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>>[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'll only see here.
We we'll take you through it's moving the markets and answer your questions about investing.
Coming on today's show we will get a reaction to today's US inflation report and what it means for rates with TD Asset Management Hafiz Noordin and MoneyTalk's Anthony Okolie will look at how small businesses are viewing the current environment. And in today's WebBroker education segment, Caitlin Cormier will walk us through how a bond letter works and how you can set one up on the platform. You can email us anytime at moneytalklive@td.com or fill out that viewer response box right here on WebBroker.
… We have some green on the screen where we have been drifting lower now as we had the lunchtime trading session.
Decidedly lower.
The TSX down 113 points. A little more than half percent.
Right now I did see a bit of a rally into tech names earlier today.
Shopify up a little stronger, drifting towards the breakeven line still in positive territory with 65, 21. Up $0.18.
They are reporting tomorrow so this is ahead of earnings for them as well.
But losing some steam. I did notice weakness in the lumber play earlier. Let's check in on Interfor.
Stop down almost 4%. South of the border, inflation hits and people try to make sense of the headline, the month-to-month moves, the annual moves.
Earlier in the session we were positive on Wall Street but right now drifting lower down 35 points almost a full percent for that broader read of the market.
Let's check NASDAQ, pretty much keeping pace with the broader market down hundred and 10 points almost a percent as well.
And Palentir stock almost up 13… Money so moving in that direction on the down day and that your market update.
The latest Jewish inflation reports show the well because I easing it will take back to get to the target range.
Joining us now Hafiz Noordin, Portfolio Manager at TD Asset Management. Great to have you on the show.
> Great to be here.
>> The market reaction has been mixed. Not very dramatic with the big take away, I guess I had I think others did to, I want to get your opinion.
This is a fight it's gonna take a while.
We know that but nothing to to Medicare.
>> For sure.
I think it's interesting going into this particular print was the theme that started to take a bit of a hold of the market and that Jerome Powell started to put forward that idea of disinflation.
Getting sanguine about this idea that inflation will come down. But for those going into today, hoping foramiss to the downside did not get that. Half a percent on a headline basis, .4% of the core but when you feed that into the year-over-year basis, a bit of a beat to the upside.
6.2 expected by the market… Encore, 5.6 on a year-over-year versus pub 5.5 by the markets. So I absolutely agree. The broad theme of inflation decelerating is certainly there compared to last year. But it's going to be a bumpy ride.
>> I like the chart we were just showing the audience in terms of where we were in inflationary pressures and indeed we have come off of those highs tween core and headline.
When you talk about that sweet spot, that dotted line along the bottom, that 2%, we obviously have a way to go.
I know we don't have a crystal ball but how long it takes to get there?
>> Well I think one of the big forward-looking indicators we have to factor in and what the market has been doing is shelter prices. It's about 40% of CPI. So, what the market is generally been a bit more comfortable with is this idea that rent prices which are a good forward-looking indicator as well as housing prices themselves do point to this idea that the shelter component of CPI which lags a lot, it's very slow-moving and very lagging compared to real-time data.
That should continue to chug down.
So that's kind of unknown part of the deceleration story. The other part that's known is goods prices. So we know we have this big sort of impact from supply chain disruptions over the post pandemic.
so that had a lot of impact on goods prices but that's come back now our supply chain is not an issue anymore.
that's the part that is sensitive to wages.
The pace of how we get to 2% really depends on do wages sustainably start to come down from their currently high elevated growth rates?
>> Obviously the average person is not enjoying these price pressures.
At the same time as investors, we are so interested in this… What does the Fed do with this information?
For a while it felt like the bond market was fighting back against the Fed.
… The bond market will be cut before the end of the year… Will that story start to change?
> In fact the Fed is winning that battle a little bit in that we have seen market pricing for this year starting to get closer to the docks. The dots were showing that stable rate… I think this price discovery, so to speak, it will be dated by data point.
The jobs number kind of kicked it off a couple weeks ago in very strong showing of that resilience in the labour market.
Today it's accelerating further to show that it's going to be a slow move back to 2%.
And I think it's probably the bigger and more important story is not just if inflation is coming down but what is the floor?
Is 2% really were regular land? I think there's a lot of uncertainty around that.
From some of the work that we do, that's not necessarily a done deal. You know, 3 to 4% is reasgiven the trends right now in housing inflation.
But there's just a lot of price discovery around that trend.
>> So when it comes to the Fed funds rate, if we do end up in a higher endpoint, the terminal rate is a little higher.
Perhaps only a couple of months ago… Indeed the Fed does stay there once they get to that point, they don't cut rates before the end of this year, how does that set up fixed income for this year?
>> For the most part the markets moved in that direction. After an initial rally in bonds at the start of the year, we see a bit of a pullback in the past few weeks.
Part of that has been that repricing of the terminal rate for this year.
But we still do see… So there is still potentially room to go if inflation stays firm or if jobs continue to be strong. We could see a further pulling back of some of those rate cuts that are priced in for next year.
That would primarily impact the short end and the sort of five-year point of the curve because that's the most sensitive to the Fed's policy and expectations of the Fed policy rate over the next couple years.
For longer data bond yields, not necessarily impacted as strongly, we could still see yields going higher at the long end. But that will be more sensitive to growth expected growth outcomes. So if we think that the market expects more of a chance of a recession to happen because of policy rates, then we can actually see long bonds stabilizing and potentially even decline if we are getting into that part of the cycle.
>> Is part of the difference, I'm sure we end up with central bank policy and inflation is the fact that they are actually showing us some pretty attractive yields for the first time in a very long time.
>> For sure. It's almost double compared to last year.
So your starting point is a fixed income investor is a very high level of income. 4 to 5% of betting on where on the curve.
And then at the same time, if you're getting that duration or interest rate risk in your portfolio from being a little bit out of the curve, that helps to provide in a recessionary environment a boost to your total returns if yields do then start to come down.
So definitely the risk/reward is even more in favour of positive in terms of fixed income but still you have to be mindful that there will be volatility along the way with the incoming data.
>> Fascinating stuff and a great start to the show. We will get your questions about fixed income with Hafiz Noordin in just a moment's time.
Including: A reminder that you can get in touch with us any time by emailing us at moneytalklive@td.com right now let's get you updated and some of the top stories in the world of business and how the markets are trading.
The parent company of Tim Hortons is reporting lower adjusted net income in its most recent quarter.
Despite growing sales compared to the same period last year.
Restaurant Brands International is citing unfavourable currency movements and higher expenses among other factors.
The company is also announcing its current Chief Operating Officer will become CEO effective March 1.
Stocks down to the tune of about 3% right now.
TC energy is hiking its quarterly dividend on the back of an adjusted earnings beat.
The quarterly results were boosted by stronger than forecasted contributions from the company's natural gas pipelines business.
However, cost increase for the coastal ghastly projects did CTC energy take a $3 billion pretax charge in the quarter. Down a little shy of a percent.
Coca-Cola top sales estimates in its latest quarter. With the higher cost of living its offerings soft demand for its offering softened juice offerings are among the weak spots in the corner.
