2025.
>> I will confuse dates all day. That's going to happen. More quickly in the US than in Canada. I think that's the point I want to emphasize here. In a way that doesn't require me to actually recite dates.
>> Excellent indeed in a great start the program. Lots to talk about with Andrew Kelvin. The economy, interest rates and everything happening. A reminder of course that you can get in touch with any time by emailing moneytalklive@td.
com or Philip the response on WebBroker.
Right now let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
Shares of Laurentian banker in the spotlight today, that is the Montréal-based lender confirms its conducting a quote Strategic review to maximize shareholder and stakeholder value". Laurentian made the comments in a release following a Globe and Mail report the lender was considering a sale and planned to approach potential buyers.
Aritzia says higher costs hit the bottom line in its most recent quarter, the Vancouver-based retailer net revenue was nearly cut in half compared to the same period last year as margins were squeezed by inflationary pressures. Aritzia is also planning to warn customer traffic slowed at the beginning of June as consumers shift their spending patterns in a high interest rate environment.
Shares of Domino's are getting a lift today amid news the pizza chain is partnering with UBER Eats. Customers will be able to order through the gloom wrap in for a US pilot markets this fall and Domino's says it plans to expand the partnership with UBER Eats to several countries later this year including Canada. Let's check in on the markets with the TSX Composite Index.
Green on the screen on both Bay and Wall Street right now in 149 points, three quarters of a percent.
South of the border, US inflation is quickly a tick lighter than expectations.
We are seeing a movement into stocks. 27 points to the upside. Good for a gain of almost 2/3 of a percent.
All right.
We are back with Andrew Kelvin taking your questions about the economy and interest rates.
Let's get to them.
Here's an interesting one.
What's the potential impact on the part of the Vancouver strike?
>> It's a really difficult thing to quantify in the short term because the impacts won't be linear.
Some of the numbers thrown around suggest that between 500 million and $750 million per day within the trade… If you were to analyse that over a whole year, it's about 20% of Canada straight. More or less.
That's pretty significant number.
In the short term, you put yourself in the position of manufacturer, it might be that you have three weeks worth of inputs on hand.
But the longer the port drags on, the port strike drags on, the longer you like to curtail production.
Conversely, you will only be producing so much if you were unable to get your exports to market if they are just going to be piling up at the port.
So, the longer it goes on, the more significant the impacts will be. It's something that would be short-term inflationary I would expect and something short-term negative for activity as it moves on. I think from a policy standpoint, this is a sort of shock is very easy for the Bank of Canada look through.
They will know there is a strike on GDP strangely weakened for the month of July.
They will be able to point to that port strike is a reason why. So I don't think it has much of the policy implication but it can have certainly significant near-term economic ones.
>> Interesting take on that. Let's talk about the hikes that we are seeing from the Bank of Canada. People want to know if they're doing more harm than good at this point?
It does make the cost of money more expensive.
>> The Bank of Canada is trying to walk a fine line between over and under tightening.
There is a point where it does more harm than good.
The truth is we are not going to be able to answer that question properly until we have the benefit of hindsight.
It is very difficult midcycle to look at where we are and say "this is now the number that is perfect for tightening" that's where the Bank of Canada thought they were in camp in January tightening 50 basis points. I'm very sympathetic to the base perspective that if three month trend core inflation is not moving back towards 2%, their job is to get 2% inflation.
And even if it implies a bit of a negative overshoot on what it's going to do to the economy, their job is to percent inflation and their tool is the overnight policy rate. So, we can certainly get to that point although the ponds we had in January suggest it's very sensitive about that and it may be the case in two or three or one year. Looking back at this saying "right, that last batch of rate hikes was unnecessary and punitive.
I think that's something we may wind up seeing in hindsight." Wherever the cycle ends.
I think in the moment, the Bank of Canada is weighing those risks and just given the fact that the economy was so resilient in the first half of the year, I think they had to sort of, take that resilience on board. I think it's a very dangerous thing for a central bike that is been, missing its inflation target for so long to just assume that resilience was going to stop with no action on their behalf.
>> The last Canadian inflation print, I know some pundits seized on that bit of information that if you stripped out mortgage interest costs which, of course, have moved higher and aggressive rate hike cycle. If you strip those out, inflation would be around 2.4%.
You thought maybe you ought to blame.
What's the counter for that idea?
>> We also have seen pretty negative impacts from energy prices right now.
Those core inflation metrics strip out the really extremely high and extremely low inflationary inputs.
