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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 markets and answer your questions about investing.
Coming up on today show: we will be joined by TD Chief Economist Beata Caranci to discuss recession possibilities next year. And in today's WebBroker education segment, Nugwa Haruna will show us how you can find data on interest rates using the platform.
Hearsay can get in touch with us. Just email moneytalklive@td.com or you can develop your response box on the video pelt player on WebBroker. Before we get to the guest today let's get you an update on the markets.
Could we get a Santa rally? The market is trying. Let's chicken home first on Bay Street, the TSX compass and up 254 points, about 1 1/3%. A bit of a risk on appetite as benefiting some energy names, some mining names. Let's take a look at Crescent Point Energy.
A bit of a bumpy ride for these names with nine bucks and 36 names a share, Crescent point, we will call at 3%.
BlackBerry out with its latest earnings, disappointing among analysts with their cybersecurity revenue. That stock is not taking part in today's broader rally. We have about 8 1/2% BlackBerry with five bucks and change. South of the border, you have investors digesting some earnings and given the market some reason for optimism. Nike and FedEx, we will get deeper into those names later in the show but basically they were able to show the street made investors think it won't be as bad as we think heading into next year at least on the corporate site.
The S&P 500 up 54 points. Pretty solid gain. The tech heavy NASDAQ, broader market, doing a little bit better. About 1.6%. And Carnival Cruise Lines on the move today as well.
Narrowing their loss compared to the same period last year.
Eight bucks and $0.53 a little up more than 5%. And that's a market update.
One of the big questions facing investors as we head into the new year is whether the aggressive rate hiking cycle were seen from central banks will push us into procession.
Or are we in for a potential softer landing? Joining us now to discuss his Beata Caranci, chief economist at TD. Great to have you back.
>> Great to be here thanks.
>> Let's tackle the big question first. I saw a note from your team in recent days about how you can't turn around without having a kind of recession chatter and people sort of baking it in. But perhaps, are we seeing any signs yet that that is a done deal? Can we escape that?
>> I think the challenge, especially in the case of the US right now is there is too much resilience in the economy.
Especially inside the job market.
So you can't really cool down wage inflationary pressures without the job market cooling down.
Hence central bankers always talking about a bit of pain to be felt in the coming year.
So that's going to be a challenge. So recession calls are really forecasts. They are not based on current data or evidence in the data today.
By that token, you get a lot of distribution in terms of timing. Some people say "Q1, Q2, Q3" literally it's pedicle spread across every quarter. You don't get a lot of differences in the depth many view it as something to be mild as a recession is.
Not for those who lose their jobs. But they are not perceiving it to be deep. So something like a 2001 experience.
>> If we just get a skimming of the surface, we slow down the economy enough to bring down inflation, will that be enough to bring down inflation?
I think the reason people keep saying is there will be a recession is because you won't get inflation back down around the 2% target over time unless you inflict that kind of pain.
>> And that goes back to the question of what is driving inflation.
Not a strong consensus. Some people still view that the supply-side factors related to the war and the legacy of the pandemic is still out there.
As an example. If you look at new vehicle cars, there is still a backlog of production happening of people ordering their car this year, not getting and until next year.
So there is still a legacy impact coming through.
On the flipside, you are seeing used prices for cars come down pretty hard in the last few months.
As some of that rotation happens.
So the big question is: how much of a slowdown you need to affect the domestic drivers?
On things like clothing and everything else.
That's where it is perceived to be "well we don't really need a hard, hard landing to get those drivers to kick in.
" But at the end of the day you do need wage growth to get down to about 3% to get inflation down. That's around the correlation.
We are a couple of points off of that right now.
So it does suggest you have to inflict some pain in the job market.
>> We did get a fresh read on inflation in this country just today. From the Americans last week. It appears we are headed in the right direction. But we are not apparently in a rush to get there. This feels like it might take some time.
>> Yes. It's very sticky and that's the nature of inflation.
Policy does work as everyone now knows… I think we won't really see significant movement probably until mid of next year towards the second half of next year.
And that's because we need the domestic demand drivers to slow down fast enough for that to pass through the inflation drivers. And I also think the battle is really not with inflation adding into the three and 4% range.
It's probably going to be to get into the two or 3% range.
That's going to be the hard-fought territory and that's where, it depends how much of a soft landing you have to have to get that outcome.
> Of course you know better than I do that your team, I think has called that we will get one more rate hike, 25 basis points.
Imagine that.
We've become so accustomed to it. But then they will be done. But Dunn does not mean a reversal in policy. We have to stay there for a while to keep waging this fight.
>> Yes. So that's the bank of Canada getting to about 4.5%.
Now, we did build in cuts in the fourth quarter. That's because the fourth quarter of next year… That's because that service ratio of Canadians, the proportion of income that they are dedicating to paying interest, is going to be at a historic high.
Every quarter that Rosen, more more people are going to be renewing their mortgages at this higher level.
Eating up their disposable income which means you are not to be able to spend in other areas. So that's the dynamic that we are anticipating in Canada to really drive down consumer spending into contraction territory for Canada.
That, we think will allow the Bank of Canada to step back a little and put some relief in.
Having said that, if you were up 4.5% and you drop rates to 3.5%, 3.75%, that is still high relative to what the Bank of Canada Dean's the neutral rate.
The rate that the economy is in that Goldilocks phase.
You were still in restrictive territory. It won't feel that great at that stage.
>> Is our sensitivity in this country a wildcard for us? If things play out the way we think they will play out, it makes a lot of sense as we start to renew mortgages or people with rates they have Artie seen… More than 400 basis points in the course of a year. Is the wildcard that that hits harder than anticipated?
>> Yeah. It's a big wildcard for Canada. We haven't really gone through a cycle in quite some time. Going all the way back to the 80s.
So the US had this experience in 2009. We saw from them that it's not a quick experience.
It does last for several years in terms of noxious cautiousness on consumer spending but the recovery of the psychology of housing.
So we don't know if Canadians are going to be reacting in the same way and we also know that the leverage today is higher than what you saw in the US during that crisis. Now, the running on loans is significantly better. Nothing to compare there. However, at the end of the day people will have to extend and pay more money on their debt. That's going to take away from the consumer cycle and we don't really have a good historical gauge of what that's gonna look like.
>> We mentioned pain a bit earlier. I want to get more on that topic. Central bankers of said "look we are doing, taming inflation it's necessary, there's going to be some pain." What is the full onslaught of that pain hitting look like for the Canadian economy?
>> I feel it it's in two areas. One is the share of your income dedicated to pain for debt. Which is fine if you think "I have extra savings and disposable income.
So you dedicate that savings to that payment.
That's not the majority. Many people will have to be making a sacrifice in other areas of spending. So that's a direct impact.
The other impact is what happens to the job market in an environment where you have very high interest rates and it is deliberate breaking of the economy.
In terms of hitting the rates. So we anticipate in our forecast about 100,000 job losses.
However it could be more because we are not quite certain about these dynamics on the debt/service ratio and house households will absorb it. One factor that Canada has in terms of risks is we had a lot of job hiring coming out of the pandemic.
More than what you saw in the US. You might think great, there are higher incomes across the country, but at the same time it may mean that firms do more on scaling back workers.
Because it's not as lean. The labour market is not as lean as what you are looking at in the US where employers or may be incentivized to hoard employment.
We've seen more movement on that site in Canada so it's a bit of a risk in an odd way.
>> Fascinating stuff and a great start the program. We will get your questions for Beata Caranci on the economy just a moment's time.
