Bank of Canada holds rates steady and sees the recent economic slump already easing. That decision comes in spite of the yield curve flashing the biggest recession signal yet. Kim Parlee talks with Michael Craig, Head of Asset Allocation at TD Asset Management.
- Hello and welcome to the show. It is great to have you with us. The Bank of Canada did the expected and held its benchmark interest rates steady at 1.75%. However, the bank continued to put a positive spin on its economic outlook, touting improved housing stability, strong job growth, and some easing of trade tensions with the United States. That decision comes in spite of a key slice of the Treasury yield's curve becoming the most inverted since 2007.
Joining me to talk about this and a lot more is Michael Craig. He is head of Asset Allocation at TD Asset Management, and he joins us from Seattle. Michael, great to see you. Let me just start with the Bank of Canada. Central bankers tend to be a pretty even-handed bunch, but this was a particularly even-handed statement that came from the Bank of Canada today. Anything notable that stood out for you?
- Not a lot. It was, I would say, on the upbeat side. I would say it poses a bit of an anomaly right now across the world, across the global central bankers around the world. So I wouldn't be shocked to see in a few weeks him go the other way. He's been good for volatility and good for traders. But at the end of the day, our markets will just follow what's happening in the dominant US-European markets. It's nice to see some of the things that were a real risk abating somewhat. But look, we're not going to see tremendous growth in Canada without things picking up in the United States.
KIM PARLEE: Yeah. Good point. And I guess the other thing, of course, people are watching in terms of tremendous growth or not is the yield curve. I mentioned in the introduction that we're seeing a real gap now, I think, between the three-month and the 10 years. It's inverted. Is that something that-- or I should ask you how concerning is that or do you need to see more persistence on that front?
- Yeah, I mean, there's a few things here to take away from it. The yield curve over the last 30 years, every time it's inverted, we've actually had double-digit market returns, except for 2000 when we had a real valuation bubble. So first off, it's not like you get an inverted curve and markets sell off aggressively the next month.
The second thing I would say is that we are going through a global growth slowdown. That's already been reflected in the data. This isn't starting. It's more probably near the end. So it's something to be mindful, and it's reflecting that. And the third thing, the longer-term part of the yield curve is really a function of inflation expectations in the years to come.
Now, if you put together demographic profiles in both the emerging world and the developed world, which are certainly slowing-- we're not going to have-- we're going to have more and more retirees and less people entering the workforce, as well as the advances in various technologies. These are all very disinflationary trends that are going about.
And therefore, long-term bond yields are reflecting that. They're basically telling us that the cost to produce things is-- right now, the expectation is the cost of producing is going to be less in the future and that we should expect lower inflation in the years ahead.
KIM PARLEE: OK. One thing I know that's not good for inflation growth are trade wars. And I know we've been hearing a bit from China in terms of their state media talking about rare earths, and that seems to be a bit of nuclear arsenal when you're talking trade spats right now. I'm curious for you. I mean, you've recently stepped into the head of asset allocation at TD Asset Management. How do you analyze that with, I'd say, the more fundamentals of what's going on with economic growth?
Yeah. I mean, Xi and Trump have kind of dug in. Xi is under pressure from some of the more nationalist forces in China who are looking to undermine him. He's having to tow a pretty hard line. The problem China faces is there's really not a lot they can do. The rare earths is really the one card they can play, but as far as limiting agricultural imports, that's an annoyance, but it's more of a six-month hit to farmers as the global trade kind of reasserts itself around that. It's a commodity.
As far as imports and whatnot, there's only so many things that China can do to push back. I think this is something that there's the short term and the long term. In the short term, this is providing investors an opportunity to get the market on sale, quite frankly. We're looking now at-- we position defensively about a month and a half ago and are now looking to step into these markets as equity prices are much more favorable. And so I think in the short term, this is more of an opportunity.
Longer term, we've all been living in a world of globalization and the whole world trading with one another. And it feels as though we're going towards a different type of world, where we really have kind of two sets of trading systems, one that would be led by China, and maybe more in the South Pacific, and the other led by the United States, which would be more of the traditional developed markets.
It's hard to forecast what the world looks like, but it's something we think about going forward as companies start to reassert their supply chains, look for other places to produce, and trading relationships are reorganized. It's not a great outcome. It certainly is going to lead to more costs for companies. But I don't think while this might lead to a bit of a cyclical uptick in inflation, it's certainly not going to be able to overpower the structural forces that are pushing inflation lower in the years to come.
- Michael, last question for you. I've only got about a minute here. But I'm curious. You, I know, part of what you do is you're out there, you're talking to clients. What kind of questions are they asking right now, and what's top of mind?
- Top of mind is certainly this trade announcement. It's what people are seeing every day in the news. And it's certainly is one to be concerned of, but if you go through this Trump presidency, there's been a lot of volatility that's been created and not much follow-through. And so I really don't really see this as something to be panicking about, quite frankly.
When you look into the internals in the market, fundamental long-term investors have actually been buying into this, whereas more of the faster money, systematic money has been selling. So, to me, I don't really see this as a huge risk every time. Market goes on sale, it's usually for a reason like this. And so I think investors should kind of look through it a little bit and look to the opportunity that's presenting.
KIM PARLEE: Michael, always a pleasure. Thanks for joining us. We'll look forward to talking to you when you're back in Toronto.
- Have a great night.
- You too. Michael Craig. He is head of Asset Allocation at TD Asset Management, and he joined us from Seattle, Washington.