So, that contribution from mortgage interest costs would be accounted for and implicitly discounted in some of these core metrics.
So the Bank of Canada is aware of that.
That would be the counterpoint.
I do think you forgot to cherry pick the things that are very inflationary, we should also look at the things that are outside of the Bank of Canada's control and deflationary. That's the other point I would make there in terms of how much time they can take to figure out if they are in fact, behind the curve.
The risk they face now is because we have been in this high inflation environment for so long, at some point, inflation expectations will become anchored.
If inflation doesn't get 2% for a very long period of time, >> You lose the faith of the public right?
>> Why would I believe, let's say you were seven years, if you fast-forward to the end of this decade, inflation has not hit 2% yet, why would I ever believe it can hit that in the future?
That reflects into corporate pricing behaviours and that will reflect into wage negotiations and it just helps entrench that inflation. So there is a time cost to them setting in the sidelines and waiting to see if they've done enough.
> Next question will follow nicely on that. A viewer wants to know when we will see wage growth starting to cool in this country?
>> I do think we are starting to see some signs of wage growth cooling.
It is still a tight labour market but we are seeing job vacancies become lower.
We are seeing survey reports of labour market type, tightness and show a little bit less intensity in the labour shortage which should fit with us lower wage growth. As the interest rates work their way through the economy, once growth does slow, if it doesn't affect slow later this year, that should be consistent with a better balance of the labour market and to see wage growth returning to more normal levels. So I would expect wage growth and start slowing within the next quarter or two.
But that's entirely predicated on the idea that you know, we see the economy start to slow.
>> Somewhat related to this because of the Bank of Canada took matters in the opening remarks mention the fact that rapid population growth is contributing to both supply and demand. Obviously, more Canadians, more people entering the labour force and easing labour shortages, but also spending an average demand for housing.
That one equation makes more sense in : perhaps wages come down with other effects.
> In the long term I think they just balance.
Supply increases demand and onward we go.
In the short term, I'm not so, it's not so clear to me that that is the case.
In the short term, when you think about people coming to this country, they need to adapt their skills to labour force.
Perhaps they are students.
If your student you're not contributing necessarily a lot of labour but your demanding food, shelter and transportation and all these other things that go along with living here.
So in the short term, I do think it probably is more of a demand driver than a supply driver and you can really see that in the impact on the housing market and rental prices.
We don't build houses quickly enough in this country to accommodate our rapidly growing population.
That's only gonna put up upward pressure on renter prices and I think it's really going to the downward pressure that we saw on house prices on this very sharp increase in interest rates we've seen over the last year or so now.
I think you for getting back to December 2021 or January 2022 and tell people that you're going to be at 5% by 2023, people would have been predicting absolute mayhem in the housing market.
That is not materialized.
In part because this population growth drives shelter demand and, you know, if you open up a textbook of economics what's the first thing that gets hit when interest rates drop go up? House price will be pretty high on that list.
So with the population growth, it will help sort of blunt the impact of high policy rates and contribute to the resilience we've seen in the economy.
>> If you told me that back in the end of 2021 or 2022, I might've made some different choices.
>> I might've sold my house.
>> But here we are today.
As always make sure you do your own research for making investment decisions.
We will get right back with Andrew Kelvin and a reminder that you can email us anytime with your questions at moneytalklive@td.com.
Now let's get to our educational segment of the day. In today's segment were having a look at the retirement planning tools with the WebBroker platform. Caitlin Cormier, Client Education Instructor with TD investing has more.
>> Have you ever wondered how much you need to save in order to retire? Maybe you want to know if you're saving enough or maybe you need to up your contributions.
Tools on WebBroker can help you figure out whether that's the case or not.
Let's go ahead and hop into WebBroker and see what this tool can do.
We're going to click on the "goals " tool at the top menu of this screen.
Once we get here, were just going to go ahead and delete the previous goals so we can get started.
Once were here, we can choose what we like to say for.
We can choose retirement, major purchase or for my money to grow.
You can put in your current age as well as the current income that you are earning.
And what age you would like to retire at.
You can also choose what you would like to have at retirement for income.
We can choose either 60% of our current encumber or 80% or another amount we have chosen. Let's just choose 80% for today and we do have a note saying that on average, people need about 60 to 80% of their current income to maintain a similar lifestyle in retirement.
All right. Now we get to name her goal.
Name our goal.
Let's let savings continue. Next up we will choose our investor profile. If you need some help with choosing which investor profile has the most appropriate look for you, you can do some comparisons and watch a video. Because we have a long time frame, for today's process I will go ahead and choose the aggressive portfolio.