A reminder that you can get attention us any time by emailing moneytalklive@td.com or Philip of your response box under the video player and WebBroker.
Now let's get you updated on the top stories and take a look at how the markets are trading.
>> Shares of Nike are on the move today as the fitness apparel giant is making headway to work down its inventory, also boosting its digital sales. Nike did beat analyst expectations for sales and profit in its latest quarter.
The margins were squeezed by higher costs in the market. They are pleased by what they handed in.
17 bucks a share, almost 14%.
FedEx is promising to find another $1 billion in savings as it grapples with a global slowdown in demand. The package delivery company managed to beat earnings expectations despite pressures on the business. This most recent promise of cuts would bring total savings for fiscal 2023 to $3.7 billion.
You have FedEx, up almost 5%.
Well it appears Elon musk is willing to leave the top job at Twitter, if you can find a replacement.
In a tweet, musk said he will step down as soon as he finds "someone foolish enough to take this job." Musk has faced criticism that his acquisition of Twitter is diverting his focus away from Tesla.
And here's how the main benchmark index in Canada's trading. We do have a rally on our hands on both sides of the border.
… South of the border, perhaps the feeling that things might not be as bad as we go into next year with fairly decent gain on the S&P 500. 52 points on the upside, good for one of their present as well.
We are back now with Beata Caranci taking your questions about the economy. Let's get to them.
Obviously an important one here what's the health of the consumer?
>> It's a mixed question because if you look at what we call "excess savings" what would've happened if the pandemic never occurred… You can look at people's deposits and they are higher than they were pre-pandemic.
And the counterfactual.
Unlike Americans who are spending their excess savings, Canadians really have not made big dents. So they're still sitting on a decent amount of cash.
Now that is distributed to the upper 60% of households.
So the bottom 40% have returned more to their pre-pandemic behaviours. But there is a large portion, the majority of Canadians who still have some push in there.
That's the hope that you end up with the shallow recession in spite of the interest rate cycle and the risks because there is an element there of an ability to pay. And then the job market has been, up until now, very strong, more Canadian employment that we've seen in recent history.
You have these double positive factors on the consumer.
But at the end of the day, we don't know exactly how 2023 is going to unfold and people's ability to pay for those mortgages. Just because 60% of households have that deposit holding above pre-pandemic, are they the same ones holding onto the deck?
Now we don't know. So that will plant next year.
I think there is quite a bit or risk and there is a swing factor in the forecast. If we get it wrong, that trajectory… Hoping we will be pleasantly surprised.
The numbers don't look great on paper.
>> Of course a big part of the story this year, coming out of the pandemic lockdowns, we spent a lot on goods, understandably.
Services, understandably. Because the world opens up and you want to go out. We are starting to balance out or are we still in the services experience?
>> We spent a lot but not like the US. They just like to consume goods far greater than Canadians. Canadians actually did a much better job of normalizing that spending patterns ahead of what you see in the US.
On the services, there is an element there. There is built-up demands, I'm sure and certain areas of travel.
But there is likely some conservatism that now kicks in with where we are in the business cycle. So there should be still more rotation towards services to realign to historical patterns. But it's probably going to create more slowly than we are anticipate because we are at that peak interest rate cycle where people are naturally more cautious.
>> Another question now about the housing market.
Can we get the Ada's view on the housing market?
We talked about the top of the show that we are seeing higher shelter costs.
What is it actually mean for the health of the market?
>> Yeah, so affordability is not good. In Canada.
It's a little bit, people always say "home prices, we will end up with better affordability…" We don't end up with a higher interest rate. So we have seen significant improvement in affordability. For the housing market, this is a challenge for Canada. You would need prices to, you know, double. Come down double as we've already seen.
Really to move the dial in affordability.
But if that's the situation, you probably are in a deeper recession and people can afford it. So we are stuck in these two worlds.
The affordability part of the housing has to come from the policy side and it's not meant for, you know, middle, upper income. It's really meant for the slice of the population that requires good steady housing. So this is more for the lower income individuals we have to make sure they are taken care of. The rental market will resolve itself through the supply side on the condo building. But the affordability question Canada really is not going to improve significantly unless you get a harder landing in a recession which is what nobody wants.
>> Have the two sides or maybe the three or four signs that are all part of the housing market I think of the industry of… Is there a political will to build them?
Is the appetite therefore them? The appetite seems to be there. The argument is immigration.
Even though the housing market is going through a rough time right now, we are planning on bringing in some new Canadians and people need a place to live.
That's going to be a driver. Are we meeting those demands?
>> On the supply side, we were, prior to very recently.
We saw construction finally start to accelerate in Canada in the last couple of years.
It's going to slow down now because and where we are in the business cycle.
We still have high levels of immigration numbers coming in where people are going to need housing. The other factor that we have to consider is immigration policy… It's not like it's evenly spreading across Canada.
Certain provinces absorb a disproportionate share.
Ontario is one, BC is another. These are two provinces that have the worst affordability as well in the country. So from a policy prescription perspective, there needs to be more attention focused on certain areas, more incentives for people to move towards other provinces but that just doesn't happen on its own.
There has to be a proper job market and skill match and all that to go along with it as well as families and communities that people can identify with.
So it's a complicated question on a complicated answer.
It's not easily solved.
Just a building is fine but they need to build to scale. Is it right size to family?
Condos for example being 600 ft.8, not ideal to continue on with a high concentration of that.
Is it the right size? Do we have enough rental and affordable rental for that lower income individual? So we really get into really precise prescriptive policy which is why I'm saying it's not really going to be in the Bank of Canada's hands. There's nothing that they can do on the interest rate side to answer that.
That is all government, all the way down to the local levels to help find a solution. We are seeing a lot of political motivation there. But as you know, it takes years to build things.
Years to even alter regulation to change things, like what we are seeing with the Greenville. There's a lot of tension there. So there's not a quick solution.
>> You mentioned the Bank of Canada.
Iron over the times when I got the questions of the government and the Bank of Canada.
In the end, the mandate is inflation that has clearly been the fight. Do they need to start thinking heading into next year what affects their policies of having on the housing market?
>> Yeah.
I think house central banks approach the mandate in general. This is not just the Bank of Canada, the Federal Reserve does this in Europe as well.
They don't really set policy rates to manage asset price risks. And most people, when you think of asset price tricks, you think of the stock market and of course, you don't have interest rates trying to influence earnings but on the flipside, home price assets in Canada are very material from household wealth and now from a risk perspective of leverage.
That's a direct result of the policy rate having been at effectively zero for far too long.
Even though the economic data was telling you the risks were lessening and we were seeing it through the job market numbers.
Literally, as the Bank of Canada governor was saying "we believe rates low for a very long time at least until 2023", that is the point of the cycle that happened in 2021 were BC uptake in interest rate mortgage that went from total stock of 20% of outstanding mortgages to 35%. So when you provide that guidance, which, obviously did not transpire, it didn't last till even 2022. They embedded and contributed to the embedding of wrists on the housing site. So the question I think we have to ask ourselves in a country like Canada, high concentrations of populations in small areas of affordability was it necessary to keep the policy rated zero? Should they be thinking of a higher floor?
Because we have unique housing risks in Canada.
We have the highest population growth of any G-7 country and they need to conjoin these two concepts.
If they had moved rates to 1%, still very stimulative.
Still very low. It might have flattened the curve a little bit, it created a little more of a disincentive to do the interest rate mortgage because that was so much crude cheaper than say a five year term of the time and it might… This is not part of the framework right now in terms of where they are setting policy rates but it's questionable whether you can take that old school mandated continue monitor housing risks that don't respond to them.