As for the markets here at home, the TSX Composite Index, $0.90 $0.97 in the hole to breakeven. South of the border, investors spent the morning making sense of the inflation report and what it could mean for everything that Hafeez and I just discussed.
Down about three quarters of a percent.
We are back now with Hafiz Noordin taking your questions about fixed income so let's get to them.
Gen. Greene question: can you explain the relationship between bond yields and interest rates?
>> Yeah. It's always a good reminder of how bonds work in the quick answer is that there is an inverse relationship between bond yields and bond crisis which means when bond yields go up, bond prices go down in the other way around.
The reason that the cases when, as a bond investor, you are entering into a contract. You are lending your money out and let's say it's $100 upfront… You can earn a coupon and is a fixed coupon in most bonds.
So let's say it's five dollars per year.
At the end of the maturity, 10 years from now, you will get your $100 back.
In that simple scenario where you are lending 100 upfront and getting 100 back, your yield is basically the same as that coupon rate. 5%.
Let's say you hold that bond in market yields go up. You know yields go up and down reflecting inflation expectations and reflecting central bank policy rates.
If the yield goes from 5 to 6%.
The coupon of five dollars and still stays the same. So that's in the contract.
So one has to adjust as the bond price.
The price has to come down so you get a higher yield.
Instead of $100 upfront, you'll give $92 upfront.
You'll still earn that five dollars per year and you get $100 back.
Your yield is 5% from the coupon plus an extra 1% yield because you bought that bond at a discount.
Then the same thing works the other way round where, if yields go down, bond prices go up so you're having to put up more money upfront.
You will still get that coupon and then your yield is a bit lower than the coupon because yield markets have come down.
So it's that inverse relationship you have to remember is a bond investor.
>> Great explanation of how they work and are correlated to each other.
You mentioned central banks thereto. At last year that aggressive central bank raising of rates does have an effect on the bond market that across the curve, that's when it starts to get a little more complicated as to what part of the curve is the Fed influencing or directly and perhaps more indirectly.
>> That's right.
The main thing to remember is a fixed income investor to try to make sense of it all is you are expected Christ return from yields is linked to the duration of your fixed income… So you when you see the duration of a fund or whatever the instrument is, to understand how sensitive you are to movements and interest rates, if the duration of a typical fixed income fund is say, eight years, that means a 100 basis point moving yields will swing the price return component 1 8%. So you take that plus or -8% and you add on your income return and that's your expected total return.
So when you're looking at different parts of the yield curve you have to remember that longer dated bonds have longer duration and shorter dated bonds have shorter duration so you will get less price sensitivity and the short end and your income level just depends on the yield at that time that you're looking at for that fixed income investment.
>> People always coming to these things for the first time so we are happy to help. Next question: I guess this question could cut both ways.
They did tell us they are on pause. Some people thinking about cats and then maybe even for a hike the condition?
>> If there's one thing we've learned from central banks in general is it's what they say and what actually happens. Very often it's not the same thing.
I think the Bank of Canada in this case, they have done a lot of hiking so we can definitely sympathize with the idea that they have tightened a lot in an economy which is very susceptible to high interest rates. We have very high household debt here compared to other countries.
So there was this idea from them in January that they would pause. They communicated that. The market basically got on board and priced in for half percent policy rate for the rest of the year.
Then this monster job support came along last week.
The market was expecting about a 15,000 jobs added for January. We got 10 times that. 150000 Jobs Added in January.
So it really reinforced this notion that the labour market continues to be very tight.
At this point, not cracking under the pressure of higher interest rates.
There is still time to see how that involves or rather evolves but for the most part, that high jobs number did cause market pricing for the Bank of Canada to move up a little bit.
Instead of 4 1/2% for the rest of the year, there's a bit more of the likelihood of another 25 basis point hike by sometime this Summer.
I probably think the earliest that could happen is April when they release their next monetary policy report.
So that's what we're looking for in terms of how they update their forecast and their inflation expectations in that report.
>> Has a Bank of Canada given themselves enough flexibility to lay the groundwork for the conditional pause?
In the sense that central banks are starting to agree and maybe they address this directly, saying they have to restore some credibility. Saying one thing and the pandemic, things unfolded another way… We said it was transitory and we are still trying to battle it down.
They left themselves enough leeway if they have to react and raise rates.
>> I think the data allowed for them to moderate their tone a bit. Starting from October of last year is when you saw a bit of a rollover and inflation prints, the US got to 9%. The year-over-year headline prints have felt better. And certainly, even this sort of more shorter-term, month over month, quarter over quarter momentum inflation has argued be slowed down a little bit.
It's not enough but it's enough of the central banks to be able to say "we've done a lot. This is historically the fastest we've done, 400 basis points in a year." There's enough at this point to at least wait and see that, knowing that most monetary policy acts with two, maybe three quarters, let's see what it does.
Let's see how resilient the labour market is. If we start to see renewed pressures and inflation, we will have to enact. We will have to enact accordingly. I think the market understands that and as the data will come in, the market will help move them towards those new terminal rate target.
The central banks will have to listen.
>> Another question now… Is it time to buy the long bond?
We can't give you any direct investment advice but let's talk with the long bond.
>> I agree it depends on the time horizon of whether the long bond makes sense versus the shorter duration fixed income investment.
Broadly speaking, what I would say, yes it's definitely an attractive time for the long bond for one of the reasons I alluded to. Just the level of income. 3.8% right now with the US, I think it was around 2.1 a year ago.
So you're getting that boost in income.
But I think the bigger role that the long bond will plan a portfolio is that duration component. The interest rate risk factor.
And it's not just about can anticipate that yields will come down and I want to own duration.
It's not just about making a directional call.
It's about the correlation that that factor has with entities.
So if we get an environment where he actually the deeper recession than what's priced in right now, especially in a time when the soft landing narrative has been moving equity prices higher and given discarding point for evaluations there, if that scenario is wrong, we actually do get into a deeper recession,. To see the equity part of your portfolio go down.
But the long bond, you know, because yields typically go down when recession abilities are going up, that part of the portfolio would have more shock absorption and help to reduce portfolio volatility and mitigate some of that impact of lower equity prices.
>> As always at home make sure you do your own research before making investment decisions.
We will get back to your questions with Hafiz Noordin on investments in just a moment's time.
Just email us with your questions any time at moneytalklive@td.com. Now let's get your educational segment.
Bond laddering is one strategy fixed income investors may consider.
WebBroker has tools to help you create one.
Joining us with Maurice Caitlin Cormier, Client Education Instructor with TD Direct Investing.
Always great to see you Caitlin. Let's talk about a bond ladder is before we dive in to how to do one on WebBroker.
>> Absolute way so keeping with the theme of the day in talking about fixed income, investing in bonds specifically, one of the strategies that investors who want to invest in bonds to an employee is going in and actually building a bond ladder. A bond ladder is a fixed income type of strategy that investor purses does an investor purchases bonds with multiple maturity dates scattered over months or years.
You might build a portfolio like this as it can improve predictability of future income.
Seo portfolio set up and you know exactly when those different incomes are coming in.