Lastly, we get to say what money we are using towards our retirement goal.
So we are going to click whichever direct investing accounts we have. Any money that we have sitting aside towards this goal and any contributions we are currently making. So I'm just going to put some information in there.
Now, here we have what our actual projection will be as well as how much money we do we need in order to hit our goal. We can see here that we are a bit short of our goal based on our current savings. We can make some changes to get closer to that goal.
We can either increase our retirement age or decrease the income we need or increase our contribution amount. Let's just go ahead and start by increasing our contribution amount.
So we will get a little closer. Still a little bit short… We can also come in and choose maybe to retire a couple of years later.
Again, where getting a little bit closer and then maybe let's just increase our contribution warmer time and see if we can get pretty close. All right. We are pretty close there on our goal.
Another thing that we can also do is we can click to view assumptions and we can put in, for example, if were going to have rental income or a pension or something like that, as far as other income coming in, we are not including in the previous calculation, we can actually put it in here. Click "save" and then we will see, at this point our goal is reduced because of that additional income and our projection is for us to actually be eating our goal. Ready to start, we can stick we can click on starting this plan and go to our dashboard. This is where we can see whether we are on track for our goal or maybe need to make some adjustments along the way. You can even make this page your homepage so you're able to come in and check on it anytime you like. So hopefully this tool will help you with your retirement planning and making sure you are on track.
>> Our thanks to Caitlin Cormier, Client Education Instructor at TD Direct Investing.
Sure to check at the learning centre and WebBroker for more educational videos, live interactive master classes and upcoming webinars.
Now before we get back to your questions about the economy and interest rates for Andrew Kelvin, a reminder of how you can get in touch with us.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live!
Okay, we are back with Andrew Kelvin taking your questions about the economy and interest rates.
In a coming in the last couple of moments.
Let's start getting to them.
Decisions based on data… (Greg reads the question) >> Great question.
One of the really tricky things with Canadian data is it is quite lagged actually.
We will be waiting for quite some time to have a complete read on what happened in Q2. We will not have that until closer to the end of Q3. The most timely piece of data in Canada is the labour force survey.
The jobs data.
The jobs data, the standard error on that report is somewhat within the vicinity of 30,000 jobs.
Which is a lot in the context of a sort of, breakeven rate for the Canadian economy of about 30,000 jobs.
Quite often, we can't say with any tremendous confidence if at any given month, jobs increase or decrease in Canada.
Which is not incredibly helpful.
When we are trying to make decisions on a month-to-month basis.
Over a longer time horizon, these metrics tend to be a bit more reliable. But, a rule of thumb, I think, is generally the more lagged of the data is, the more reliable it will be.
I do think the Canadian GDP figures are quite reliable. In the CPI data is quite reliable as well.
It's just that the jobs numbers in Canada, you need to take with a little bit of a grain of salt or lot of a grade of salt given the volatility there.
> Given the fact that it can be that volatile the margin of error, when people say "look at the longer-term trend we can see where we are really headed" I remember month-to-month you thought this, this, this, somewhere within all that there must be some kind of truth.
>> I try to use six-month trends.
It means I'm looking at quite lagged data though if I'm looking all the way to six months in the past. The other thing which is I think a bit more difficult, is if you think about the way the Central Bank thinks about these things, they have this model and they have an expectation for growth and what that translates to inflation.
Those things can change as the world around us just.
They are estimated and calibrated based on the state of the world that we may not be relevant today.
The world is a very different place now than it was in 2018 or 2019.
So there may be some uncertainty in terms of how economies of all going forward compared to what we were used to.
So I think central bankers need to be a little bit more humble than they have been in the past.
Something I think the Gov.
mackerel referred to in his press conference today given the amount of uncertain Sheri there is about how the economy will function in the face of the future.
How Gov.
Mackel referred.
>> (Greg reads the question) if this is inflationary, wise to present magic?
> Two pieces to that question. I don't think it's an unreasonable target.
When you think about the way the initial cloak, as I said, in the long run, it was quite a balance.
It really is acceleration in immigration that tends to be, in my view, short-term inflationary.
That rate of change on the rate of change.
As we see immigration numbers start to stabilize, one thing we have seen recently is a makeup from some of the may very low migration years during the pandemic.
People think about the lifecycle of a foreign student.
A cohort enters in a cohort leaves rather by permanent residency or by migrating. A couple of years more deriving.
