Economic Outlook – 08/19/2022

[music] Hello I'm Greg Bonnell and welcome to MoneyTalk Live which is brought to you by TD Direct Investing. Coming up on today's show: TD Asset Management's Head of Fixed Income Robert Pemberton will give us his view on the tug of war happening between growth and inflation. And we'll hear whether the recent run in equities has the hallmarks of a bear market rally with Michael Craig, Head of Asset Allocation at TD Asset Management. Closing today's web broker education segment, will explore trailing stop orders and how you can use them on the platform with Bryan Rogers. And before we get to all that let's get you an update on the markets. It definitely risk off globally. We'll start at home on Bay Street with the TSX Composite Index. At the moment, 20,119 shedding 145 points. As of yesterday's close, we are on track for a moneymaking week. Clearly that is at risk right now. A fairly broad based selling, the major concern is the future path of central-bank action heading into the fall. I thought that we have not been concerned with all through the some rally but some second thoughts about market participants today about where we could be headed after the some rally. Let's check in on Air Canada, some of the bigger big-name is moving into the downside in Toronto. 1864 a share down a little more than 3%. In the tech space, fairly broad-based but getting hit earlier as well. We have Shopify here 45 bucks and $0.20 a share. Down a little more than 5%. Let's check in on that broader reading of the American market, the S&P 500 right now. It looks like it's not can it be able to make it. The close last Friday for moneymaking weeks in a row for the S&P 500, the Summer rally we've been talking about. It is clearly in jeopardy today. 4232 down 51 point a little more than a percent. Let's check in on the NASDAQ. Down more than 2% of their morning session a bit off of those lows right now. Still under some pressure. Down 1.9%. And Foot Locker, the broader market is under some pressure. Were seeing some names move higher. 39 bucks and $0.99 a share, more than 22% and earnings beat at the new incoming CEO which seems to have some money moving toward the name. And that's her market update. Cooler than expected U.S. Inflation data has let some market watchers to believe that a "Fed Pivot" away from jumbo-sized interest rate hikes is on the way, but is that Actually the case? Robert Pemberton head of fixed income at TD Asset Management join me earlier to discuss. >> Core inflation continue to rise. The Bank of Canada, the Bank of England, ECB are all focused on inflation targeting that lower inflation growth. My current read on it is that if you were going to call anything a "pivot" in the last Fed announcement, it would be a pavement from the end of the beginning to the beginning of the end. Of Fed rate hikes. That Pivot is still in the process and we are a long way of being done on the rate hikes. >> I was going to say the beginning of the end something along road. I think we've become accustomed to really quick responses and it sort of getting our needs met very quickly by central banks. It's been a while right? Always riding into the rescue. This seems to be where evil or saying "we have an inflationary problem here and will do whatever it takes." Some credibility may have been lost early in the pandemic. >> Well certainly with the responses we saw both from a monetary perspective and a fiscal perspective during the pandemic, the economic growth we saw coming out of it definitely saw central banks behind the times with respect to inflation and inflationary pressures. I'm certain when economic historians look back at this. They will say that the central banks were slow to react. The reaction function since then has actually been very, very positive in terms of dating back much of the credibility. And we've seen that both from where we C-terminal rates, which is to say what the markets pricing for where central banks will get to as well as what were starting to see from an inflation perspective. My thought process on it right now is that were likely to see inflation move lower, relatively quickly to probably that for, 4 1/2 to 5% range. But from 5 1/2 or 5% rather, down to 2%, could be a much longer slug than the markets currently pricing. Racks let's talk with a long gain then. Rather the long game. Not only from a pivot point of view but even this fact that they're going to be done pretty soon and they're going to be cutting again. Thereafter react to weakness in the economy. Some people are saying not so quick. The inflation job of bringing it down to Target will be a rough one, a long one. They just can't turn on a dime again and get back to the easy monetary policy. We are knocking to get all of our needs met in the next couple of days or weeks. >>Correct. And I think maybe a good way to frame that is people expecting the Fed put to come back into the marketplace are likely to be disappointed over the next two or three years. We certainly believe that the market is mispricing the rate cuts in '23 and '24 in order to get inflation back down. Certainly, some of the cyclical components of inflation are going to come back down and ease. certainly some of the cyclical components of inflations will come down with ease but some of the secular issues associated with it, particularly wages, housing, owners equivalent rent and things along those lines will remain sticky and higher for longer. Which tends to mean that overall inflation will