I think it ensures adequate liquidity maintained for unforeseen obligations or other investment opportunities.
So the idea with the latter, again if we have one do every single year, then we have money that is kind of up for grabs her up for renewal sort of idea every single year.
So we will have money available. And it also helps to reduce risk and increase yields because again, we are pushing these bonds out.
We can do longer durations because we have something do every year.
So we have longer time frames there we tend to reduce the risk of our portfolio and increase the yield of those longer time frames.
Finally, it also helps to offer diversification and a smooth stream of income.
So lots of benefits there as far as if you're looking at building a bond portfolio laddering can definitely be an option to consider.
>> That's in a bond ladder is and how does one set one up on WebBroker?
>> For sure.
Working 1/2 white into WebBroker and where women ago is under the "research" tab.
We will click and go down here to "fixed income".
So under here, you can see in the right hand side, there are some future portfolios and personal portfolios.
This is where our bond ladders would live once we create them.
But let's look at how we are actually going to create it.
Here we have a listing of all these different kind of quick picks of bonds.
We have different time frames.
I will use it for today because it makes our search a little bit easier.
So we can choose all of these different categories. I'm gonna go under "provincial bonds" here.
I'm to look for something that has a due date of 2027.
So let us scroll down here. Go ahead and choose my home province of Nova Scotia just because.
I'm going to select a bond there.
I'm going to added to this bond ladder.
This portfolio here and it will pop me over and show me what irony have to save time today.
So I have a bond here, an agency bond in 2025.
I have one in 2028, 2026 and 2027.
Again, I can add as many bonds to this portfolio as I would like but we will go ahead and maybe just stay with this for today.
The next thing I wanted to as I want to type in the quantity.
So again, if I'm building a portfolio, I want to take an investment amount for each one of these individual bonds.
If I were going to build a portfolio.
Celestial salmon to invest $10,000 in each of these.
A minute click "calculate" and once I'm ready, I can go ahead and click to create a ladder report.
So this report is a really interesting report that takes basically the investments that we've looked at, that we've chosen and gives us a report on what that portfolio would look like.
So we see the price of the bonds list under there. We see the quantity of each one, the market value… Were some of these are trading at a discount, a premium… The percentage that East one is, our yield to maturity so what are actually yield is… Our annual yields, the ratings so the credit ratings, term to maturity duration… All of that is listed here in our total annual income is listed at the very end.
So we can actually see what income we expect to come in per year on each one of these bonds.
I'm also scroll down to the next page because this is a bit more for those of you that are more visual. It's giving us an actual visual representation of what this portfolio would look like.
So again, were seeing our monthly income.
Which months were having income come in on the dollar value. We are seeing here that we are actually allocated pretty well as far as being diversified so we have provincial, government, corporate and agency bonds.
We have a list year to show what bonds are coming to 2 to 3, 3 to 4, 45 and 5 to 6 years.
So again, we have the staggering maturities and our credit rating breakdown is listed here as well.
Finally, at the bottom, we have that breakdown of those different values.
So annual income maturity value, market value, all of those things.
It really does a great job at kind of, putting everything together in one and really giving you a snapshot of what it would look like if you were to move forward with that portfolio.
So again, just one of those tools that you can use and build a bond portfolio if that's something you're looking to do.
Definitely a great tool to get you started.
>> As always Caitlin. Thanks for that.
>> Thank you.
>> Caitlin Cormier, Client Education Instructor at TD Direct Investing.
Make sure to check out the learning centre on WebBroker for live master classes and upcoming webinars.
Before you get back your questions about fixed income for Hafiz Noordin, a reminder of how you 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 taking your questions with Hafiz Noordin. Lots coming in.
(REITs question) >> Stick inflation can still mean a number of different scenarios. We have to remember is that sticky can mean that we are sticking at current rates which is pretty bad given what the markets priced and which is more getting towards 2 to 3%.
Or there's a scenario where we get to 3% or so. What you have to think about is where do we end up and where we see that sticky and had a central banks react?
Do they hike rates even further from where they are now or do they keep rates where they are?
For longer time… So I think depending on that, a floating-rate note can be usefulin that if your view of where the fixed rate is now, let's say 4 1/2% of the US, if you think it's good to be higher than that of that.
In a floating rate would do better because your coupon would be linked to the underlying policy rate over that time which you would expect is going higher.
So I think the only challenge is just how you predict that.
I think it's a very difficult thing right now in this environment to anticipate where that will be over the next couple of years. There are just a lot of different scenarios. Again, it comes back to where does inflation go? What's the floor on inflation?
But even if you can anticipate that, can you really anticipate how central banks in a reactor on that?
Because they may have different ideas of whether the policy rate needs to go higher or not or whether it needs to stay where it is for a longer time.
I think they right now, still don't know where that equation is. So it's a challenging call to make.
>> That maybe think two of the fact that 2% is the sweet spot but there is a range.
They always talk about a target range.
I guess it's even hard to try to guess if they end up at about 3% and got stuck at three, with that be good enough for them?
We don't know.
But there's definitely a range they are able to play with.
> If you remember pre-COVID there was this change of view in terms of average and felt inflation target and it was about trying to keep target inflation to be higher than the 2% level for a sufficient time to make up for all of that lost inflation post of the global financial crisis.
So arguably could get to 3% but it's really about the trend in inflation and what does it mean in terms of financial stability? That's what we have to see how they can OSS and I think it's really a challenge to try to anticipate that right now.
>> Another question now this one of the Canadian bond funds.
The viewer wants to know why they are declining?
> Sure so last year of course, there is the 400 basis points of typing in the policy rates.
So when you have central banks hiking aggressively, that's bad for fixed income.
And that's why a typical eight year duration fixed income fund would've been down, you know, 10 to 15% right?
So that was applicable for Canadian government bonds, for US government bonds, really there was nowhere to really hide in developed markets in that sense.
To start this year, we actually have seen positive returns in January, 2 to 3% because we've seen bond yields come down a bit.
Maybe a little bit of giving back to that in February.
So there is a bit of that volatility but you know, our take on just the starting point for fixed income yields is that after those losses from last year, the starting point for income levels is much more attractive.
We will have some of his volatility in the price return component but that income return is still good to be a much more positive value added for a portfolio right now.
>> Another question here. Lots of them.
(Reads question) Caitlin was just showing us how to get into the months base but maybe it's a little too rich for some people.
>> Yeah and I think the key thing to remember in fixed income is that it is not like equities were it's very easy to transact as an individual.
A lot of parts of the market.
Assuming the government and bond market is more liquid, but the corporate bond market is very much over-the-counter and so it's not easy like an exchange to be able to trade on. So as an individual investor, looking for these sort of pool funds type of strategies helps to reduce those transaction costs and ultimately achieve the same kind of outcome you're looking for a witch as, you know, some amount of duration and some amount of income in a liquid part of your portfolio.
And funds and that we are set up to provide that economy to scale so that when going up to the market, as we do a TD Asset Management, we are able to go directly to corporate bond issuers and say "we are interested in a new issue from you and we will be a lead order in that." So I think it's important to remember that as an institution, it's very different being in a… Market versus being an individual investor.
