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[music] >> Hello, I'm Greg Bonnell. 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're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today show, we'll discuss the future passive rates after the Fed signalled there may not be many more ahead for them.
TD Senior economist James Marple is Argus. And in today's WebBroker education segment, Nugwa Haruna is going to show us how you can find news and alerts using the platform.
So here's how you can get in touch with us. Just email moneytalklive@td.com or you can fill out that viewer response box under the video player here in WebBroker.
Before you get your guest of the day, let's get you an update on the markets. We've got a pretty healthy rally on our hands. It was very interesting to watch the market reaction post 2 PM Eastern time yesterday, that was the Fed decision, the press conference. The market didn't know whether they were going to be up or down.
By the closing bells, they were down but they are making background back today. We will start here in Toronto, 19,563, TSX got a triple digit gain of 120 points, a little bit firmer than half a percent.
A bit of risk appetite today, it benefits some tech names. Including Shopify at 6325, it is up to and 1/2%.
Also notice that tech resources getting a bit earlier today.
[video buffering] Tech heavy NASDAQ there even better at least the last time I checked. Indeed, it up a little more than 2%.
Shares of Block are under pressure today, being targeted by a short report at the moment.
You've got 6321 for the name, down about 13%.
And that's your market update.
Of course, the US Federal Reserve raised interest rates by 25 basis points. Other global banks making similar moves in its wake. That is policymakers are dealing with a wave of banking turmoil. Signals out there that they may be near their end of the hiking cycle. Let's talk about all of that with James Marple, Senior economist with TD. Great to have you back on the show.
We are sifting through the aftereffects of what we got from the said. What was your week?
>> I think they made the right decision. The market was anticipatingthis rate. Interestingly, before all the recent events with SVB did there was isolation said they would go 50. Certainly with the economic data came in at the start of this year, it would have warranted some of that.
We have seen job growth come in well above expectations and well above the pace you would expect given where the unemployment rate is,but also seeing inflation remained stubborn and something that they are trying to get to 2%. More hikes would have been on the table. But offset obviously by what we have seen in terms of the banking sector.
>> Yeah, it seems like the collapse of Silicon Valley Bank is making some US regionals worry. It had them dial back the tough talk. That was only two weeks ago.
Jerome Powell was in Washington saying they might need to go further than expected, putting 50 on the table.
All of that godchild back. Now the market is trying to figure out if they are done or not. As you said, the economic conditions, we have some jobless numbers this morning in the labour market is still tight in the states.
It seems to be a pretty tough road ahead.
>>that was reflected in the statement and in the chairman's press conference afterwardwhere he shared it the uncertainty they are facing. Trying to figure out how much this tightening and financial conditions, probably know it will be tighter lending standards especially among some of these smaller banks that have been under pressure, what that will mean to the real economy.
And there just isn't a lot to go by on that.
we can try to look at historical correlations but this is kind of unprecedented, certainly in the speed at which things have happened and given all the changes that have happened in the financial sector in the last decade. It's a little bit of a guessing game, but I think we can say that if or when financial conditions are tightened and lending standards are tightened, tends to result in less loan growth, less demand and less economic activity.
In some sense, that replaces what the Fed was trying to do in terms of raising interest rates.
I think it makes sense for them to say, maybe we are close to the end. We obviously have to watch very carefully the economic data as it comes in, but also some of the very high frequency data in terms of what we are seeing in terms of deposits and loan growth, especially commercial and industrial lending, commercial real estate lending were some of these smaller banks are really important to those sectors.
So yeah, wait and see modefor now. Is there calm now, will things go back to normal or is there another shoe to drop? I don't think anybody has the answer.
>> If we had the answers in advance, it would make all of this a lot easier. In the wake of the Fed, the Bank of England, this was national bank raising rates but here at home in Canada,we are on pause. And we got the Bank of Canada minutes around that thinking. We are not used to getting minutes from our central bank.
I think this is the only the secondgo around. Are you gleaning anything about what they are thinking about going forward?
>> I didn't even realize it came out because we were so focused on the Fed.
A little bit more. Nothing too surprising.
We got some of their thinking with respect to inflation what had to happen for inflation to come down toward their target, reflecting some of the strengths we have seen, continued strength in the labour market.