Believe that always to the regulators when you're a major contributor to that outcome.
>> Fascinating stuff as always and make sure you do your own research before making any investment decisions. We will get back your questions with Beata Caranci on the economy just a moment's time. A reminder you can get in touch with at any time by emailing MoneyTalkLive@td.com. Now let's get to our educational segment.
inflation and interest rates have been a big topic on the minds of investors this year and WebBroker can help you keep track of both.
Joining us now for more as Nugwa Haruna, Senior Client Education Instructor TD Direct Investing.
>> Always a pleasure being here Greg. Yes, we talked about inflation and the government of Canada keeps track of the inflation using the consumer price index or CPI. The CPI seeks to measure any changes in the fixed basket of goods and services.
From the previous period to the next period.
When investors are consumers think about inflation, gradual inflation is not necessarily a bad thing.
So an economy that has inflation means that consumers are able to experience increases in their wages and it also means that, for businesses, you are aware of what the potential increases in their expenses would be.
Investors looking to keep track of inflation can do so in WebBroker.
So. Once in WebBroker, you would click on "research".
Click on "reports".
Once here in the right side of your screen, you can scroll down and you would get to "TD Economics".
Of open that page for us already.
You are presented with this page.
Now, the Canadian CPI index, information for November 2022 just came out. So you are actually able to pull up this report and you can take a look at information such as what that change in inflation has been, year-over-year. So I will show you information that investors may get from this.
In specific areas like what inflation has been an with things like gas prices and things like food, things like shelter… Then you will also be able to see what the TD Economics predict will be the implication of these new inflation numbers. If investors are They can also pull up the quarterly economic form cast to help with planning in the coming months if interested.
>> Interesting stuff.
That's in the playbook for the central banks. Where can we keep tabs on those metrics?
>> Right.
So you talk about interest rates.
Very important as well.
So investors can still find this, still it TD Economics.
While I'm on the TD Economics page, this time, I will click on the tab that says "forecast". When I click on there, I'm presented with the latest financial forecast.
I will click on there.
Some additional information that investors would see here would be things like let's say in Canada, the overnight target rate, you can see for the last three quarters what that's been. Then with the forecast is for the next couple of years.
Now, investors who might be curious to ask what the overnight target rate is, this is the rate set by the Bank of Canada.
This tends to determine what the borrowing and lending rates would be between major banks.
So when this rate tends to go up, it means that some of these additional costs may be passed on to the consumer.
So it means that borrowing could get more expensive.
So rates on your mortgages may go up.
It also means that rates on things like saving account counts and GICs would go up as well. Both of these would lead to less spending right? If I can get some more money in my GIC, chances are I will save money is supposed to spend money.
Then if it cost me a lot more money to buy a house, I will save that money as well.
This may be a way for the Bank of Canada to keep inflation on track.
So investors are looking for this information and they can do that going on WebBroker, going on the reports and the TD Economics page.
> Great stuff is always Nugwa, thanks for that.
>> Always great to be here.
>>make sure to tune into WebBroker for webinars and be sure to 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.
We are back with Beata Caranci taking your questions about the economy and this one coming in the past couple of minutes. In the new economic environment, what industries or sectors may benefit or do well?
>> Typically, a low economic… It's back to basics.
Prioritizing healthcare and education where you would not prioritize clothing and electronics as an example.
We talked about earlier that rotation and spending.
Food, grocery stores would do better. Better than eating out.
So that's typically what happens.
I would say there's a unique element in this cycle and that we have gone through a significant budget season where you can see there is a lot of funding dedicated to climate transition. Within that, you have significant focus on clean tech, infrastructure.
As well as just basic bridges and other aspects. So those areas of the economy are likely going to carry us forward through the next couple of years as we go through this rough patch on the consumer cycle. On the flipside, the business cycle, in relation to those areas are probably going to be more resilient than they would be in a normal downturn. Right? Because there's a lot of tailwind happening in those sectors.
We have a very clear risk analysis presented to us from Europe.
And what happens when you are not prepared for climate transition and technology? So there is even more pressure on governments and the private sector to deliver on that end.
So I think we will have a little bit of a unique aspect in this cycle that we may end up with stronger business investment and we traditionally have seen in this cycle. In particular, with nonresidential construction, not necessarily in condo construction which is also part of nonresidential but actually in buildings and making sure you can charge your EV on the highway since we have these target so we have to hit as a country by 2030.
60% of vehicles sales being in EV's. So there's a lot of change there that we have to think about and likely will drive the investment going forward.
>> I love that. The fiscal spending from governments driving the next couple of years. Lots of questions coming.
Do you anticipate the Bank of Canada lowering interest rates in 2023 or 2024?
>> Yes to both years. We do have the fourth quarter of 2023 as our pivot point on Bank of Canada policy where it would be most likely that it would start cutting.
Now, backing up that view is one that inflation actually cooperates and continues to decelerate.
Backing up that view is that the consumer is basically in stall mode and that's taking the pressure off of the inflation cycle.
So there's a couple of preconditions to get there.
We do think by the fourth quarter we would see something in the order of between 50 and 100 basis points of cuts. Our forecast formerly has 75.
Continuing on into 2024.
Having said that, I know people sometimes ask that question because they're trying to time of buying a house or something.
>> Trying to figure out when their floating rate mortgage will float in a new direction.
>> The whole premise of the cuts is because the economy is very weak.
The job market will likewise be weak. So just bear that in mind. They're there for a reason to kind of put a floor under the economy.
>> Would we anticipate when central banks move like before, they move one quarter of a point and not 50, 75 points. Can they be as aggressive or can they go on a more regular pace?
>> I would think they'd be a bit more cautious on the cutting side. Usually when you do large increments like we are experiencing, it's because you are behind the eight ball basically right? And you are trying to catch up. They would be worried that we would be signalling too much panic on the economics side.
What if inflation turns the corner on them and then they get caught again?
So my guess is that they would probably reinstate going and 25 basis point increments unless, to everybody's surprise, we end up in a hard landing recession cycle like significant job losses. You would have to be in the quarter million, up to 400,000 range. Then you might see stronger moves at that point.
But absent that, I think people are cautious.
>> Another question here now. Next year, 2023, will we see a potential tug-of-war between fiscal and monetary policy?
This one fascinates me in the sense that the electorate starts to feel pain because of monetary policies doing to politicians feeling the heat to step in.
>> They have. Based on the budget season, you can see that, depending on the… A lot of people think of the federal government side.
But actually, a lot of stimulus is coming through the provincial side. So, and it varies by province. Most levels of government, they are looking for ways to mitigate the pain to the lower income households.
The federal level, you have things that have some aspect of student interest loan forgiveness. So there's all sorts of aspects. Even raising the amount for seniors as well.
Unlimited income. So there's all sorts of initiatives like that already embedded and rolling out. We would expect that those type of initiatives are likely to continue as we get into 2023. Because the governments are unlikely to do… They will likely focus on the lower income.
>> Is that the key?
To make sure you were targeting for people that need the money the most taken using on things like food, heat, shelter and not people who don't really need it?
> Yes and really that lower income individual, if you're spending on food and shelter, this is not what causes inflation in Canada.
So that's not the driver.
The driver of what you would expect to see in terms of broad-based price increases.
That's not we are worried about.
It's more in the middle income and upper income.
So that's where you'd want to limit any past from the fiscal side.
On the flipside, because governments are riveting to the investment side of the economy and trying to get ready for the climate transition, that is very stimulative.