remain higher. With that, as I mentioned, the idea that the Fed will be cutting rates in 2023, this in my opinion is a little misplaced at this stage. I think the market is trying to bet between which former Fed governor or Fed Chairman rather than going to have. Whether it's going to be the Arthur Burns of the mid-1970s or whether it's going to be Paul Voelker of the 1980s. Arthur Burns, was historically reluctant to raise rates meaning later follow inflation. Where is we know that Paul Voelker had a great deal of credibility when it came to raising rates and dealing with the tough medicine upfront in order to provide a better outcome for the economy longer term. >> Well these divergent views in the market right now, will this push and pull with people trying to figure out exactly where they're trying to be, how should we approach that is investors? >> The fact that we've seen an aggressive hike early on in the cycle and we continue to believe they will see the 50s or 75's going forward for the next couple, central bankers broadly in North America want to get to at least 3 1/2% on an overnight basis. Which clearly, we are 100 basis points away from. So we are going to continue to see that. But from a fixed income perspective, what that means is more likely to see more volatility partly because we are going to see more volatility in both inflation and resent in economic growth and in assets and broadly speaking.… Today's numbers in retail sales, yesterday's numbers in CPI, housing data, employment data. All of that is going to drive market outcomes which means were likely to see a broader range particularly at the front end of the yield curve as investors are trying to price 50 or 75. To me that's… Kind of picking it knits. It's going to be at least 50. It might be 75 depending on what the data shows us. But volatility will be higher. Interestingly, longer term maturities in the bottom market are likely to experience somewhat less volatility. Simply because so much has Artie been priced in for central-bank cuts and a way to think about long term yields is there a series of short term yields and with the idea idea that break-evens in the RRB market or in the TIPS market continue to point to long-term control of inflation. We believe that the longer end of the yield curve is likely to behave better than the front end of the yield curve, which is why you're seeing the inversion of the yield curve, where short-term yields to maturity are higher than long term yield to maturity's and that's really under the bases that central banks are going to have to enact aggressively initially. But over the long term are likely to see things moderate back towards the 2 1/2 overnight range that several years out. >>- For some people, that inversion of the yield curve is not a good sign for what's coming ahead in the economy. People always want to say, this time it is different. Is it different this time? Or is this giving us a pretty dire warning sign? >> I don't know if I would use the word "dire" but inversion in the yield curve generally means that there will be some economic pain ahead. The two year 10 your curve is inverted. The one that I'm really more focused on is three months. it still remains positive at the margin but I expected to invert before the end of the year which really points to an economic slowing in 2023, 2024. And as a reminder to our viewers, the central bank has a very blunt tool with monetary policy. And what they're looking to do is decrease demand in the economy overall. And if they're going to do that, there will be slowing. It's just, will it be painful slowing, or will it be more moderate and softer? And I think there are different definitions of how to think about that. There's going to be a requirement for some unemployment increases in order to take some pressure off the labour markets. There is going to be a need for final demand to decrease across multiple services. So they're trying to engineer that. And an analogy I used in a conversation not too long ago about this would be the central banks trying to land as C – 130 Hercules cargo plane on a postage stamp. So it'll be a tough one to achieve a very soft landing and it's certainly something that they're looking at trying. We think of the probabilities of a recession are greater than 50% over the next 12 to 18 months. That was Robert Pemberton head of income at TD fixed Asset Management. Stay tuned. Next week we will hear from Benjamin Chim lead for high yield fixed income at TD Asset Management. Let's get to update on the top stories in the world of business and take a look at how the markets are trading. [music] Fresh evidence today the Canadians are slowing their consuming and hide prices. An early read from stats can… As those pandemic restrictions receded. There is noting a pullback on goods purchases in July. All services spending is still holding up. But TD economics suggests it's only a matter of time before Canadians cut back on entertainment and travel spending. Heavy machinery maker Deere & Cofell short.… While sales of $13 million were stronger than expected, net income came well below the estimates. Shareholders of General Motors will be making payments again, the trade automaker says albeit at a lower level than before the pandemic. GM did suspend that dividend payout during the early months of the COVID-19 lockdowns. The reinstated dividend will be $0. 90 per share. 