But they had a few statements. Around inflation, I think it was interesting that they have commented that they have seen signs expectations for inflation have risen above a level that they think is consistent with them hitting their 2% target and they need to see some of that come in.
Similarly, on the wage front, that wage growth is higher than is consistent with their 2% inflation target.
And of course seeing what we've seen in the labour market, ongoing very strong job growth and record low unemployment rate, no signs that that's really going away anytime soon.
So yes, they are on pause, but I think there is probably some risk in both directions with respect to policy there. I think as they recognized in their statement, and we know that the Canadian economy is more interest rate sensitive and our own forecasts do expect to see some underperformance vis-à-vis the US.
So it does make some sense that they would remain on pause and certainly now with this uncertainty we have seen in financial markets and the contagion we will see to Canada, a wait-and-see approach makes a lot of sense.
>> They've been telling us all along that spring inflation down, they are going to have to see the impacts of all of these aggressive rate hikes and the biggest impact would be pain in the labour market. I briefly mention the fact that the latest read on US jobless numbers is still showing a very strong market there.
How come we are not getting that weakness in the labour market? I would think some of the central banks are scratching their heads right now that we are still not seeing it.
>> I think that's a good question. I think always we have seen that the labour market legs some of the other indicators of real economic activity and we have certainly seen signs that real activity has slowed.
But definitely, I think the pandemic and some of the disruption that we have seen there has made reading tea leaves even more difficult and that's probably changed some of the leading legs and some of the economic variables and it's a little bit of a mystery.
We have seen economic activity slow and job growth not show any signs of slowing.
In fact, accelerate.
Some of it has been in some strange sectors that are not all that cyclical.
We've seen especially in Canada hiring and government sectors and other places where you could say it's a one-off and probably not going to be maintained.
but I agree that it is a little bit of a mystery.
In all the forecast for affecting the slowdown we've seen, we would expect that margin compression, scene demands her to come in, that is going to show up in the labour market in terms of a slowdown in hiring and an increase in the employment rate. One thing I think that's important in Canada that is a big difference versus the US is the rate at which the population is growing.
>> We got over million people for the first time last year.
>> Exactly.
So that very strong population and therefore labour force growth. It creates a higher bar for the number of jobs you have to create before you see some upward pressure on the employment rate.
So in Canada I think it's quite possible that we see the unemployment rate go up as the economy is slowing, even if you don't see outright job losses or significant job losses just because you are moving against an increasing target for the number of jobs you have to create just to stay still in the implement rate.
>> Interesting points in deed and a great start to the program. You will get your questions about the economy for James Marple in just a moment's time.
A reminder that you get in touch with us anytime.
Just email moneytalklive@td.com or follow the viewer response box under the video player on Whataburger.
Before we get you updated on all that, let's get you an update on top stories in the world of business and take a look at how the markets are trading. Ford says it's electric vehicle unit lost $2 million last year and it's forecasting a $3 billion loss for that division this year. The Detroit automakers now breaking it results into three categories: EVs, Electra vehicles, traditional internal combustion engine vehicles which we are accustomed to and fleet sales to business and government. Now, those other two divisions saw combined operating profits of some $10 billion. The maker of Ski-Doo's and Sea-Doo's is forecasting continued growth in sales for this year.
BRP is reporting a more than 30% jump in sales for its most recent quarter, that was helped in part by the introduction of the Sea-Doo switch, I had to look this up, it's a small pontoon boat.
And the Québec-based company forecasting sales growth ahead of the streets estimates for this year.
Business jet maker Bombardier lifting its revenue and free cash flow targets. The forecast came at the company's investor day where it laid out a target of more than $9 billion annual revenue by 2025. Bombardier of course shifted its business to become a pure play business jet company in 2021.
Let's check in on the markets now. We will start here at home on Bay Street with the TSX Composite Index.
triple digit gain of 127 points we will call that, a little firmer than half a percent.
South of the border, as investors take a look at the macro climate and all the moves we are seeing from central banks and put it all together, there seems to be a reason to buy stocks today. We are up 60 points on the broader read of the American market, about 1 1/2%.
We are back now with James Marple, we are taking your questions about the economy. Let's get to them. Here's an interesting one.
How will falling home prices hit the Canadian economy?