Now of course, arriving without the same… It's created a little bit more of an overshoot there. So I don't expect to be growing the population at the same pace as we have going forward.
I would make that point. Now, in terms of actually being able to hit the 2% target, if we have a short-term inflationary shock coming from the acceleration of population growth, it just implies that you might need a higher overnight rate to hit that 2% target.
It's a calibration in some sense. So I don't think it makes it an invalid target I think it might make it a little bit harder hit but I don't think it invalidates it as a target.
The other piece you mentioned about 2% being magical, I don't know if there's anything magical about 2%. I think it's just sort of a nice balance between not eroding savings too much but avoiding the risk of deflationary episodes.
I think what's difficult and sort of improving is the ability to move off of an inflation target. Potentially to the upside. Because, I talked a little bit early about the difficulty within inflation expectations and you want to keep them quite anchored because once you become unanchored it's very hard to get that genie back in the bottle.
I can imagine a scenario where if you were in, Canada, wherever, if the government were to decide they wanted to raise their inflationary target, it's not obvious to me that they could do that without it spillover to inflation expectations.
>> A wider message being sent out to the public.
>> If the government of Canada says a 3% target is okay, you couldn't hit the last target so why would I believe you would hit this target?
I think his value and stability ran inflation target.
It should be extremely high to move it.
The bar should be.
2% in the past… It should be 2% of the future.
>> Let's get to know the question now.
(Greg reads the question) >> So, I would first speak of tail risk scenarios in the long term inflation remains about target. The higher the bar is for the BOC TEs before inflation hits 2%. The other point I make is all the scenarios mentioned, those are scenarios where I would expect inflation to hit 2% in short order because they imply really really significant demand impacts.
So these scenarios do exist. There's always a so-called "Black Swan" events.
It could happen and be really negative.
The pandemic would've been a great example. That certainly was not on my radar in 2019.
I would stress that the Bank of Canada would be moving lower in these circumstances because there's an overwhelming amount of added evidence to suggest that we are likely to be running into a deflationary environment pretty soon.
It needs to be a shock big enough to drive the economy from persistently high inflation to persistently below target inflation with high degree of certainty.
I think this is why some people in my position were sort of watching what happened in the United States in the spring very closely because had there been more widespread financial contagion in the United States in the spring, that might've been a scenario that would have meant that threshold because Canada, obviously is part of the global economy. A scenario where there is a very deep recession in the United States would have undoubtedly implications here.
That might be a scenario I would look at.
You have a very, very sharp recession for whatever reason, could push the Bank of Canada into easing, because I'm sure that's bad in that scenario, would probably be highly tempted to cut rates right?
That would just be an example. Purely hypothetical.
But those scenarios exist.
I would want to emphasize that you would need to have a very large piece of evidence that you could say with a high degree of certainty that deflation is coming.
That's what would be, that's what it would take for the BOC to start aggressively cutting before there are 2%.
>> We will get back to your questions for Andrew Kelvin on the economy and just moments time and as always make sure you do your own research before making any investment decisions.
A reminder you can get in touch with us at any time.
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US small business optimism continued its momentum in June, however owners are still troubled by inflation and labour concerns.
Joining us now with more details and at TD Economics take on it is Anthony Okolie.
>> Thanks very much Greg. US small business optimism Index jumped in June talking market expectations that came in.
1.6 point tired and 91 in June. That marked the highest level since November.
Also representing the 18th consecutive month index has fallen below its 49 year average of 98 points.
Now, small businesses remain broadly pessimistic about the state of the US economy.
But June didn't see a modest turnaround in future expectations.
As the economic index hit its highest level since February 2022.
The biggest gains in expectations for the economy to improve, it was up 10 points to -40%. As well as expectations for higher real sales in six months time. That was up seven points to -14.
Now, current earnings trends also prove slightly up about two points. While reports of insufficient inventory as well as plans to increase inventory, both dipped slightly by about one point last month.
Now, firms are still clearly worried about inflation and labour.
They continue to remain concerns for small businesses but a majority of small businesses in the US still report their intention to increase employment and this lines up with the resilience that we've seen in the US labour market in recent months.
Meanwhile, the share of firms with unfulfilled job openings stay elevated but it did fall slightly to two points to about 42%. The quality of labour concerns were unchanged. At about 24% of business owners identifying this is a top business problem.
Interesting, inflationary prices fell in June and they are now tied with quality labour concerns to be the top issues facing small businesses in the US. Greg?
>> Interesting for the timing of the report because businesses are concerned about inflation.