75% lower than that pre-pandemic. Let's check back in on the markets. … Still several weeks out. Those concerns persist about inflation and how sticky is going to be even though we've got some softer than expected readings from both Canada and the United States in recent days. What central banks are ultimately going to do about it, you have this TSX down to hundred and 48 points with three quarters of a percent. Let's check in on what's happening on Wall Street with the S&P 500. Right now we are seeing broad-based selling on those last trading day of the week. S&P 500 down to the tune of 1.2% at this hour. Of course, apart from today selling pressure we have seen quite a run in the equity market since June. A Summer rally on our hands. Investors increasingly betting, at least some of them that easing inflation may cause the reserve to pivot from its rate hiking cycle. However, Michael Craig, Head of Asset Allocation at TD Asset Management says we may be in a classic bear market rally. Here's our conversation. >> Well, we're coming off really, really bombed out sentiment levels in late June. And I think you go into the summer, people are on vacation, liquidity is light-- and this is classic bear market dynamics where you get these double-digit rallies off depressed lows. And so the question is that we put the lows in and is this sustainable? And I would say, look to next two months are typically very challenging seasonal periods. I would be quite cautious going into September at these levels after seeing such a big double-digit rally in the bond forces. >>Because, of course, the big story of the year has been inflation. And it kept moving higher and higher and higher and really sending shockwaves through the market. So we got the Canadian number today. We're starting to ease, but still uncomfortably high. We got the US number recently. And the market rejoiced in the fact that, oh, it's only 8.5% instead of 8.7%. And then these expectations think, well, then the Fed will just pivot off of all this. I mean, these sort of lofty expectations-- are we getting a little ahead of ourselves if that's your market thesis? >> Yeah, it's pretty, you're really looking at the market with rose coloured glasses. . It's like losing weight. The first five pounds is easy. It's just water. And then the hard work begins. And the inflation numbers came off as a function of gas prices and used cars. And these are all very cyclical factors that I don't think should shock anybody. But again, summer dynamics, not a lot of people in, you had some good news on the back of a bleak outlook, and so the market really ran with it. For us to take this, then, and say, well, the Fed is going to pivot, is a bit of a stretch. We're probably going to be around a 5-handle by Christmas on inflation. But the real challenging part is the structural aspects. And I do believe they will fall, it's just going to take longer. And that's really what gets you into the owners .… I don't think the Fed can really pivotably have inflation on it to handle which I think is going to take longer than people may think. >>Is part of the discussion, I guess, perhaps, around the Federal Reserve table or the Bank of Canada-- that central banks seem to have lost a little bit of the faith of the people? Earlier this year, it's like, don't worry. Inflation is transitory. We don't have to act too aggressively. And suddenly, it seemed like inflation had caught them out. Do they have work to do still to sort of restore our confidence in their ability to keep inflation in check? >> I think broadly, broad media still has them under the gun. but if you look at the market expectations, in terms of market participants, I think long-term inflation expectations are anchored. Might be too strong a word. But they are certainly not getting away from them. And the Michigan data on five-year expectations came out last week and it continues to trend lower. Shorter, year out, higher, but I think people think long-term inflation expectations are starting to come re-anchored. And the various Fed governors have all come from all different walks of life in terms of doves, hawks-- they have been uniform in terms of saying we're tightening policy until we get inflation under control. very rarely do you see them singing from the same choir book if you will. It is believed that they will tighten their policy until inflation is under control. > If we take them up there were that they are going to do whatever they knew to get inflation under control, could that mean a recession? The whole point of raising rates is to start slowing what seems like our insatiable demand. Money for every ass and we get our hands on… >> Obviously that they don't want to create a recession. But if a recession is what it takes to get inflation under control, they will take that. So the other thing too, I think people need to understand is that we are to see hikes hiked into the end of the year. The markets kind of looking for cuts as early as middle of next year. I'm not certain that can be in the cards. Working to go through. Your money is going to be tight. It can be expensive and that's what going to hurt. We're going to get used to higher rates as they keep hiking. But it's that extended period of time with very, very restrictive policy. That's where I think you get into the recession situation because the cost of money is so much higher than it has been in previous years. >> You know that, would be to his investors? I think it's pretty fair to say that when you talk the average investor, then they feel burdened by what happened in the first half of the