In fact, when you look at fiscal… Like the bang for the buck, every dollar and how much more you get out of the economy, the fiscal multipliers are highest on the investment infrastructure cited next going to have an impact on putting this boost in the economy.
That could be inflationary even though it's needed or investments. We are, right now, in a tight labour market. So you could have some competition between the federal government, the provincial governments on the labour they need, relative to the private sector in areas like construction manufacturing which are already fairly lean.
>> Actually, I have not thought about that and it's a fascinating fact as well.
Building infrastructure, you don't get the labour market that the central bank is looking for because of what the other side of the island is doing… That seems like a situation that is not easily resolved.
>> This is why you get people saying "listen, the only way you look at this is by having a private site coming down more and some offset would end up going into the fiscal side." Now, these skills are not directly transferable. If you work in the residential housing market, that's not necessarily a transferable skill into building a bridge right? So these are not the same people.
But at the end of the day, it almost puts a bit of back stop in some of the interest rates.
>> Fascinating stuff. Let's get to another question.
If you were asking if you get a halt by the BOC in terms of their rate hiking cycles, is this causing another type of inflation?
If the US Federal Reserve keeps raising, you have some discrepancy in the strength of the currency.
That drive inflation?
>> Yes. It's a good question.
A couple points to make their.
First, I think a lot of people think that the Bank of Canada traditionally follows the Federal Reserve.
There is obviously a very close link of the monetary policies because they policies are structured very similarly in terms of consumers being a leader of the economy and of course the trade relationship being so strong. We import that strength.
However when you have peak policy rates, when interest rates are peeking, you almost always get a decoupling of Canada to the US. So it's a very, very common historical thing. It's actually more the norm.
You will see 75 to 100 basis point gap between the Bank of Canada policy rate in the Federal Reserve. We hold rates at a lower level than the US. That is in part because we don't need to do as much as the US because they have really driven global financial markets and conditions in the yield curve and so we import some of their tightening through that channel.
In terms of the dollar, the Canadian dollar, as is currently trading, it's been bouncing around between 72, $0.74.
Many weeks.
That is already reflecting that gap in the policy rates.
So, we will be importing that move that has happened in the last month or so as the repricing is starting to come through on the differential between the two central banks.
That will be coming through in 2023.
Often, where do you see it first come through? Actually to the prices which, as you know from today, they're not great.
Already up over 11% over a year to year basis. So that's where that comes through.
It may not come through as much in the other categories because the consumer cycle will be coming in on that cycle. So that tamps down the willingness to pay for higher prices.
But when it comes to food, you need food.
You have no choice.
>> Vegetables… I don't have luck during the Summer.
Gotta buy them from the Americans.
Look at back to your questions.
Just a moment's time, a reminder to make sure you do your own research before making any investment decisions.
A reminder you can get in touch 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.
>> Let's check it on the markets. Of course the big question that we've had is will beget a bit of a Santa Claus rally going into the holidays?
We are trying.
The TSX Composite Index up 62 points, good one and 1/3% rise. You were seeing some money moved to energy and mining names. Let's check out Athabasca oil.
The basket in the energy space, two bucks and $0.18 a share, up a little more than 4%.
Barrick Gold, one of the giants in the mining space, up a little more than 2% with 24 bucks and change. Of course, south of the border, you of investors digesting will be heard from FedEx. We are from Nike. We heard seems to have pleased the street and perhaps given investors some comfort that it won't be quite as bad as feared for corporate earnings. Giving everything we are working our way through here. The S&P 500 up 1.4% about 54 points. The tech heavy NASDAQ doing a bit better than that.
Pretty much keeping pace with the broader market. One of the 3rd%. Let's check in on Nike again as we said, working down its inventory and boosting its online sales. Better results than the street was expecting.
Not only making the broader market feel better at least for today, investors putting money into the name. You have Nike had 117 bucks and change. We will call that 14% at this hour.
We are back now with Beata Caranci chief economist with TD Bank taking your questions on the economy so let's get through them again.
How do you see the EU doing next year?
>> Not good. They are, along with the UK them, they would be leading the advanced economies in the recession cycle.
However, we had some real pleasant surprises. I think we were braced for a worse outcome, at least at the end of this year.
They have skirted the worst, this is coming from the energy side.
They got lucky with a mild all, early winter that allowed their storage levels for natural gas and other fuels to stay high.
That was, it sounds weird, because the economists whether in terms of accuracy. And here I am talking about the weather. But the reality is the weather was a huge risk factor to their outlook.
So we have skirted that aspect.
They should probably come out of that recession cycle as we get towards the back half of next year.
However, that doesn't mean they have removed all their risks. They are doing a fantastic job in rotating their energy cycle away from Russia towards other services.
The US is a huge supplier.
Moving really fast and putting in loading LNG terminals at lightning speed. A lot happening but at the end of the day they have to restock although storage terminals. At the end of the winter. Now they don't have Russia gas as the starter for the storage with each they did have this year.
So all is coming from new sources. Again, it's a little bit of a wild factor that we have to observe and see how they do.
So they are not out of the woods regardless.
But surprisingly, doing better than many had expected because we thought that landing would be very hard. It could've been a lot worse.
>> Speaking of wildcards, we have a question about China.
What do you see about what's happening in China?
The global economy in 2023?
>> Talk about a swing factor on the economy. China is it.
We knew eventually they would abandon their zero COVID policy. It was not sustainable. They are doing it faster than we expected.
They have ripped the mandate off which we did not expect. We thought it would be more gradual. So from that perspective, we don't anticipate they will have a good first quarter.
We know from the experience of other countries, lots of examples that the illness rate will continue to climb and that the put pressure on, not just the hospital system, but also the… Could cause some pressure. We think that peak impact will be around the first quarter.
but after that, if they show improvement, that economy is primed with pent up demand. For them it's been three years straight a very harsh lockdowns and that can be a consumer cycle that just comes out of the gate running.
They have had less than 3% growth this year which, for them, is extremely poor as they were expecting 5%. Next year they could be 5+ percent growth as they get that tailwind on spending. It really depends on whether the consumer confidence starts to come back into the economy, which we think it will because, like all of the countries, there's gotta be a lot of pent up demand.
>> All right. We have run out of time but we do have the chief economist of the bank here and for the last time of 2022, it's been quite a year. What should we be thinking about is investors heading into the next year with the economy?
>> I would say don't panic.
hahaha. There's a lot of concern when people hear the word recession. We come out the other side and it's a way to recalibrate the economy. I think the central banks are highly sensitive and are trying to find the right balance.
They will respond accordingly. Also, inflation is not the worst problem to have in the world.
In terms of when you saw the global financial crisis and financial institutions and the people, energy crisis in Europe… I think in North America, the business cycle is really well-positioned relative to what you are seeing in other countries.
I'm grateful for at least that aspect. That we don't face the extreme challenges that you were seeing in other places.
So to end on an optimistic note, even though the outlook will be a tough one next year, it shouldn't be anything that we haven't seen before relative to what we are seeing in other countries experiencing.
>> Always a pleasure to have you here to get your insights.
Thank you for joining us and I look forward to more next year.
>> Thank you.
>> Beata Caranci, chief economist at TD Bank. Will be back tomorrow with an update of the markets and some highlights from our best reviews this week.
MoneyTalk Live will be taking a holiday hiatus that starts Friday, December 23 and we return on Monday, January 9.
We will have Tarik Aeta, Global Health Care Analyst at TD Asset Management taking your questions about the healthcare sector. That's it for us today. Take care.