We have a fresh read on consumer prices in the US. What are they saying about that?
>> Aspects of the survey related showed a mix sign in June.
For example tensions raised compensation fell to the lowest level in two years, plants raising prices in the future hitting a seven-month high in June. So a bit of a mixed picture.
But today's June CPI print shows inflation is moving in the right direction.
Now, TD Economics cautions that progress should not be confused with mission accomplished.
Core inflation is still running at multiple at a 2% inflation target.
TD Economics warns that if the future path of disinflation decelerates materially, that would likely be additional upside risks to interest rates.
That of course could read an increase in inflationary concerns among small businesses in the United States. Greg?
>> Interesting stuff thanks Anthony.
>> My pleasure.
>> MoneyTalk Live Anthony Okolie. Now for an update on the markets.
>> This is td's advanced dashboard. Of course the heat map function, viewing market movers. Let's take a look at the 660 by price and by volume. Let's start with the green on the screen. Clearly it is in the material space. Names like Kinross, the K almost up 5%. You have Barrick Gold up about 4 1/2%.
And First Quantum, about 3 1/2%. You saw a big pullback in the US dollar today with a slightly softer than expected US inflation playing into the commodities trade and in the energy space, a bit of a mixed bag is in it? You have Imperial oil down to the tune of about 2%, Chenault was down to the tune of 1/2% but Enbridge modestly positive.
Now, we can use a lot of different screens here. It could be the S&P 100, let's take a look at what's happening here.
Definitely some strength in tech today.
You have nameless like Nvidia up to .6%, Meta up almost 3%, Cisco down about 2 1/2.
You can get more information on the dashboard by visiting here.
Back with Andrew Kelvin. A pretty busy day. Somebody wants to talk about the state of the Canadian housing market.
Another 25 basis point from the Bank of Canada.
>> So I come back to the basics of supply and demand here.
Obviously another rate hike from the Bank of Canada will have negative impacts on the housing market. That's by design on some level.
The Baker candidate did know that the housing market proved more resilient than expected because of a very strong population growth. I would just put forward that as long as there is a generalized shortage of housing in this country, we are unlikely to see very large scale declines in house prices absent a very large employment shock.
As things stand today, I don't think this does much to change the disposition of supply and demand in the housing market.
I'm not necessarily incredibly optimistic of the housing market from here but Norm I especially pessimistic.
>> When you talked about, obviously, it's been a long-standing thought of the housing market, underpinning the fact that I have a job and I can make a mortgage payment. I'm not forced to sell.
The Bank of Canada today putting the rates… They do not see a recession.
How do we square them with them slowing things without even sacrificing growth the most part marked its lower growth but not negative.
>> I think you get per capita terms.
The Bank of Canada saw GDP growth (…) I would expect to see population growth above 1.2% next year.
I think GDP per capita will be negative this year as well. So that's how you square that.
It's not a recession and every term because the economy is still growing.
We are adding households.
Really we are growing at a pace that is not bringing more slack into the economy.
I think that's how you sort of square that circle of growth.
But as we have this very strong drive for population growth it avoids us falling into a technical recession and I think there is a state of the world where a long way from a technical recession but a lot of people feel like we might be in one.
> We can squeeze one more question and for Andrew.
[Greg reads the question] >> Our expectation is Government of Canada bond yields will be lower by the end of this year.
As it becomes evident that central banks are done with hikes. That's our expectation for bond yields. You know, to the extent to the extent that GICs follow.
That's the direction I would expect GICs to move. In the short term it's a question of if central banks are finished with rates after the month of July.
Not just in Canada, the US matters to.
Because the US bond market really matters for Canadian bond market. We have seen really extreme volatility in government bond yields in both Canada and the United States.
So, I guess, from that perspective, I wouldn't be confident to say we definitely at the top on yields. I would not want to make that statement here.
But we do think that by the time we hit the end of 2023, by the time we had 2024, we do expect government bond yields to move lower and I would expect that would have a drag on fixed income products very broadly.
> Always great insights and great conversation especially in a day like this.
>> Thank you.
>> Our thanks to Andrew Kelvin from TD Securities.
Be sure of Canadian and global rate strategy with TD Securities. And be sure to always do your own research before making any investment decisions. Stay tuned on Thursday, Juliana Faircloth, Industrials Analyst with TD Asset Management will be our guest taking your questions what industrial stocks meaning rails, airlines, auto stocks and more. A reminder you can email us anytime with your questions@moneytalkliveht.com.
That's all the time for today. Thanks for watching and take care.
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