>> If we do get the recession, another question, how can small investors… I think I may have jumped there. Which one your me to read?
What does a recession mean for corporate bonds?
>> That's one of the big topics right now.
Because this is probably a very anticipated position the debate about how deep it's going to be.
What is it mean for risk assets general corporate bonds and equities.
Corporate bonds is kind of this bear market rallies so to speak.
You know, 10 basis points, 50 basis points in high yields… That's now Goddess devaluations, let's call it 120 basis points.
450 and high-yield, those are levels that I would say are consistent with sort of average spread levels historically. So you have to ask yourself if were at an average part of the cycle or if this is an average you know, Outlook in terms of economic growth… I would argue that the risks in terms of economic growth are a little more tilted to the downside than they are to the upside really just because it's a simple story. A huge amount of tightening in terms of monetary policy, the stimulus from a fiscal policy perspective has rolled off.
We have quantitative tightening that is just kind of chugging along in terms of reducing the amount of bonds that central banks are purchasing. So historically, that means that it is a tougher environment for risk assets and corporate bonds. We will have to watch in terms of the Outlook. The default rate for high-yield in particular.
We get into a recession and does it start to increase defaults? We haven't seen that yet.
Still historically low, 0 to 1% default rate.
That's why spreads are so low now. But it's that SKU of economic growth to the downside that leads me a little more cautious.
>> Back to your questions on fixed income with Hafiz Noordin in just a moment's time and a reminder to do your own researchbefore making investment decisions. A reminder that you can get in touch with us anytime.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live.
>> US small business optimism improved in January as inflation started to ease slightly.
However inflation does remain a major concern for business owners.
Joining us with more now is Anthony Okolie. TD Economics is a take Dustin and Anthony?
>> Yes Greg it did end up in January, inflation does continue to be a problem.
The index hedged up about half a point to 90.3 in January.
That slightly above estimates but again, indexes below the 49 year average of 98.
Now, when we dig into the numbers, six of the 10 subcomponents improved last month and owners who expected better business over the next six months, that number rose.
Again, it's -45 which is still in recession.
Still recession reading.
Despite persistent words about inflation, there are signs that price pressures are slowly updating.
The number of owners raising average prices… Leveling off, that could potentially be optimistic going forward if again inflation remains fairly sticky.
One positive development was an earnings trend. It actually became less negative in January.
Which means fewer negative profit reports and the share of businesses reporting capital outlays.
That was another positive development for the index as well.
It was up four points to 49%. On the downside however, the number of owners expecting higher yield sales fell 4 points to a negative reading of -14.
That's a fairly weak reading.
Finally, despite the profit picture, the labour market is still a big issue for owners. Again 45% of all nursing job openings are hard to fill and concerns regarding labour costs also roles as well.
But those planning to raise compensation actually fell for the third month in a row overall.
So, again, when we look at the numbers, the index does show a slightly better footing than it ended last year.
Greg?
>> Inflation touches so many parts of a small business operation. Apart from that though anything else on what business owners are concerned about?
>> I think the ability to hire and manage workers still remains a key concern among small business owners in the US.
24% of business owners identified this as a top business problem. Again, just second only to inflation.
The uptick that we saw in job openings recently with the jolts reporting strengthens the view that there is still appetite for challenge.
While the labour market is still pretty tight with plans for future compensation increases have fallen sharply. As I mentioned earlier since October.
TD Economics says that this adjusted inflation could continue to head lower through this year and into 2024.
>> Very interesting stuff. Thanks Anthony.
>> My pleasure.
>> MoneyTalk Live is Anthony Okolie.
I check in on the markets now on Bay Street on the heels of the US inflation report which of course the market tried to make sense after the morning session. It's decided it wants to be down modestly.
76 points in the hole in Toronto about 1/3 of a percent.
We want to take a look at some companies, company CAE sales up with a boost in the stock and hanging in there at 31, 46 a share.
Yeah CAE up a little more than 4%.
Restaurant Brands International, we told you about them at the top of the show, they saw improving sales but also costs biting into profits.
South of the border, the S&P 500, having checked this since the top of the show but still negative.
Nothing too dramatic.
20 points in the hole. We'll call about half a percent.
The tech heavy NASDAQ keeping pace with the broader market. Down about 1/3 of a percent.
Nvidia, we did notice the chipmakers hanging in there. 226 bucks a share up almost to the tune of 4%.
We are back now with Hafiz Noordin from TD Asset Management, talking fixed income.
Let's get another question in here.
This one about the emerging markets.
Are they looking attractive right now?
>> They are looking attractive in terms of the fact the yields are high across emerging markets.
What's important to remember in general with emerging markets as they do well when risk assets are broadly doing well and also in the US dollar is going down.
For EM assets, both of those have been the case since around October of last year. We saw some very strong absolute returns but also outperformance relative to developed markets.
Given where we are now after a pretty good run, I think it's can be really critical going forward, certainly the data, watching how today's data and other developed markets labour inflation data shift any expectations on central-bank movements but even beyond that, I think it's really critical for individual EM countries is their own policy credibility which, I think, we are starting to see some more differentiation. A good example is Mexico which recently was expecting a hike of 25 basis points hiked by 50 to be a little more proactive.
And I think a showing of this idea of they are looking for more stability in their capital accounts, their currencies… Those are the types of countries you want to be in that are actually being proactive and have the support of all levels of government.
Brazil is a bit of a different story. I think the central banks are being pretty credible but facing some pressures from the new Pres.
around revising inflation target.
But I think even in the face of that, they're doing it knew a good job in terms of maintaining some independence. So it's case-by-case work.
Peru would be an example of the downside.
So much social unrest that they decided not to hike on their last meeting even though the market expected them to.
So we will see that differentiation and you have to understand those governments and see if they're credible in terms of their policy.
>> We are almost out of time but we want to squeeze one more in. How big a risk as the debt ceiling?
We have to worry about the debt ceiling.
>> Sadly we do.
We have been through this before, different variations.
I think from one perspective, we know what some of the signals in the market are to look for to see and monitor if there is stress that is getting pervasive.
One lenses credit default swaps on the US government already showing levels consistent with the 2013 debt ceiling crisis.
Not so much the 2011 crisis where we actually got our credit rating down right?
So I think we will be monitoring that.
Monitoring treasury bills would help to show funding rates for the government. We are he saw there is getting a little dislocated getting into the June to the August timeframe.
So I think, big picture, we will have to live through this.
I don't expect that the US government will default. That would be suicide.
But I think at the end of the day, it could be a meaningful source of volatility and I think it speaks of the bigger picture, just around getting into the election cycle… What will that mean around fiscal policy and any undue influence on the central bank? Those are the things I worry about that are more about the bigger picture story. Not so much of the government's gonna find a way to fund itself.
>> Great to have you on the program will see you next time.
>> My pleasure.
>> Our thanks to Hafiz Noordin, Portfolio Manager at TD Asset Management.
Stay tuned will have Nicole Ewing this week… That's all the time we have for the show this week stay tuned for more see you next time.