[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 markets and answer your questions about investing.
Coming up on today show: we will be joined by TD Chief Economist Beata Caranci to discuss recession possibilities next year. And in today's WebBroker education segment, Nugwa Haruna will show us how you can find data on interest rates using the platform.
Hearsay can get in touch with us. Just email moneytalklive@td.com or you can develop your response box on the video pelt player on WebBroker. Before we get to the guest today let's get you an update on the markets.
Could we get a Santa rally? The market is trying. Let's chicken home first on Bay Street, the TSX compass and up 254 points, about 1 1/3%. A bit of a risk on appetite as benefiting some energy names, some mining names. Let's take a look at Crescent Point Energy.
A bit of a bumpy ride for these names with nine bucks and 36 names a share, Crescent point, we will call at 3%.
BlackBerry out with its latest earnings, disappointing among analysts with their cybersecurity revenue. That stock is not taking part in today's broader rally. We have about 8 1/2% BlackBerry with five bucks and change. South of the border, you have investors digesting some earnings and given the market some reason for optimism. Nike and FedEx, we will get deeper into those names later in the show but basically they were able to show the street made investors think it won't be as bad as we think heading into next year at least on the corporate site.
The S&P 500 up 54 points. Pretty solid gain. The tech heavy NASDAQ, broader market, doing a little bit better. About 1.6%. And Carnival Cruise Lines on the move today as well.
Narrowing their loss compared to the same period last year.
Eight bucks and $0.53 a little up more than 5%. And that's a market update.
One of the big questions facing investors as we head into the new year is whether the aggressive rate hiking cycle were seen from central banks will push us into procession.
Or are we in for a potential softer landing? Joining us now to discuss his Beata Caranci, chief economist at TD. Great to have you back.
>> Great to be here thanks.
>> Let's tackle the big question first. I saw a note from your team in recent days about how you can't turn around without having a kind of recession chatter and people sort of baking it in. But perhaps, are we seeing any signs yet that that is a done deal? Can we escape that?
>> I think the challenge, especially in the case of the US right now is there is too much resilience in the economy.
Especially inside the job market.
So you can't really cool down wage inflationary pressures without the job market cooling down.
Hence central bankers always talking about a bit of pain to be felt in the coming year.
So that's going to be a challenge. So recession calls are really forecasts. They are not based on current data or evidence in the data today.
By that token, you get a lot of distribution in terms of timing. Some people say "Q1, Q2, Q3" literally it's pedicle spread across every quarter. You don't get a lot of differences in the depth many view it as something to be mild as a recession is.
Not for those who lose their jobs. But they are not perceiving it to be deep. So something like a 2001 experience.
>> If we just get a skimming of the surface, we slow down the economy enough to bring down inflation, will that be enough to bring down inflation?
I think the reason people keep saying is there will be a recession is because you won't get inflation back down around the 2% target over time unless you inflict that kind of pain.
>> And that goes back to the question of what is driving inflation.
Not a strong consensus. Some people still view that the supply-side factors related to the war and the legacy of the pandemic is still out there.
As an example. If you look at new vehicle cars, there is still a backlog of production happening of people ordering their car this year, not getting and until next year.
So there is still a legacy impact coming through.
On the flipside, you are seeing used prices for cars come down pretty hard in the last few months.
As some of that rotation happens.
So the big question is: how much of a slowdown you need to affect the domestic drivers?
On things like clothing and everything else.
That's where it is perceived to be "well we don't really need a hard, hard landing to get those drivers to kick in.
" But at the end of the day you do need wage growth to get down to about 3% to get inflation down. That's around the correlation.
We are a couple of points off of that right now.
So it does suggest you have to inflict some pain in the job market.
>> We did get a fresh read on inflation in this country just today. From the Americans last week. It appears we are headed in the right direction. But we are not apparently in a rush to get there. This feels like it might take some time.
>> Yes. It's very sticky and that's the nature of inflation.
Policy does work as everyone now knows… I think we won't really see significant movement probably until mid of next year towards the second half of next year.
And that's because we need the domestic demand drivers to slow down fast enough for that to pass through the inflation drivers. And I also think the battle is really not with inflation adding into the three and 4% range.
It's probably going to be to get into the two or 3% range.
That's going to be the hard-fought territory and that's where, it depends how much of a soft landing you have to have to get that outcome.
> Of course you know better than I do that your team, I think has called that we will get one more rate hike, 25 basis points.
Imagine that.
We've become so accustomed to it. But then they will be done. But Dunn does not mean a reversal in policy. We have to stay there for a while to keep waging this fight.
>> Yes. So that's the bank of Canada getting to about 4.5%.
Now, we did build in cuts in the fourth quarter. That's because the fourth quarter of next year… That's because that service ratio of Canadians, the proportion of income that they are dedicating to paying interest, is going to be at a historic high.
Every quarter that Rosen, more more people are going to be renewing their mortgages at this higher level.
Eating up their disposable income which means you are not to be able to spend in other areas. So that's the dynamic that we are anticipating in Canada to really drive down consumer spending into contraction territory for Canada.
That, we think will allow the Bank of Canada to step back a little and put some relief in.
Having said that, if you were up 4.5% and you drop rates to 3.5%, 3.75%, that is still high relative to what the Bank of Canada Dean's the neutral rate.
The rate that the economy is in that Goldilocks phase.
You were still in restrictive territory. It won't feel that great at that stage.
>> Is our sensitivity in this country a wildcard for us? If things play out the way we think they will play out, it makes a lot of sense as we start to renew mortgages or people with rates they have Artie seen… More than 400 basis points in the course of a year. Is the wildcard that that hits harder than anticipated?
>> Yeah. It's a big wildcard for Canada. We haven't really gone through a cycle in quite some time. Going all the way back to the 80s.
So the US had this experience in 2009. We saw from them that it's not a quick experience.
It does last for several years in terms of noxious cautiousness on consumer spending but the recovery of the psychology of housing.
So we don't know if Canadians are going to be reacting in the same way and we also know that the leverage today is higher than what you saw in the US during that crisis. Now, the running on loans is significantly better. Nothing to compare there. However, at the end of the day people will have to extend and pay more money on their debt. That's going to take away from the consumer cycle and we don't really have a good historical gauge of what that's gonna look like.
>> We mentioned pain a bit earlier. I want to get more on that topic. Central bankers of said "look we are doing, taming inflation it's necessary, there's going to be some pain." What is the full onslaught of that pain hitting look like for the Canadian economy?
>> I feel it it's in two areas. One is the share of your income dedicated to pain for debt. Which is fine if you think "I have extra savings and disposable income.
So you dedicate that savings to that payment.
That's not the majority. Many people will have to be making a sacrifice in other areas of spending. So that's a direct impact.
The other impact is what happens to the job market in an environment where you have very high interest rates and it is deliberate breaking of the economy.
In terms of hitting the rates. So we anticipate in our forecast about 100,000 job losses.
However it could be more because we are not quite certain about these dynamics on the debt/service ratio and house households will absorb it. One factor that Canada has in terms of risks is we had a lot of job hiring coming out of the pandemic.
More than what you saw in the US. You might think great, there are higher incomes across the country, but at the same time it may mean that firms do more on scaling back workers.
Because it's not as lean. The labour market is not as lean as what you are looking at in the US where employers or may be incentivized to hoard employment.
We've seen more movement on that site in Canada so it's a bit of a risk in an odd way.
>> Fascinating stuff and a great start the program. We will get your questions for Beata Caranci on the economy just a moment's time.