year there a bit puzzled about what's happening right now. What we do when we don't know if we can trust? Would we do with our money in times like these? >>Well, first, it's the old adage-- if you look at a longer term chart-- an index chart of returns, this is a little bit of a blip. So we've got to put things in perspective. It's no fun being down 10%. But we've had it pretty good for a number of years now. So I always say, step back to what you're trying to solve for the biggest risk for investors is getting to the day when you need the money and not having the money there. In terms of the next 12 months, a few things-- one, the bond market's had a really rotten six-month start to the year. Bond investors for a long time have been under pressure because yields haven't been very attractive. Today, I think you can look at the bond market and yields are far higher than they have been in the past. And that's something that were looking at in terms of looking at bond yields of four or 5% in yield on investment grade Index. So that's attractive. On the stock side, I would be cautious. Short-term going into the fall. But at some point over the next 12 months, I think it will be a very opportune levels for kind of longer-term capital accumulation. And the third to thing, what gets lost this year is that last year everyone was an expert in investing. A lot of those fads have really been hurt this year. And it's so important to be mindful that we have these marked to markets. They're no fun. But it's that permanent loss of capital when you have things that just disappear that's really what it hurts investors. And so I would say, particularly going in the next 10 years, that's what you want to mostly avoid is permanent loss. And that gets you into more tangential investments, if you will, and something to be watchful for as we come out of this and we start to recover. >> It sounds like you still want to have a balanced portfolio long run. It has proven to work for us. I think the faith being shaken, you talk to but how miserable it was and bonds the first half of the year because people were looking at and saying "okay my equities are down but luckily I'm at diversified in my portfolio. Whether that 60 to 40 or whatever Math you slice up. . . . . We were sort of going into unprecedented times where bonds were going to suffer to that degree at the same time that equities were suffering to that degree. >>Yeah, I haven't actually been alive since the last time we had a start that terrible. And I'm not that young. So it is a bit of an anomaly. I think there is lessons to be learned. The first half of the year, outside of energy and commodities would be the only really places to have hit out. And I do think we need to be mindful that of the next 10 years, stagflationary periods, something that we haven't seen for a long time-- we did see in the first half of this year-- are more likely than not to occur again. And so there are, certainly, areas where you can evolve the balanced portfolio-- our sense would be to use commodities. And so there's room for improvement. But to abandon the strategy, I think, is unwise. Because you go through these periods and you have a tough and miserable time but it just set you up for the future higher returns. >> In volatile markets, investors may consider using stop orders to try to limit their downside risk. There are different types of stop orders and today were going to look at trailing stops. Bryan Rogers, client education instructor at TD direct investing joins us now for more. Bryan walk us through how trailing stops differ from a regular stop order. >> Just to protect profit or potentially eliminate more downside risk. So in that situation, we were talking about today, with all that uncertainty and volatility. … With a regular stop order, that is kind of a one and done thing. A certain stock price and it just stays that price until you manually go in and do it again. So if the stock moves in a certain direction, your stock… If you vendor for long. Of time. With trailing stops that can automate that process. So you can change the stop and adjust it to be fit where you wanted to be. To follow. I do have a short little animation or video clip to kind of explain the process of the trailing stop. So if we pull that up. You can see, if you're doing a regular stop order, let's say you bought a stock at $10, you would set it to say a dollar below at nine dollars. Then it goes up and down, you can see it fluctuating up and down. As soon as it hits that nine dollar prices can it trigger a market order. That order is done. If you do a trailing stop, you can see here, you can enter what we call… It's a fancy word meaning arrange. If the stock was up by a dollar, then… If we bought in the $10, it never went down to that nine dollar range, it will continue to fall. Past 10 up to 11 and further up that. Stop order will change now with the system of following by one dollar. So if we were at 12 1/2 dollars now, and said as soon as it starts to dip down by your 1 Dollar Trl., that's where it will actually execute and start to create a self. You'll notice as it's going down you see it fluctuating a bit. Once it drops to the point where it gets to your new stop point, you have a trigger in order and you'll get into that position. Have a much better profit too. >> That's a great graphic. It really drives home visually exactly what a trailing stop is. If people are intrigued, how would you actually enter a trailing stop on web broker? >> I have