[music]
Every day I'll be joined by guests from across TD, many of whom you'll only see here.
We we'll take you through it's moving the markets and answer your questions about investing.
Coming on today's show we will get a reaction to today's US inflation report and what it means for rates with TD Asset Management Hafiz Noordin and MoneyTalk's Anthony Okolie will look at how small businesses are viewing the current environment. And in today's WebBroker education segment, Caitlin Cormier will walk us through how a bond letter works and how you can set one up on the platform. You can email us anytime at moneytalklive@td.com or fill out that viewer response box right here on WebBroker.
… We have some green on the screen where we have been drifting lower now as we had the lunchtime trading session.
Decidedly lower.
The TSX down 113 points. A little more than half percent.
Right now I did see a bit of a rally into tech names earlier today.
Shopify up a little stronger, drifting towards the breakeven line still in positive territory with 65, 21. Up $0.18.
They are reporting tomorrow so this is ahead of earnings for them as well.
But losing some steam. I did notice weakness in the lumber play earlier. Let's check in on Interfor.
Stop down almost 4%. South of the border, inflation hits and people try to make sense of the headline, the month-to-month moves, the annual moves.
Earlier in the session we were positive on Wall Street but right now drifting lower down 35 points almost a full percent for that broader read of the market.
Let's check NASDAQ, pretty much keeping pace with the broader market down hundred and 10 points almost a percent as well.
And Palentir stock almost up 13… Money so moving in that direction on the down day and that your market update.
The latest Jewish inflation reports show the well because I easing it will take back to get to the target range.
Joining us now Hafiz Noordin, Portfolio Manager at TD Asset Management. Great to have you on the show.
> Great to be here.
>> The market reaction has been mixed. Not very dramatic with the big take away, I guess I had I think others did to, I want to get your opinion.
This is a fight it's gonna take a while.
We know that but nothing to to Medicare.
>> For sure.
I think it's interesting going into this particular print was the theme that started to take a bit of a hold of the market and that Jerome Powell started to put forward that idea of disinflation.
Getting sanguine about this idea that inflation will come down. But for those going into today, hoping foramiss to the downside did not get that. Half a percent on a headline basis, .4% of the core but when you feed that into the year-over-year basis, a bit of a beat to the upside.
6.2 expected by the market… Encore, 5.6 on a year-over-year versus pub 5.5 by the markets. So I absolutely agree. The broad theme of inflation decelerating is certainly there compared to last year. But it's going to be a bumpy ride.
>> I like the chart we were just showing the audience in terms of where we were in inflationary pressures and indeed we have come off of those highs tween core and headline.
When you talk about that sweet spot, that dotted line along the bottom, that 2%, we obviously have a way to go.
I know we don't have a crystal ball but how long it takes to get there?
>> Well I think one of the big forward-looking indicators we have to factor in and what the market has been doing is shelter prices. It's about 40% of CPI. So, what the market is generally been a bit more comfortable with is this idea that rent prices which are a good forward-looking indicator as well as housing prices themselves do point to this idea that the shelter component of CPI which lags a lot, it's very slow-moving and very lagging compared to real-time data.
That should continue to chug down.
So that's kind of unknown part of the deceleration story. The other part that's known is goods prices. So we know we have this big sort of impact from supply chain disruptions over the post pandemic.
so that had a lot of impact on goods prices but that's come back now our supply chain is not an issue anymore.
that's the part that is sensitive to wages.
The pace of how we get to 2% really depends on do wages sustainably start to come down from their currently high elevated growth rates?
>> Obviously the average person is not enjoying these price pressures.
At the same time as investors, we are so interested in this… What does the Fed do with this information?
For a while it felt like the bond market was fighting back against the Fed.
… The bond market will be cut before the end of the year… Will that story start to change?
> In fact the Fed is winning that battle a little bit in that we have seen market pricing for this year starting to get closer to the docks. The dots were showing that stable rate… I think this price discovery, so to speak, it will be dated by data point.
The jobs number kind of kicked it off a couple weeks ago in very strong showing of that resilience in the labour market.
Today it's accelerating further to show that it's going to be a slow move back to 2%.
And I think it's probably the bigger and more important story is not just if inflation is coming down but what is the floor?
Is 2% really were regular land? I think there's a lot of uncertainty around that.
From some of the work that we do, that's not necessarily a done deal. You know, 3 to 4% is reasgiven the trends right now in housing inflation.
But there's just a lot of price discovery around that trend.
>> So when it comes to the Fed funds rate, if we do end up in a higher endpoint, the terminal rate is a little higher.
Perhaps only a couple of months ago… Indeed the Fed does stay there once they get to that point, they don't cut rates before the end of this year, how does that set up fixed income for this year?
>> For the most part the markets moved in that direction. After an initial rally in bonds at the start of the year, we see a bit of a pullback in the past few weeks.
Part of that has been that repricing of the terminal rate for this year.
But we still do see… So there is still potentially room to go if inflation stays firm or if jobs continue to be strong. We could see a further pulling back of some of those rate cuts that are priced in for next year.
That would primarily impact the short end and the sort of five-year point of the curve because that's the most sensitive to the Fed's policy and expectations of the Fed policy rate over the next couple years.
For longer data bond yields, not necessarily impacted as strongly, we could still see yields going higher at the long end. But that will be more sensitive to growth expected growth outcomes. So if we think that the market expects more of a chance of a recession to happen because of policy rates, then we can actually see long bonds stabilizing and potentially even decline if we are getting into that part of the cycle.
>> Is part of the difference, I'm sure we end up with central bank policy and inflation is the fact that they are actually showing us some pretty attractive yields for the first time in a very long time.
>> For sure. It's almost double compared to last year.
So your starting point is a fixed income investor is a very high level of income. 4 to 5% of betting on where on the curve.
And then at the same time, if you're getting that duration or interest rate risk in your portfolio from being a little bit out of the curve, that helps to provide in a recessionary environment a boost to your total returns if yields do then start to come down.
So definitely the risk/reward is even more in favour of positive in terms of fixed income but still you have to be mindful that there will be volatility along the way with the incoming data.
>> Fascinating stuff and a great start to the show. We will get your questions about fixed income with Hafiz Noordin in just a moment's time.
Including: A reminder that you can get in touch with us any time by emailing us at moneytalklive@td.com right now let's get you updated and some of the top stories in the world of business and how the markets are trading.
The parent company of Tim Hortons is reporting lower adjusted net income in its most recent quarter.
Despite growing sales compared to the same period last year.
Restaurant Brands International is citing unfavourable currency movements and higher expenses among other factors.
The company is also announcing its current Chief Operating Officer will become CEO effective March 1.
Stocks down to the tune of about 3% right now.
TC energy is hiking its quarterly dividend on the back of an adjusted earnings beat.
The quarterly results were boosted by stronger than forecasted contributions from the company's natural gas pipelines business.
However, cost increase for the coastal ghastly projects did CTC energy take a $3 billion pretax charge in the quarter. Down a little shy of a percent.
Coca-Cola top sales estimates in its latest quarter. With the higher cost of living its offerings soft demand for its offering softened juice offerings are among the weak spots in the corner.