A reminder that you can get attention us any time by emailing moneytalklive@td.com or Philip of your response box under the video player and WebBroker.
Now let's get you updated on the top stories and take a look at how the markets are trading.
>> Shares of Nike are on the move today as the fitness apparel giant is making headway to work down its inventory, also boosting its digital sales. Nike did beat analyst expectations for sales and profit in its latest quarter.
The margins were squeezed by higher costs in the market. They are pleased by what they handed in.
17 bucks a share, almost 14%.
FedEx is promising to find another $1 billion in savings as it grapples with a global slowdown in demand. The package delivery company managed to beat earnings expectations despite pressures on the business. This most recent promise of cuts would bring total savings for fiscal 2023 to $3.7 billion.
You have FedEx, up almost 5%.
Well it appears Elon musk is willing to leave the top job at Twitter, if you can find a replacement.
In a tweet, musk said he will step down as soon as he finds "someone foolish enough to take this job." Musk has faced criticism that his acquisition of Twitter is diverting his focus away from Tesla.
And here's how the main benchmark index in Canada's trading. We do have a rally on our hands on both sides of the border.
… South of the border, perhaps the feeling that things might not be as bad as we go into next year with fairly decent gain on the S&P 500. 52 points on the upside, good for one of their present as well.
We are back now with Beata Caranci taking your questions about the economy. Let's get to them.
Obviously an important one here what's the health of the consumer?
>> It's a mixed question because if you look at what we call "excess savings" what would've happened if the pandemic never occurred… You can look at people's deposits and they are higher than they were pre-pandemic.
And the counterfactual.
Unlike Americans who are spending their excess savings, Canadians really have not made big dents. So they're still sitting on a decent amount of cash.
Now that is distributed to the upper 60% of households.
So the bottom 40% have returned more to their pre-pandemic behaviours. But there is a large portion, the majority of Canadians who still have some push in there.
That's the hope that you end up with the shallow recession in spite of the interest rate cycle and the risks because there is an element there of an ability to pay. And then the job market has been, up until now, very strong, more Canadian employment that we've seen in recent history.
You have these double positive factors on the consumer.
But at the end of the day, we don't know exactly how 2023 is going to unfold and people's ability to pay for those mortgages. Just because 60% of households have that deposit holding above pre-pandemic, are they the same ones holding onto the deck?
Now we don't know. So that will plant next year.
I think there is quite a bit or risk and there is a swing factor in the forecast. If we get it wrong, that trajectory… Hoping we will be pleasantly surprised.
The numbers don't look great on paper.
>> Of course a big part of the story this year, coming out of the pandemic lockdowns, we spent a lot on goods, understandably.
Services, understandably. Because the world opens up and you want to go out. We are starting to balance out or are we still in the services experience?
>> We spent a lot but not like the US. They just like to consume goods far greater than Canadians. Canadians actually did a much better job of normalizing that spending patterns ahead of what you see in the US.
On the services, there is an element there. There is built-up demands, I'm sure and certain areas of travel.
But there is likely some conservatism that now kicks in with where we are in the business cycle. So there should be still more rotation towards services to realign to historical patterns. But it's probably going to create more slowly than we are anticipate because we are at that peak interest rate cycle where people are naturally more cautious.
>> Another question now about the housing market.
Can we get the Ada's view on the housing market?
We talked about the top of the show that we are seeing higher shelter costs.
What is it actually mean for the health of the market?
>> Yeah, so affordability is not good. In Canada.
It's a little bit, people always say "home prices, we will end up with better affordability…" We don't end up with a higher interest rate. So we have seen significant improvement in affordability. For the housing market, this is a challenge for Canada. You would need prices to, you know, double. Come down double as we've already seen.
Really to move the dial in affordability.
But if that's the situation, you probably are in a deeper recession and people can afford it. So we are stuck in these two worlds.
The affordability part of the housing has to come from the policy side and it's not meant for, you know, middle, upper income. It's really meant for the slice of the population that requires good steady housing. So this is more for the lower income individuals we have to make sure they are taken care of. The rental market will resolve itself through the supply side on the condo building. But the affordability question Canada really is not going to improve significantly unless you get a harder landing in a recession which is what nobody wants.
>> Have the two sides or maybe the three or four signs that are all part of the housing market I think of the industry of… Is there a political will to build them?
Is the appetite therefore them? The appetite seems to be there. The argument is immigration.
Even though the housing market is going through a rough time right now, we are planning on bringing in some new Canadians and people need a place to live.
That's going to be a driver. Are we meeting those demands?
>> On the supply side, we were, prior to very recently.
We saw construction finally start to accelerate in Canada in the last couple of years.
It's going to slow down now because and where we are in the business cycle.
We still have high levels of immigration numbers coming in where people are going to need housing. The other factor that we have to consider is immigration policy… It's not like it's evenly spreading across Canada.
Certain provinces absorb a disproportionate share.
Ontario is one, BC is another. These are two provinces that have the worst affordability as well in the country. So from a policy prescription perspective, there needs to be more attention focused on certain areas, more incentives for people to move towards other provinces but that just doesn't happen on its own.
There has to be a proper job market and skill match and all that to go along with it as well as families and communities that people can identify with.
So it's a complicated question on a complicated answer.
It's not easily solved.
Just a building is fine but they need to build to scale. Is it right size to family?
Condos for example being 600 ft.8, not ideal to continue on with a high concentration of that.
Is it the right size? Do we have enough rental and affordable rental for that lower income individual? So we really get into really precise prescriptive policy which is why I'm saying it's not really going to be in the Bank of Canada's hands. There's nothing that they can do on the interest rate side to answer that.
That is all government, all the way down to the local levels to help find a solution. We are seeing a lot of political motivation there. But as you know, it takes years to build things.
Years to even alter regulation to change things, like what we are seeing with the Greenville. There's a lot of tension there. So there's not a quick solution.
>> You mentioned the Bank of Canada.
Iron over the times when I got the questions of the government and the Bank of Canada.
In the end, the mandate is inflation that has clearly been the fight. Do they need to start thinking heading into next year what affects their policies of having on the housing market?
>> Yeah.
I think house central banks approach the mandate in general. This is not just the Bank of Canada, the Federal Reserve does this in Europe as well.
They don't really set policy rates to manage asset price risks. And most people, when you think of asset price tricks, you think of the stock market and of course, you don't have interest rates trying to influence earnings but on the flipside, home price assets in Canada are very material from household wealth and now from a risk perspective of leverage.
That's a direct result of the policy rate having been at effectively zero for far too long.
Even though the economic data was telling you the risks were lessening and we were seeing it through the job market numbers.
Literally, as the Bank of Canada governor was saying "we believe rates low for a very long time at least until 2023", that is the point of the cycle that happened in 2021 were BC uptake in interest rate mortgage that went from total stock of 20% of outstanding mortgages to 35%. So when you provide that guidance, which, obviously did not transpire, it didn't last till even 2022. They embedded and contributed to the embedding of wrists on the housing site. So the question I think we have to ask ourselves in a country like Canada, high concentrations of populations in small areas of affordability was it necessary to keep the policy rated zero? Should they be thinking of a higher floor?
Because we have unique housing risks in Canada.
We have the highest population growth of any G-7 country and they need to conjoin these two concepts.
If they had moved rates to 1%, still very stimulative.