>> Well, they already have in the way that we have seen noticeably in the economic data over the course of 2022 even. Residential construction activity, which has been an increasingly important share of GDP over the last several decades, pulled back, has been declining. We have seen in over 30% decline in home sales and, of course, with that, comes other activity, Renovation and spending activity.
last year growth went from about 3% over the course of 21 to 2% in 2022 and all of that can be explained by the contraction or subtraction from growth or from activity in residential construction. So it's already been a meaningful slowing in that activity and therefore going to the economy.
It sort of interesting you haven't seen the same thing in terms of the job market.
So this is one of the areas where we have that disconnect where you haven't seen layoffs or a decline in activity there to the same extent as if seen elsewhere.
So maybe that is to come and we will still see some of that going forward. Home prices declining obviously when consumer sentiment and consumer ability… > And the wealth effect.
If your home prices going up, you feel you are richer, may be put more money into the economy.
>> Yeah, you were able to borrow against the increasing value of your home in a way that maybe you don't want to do in a declining price environment.
So all of that suggest that we will continue to see a way to on the Canadian economy due to housing. But I would say that we are pretty through the worst in terms of where we see home prices. We have already seen a close to 20% contraction in the average transacted price from peak was way back at the start of 2022 so we've already, we are a year through that and going forward, we have mortgage rates that are probably not going to go up much more. The Bank of Canada is now on hold and we have, in many markets still, the balance of supply and demand is actually still towards sellers market. That's not true in major cities, in Toronto and Vancouver, where maybe those areas where affordability is the most stretched and you still see demand weakest could still see some price declines. But overall, for the Canadian housing market in aggregate, I don't think we will see the kind of declines we've seen to date and so that seems to suggest that at least much of the pain is in the rearview mirror.
>> Is part of the story going forward, ambitious immigration targets? You mentioned off the top of the show 1 million new Canadians in a year for the first time in our history.
>> That's a good point.
There is demand in population growth. There is evidence that we have been under building relative to the population growth we have seen and outside of some of the cyclical factors and the very swift adjustment in mortgage rates would obviously cut into demand, I think we will see strong housing demand over the next several years and without the supply coming online that will mean a prices have to go up.
>> Let's get to another question now. Got lots coming in from the audience. This one, they want to know your expectation for Canada's economy versus the United States to the rest of the world this year.
How are we going to say her?
>> I think in both cases, thinking about advanced economiesmaybe in one bucket, the Canadian economy slightly underperforming the US as mentioned, given the high levels of household debt, interest rate sensitive and we also lose out when the US lows as doubts an important export market. So we have not a ton of underperformance but closer to zero growth in Canada and around half a percent if we look on through the year basis. And then in Europe, the Outlook in Europe had improved a fair bit over the past few months thanks in part to good weather.
We did get the kind of extreme weather or even normal weather patterns that would have potentially caused real shortages andshut-ins due to the war in Ukraine.
But that hasn't come through so I mean Europe's probably just on a secular base is growing at a slower ratethen North America but over the next year, we have a similar, basically zero growth in the economy and then if we think about the rest of the world, the Chinese growth outlook has improved just by nature of coming off COVID restrictions. We have seen that show up in the economic data early this year and there probably is just a bit of pent-up demand therefrom being locked down for so long. They are, they continue to face some growth challenges with respect to their real estate market and those certainly aren't going away. And just the loss of trade with Western countries that that would be the source of growth that we've seen in the past. But still probably seeing something like 5% growth in emerging market economies seeing some positive growth, though much slower than we have seen in the past. So I would say all told, Canada's economy is right in the middle of where advanced economies are with a very slow growth reflecting higher interest rates and just the need to see slow growth in order to bring inflation down.
>> Even let me take some of these macro concerns, cyclical concerns about economic growth, pullbacks out of the picture, it seems to be interesting commentary lately on the fact that our ambitious growth of our population through immigration is supporting GDP and perhaps a way that doesn't reflect productivity in this country. If you sure about the effects of new Canadians coming in and contributing to the economy and growing the GDP, they haven't been doing a great job with productivity.
>> Absolutely.
That is what growth in living standards comes from which is productivity.
We might see headline growth that is similar to other countries but given the stronger labour force growth that we have seen that implies lower productivity growth which does means lower income growth for every household, household income growth and… That has been a challenge and a long-term challenge of the Canadian economy.
We need to see higher investment to get higher… To get the higher productivity growth.