As for the markets here at home, the TSX Composite Index, $0.90 $0.97 in the hole to breakeven. South of the border, investors spent the morning making sense of the inflation report and what it could mean for everything that Hafeez and I just discussed.
Down about three quarters of a percent.
We are back now with Hafiz Noordin taking your questions about fixed income so let's get to them.
Gen. Greene question: can you explain the relationship between bond yields and interest rates?
>> Yeah. It's always a good reminder of how bonds work in the quick answer is that there is an inverse relationship between bond yields and bond crisis which means when bond yields go up, bond prices go down in the other way around.
The reason that the cases when, as a bond investor, you are entering into a contract. You are lending your money out and let's say it's $100 upfront… You can earn a coupon and is a fixed coupon in most bonds.
So let's say it's five dollars per year.
At the end of the maturity, 10 years from now, you will get your $100 back.
In that simple scenario where you are lending 100 upfront and getting 100 back, your yield is basically the same as that coupon rate. 5%.
Let's say you hold that bond in market yields go up. You know yields go up and down reflecting inflation expectations and reflecting central bank policy rates.
If the yield goes from 5 to 6%.
The coupon of five dollars and still stays the same. So that's in the contract.
So one has to adjust as the bond price.
The price has to come down so you get a higher yield.
Instead of $100 upfront, you'll give $92 upfront.
You'll still earn that five dollars per year and you get $100 back.
Your yield is 5% from the coupon plus an extra 1% yield because you bought that bond at a discount.
Then the same thing works the other way round where, if yields go down, bond prices go up so you're having to put up more money upfront.
You will still get that coupon and then your yield is a bit lower than the coupon because yield markets have come down.
So it's that inverse relationship you have to remember is a bond investor.
>> Great explanation of how they work and are correlated to each other.
You mentioned central banks thereto. At last year that aggressive central bank raising of rates does have an effect on the bond market that across the curve, that's when it starts to get a little more complicated as to what part of the curve is the Fed influencing or directly and perhaps more indirectly.
>> That's right.
The main thing to remember is a fixed income investor to try to make sense of it all is you are expected Christ return from yields is linked to the duration of your fixed income… So you when you see the duration of a fund or whatever the instrument is, to understand how sensitive you are to movements and interest rates, if the duration of a typical fixed income fund is say, eight years, that means a 100 basis point moving yields will swing the price return component 1 8%. So you take that plus or -8% and you add on your income return and that's your expected total return.
So when you're looking at different parts of the yield curve you have to remember that longer dated bonds have longer duration and shorter dated bonds have shorter duration so you will get less price sensitivity and the short end and your income level just depends on the yield at that time that you're looking at for that fixed income investment.
>> People always coming to these things for the first time so we are happy to help. Next question: I guess this question could cut both ways.
They did tell us they are on pause. Some people thinking about cats and then maybe even for a hike the condition?
>> If there's one thing we've learned from central banks in general is it's what they say and what actually happens. Very often it's not the same thing.
I think the Bank of Canada in this case, they have done a lot of hiking so we can definitely sympathize with the idea that they have tightened a lot in an economy which is very susceptible to high interest rates. We have very high household debt here compared to other countries.
So there was this idea from them in January that they would pause. They communicated that. The market basically got on board and priced in for half percent policy rate for the rest of the year.
Then this monster job support came along last week.
The market was expecting about a 15,000 jobs added for January. We got 10 times that. 150000 Jobs Added in January.
So it really reinforced this notion that the labour market continues to be very tight.
At this point, not cracking under the pressure of higher interest rates.
There is still time to see how that involves or rather evolves but for the most part, that high jobs number did cause market pricing for the Bank of Canada to move up a little bit.
Instead of 4 1/2% for the rest of the year, there's a bit more of the likelihood of another 25 basis point hike by sometime this Summer.
I probably think the earliest that could happen is April when they release their next monetary policy report.
So that's what we're looking for in terms of how they update their forecast and their inflation expectations in that report.
>> Has a Bank of Canada given themselves enough flexibility to lay the groundwork for the conditional pause?
In the sense that central banks are starting to agree and maybe they address this directly, saying they have to restore some credibility. Saying one thing and the pandemic, things unfolded another way… We said it was transitory and we are still trying to battle it down.
They left themselves enough leeway if they have to react and raise rates.
>> I think the data allowed for them to moderate their tone a bit. Starting from October of last year is when you saw a bit of a rollover and inflation prints, the US got to 9%. The year-over-year headline prints have felt better. And certainly, even this sort of more shorter-term, month over month, quarter over quarter momentum inflation has argued be slowed down a little bit.
It's not enough but it's enough of the central banks to be able to say "we've done a lot. This is historically the fastest we've done, 400 basis points in a year." There's enough at this point to at least wait and see that, knowing that most monetary policy acts with two, maybe three quarters, let's see what it does.
Let's see how resilient the labour market is. If we start to see renewed pressures and inflation, we will have to enact. We will have to enact accordingly. I think the market understands that and as the data will come in, the market will help move them towards those new terminal rate target.
The central banks will have to listen.
>> Another question now… Is it time to buy the long bond?
We can't give you any direct investment advice but let's talk with the long bond.
>> I agree it depends on the time horizon of whether the long bond makes sense versus the shorter duration fixed income investment.
Broadly speaking, what I would say, yes it's definitely an attractive time for the long bond for one of the reasons I alluded to. Just the level of income. 3.8% right now with the US, I think it was around 2.1 a year ago.
So you're getting that boost in income.
But I think the bigger role that the long bond will plan a portfolio is that duration component. The interest rate risk factor.
And it's not just about can anticipate that yields will come down and I want to own duration.
It's not just about making a directional call.
It's about the correlation that that factor has with entities.
So if we get an environment where he actually the deeper recession than what's priced in right now, especially in a time when the soft landing narrative has been moving equity prices higher and given discarding point for evaluations there, if that scenario is wrong, we actually do get into a deeper recession,. To see the equity part of your portfolio go down.
But the long bond, you know, because yields typically go down when recession abilities are going up, that part of the portfolio would have more shock absorption and help to reduce portfolio volatility and mitigate some of that impact of lower equity prices.
>> As always at home make sure you do your own research before making investment decisions.
We will get back to your questions with Hafiz Noordin on investments in just a moment's time.
Just email us with your questions any time at moneytalklive@td.com. Now let's get your educational segment.
Bond laddering is one strategy fixed income investors may consider.
WebBroker has tools to help you create one.
Joining us with Maurice Caitlin Cormier, Client Education Instructor with TD Direct Investing.
Always great to see you Caitlin. Let's talk about a bond ladder is before we dive in to how to do one on WebBroker.
>> Absolute way so keeping with the theme of the day in talking about fixed income, investing in bonds specifically, one of the strategies that investors who want to invest in bonds to an employee is going in and actually building a bond ladder. A bond ladder is a fixed income type of strategy that investor purses does an investor purchases bonds with multiple maturity dates scattered over months or years.
You might build a portfolio like this as it can improve predictability of future income.
Seo portfolio set up and you know exactly when those different incomes are coming in.