Still very low. It might have flattened the curve a little bit, it created a little more of a disincentive to do the interest rate mortgage because that was so much crude cheaper than say a five year term of the time and it might… This is not part of the framework right now in terms of where they are setting policy rates but it's questionable whether you can take that old school mandated continue monitor housing risks that don't respond to them.
Believe that always to the regulators when you're a major contributor to that outcome.
>> Fascinating stuff as always and make sure you do your own research before making any investment decisions. We will get back your questions with Beata Caranci on the economy just a moment's time. A reminder you can get in touch with at any time by emailing MoneyTalkLive@td.com. Now let's get to our educational segment.
inflation and interest rates have been a big topic on the minds of investors this year and WebBroker can help you keep track of both.
Joining us now for more as Nugwa Haruna, Senior Client Education Instructor TD Direct Investing.
>> Always a pleasure being here Greg. Yes, we talked about inflation and the government of Canada keeps track of the inflation using the consumer price index or CPI. The CPI seeks to measure any changes in the fixed basket of goods and services.
From the previous period to the next period.
When investors are consumers think about inflation, gradual inflation is not necessarily a bad thing.
So an economy that has inflation means that consumers are able to experience increases in their wages and it also means that, for businesses, you are aware of what the potential increases in their expenses would be.
Investors looking to keep track of inflation can do so in WebBroker.
So. Once in WebBroker, you would click on "research".
Click on "reports".
Once here in the right side of your screen, you can scroll down and you would get to "TD Economics".
Of open that page for us already.
You are presented with this page.
Now, the Canadian CPI index, information for November 2022 just came out. So you are actually able to pull up this report and you can take a look at information such as what that change in inflation has been, year-over-year. So I will show you information that investors may get from this.
In specific areas like what inflation has been an with things like gas prices and things like food, things like shelter… Then you will also be able to see what the TD Economics predict will be the implication of these new inflation numbers. If investors are They can also pull up the quarterly economic form cast to help with planning in the coming months if interested.
>> Interesting stuff.
That's in the playbook for the central banks. Where can we keep tabs on those metrics?
>> Right.
So you talk about interest rates.
Very important as well.
So investors can still find this, still it TD Economics.
While I'm on the TD Economics page, this time, I will click on the tab that says "forecast". When I click on there, I'm presented with the latest financial forecast.
I will click on there.
Some additional information that investors would see here would be things like let's say in Canada, the overnight target rate, you can see for the last three quarters what that's been. Then with the forecast is for the next couple of years.
Now, investors who might be curious to ask what the overnight target rate is, this is the rate set by the Bank of Canada.
This tends to determine what the borrowing and lending rates would be between major banks.
So when this rate tends to go up, it means that some of these additional costs may be passed on to the consumer.
So it means that borrowing could get more expensive.
So rates on your mortgages may go up.
It also means that rates on things like saving account counts and GICs would go up as well. Both of these would lead to less spending right? If I can get some more money in my GIC, chances are I will save money is supposed to spend money.
Then if it cost me a lot more money to buy a house, I will save that money as well.
This may be a way for the Bank of Canada to keep inflation on track.
So investors are looking for this information and they can do that going on WebBroker, going on the reports and the TD Economics page.
> Great stuff is always Nugwa, thanks for that.
>> Always great to be here.
>>make sure to tune into WebBroker for webinars and be sure to 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.
We are back with Beata Caranci taking your questions about the economy and this one coming in the past couple of minutes. In the new economic environment, what industries or sectors may benefit or do well?
>> Typically, a low economic… It's back to basics.
Prioritizing healthcare and education where you would not prioritize clothing and electronics as an example.
We talked about earlier that rotation and spending.
Food, grocery stores would do better. Better than eating out.
So that's typically what happens.
I would say there's a unique element in this cycle and that we have gone through a significant budget season where you can see there is a lot of funding dedicated to climate transition. Within that, you have significant focus on clean tech, infrastructure.
As well as just basic bridges and other aspects. So those areas of the economy are likely going to carry us forward through the next couple of years as we go through this rough patch on the consumer cycle. On the flipside, the business cycle, in relation to those areas are probably going to be more resilient than they would be in a normal downturn. Right? Because there's a lot of tailwind happening in those sectors.
We have a very clear risk analysis presented to us from Europe.
And what happens when you are not prepared for climate transition and technology? So there is even more pressure on governments and the private sector to deliver on that end.
So I think we will have a little bit of a unique aspect in this cycle that we may end up with stronger business investment and we traditionally have seen in this cycle. In particular, with nonresidential construction, not necessarily in condo construction which is also part of nonresidential but actually in buildings and making sure you can charge your EV on the highway since we have these target so we have to hit as a country by 2030.
60% of vehicles sales being in EV's. So there's a lot of change there that we have to think about and likely will drive the investment going forward.
>> I love that. The fiscal spending from governments driving the next couple of years. Lots of questions coming.
Do you anticipate the Bank of Canada lowering interest rates in 2023 or 2024?
>> Yes to both years. We do have the fourth quarter of 2023 as our pivot point on Bank of Canada policy where it would be most likely that it would start cutting.
Now, backing up that view is one that inflation actually cooperates and continues to decelerate.
Backing up that view is that the consumer is basically in stall mode and that's taking the pressure off of the inflation cycle.
So there's a couple of preconditions to get there.
We do think by the fourth quarter we would see something in the order of between 50 and 100 basis points of cuts. Our forecast formerly has 75.
Continuing on into 2024.
Having said that, I know people sometimes ask that question because they're trying to time of buying a house or something.
>> Trying to figure out when their floating rate mortgage will float in a new direction.
>> The whole premise of the cuts is because the economy is very weak.
The job market will likewise be weak. So just bear that in mind. They're there for a reason to kind of put a floor under the economy.
>> Would we anticipate when central banks move like before, they move one quarter of a point and not 50, 75 points. Can they be as aggressive or can they go on a more regular pace?
>> I would think they'd be a bit more cautious on the cutting side. Usually when you do large increments like we are experiencing, it's because you are behind the eight ball basically right? And you are trying to catch up. They would be worried that we would be signalling too much panic on the economics side.
What if inflation turns the corner on them and then they get caught again?
So my guess is that they would probably reinstate going and 25 basis point increments unless, to everybody's surprise, we end up in a hard landing recession cycle like significant job losses. You would have to be in the quarter million, up to 400,000 range. Then you might see stronger moves at that point.
But absent that, I think people are cautious.
>> Another question here now. Next year, 2023, will we see a potential tug-of-war between fiscal and monetary policy?
This one fascinates me in the sense that the electorate starts to feel pain because of monetary policies doing to politicians feeling the heat to step in.
>> They have. Based on the budget season, you can see that, depending on the… A lot of people think of the federal government side.
But actually, a lot of stimulus is coming through the provincial side. So, and it varies by province. Most levels of government, they are looking for ways to mitigate the pain to the lower income households.
The federal level, you have things that have some aspect of student interest loan forgiveness. So there's all sorts of aspects. Even raising the amount for seniors as well.
Unlimited income. So there's all sorts of initiatives like that already embedded and rolling out. We would expect that those type of initiatives are likely to continue as we get into 2023. Because the governments are unlikely to do… They will likely focus on the lower income.
>> Is that the key?
To make sure you were targeting for people that need the money the most taken using on things like food, heat, shelter and not people who don't really need it?
> Yes and really that lower income individual, if you're spending on food and shelter, this is not what causes inflation in Canada.
So that's not the driver.
The driver of what you would expect to see in terms of broad-based price increases.
That's not we are worried about.
It's more in the middle income and upper income.
So that's where you'd want to limit any past from the fiscal side.