Hopefully, that is something that changes going forward. Yes, that will continue to be a challenge that limits the pace of growth in Canada relative to places like the US.
>> Interesting stuff.
Let's get another question in now. It may be someone planning on going on vacation.
Outlook for the loonie?
>> I think the loonie obviously had been hit over the past of the course year just by the overall strength of the US dollar.
Now, we have started to see, and combined with the Bank of Canada being on hold and some speculation that the federals reserve will continue to hike interest rates, some of that now has come off the boil. It looks like the said is taking its foot off the gas pedal. The market is pricing in some cuts. I think the downward pressure on the loonie is probably mostly done and we anticipate that if we see our forecast layout where both economies face a slowdown, very little economic growth but we don't see a typical recessionary environment or a large increase in unemployment that would require hiring rates the loonie will stay closer to where it is and appreciate over the course of 2024.
That's going to be too far in the future to make confident predictions, but we think we probably are below what we would call fair value given differences in prices.
So that suggests we could see some rebound.
>> There were worries that if the weakening continued… So much of what we buy from the states would just get that much more expensive and give us a bigger problem than inflation.
>> It's certainly something the Bank of Canada has to take into consideration. That feeds into their inflation outlook.
If they see that the dollar is weakening to the point that it's changing their inflation outlook, then yes, they would have to address that with tighter policy.
There are limits to how far below you can see policy diverge between the two countries just reflecting that dynamic.
>> Interesting stuff. As always, make sure you do your own research before making any investment decisions.
we are going to get back your questions on the economy for James Marple in just a moment time.
A reminder that you get in touch with us anytime.
Email moneytalklive@td.com.
Now, look at our educational segment of the day.
Of course, when investing, it's helpful to stay on top of all the market moving news. WebBroker has tools that can help you do that. It joining us now, Nugwa Haruna, Senior client education instructor with TD Direct Investing.
Nugwa, always great to see you.
Let's talk about WebBroker, breaking news and how it can help us stay on top of it all.
>> You mentioned this at the start of the show, Greg, the impact of the feds news on the market yesterday.
So for investors who want to stay up-to-dateon how major news impacts the markets themselves, they can do that using different tools within WebBroker.
Let's happen to WebBroker and we will take a look at where investors can find use.
So once in WebBroker, right on the main page there, investors are able to get the market update for both Canadian and US stocks. So for investors, yesterday, there was a dip in the markets after around 2 PM, after that announcement. For investorsyou want to stay up-to-date about what to expect in the markets today, they can do that using some of these featured reports we have on screen here. So for instance we have one called the US morning news call or the Canadian.
I opened the US one for us so we can take a quick look.
What this report shows investors is just the top news for that specific day.
It also gives investors an idea of the stocks and securities to watch in that market which would be the US market.
There are still a few places investors can stay up-to-date when it comes to Newman's.
I will take you directly to the news page and WebBroker. So we're going to click on research.
And news and commentary.
So on this page once again, I can select US Or Canadian markets. We will stick with the US for today. I can get information about global news and commentary.
if I'm interested in specific business news, I can get that information down here.
I can also type in the keywords to see any news articles about specific topics.
So once again, still talking about interest rates here, I'm just going to put interest rate, I'm going to search and there's over 800 articles today giving me up-to-date information. I can see how the US rate increase yesterday will impact different sectors.
And finally, while I'm still on this page, if I want to actually watch this information, I can do that focusing on the right side of the screen.
So I'm able to see different short video updates like MoneyTalk. I can see updated information from MorningStar.
This will help me stay up-to-date as well because these are recent video releases.
>> Alright Nugwa, one of the reasons we like to stay on top of the news as investors is becauseit can move the markets. Throughout the day, some use has landed. We sort of know what it is.
How do we stay on top of the market reaction?
>> Right. So as you mentioned about yesterday, the Fed made that announcement, the markets dropped, some dropped as much is 1.
6%. So for investors who don't have the time to be in WebBroker all the time,they are able to utilize alerts.
So let's go into a broker and take a look on how investors can set alerts to keep themselves up-to-date.
So in WebBroker, I'm going to select a specific index.
Let's say I track that Index.
So let's go indices.
I will scroll down you and I will selected the Dow Jones industrial average for this example. This is an index that tracks the 30 most prominent companies in the United States.