I think it ensures adequate liquidity maintained for unforeseen obligations or other investment opportunities.
So the idea with the latter, again if we have one do every single year, then we have money that is kind of up for grabs her up for renewal sort of idea every single year.
So we will have money available. And it also helps to reduce risk and increase yields because again, we are pushing these bonds out.
We can do longer durations because we have something do every year.
So we have longer time frames there we tend to reduce the risk of our portfolio and increase the yield of those longer time frames.
Finally, it also helps to offer diversification and a smooth stream of income.
So lots of benefits there as far as if you're looking at building a bond portfolio laddering can definitely be an option to consider.
>> That's in a bond ladder is and how does one set one up on WebBroker?
>> For sure.
Working 1/2 white into WebBroker and where women ago is under the "research" tab.
We will click and go down here to "fixed income".
So under here, you can see in the right hand side, there are some future portfolios and personal portfolios.
This is where our bond ladders would live once we create them.
But let's look at how we are actually going to create it.
Here we have a listing of all these different kind of quick picks of bonds.
We have different time frames.
I will use it for today because it makes our search a little bit easier.
So we can choose all of these different categories. I'm gonna go under "provincial bonds" here.
I'm to look for something that has a due date of 2027.
So let us scroll down here. Go ahead and choose my home province of Nova Scotia just because.
I'm going to select a bond there.
I'm going to added to this bond ladder.
This portfolio here and it will pop me over and show me what irony have to save time today.
So I have a bond here, an agency bond in 2025.
I have one in 2028, 2026 and 2027.
Again, I can add as many bonds to this portfolio as I would like but we will go ahead and maybe just stay with this for today.
The next thing I wanted to as I want to type in the quantity.
So again, if I'm building a portfolio, I want to take an investment amount for each one of these individual bonds.
If I were going to build a portfolio.
Celestial salmon to invest $10,000 in each of these.
A minute click "calculate" and once I'm ready, I can go ahead and click to create a ladder report.
So this report is a really interesting report that takes basically the investments that we've looked at, that we've chosen and gives us a report on what that portfolio would look like.
So we see the price of the bonds list under there. We see the quantity of each one, the market value… Were some of these are trading at a discount, a premium… The percentage that East one is, our yield to maturity so what are actually yield is… Our annual yields, the ratings so the credit ratings, term to maturity duration… All of that is listed here in our total annual income is listed at the very end.
So we can actually see what income we expect to come in per year on each one of these bonds.
I'm also scroll down to the next page because this is a bit more for those of you that are more visual. It's giving us an actual visual representation of what this portfolio would look like.
So again, were seeing our monthly income.
Which months were having income come in on the dollar value. We are seeing here that we are actually allocated pretty well as far as being diversified so we have provincial, government, corporate and agency bonds.
We have a list year to show what bonds are coming to 2 to 3, 3 to 4, 45 and 5 to 6 years.
So again, we have the staggering maturities and our credit rating breakdown is listed here as well.
Finally, at the bottom, we have that breakdown of those different values.
So annual income maturity value, market value, all of those things.
It really does a great job at kind of, putting everything together in one and really giving you a snapshot of what it would look like if you were to move forward with that portfolio.
So again, just one of those tools that you can use and build a bond portfolio if that's something you're looking to do.
Definitely a great tool to get you started.
>> As always Caitlin. Thanks for that.
>> Thank you.
>> Caitlin Cormier, Client Education Instructor at TD Direct Investing.
Make sure to check out the learning centre on WebBroker for live master classes and upcoming webinars.
Before you get back your questions about fixed income for Hafiz Noordin, a reminder of how you 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 taking your questions with Hafiz Noordin. Lots coming in.
(REITs question) >> Stick inflation can still mean a number of different scenarios. We have to remember is that sticky can mean that we are sticking at current rates which is pretty bad given what the markets priced and which is more getting towards 2 to 3%.
Or there's a scenario where we get to 3% or so. What you have to think about is where do we end up and where we see that sticky and had a central banks react?
Do they hike rates even further from where they are now or do they keep rates where they are?
For longer time… So I think depending on that, a floating-rate note can be usefulin that if your view of where the fixed rate is now, let's say 4 1/2% of the US, if you think it's good to be higher than that of that.
In a floating rate would do better because your coupon would be linked to the underlying policy rate over that time which you would expect is going higher.
So I think the only challenge is just how you predict that.
I think it's a very difficult thing right now in this environment to anticipate where that will be over the next couple of years. There are just a lot of different scenarios. Again, it comes back to where does inflation go? What's the floor on inflation?
But even if you can anticipate that, can you really anticipate how central banks in a reactor on that?
Because they may have different ideas of whether the policy rate needs to go higher or not or whether it needs to stay where it is for a longer time.
I think they right now, still don't know where that equation is. So it's a challenging call to make.
>> That maybe think two of the fact that 2% is the sweet spot but there is a range.
They always talk about a target range.
I guess it's even hard to try to guess if they end up at about 3% and got stuck at three, with that be good enough for them?
We don't know.
But there's definitely a range they are able to play with.
> If you remember pre-COVID there was this change of view in terms of average and felt inflation target and it was about trying to keep target inflation to be higher than the 2% level for a sufficient time to make up for all of that lost inflation post of the global financial crisis.
So arguably could get to 3% but it's really about the trend in inflation and what does it mean in terms of financial stability? That's what we have to see how they can OSS and I think it's really a challenge to try to anticipate that right now.
>> Another question now this one of the Canadian bond funds.
The viewer wants to know why they are declining?
> Sure so last year of course, there is the 400 basis points of typing in the policy rates.
So when you have central banks hiking aggressively, that's bad for fixed income.
And that's why a typical eight year duration fixed income fund would've been down, you know, 10 to 15% right?
So that was applicable for Canadian government bonds, for US government bonds, really there was nowhere to really hide in developed markets in that sense.
To start this year, we actually have seen positive returns in January, 2 to 3% because we've seen bond yields come down a bit.
Maybe a little bit of giving back to that in February.
So there is a bit of that volatility but you know, our take on just the starting point for fixed income yields is that after those losses from last year, the starting point for income levels is much more attractive.
We will have some of his volatility in the price return component but that income return is still good to be a much more positive value added for a portfolio right now.
>> Another question here. Lots of them.
(Reads question) Caitlin was just showing us how to get into the months base but maybe it's a little too rich for some people.
>> Yeah and I think the key thing to remember in fixed income is that it is not like equities were it's very easy to transact as an individual.
A lot of parts of the market.
Assuming the government and bond market is more liquid, but the corporate bond market is very much over-the-counter and so it's not easy like an exchange to be able to trade on. So as an individual investor, looking for these sort of pool funds type of strategies helps to reduce those transaction costs and ultimately achieve the same kind of outcome you're looking for a witch as, you know, some amount of duration and some amount of income in a liquid part of your portfolio.
And funds and that we are set up to provide that economy to scale so that when going up to the market, as we do a TD Asset Management, we are able to go directly to corporate bond issuers and say "we are interested in a new issue from you and we will be a lead order in that." So I think it's important to remember that as an institution, it's very different being in a… Market versus being an individual investor.