an example here on web broker. If you look at my screen, you can see that if we have an example of Apple. I have the trading tab open here. If you're familiar with that you can click on "sell". You're just putting in your quantity. Let's say a put in 100 shares. On the drop menu down here for your price, that's where you're looking for the trailing stop. Your other stop orders are there as well. Your stock market limit. Just to keep it simple will show you that one. You will see something a bit different. This triggered Delta. You can do a dollar amount or percentage in one of these. Just to keep it simple, if I wanted to do a $10 triggered Delta, that means if I bought Apple in 140 a while ago, now it's trading at about 172, I'm thinking "I want to get out of this and still of a prophet but don't want to have any losses if I'm not paying attention"… Initially it will be 162 will enter that order. But if Apple goes up to 180 or 190, 200… This trail, this 10 Dollars Trl. is going to be there. Going up to $200, your new trailing stop would be 190. Then the stock will drop down you will get a better price. So that's all there is to it in terms of entering the orders. You're all set. >> Fascinating stuff as always. Really appreciate you joining us today Bryan. >> Thanks a lot Greg. >> Our thanks to Bryan Rogers. Client education instructor at TD Direct Investing. We want to make sure you do your own research and check web broker for more educational videos, live interactive master classes and upcoming webinars. Let's check on the market. The TSX just sitting at this level for the last little while. 20,114, down 150 points with three quarters of a percent. We are seeing some broad-based selling. The tech sector on both sides of the border's feelings and pressure. We showed you Shopify the top of the stove. , Right now down about three to half percent. Let's check in the S&P 500. Clearly the risk off sentiment running a little deeper on Wall Street, down a full percentage point. a winning streak over the Summer rally. This is clearly in jeopardy right now. Unless the trade turns around for the close today at 4235, back about 48 points, a little more than a full percent. Checking in on NASDAQ, will see some pressure and some big tech names and indeed, it is playing out here on the NASDAQ 100. Down 264 points almost 2%. It was down a little more than 2%, earlier in the trading session and now just hovering around that number. Here's an interesting name, even though the broader market is down, selling is fairly broad-based, Madison Square Garden getting into the bid today. The company telling that they are exploring a spinoff and that could include their live entertainment business. One of the options on the table. 6488, stock is about 3 1/2%. Now the last few data points released south of the border have pointed to strengthen the US economy while that may seem like good news for investors, Michael O'Brien, Portfolio Manager at TD Asset Management says it may actually put a On how high equities can run in the short term. >> So much pessimism was baked as the market. I think a lot of the stocks especially, those big strong growth the technology stocks south of the border were really primed for recovery. We got that over the last 23 or four weeks. A pretty nice run. I think the reason we saw the set up transpire partly with expectations. we got pretty pessimistic but I think also a narrative crept into the market that the Federal Reserve was getting close to having done enough. Maybe they won't need to keep raising rates as aggressively as they have in obviously, if you get a signal that the Federal Reserve is going to slow down or pivot in the vernacular, to a less aggressive rate hike cycle, that's very positive for stock valuation. So I think that's what was kind of underpinning, you know, this recent rally. So the reason I was saying last week's payroll was quite significant is because it just kind of gave us a real-world data point that said "don't get ahead of yourselves here, the economy is still in pretty strong shape." >> This idea of the pivot right? It almost feel like hopes and dreams. "Don't worry were almost done, there's going to be a pivot" but this is got to change some minds about where the Fed is headed. >> It certainly change some minds but I think that what he did is it probably solidified the thinking of the Federal Reserve itself. We kinda got that evidence on Friday. That the labour market south of the border is still drum tight. So to me, that is says there going to be more rate hikes. Maybe we get 75 Basis Points in September. So we haven't quite turned that corner yet. So I think the market got a bit ahead of itself these last few weeks. >> Limit this argument that the markets are of forward-looking instrument? So yes, in anticipation of the continued strength of the US economy, the continued rate hikes were going to see in the face of strong inflation, that all that got priced out and it's behind us again. Again that's the optimist take on everything. Don't worry about it, the equity market is a forward-looking instrument. Sometimes I feel like I'm still kind of figure out what exactly the equity markets try to tell me what the current situation, whether even knows of the current situation. >>Well, you're absolutely right. The market is forward looking. The problem is the market doesn't have a crystal ball. So sometimes they get it right and sometimes they get it wrong. We're all responding to these data points in real time. you