And I'm going to choose the chart feature here. Just to give us an idea of what that movement looked like yesterday. So want him on this page, I can see yesterday after 2 PM, you see that dip in the markets.
I also put on the screen here a comparison with the TSX. So you're able to see how the TSX responded as well.
Down here, we also have volume. So you will see there was a huge spike in volume this morning and as you mention, Greg, the markets are recovering from yesterday's day.
But if I want to stay up-to-date, I don't have time to do this analysis, I can just go to the top here and click on set alerts.
And once I do that, the alert feature will pop up. So this is where I have an opportunity to anytime let's say there's a 2.5% change in that specific index I have on the screen, I can have that information emailed to me or I can get a push notification on my mobile device. I may also want to be alerted when there is a change in trading volume.
So let's say over a 10 day average we see a 10% increase about the 10 day average, I want to be notified so I can find out why.
If I want to find out why a specific index or if a specific index is doing better than another one over a certain period, I can be alerted to things like that as well. So just a great way as well for investors to stay on top of the markets with any major news announcements out there.
>> Great stuff as always, Nugwa. Thanks for that.
>> It was a pleasure being here.
>> Nugwa Haruna, Senior client education instructor at TD Direct Investing.
And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Before we get back to your questions about the economy for James Marple, a reminder of how you get in touch with us.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker.
Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
We are back with James Marple, taking your questions about the economy. Let's get to them.
This one just coming in in the past couple of minutes.
Do you think that what happened to the US regional banks is idiosyncratic or systemic? And how serious will it need to get for us to realize things are getting worse before we need to act?
The last part might be a: what's going on. So was it specific to some of these banks or something else going on?
>> Yeah, I think all that I have read and seen especially about the stresses in Silicon Valley Bank were very idiosyncratic to that bank, especially how quickly they saw their deposits light. It was very unprecedented but also just the mismatch that they had had on the asset side of their balance sheet and totally unhedged. That I think was reflective of that institution and not necessarily something we see across the board. But obviously, whenever you have a new story that there is this failure at a time when interest rates are rising, their worries about recession, there is a chance that just through the confidence channel that you see cascading events.
And I think that's why policymakers took the action that they did to really say, we are going to ensure all deposits of these institutions, we want to try to instill confidence in the broader financial sector and I think there is good reason to have that but when you are fighting this sort of panic and that kind of confidence shot, obviously there are worries and risks that it could go in the wrong direction.
But I would say for the most part that there is good reason to think that this was unique to these institutions.
>> To a certain degree, it did influence the Fed decision only in the sense that we were raising only two weeks ago for a higher terminal rate, perhaps even 50 basis points, continuation of the tough talk. They did have to soften up just a little from where they were, recognizing we had some events here, we think the banking system is sound, but we need to recognize it.
> I think that's right. They are treating it as, we have now seen that credit is becoming more expensive, especially for many of these community and midsize banks that are important sources of credit availability to the economy. We have seen even in measures that the Fed takes a senior loan officer survey and asks loan officers, how are your standards for credit changing?
And they have tightened in a way that if you look at its relationship with economic activity, when that happens, you don't see the same, with a bit of a leg, obviously, but you don't see the same kind of growth in investment and in spending on credit sensitive items and so in some ways, it is akin to exactly an interest rate hike.
So they don't know exactly its magnitude, but definitely there is reason to say, this event has changed the calculus for what policy has to do.
Ultimately, they are trying to bring inflation down to target. That means tighter financial conditions. It means slowing demand and some of that is being achieved just by the events of the day.
>> This next question here must be someone who follows central banks, try to figure out why in the general media we are always talking about CPI, the Consumer Price Index, but sometimes central bankers look at other things.
Can your guest discuss the major differences and uses between the Consumer Price Index, CPI, and the Personal Consumption Expenditure Price Index, PCE?
>> The CPI is the one that is often quoted in the press and the one the Bank of Canada talks about more than in the US where there tends to be more focused on the PCE.
Both are price indexes that try to follow ita basket of goods.
the PCE is the price index for spending that goes into GDP. So it is what is spent at any point in time. So as those spending patterns change,that basket is changing and therefore with the prices met her change and CPI is more of a fixed weight.