>> If we do get the recession, another question, how can small investors… I think I may have jumped there. Which one your me to read?
What does a recession mean for corporate bonds?
>> That's one of the big topics right now.
Because this is probably a very anticipated position the debate about how deep it's going to be.
What is it mean for risk assets general corporate bonds and equities.
Corporate bonds is kind of this bear market rallies so to speak.
You know, 10 basis points, 50 basis points in high yields… That's now Goddess devaluations, let's call it 120 basis points.
450 and high-yield, those are levels that I would say are consistent with sort of average spread levels historically. So you have to ask yourself if were at an average part of the cycle or if this is an average you know, Outlook in terms of economic growth… I would argue that the risks in terms of economic growth are a little more tilted to the downside than they are to the upside really just because it's a simple story. A huge amount of tightening in terms of monetary policy, the stimulus from a fiscal policy perspective has rolled off.
We have quantitative tightening that is just kind of chugging along in terms of reducing the amount of bonds that central banks are purchasing. So historically, that means that it is a tougher environment for risk assets and corporate bonds. We will have to watch in terms of the Outlook. The default rate for high-yield in particular.
We get into a recession and does it start to increase defaults? We haven't seen that yet.
Still historically low, 0 to 1% default rate.
That's why spreads are so low now. But it's that SKU of economic growth to the downside that leads me a little more cautious.
>> Back to your questions on fixed income with Hafiz Noordin in just a moment's time and a reminder to do your own researchbefore making investment decisions. A reminder that you can get in touch with us anytime.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live.
>> US small business optimism improved in January as inflation started to ease slightly.
However inflation does remain a major concern for business owners.
Joining us with more now is Anthony Okolie. TD Economics is a take Dustin and Anthony?
>> Yes Greg it did end up in January, inflation does continue to be a problem.
The index hedged up about half a point to 90.3 in January.
That slightly above estimates but again, indexes below the 49 year average of 98.
Now, when we dig into the numbers, six of the 10 subcomponents improved last month and owners who expected better business over the next six months, that number rose.
Again, it's -45 which is still in recession.
Still recession reading.
Despite persistent words about inflation, there are signs that price pressures are slowly updating.
The number of owners raising average prices… Leveling off, that could potentially be optimistic going forward if again inflation remains fairly sticky.
One positive development was an earnings trend. It actually became less negative in January.
Which means fewer negative profit reports and the share of businesses reporting capital outlays.
That was another positive development for the index as well.
It was up four points to 49%. On the downside however, the number of owners expecting higher yield sales fell 4 points to a negative reading of -14.
That's a fairly weak reading.
Finally, despite the profit picture, the labour market is still a big issue for owners. Again 45% of all nursing job openings are hard to fill and concerns regarding labour costs also roles as well.
But those planning to raise compensation actually fell for the third month in a row overall.
So, again, when we look at the numbers, the index does show a slightly better footing than it ended last year.
Greg?
>> Inflation touches so many parts of a small business operation. Apart from that though anything else on what business owners are concerned about?
>> I think the ability to hire and manage workers still remains a key concern among small business owners in the US.
24% of business owners identified this as a top business problem. Again, just second only to inflation.
The uptick that we saw in job openings recently with the jolts reporting strengthens the view that there is still appetite for challenge.
While the labour market is still pretty tight with plans for future compensation increases have fallen sharply. As I mentioned earlier since October.
TD Economics says that this adjusted inflation could continue to head lower through this year and into 2024.
>> Very interesting stuff. Thanks Anthony.
>> My pleasure.
>> MoneyTalk Live is Anthony Okolie.
I check in on the markets now on Bay Street on the heels of the US inflation report which of course the market tried to make sense after the morning session. It's decided it wants to be down modestly.
76 points in the hole in Toronto about 1/3 of a percent.
We want to take a look at some companies, company CAE sales up with a boost in the stock and hanging in there at 31, 46 a share.
Yeah CAE up a little more than 4%.
Restaurant Brands International, we told you about them at the top of the show, they saw improving sales but also costs biting into profits.
South of the border, the S&P 500, having checked this since the top of the show but still negative.
Nothing too dramatic.
20 points in the hole. We'll call about half a percent.
The tech heavy NASDAQ keeping pace with the broader market. Down about 1/3 of a percent.
Nvidia, we did notice the chipmakers hanging in there. 226 bucks a share up almost to the tune of 4%.
We are back now with Hafiz Noordin from TD Asset Management, talking fixed income.
Let's get another question in here.
This one about the emerging markets.
Are they looking attractive right now?
>> They are looking attractive in terms of the fact the yields are high across emerging markets.
What's important to remember in general with emerging markets as they do well when risk assets are broadly doing well and also in the US dollar is going down.
For EM assets, both of those have been the case since around October of last year. We saw some very strong absolute returns but also outperformance relative to developed markets.
Given where we are now after a pretty good run, I think it's can be really critical going forward, certainly the data, watching how today's data and other developed markets labour inflation data shift any expectations on central-bank movements but even beyond that, I think it's really critical for individual EM countries is their own policy credibility which, I think, we are starting to see some more differentiation. A good example is Mexico which recently was expecting a hike of 25 basis points hiked by 50 to be a little more proactive.
And I think a showing of this idea of they are looking for more stability in their capital accounts, their currencies… Those are the types of countries you want to be in that are actually being proactive and have the support of all levels of government.
Brazil is a bit of a different story. I think the central banks are being pretty credible but facing some pressures from the new Pres.
around revising inflation target.
But I think even in the face of that, they're doing it knew a good job in terms of maintaining some independence. So it's case-by-case work.
Peru would be an example of the downside.
So much social unrest that they decided not to hike on their last meeting even though the market expected them to.
So we will see that differentiation and you have to understand those governments and see if they're credible in terms of their policy.
>> We are almost out of time but we want to squeeze one more in. How big a risk as the debt ceiling?
We have to worry about the debt ceiling.
>> Sadly we do.
We have been through this before, different variations.
I think from one perspective, we know what some of the signals in the market are to look for to see and monitor if there is stress that is getting pervasive.
One lenses credit default swaps on the US government already showing levels consistent with the 2013 debt ceiling crisis.
Not so much the 2011 crisis where we actually got our credit rating down right?
So I think we will be monitoring that.
Monitoring treasury bills would help to show funding rates for the government. We are he saw there is getting a little dislocated getting into the June to the August timeframe.
So I think, big picture, we will have to live through this.
I don't expect that the US government will default. That would be suicide.
But I think at the end of the day, it could be a meaningful source of volatility and I think it speaks of the bigger picture, just around getting into the election cycle… What will that mean around fiscal policy and any undue influence on the central bank? Those are the things I worry about that are more about the bigger picture story. Not so much of the government's gonna find a way to fund itself.
>> Great to have you on the program will see you next time.
>> My pleasure.
>> Our thanks to Hafiz Noordin, Portfolio Manager at TD Asset Management.
Stay tuned will have Nicole Ewing this week… That's all the time we have for the show this week stay tuned for more see you next time.
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