know, the market again, with the set up coming into this, which is pretty bleak and valuations have come down quite a long ways, it wasn't an unreasonable thing to take a bit more optimistic look. If you're convinced the glass is totally full and now maybe it's half-empty, why not give it a shot? So I think that was part of it. The set up coming in was very negative. I think one thing that market is increasingly convinced of that the Fed, the US the Federal Reserve and I think by extension the Bank of Canada on the side of the border, that they do still have their inflation fighting credentials intact. I think if you look at the action of the bond market especially, but also the stock market, the way that these longer duration stocks have really picked up, is "okay we had a bit of a scare early in the year ago now we've listened to it the central bankers are saying. We've observed what they've actually done and yeah we get it, they are fighting inflation. They are to let inflation get away, they aren't and let us go back to the 70s, were knocking to have a Paul Volcker type moment." So I think it's very good in terms of reestablishing the credibility of the central banks. The problem is that credibility comes at a cost. And the cost is: in order to bring inflation back to a more palatable level of around 2%, there's a lot of what to chop. And particularly will we need to see is a softer labour market which implies slower growth. And slower growth of input typically implies lower earnings. So it's a bit of a be careful what you wish for because in order to reestablish their inflation credentials, they are going to have to slow down the economy a bit. And the realtor going forward is can they pull off that soft landing that everybody aspires to? Where you don't have a significant downturn? Or do they overshoot and force us into something a little uglier? >> So we haven't seen that softening of the labour markets south of the border. Canada's job prints have it a bit strange in terms of the tightness of the market. But also the fact that were losing positions. You mentioned the Bank of Canada. Do they have as clear a road ahead as the US Federal Reserve has with its economic indicators? Are things a bit dicey are there? >>It's a little more mixed in Canada, because like you say, the last two job reports, quite the opposite of what we saw south of the border. The last two job reports in Canada were surprisingly soft. Canada actually lost jobs in June and July. And so now the Canadian employment report is notoriously volatile. So take everything with a grain of salt. But two consecutive months of negative job growth. there is not be some signal in there. So I think in that respect, that's gotta be a big message saying to the bank of Canada that look, the economy is responding to a pretty aggressive rate hike cycle and that we've put it in place already. Some sure that gives them some pause. The other side of it, though, is that inflation is still very high. And as you mentioned in that same employment report, wage growth is running north of 5%, which is a pretty healthy level. And the participation rate, which gives you an idea of how much slack is in the labor force, the participation rate fell again, which is not a good development. So that wasn't the type of employment report the Bank of Canada would want to see, because on the one hand, the economy does appear to be responding fairly quickly to these interest rate increases. On the other hand, there's still signals that more needs to be done because the labor market, despite these job losses, is still too strong. >> - If we got to a point in this country where the Bank of Canada had justification based on the data to take a different path than the US Federal Reserve, could they at this point, coming out of the pandemic, trying to get inflation under control? Is everyone just sort of in lockstep with the Fed and what the Fed does? >> Well, obviously, the Fed is the 800-pound gorilla on the global central banking scene. But to a certain extent, each central bank can chart its own path. If you look at the Bank of Canada's situation, they were actually earlier and harder into this rate cycle. They moved quicker than the Federal Reserve did. And we've had that long-standing bank of Canada policy of targeting a 1% to 3% inflation rate, which goes right back to the early 90s. And so I think the Bank of Canada comes into this with their inflation credentials well intact. And I think the moving quickly, moving aggressively, it just reaffirms that the Bank of Canada is on the case. And so I think that does give them the flexibility if the data requires. It does give them a chance to maybe diverge a little bit from the path the US is on. But we'll see where we end up. I think there won't be a whole lot of surprises in the monetary policy front for the next couple of meetings. As we did get closer to year end, maybe that's a restart to see some of those divergences appear. If these trends continue. >> That was Michael O'Brien, Portfolio Manager at TD Asset Management. Stay tuned on Monday, Bart Melek head of commodity strategy TD securities will be taking our guests questions and taking your questions rather, giving them to our guests. We will be talking of course, about commodities. A reminder that you can get in touch with us anytime. Get a head start getting those questions into us. Just email MoneyTalkLive@td. com. That's all the time we have for the show today. Take care and have a great weekend. [music]