They do change the ways periodically but not quite as often. So it tends to happen is that you can see faster price growth in the CPI relative to the PCE because the tenancy is as the prices of some items go up, people consume less of it and so you don't get the same price increase in that overall basket as he would if you kept that consumption pattern unchanged.
So for that reason, the CPI tends to grow a little bit faster than the PCE price index. That update, that constant updating of the basket is the reason that the Federal Reserve prefers it as a price measure because it is more reflective of what consumers are actually doing today.
there are some other differences just in the weighting of various items.
the big one is spending on healthcare, which, in the CPI, has a lower weighting. In the PCE, they include spending that is done from things like insurance agencies for household but it is still being consumed ultimately by households but those different weightings can make a difference. There are some things that are in the scope of the CPI but not the PCE that can from day-to-day make a difference in the price Index and we actually had seen that over the past year that just higher waiting for energy in the CPI when energy prices were really rising that resulted in a larger deviation between the two indexes.
Other times, they will grow very similarly to one another but I think the main thing is that constantly updated basket is why the PCE is preferred and why it is talked about by the Fed and why they have made their core inflation measure.
>> That explanation was a great one. Here's the next one. This is a big topic as well.
Do you think interest rate cuts her off the table this year?
The central banks, I think Powell yesterday afternoon near the end of the press conference, he said, we are not planning any cuts this year.
>>it depends on who you ask.
If you ask the OAS futures or the fed funds futures, they are protecting cuts as soon as me, not a full cut but some chance of a cut.
Some positive probability of one. And the fed has been consistent in its messaging that as long as inflation is elevated, the economy continues to perform relatively well, they will continue to raise rates. One more rate hike is expected.
I would say that given where inflation is, the likelihood of a cut is reduced unless we were to see some serious deterioration in economic activity.
Obviously, there is some increased uncertainty around that especially given the recent events in the banking sector but our baseline forecast is that we see growth slow, some increase in unemployment, but that goes towards bringing inflation toward target and central banks remain on hold through the end of this year.
we do have one more hike from the Federal Reserve in May and then on hold until the end of this year.
But eventually, they probably will cut rates because they have moved policy into an area that is restrictive and if they get the results they want in terms of a slowing economy and slowing inflation, they will move to bring those rates closer to what they think is a neutral rate.
And when that happens, I think there is some uncertainty but we probably will at some point in the future see rates come down. Maybe not this year, but at some point.
>> We will get back to your questions for James Marple on the economy in just a moment's time.
As always, make sure you do your own research before making any investment decisions.
And a reminder that you can get in touch with us any time.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
Let's check in on the markets.
We will start your own Bay Street with the TSX Composite Index.
Still in positive territory, perhaps not as firmly as earlier in the show. Up to 92 points, about half a percent. I did notice that West Texas intermediate which had been up modestly at the start of our program and in the morning session is still down a little bit right now. It's over $70 per barrel but that might be leeching through to the energy trade.
Let's check in on Bombardier. They are all about the business jets now.
They are at 6681, Bombardier up 8%. A quick check in on Baytex energy. Some energy names are making modest gains earlier. Baytex was a little bit firmer than this in the morning session. At $4.66 per share, is still positive but just barely. Up to Penny's.
That might have to do with the pullback in the price of American benchmark rate. South of the border, the rally is still intact. The S&P 500 is up almost 1 1/2%. The tech heavy NASDAQ was up more than 2% so there was some risk appetite up there, a little bit of a pullback but still of a pretty healthy 1.95%.
Checking in on Nvidia, Jamaica's making gains last week.
274 bucks and change for Nvidia, a 3 1/2% gain.
We are back now James Marple from TD, talking about the economy. Let's get back to the questions.
Timely.
We just talked about the price of crude. Our lower oil prices a headwind for the Canadian economy?
>> Less so today than probably the heyday of 2014 before we saw the big decline.
But there are both positives and negatives.
Higher oil prices are very important to the oil Pat Shea and investment in that sector. Obviously given longer-term issues in the energy transition,we haven't seen that investment driver that in the past has , alongside energy prices. So that might be the part about the energynot being the same. At the same time, lower energy prices will help bring down inflation.
It will help the consumer in their pocketbook. There are certainly benefits to households and consumers for lower energy prices even as there are negatives to producers.
Canada exports a lot of energy.
On net, it's probably a slight negative just because of that export, that strong export orientation. But again, probably quite close to neutral where we are today.