On the flipside, because governments are riveting to the investment side of the economy and trying to get ready for the climate transition, that is very stimulative.
In fact, when you look at fiscal… Like the bang for the buck, every dollar and how much more you get out of the economy, the fiscal multipliers are highest on the investment infrastructure cited next going to have an impact on putting this boost in the economy.
That could be inflationary even though it's needed or investments. We are, right now, in a tight labour market. So you could have some competition between the federal government, the provincial governments on the labour they need, relative to the private sector in areas like construction manufacturing which are already fairly lean.
>> Actually, I have not thought about that and it's a fascinating fact as well.
Building infrastructure, you don't get the labour market that the central bank is looking for because of what the other side of the island is doing… That seems like a situation that is not easily resolved.
>> This is why you get people saying "listen, the only way you look at this is by having a private site coming down more and some offset would end up going into the fiscal side." Now, these skills are not directly transferable. If you work in the residential housing market, that's not necessarily a transferable skill into building a bridge right? So these are not the same people.
But at the end of the day, it almost puts a bit of back stop in some of the interest rates.
>> Fascinating stuff. Let's get to another question.
If you were asking if you get a halt by the BOC in terms of their rate hiking cycles, is this causing another type of inflation?
If the US Federal Reserve keeps raising, you have some discrepancy in the strength of the currency.
That drive inflation?
>> Yes. It's a good question.
A couple points to make their.
First, I think a lot of people think that the Bank of Canada traditionally follows the Federal Reserve.
There is obviously a very close link of the monetary policies because they policies are structured very similarly in terms of consumers being a leader of the economy and of course the trade relationship being so strong. We import that strength.
However when you have peak policy rates, when interest rates are peeking, you almost always get a decoupling of Canada to the US. So it's a very, very common historical thing. It's actually more the norm.
You will see 75 to 100 basis point gap between the Bank of Canada policy rate in the Federal Reserve. We hold rates at a lower level than the US. That is in part because we don't need to do as much as the US because they have really driven global financial markets and conditions in the yield curve and so we import some of their tightening through that channel.
In terms of the dollar, the Canadian dollar, as is currently trading, it's been bouncing around between 72, $0.74.
Many weeks.
That is already reflecting that gap in the policy rates.
So, we will be importing that move that has happened in the last month or so as the repricing is starting to come through on the differential between the two central banks.
That will be coming through in 2023.
Often, where do you see it first come through? Actually to the prices which, as you know from today, they're not great.
Already up over 11% over a year to year basis. So that's where that comes through.
It may not come through as much in the other categories because the consumer cycle will be coming in on that cycle. So that tamps down the willingness to pay for higher prices.
But when it comes to food, you need food.
You have no choice.
>> Vegetables… I don't have luck during the Summer.
Gotta buy them from the Americans.
Look at back to your questions.
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>> Let's check it on the markets. Of course the big question that we've had is will beget a bit of a Santa Claus rally going into the holidays?
We are trying.
The TSX Composite Index up 62 points, good one and 1/3% rise. You were seeing some money moved to energy and mining names. Let's check out Athabasca oil.
The basket in the energy space, two bucks and $0.18 a share, up a little more than 4%.
Barrick Gold, one of the giants in the mining space, up a little more than 2% with 24 bucks and change. Of course, south of the border, you of investors digesting will be heard from FedEx. We are from Nike. We heard seems to have pleased the street and perhaps given investors some comfort that it won't be quite as bad as feared for corporate earnings. Giving everything we are working our way through here. The S&P 500 up 1.4% about 54 points. The tech heavy NASDAQ doing a bit better than that.
Pretty much keeping pace with the broader market. One of the 3rd%. Let's check in on Nike again as we said, working down its inventory and boosting its online sales. Better results than the street was expecting.
Not only making the broader market feel better at least for today, investors putting money into the name. You have Nike had 117 bucks and change. We will call that 14% at this hour.
We are back now with Beata Caranci chief economist with TD Bank taking your questions on the economy so let's get through them again.
How do you see the EU doing next year?
>> Not good. They are, along with the UK them, they would be leading the advanced economies in the recession cycle.
However, we had some real pleasant surprises. I think we were braced for a worse outcome, at least at the end of this year.
They have skirted the worst, this is coming from the energy side.
They got lucky with a mild all, early winter that allowed their storage levels for natural gas and other fuels to stay high.
That was, it sounds weird, because the economists whether in terms of accuracy. And here I am talking about the weather. But the reality is the weather was a huge risk factor to their outlook.
So we have skirted that aspect.
They should probably come out of that recession cycle as we get towards the back half of next year.
However, that doesn't mean they have removed all their risks. They are doing a fantastic job in rotating their energy cycle away from Russia towards other services.
The US is a huge supplier.
Moving really fast and putting in loading LNG terminals at lightning speed. A lot happening but at the end of the day they have to restock although storage terminals. At the end of the winter. Now they don't have Russia gas as the starter for the storage with each they did have this year.
So all is coming from new sources. Again, it's a little bit of a wild factor that we have to observe and see how they do.
So they are not out of the woods regardless.
But surprisingly, doing better than many had expected because we thought that landing would be very hard. It could've been a lot worse.
>> Speaking of wildcards, we have a question about China.
What do you see about what's happening in China?
The global economy in 2023?
>> Talk about a swing factor on the economy. China is it.
We knew eventually they would abandon their zero COVID policy. It was not sustainable. They are doing it faster than we expected.
They have ripped the mandate off which we did not expect. We thought it would be more gradual. So from that perspective, we don't anticipate they will have a good first quarter.
We know from the experience of other countries, lots of examples that the illness rate will continue to climb and that the put pressure on, not just the hospital system, but also the… Could cause some pressure. We think that peak impact will be around the first quarter.
but after that, if they show improvement, that economy is primed with pent up demand. For them it's been three years straight a very harsh lockdowns and that can be a consumer cycle that just comes out of the gate running.
They have had less than 3% growth this year which, for them, is extremely poor as they were expecting 5%. Next year they could be 5+ percent growth as they get that tailwind on spending. It really depends on whether the consumer confidence starts to come back into the economy, which we think it will because, like all of the countries, there's gotta be a lot of pent up demand.
>> All right. We have run out of time but we do have the chief economist of the bank here and for the last time of 2022, it's been quite a year. What should we be thinking about is investors heading into the next year with the economy?
>> I would say don't panic.
hahaha. There's a lot of concern when people hear the word recession. We come out the other side and it's a way to recalibrate the economy. I think the central banks are highly sensitive and are trying to find the right balance.
They will respond accordingly. Also, inflation is not the worst problem to have in the world.
In terms of when you saw the global financial crisis and financial institutions and the people, energy crisis in Europe… I think in North America, the business cycle is really well-positioned relative to what you are seeing in other countries.
I'm grateful for at least that aspect. That we don't face the extreme challenges that you were seeing in other places.
So to end on an optimistic note, even though the outlook will be a tough one next year, it shouldn't be anything that we haven't seen before relative to what we are seeing in other countries experiencing.
>> Always a pleasure to have you here to get your insights.
Thank you for joining us and I look forward to more next year.
>> Thank you.
>> Beata Caranci, chief economist at TD Bank. Will be back tomorrow with an update of the markets and some highlights from our best reviews this week.
MoneyTalk Live will be taking a holiday hiatus that starts Friday, December 23 and we return on Monday, January 9.
We will have Tarik Aeta, Global Health Care Analyst at TD Asset Management taking your questions about the healthcare sector. That's it for us today. Take care.
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