>> We've been talking about the issue throughout the show but point-blank someone wants to know, is this still a risk of the recession this year?
>> I'd be lying if I said no.
>> There is always a risk.
>> There is always a risk at any time.
Risks arise when central banks are trying to fight inflation and have to be less responsive to changes in economic activity naturally because they have that part of their mandate that they are trying to meet. And we have also seen one central banks are raising rates, there is a greater chance of something breaking and we have seen something break in the banking sector.
Hopefully contained but that is something that I think it makes sense to say that all told that raises the risk of a recession.
I think we've moved forecasts down to the point where whether you call it a recession or a soft landing, there is going to be some noticeable and material slowdown in economic activity and increase in unemployment.
So that I would say has become the base case. Whether you call that a recession or not, it certainly reflective of the odds of where we are in terms of the economic cycle.
>> This next question is interesting. It will help me heading into next week.
What are your expectations for the budget?
The federal budget, not the Ontario budget which I believe is today.
Won't more spending just drive inflation higher?
They're trying to find out where the government will be spending.
What we think might be delivered next week?
>> We have heard some of the priorities of the government already.
I have been well telegraphed in terms of spending on green initiatives, especially following what we have seen in the US with the inflation reduction act, with a lot of that spending toward green energy and electrification. I would expect that to be something that is heavily in this budget, at least in terms of the tone. Obviously healthcare is another area where we have seen initiatives already with the provinces and we'll probably see some focus there.
I think the other thing, and we have heard this telegraphed from the finance minister, is some fiscal restraint for that reason. We have seen obviously over the course of the pandemic a big increase in government spending. A lot of that has come in and deficits have committed a lot over the last several years. We are close to a small deficit relative to our GDP, but between half percent and 1% of GDP which is a far cry from the double-digit deficits we had during the pandemic.
So there's already been some move towards fiscal restraint but I think that will be emphasized.
We want to see policy growing in the same direction and obviously if we had a lot more fiscal stimulus, it does make it harder towell inflation but I don't think we are going to get that. I think the changes will be potentially on the margin. Revenues, because of the cautiousness that governments have had in the federal government has had in their projections with the uncertainty on the economic front, they will have revenues come in a little bit better, so they may have some additional spending that they have as a result of that.
But we have seen in the past, past budgets, that they at least bring some of that. They haven't spent it all and used some of the towards deficit reduction. I would expect to see overall a similar path to the trajectory of deficits toward surplus. We will be looking at how much they build in terms of an uncertainty premium.
>> A rainy day fund.
>> Yeah, exactly, just given what we have seen in terms of ongoing economic uncertainty, worries about recession. I wouldn't expect to see a bunch of fiscal issues coming out of this budget.
>> Great to have you as always. Look forward to the next time.
>> Thank you.
>> Our thanks to James Marple, Senior economist with TD. We will be back tomorrow with an update on the markets and some of our top interviews of the week.
Then stay tuned, on Monday, David Mau, portfolio manager with TD Asset Management will be our guest taking your questions about industrial stocks, the rails, the airlines and such. A reminder that you can get a head start with your questions. Email moneytalklive@td.com.
That's all the time have the show today. Thanks for watching. We will see you tomorrow.
[music]
Every day, I'll be joined by guests from across TD, many of whom you'll only see here.
We're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today show, we'll discuss the future passive rates after the Fed signalled there may not be many more ahead for them.
TD Senior economist James Marple is Argus. And in today's WebBroker education segment, Nugwa Haruna is going to show us how you can find news and alerts using the platform.
So here's how you can get in touch with us. Just email moneytalklive@td.com or you can fill out that viewer response box under the video player here in WebBroker.
Before you get your guest of the day, let's get you an update on the markets. We've got a pretty healthy rally on our hands. It was very interesting to watch the market reaction post 2 PM Eastern time yesterday, that was the Fed decision, the press conference. The market didn't know whether they were going to be up or down.
By the closing bells, they were down but they are making background back today. We will start here in Toronto, 19,563, TSX got a triple digit gain of 120 points, a little bit firmer than half a percent.
A bit of risk appetite today, it benefits some tech names. Including Shopify at 6325, it is up to and 1/2%.
Also notice that tech resources getting a bit earlier today.
[video buffering] Tech heavy NASDAQ there even better at least the last time I checked. Indeed, it up a little more than 2%.
Shares of Block are under pressure today, being targeted by a short report at the moment.
You've got 6321 for the name, down about 13%.
And that's your market update.
Of course, the US Federal Reserve raised interest rates by 25 basis points. Other global banks making similar moves in its wake. That is policymakers are dealing with a wave of banking turmoil. Signals out there that they may be near their end of the hiking cycle. Let's talk about all of that with James Marple, Senior economist with TD. Great to have you back on the show.
We are sifting through the aftereffects of what we got from the said. What was your week?
>> I think they made the right decision. The market was anticipatingthis rate. Interestingly, before all the recent events with SVB did there was isolation said they would go 50. Certainly with the economic data came in at the start of this year, it would have warranted some of that.
We have seen job growth come in well above expectations and well above the pace you would expect given where the unemployment rate is,but also seeing inflation remained stubborn and something that they are trying to get to 2%. More hikes would have been on the table. But offset obviously by what we have seen in terms of the banking sector.
>> Yeah, it seems like the collapse of Silicon Valley Bank is making some US regionals worry. It had them dial back the tough talk. That was only two weeks ago.
Jerome Powell was in Washington saying they might need to go further than expected, putting 50 on the table.
All of that godchild back. Now the market is trying to figure out if they are done or not. As you said, the economic conditions, we have some jobless numbers this morning in the labour market is still tight in the states.
It seems to be a pretty tough road ahead.
>>that was reflected in the statement and in the chairman's press conference afterwardwhere he shared it the uncertainty they are facing. Trying to figure out how much this tightening and financial conditions, probably know it will be tighter lending standards especially among some of these smaller banks that have been under pressure, what that will mean to the real economy.
And there just isn't a lot to go by on that.
we can try to look at historical correlations but this is kind of unprecedented, certainly in the speed at which things have happened and given all the changes that have happened in the financial sector in the last decade. It's a little bit of a guessing game, but I think we can say that if or when financial conditions are tightened and lending standards are tightened, tends to result in less loan growth, less demand and less economic activity.
In some sense, that replaces what the Fed was trying to do in terms of raising interest rates.
I think it makes sense for them to say, maybe we are close to the end. We obviously have to watch very carefully the economic data as it comes in, but also some of the very high frequency data in terms of what we are seeing in terms of deposits and loan growth, especially commercial and industrial lending, commercial real estate lending were some of these smaller banks are really important to those sectors.
So yeah, wait and see modefor now. Is there calm now, will things go back to normal or is there another shoe to drop? I don't think anybody has the answer.
>> If we had the answers in advance, it would make all of this a lot easier. In the wake of the Fed, the Bank of England, this was national bank raising rates but here at home in Canada,we are on pause. And we got the Bank of Canada minutes around that thinking. We are not used to getting minutes from our central bank.
I think this is the only the secondgo around. Are you gleaning anything about what they are thinking about going forward?
>> I didn't even realize it came out because we were so focused on the Fed.
A little bit more. Nothing too surprising.
We got some of their thinking with respect to inflation what had to happen for inflation to come down toward their target, reflecting some of the strengths we have seen, continued strength in the labour market.
But they had a few statements. Around inflation, I think it was interesting that they have commented that they have seen signs expectations for inflation have risen above a level that they think is consistent with them hitting their 2% target and they need to see some of that come in.
Similarly, on the wage front, that wage growth is higher than is consistent with their 2% inflation target.
And of course seeing what we've seen in the labour market, ongoing very strong job growth and record low unemployment rate, no signs that that's really going away anytime soon.
So yes, they are on pause, but I think there is probably some risk in both directions with respect to policy there. I think as they recognized in their statement, and we know that the Canadian economy is more interest rate sensitive and our own forecasts do expect to see some underperformance vis-à-vis the US.
So it does make some sense that they would remain on pause and certainly now with this uncertainty we have seen in financial markets and the contagion we will see to Canada, a wait-and-see approach makes a lot of sense.
>> They've been telling us all along that spring inflation down, they are going to have to see the impacts of all of these aggressive rate hikes and the biggest impact would be pain in the labour market. I briefly mention the fact that the latest read on US jobless numbers is still showing a very strong market there.
How come we are not getting that weakness in the labour market? I would think some of the central banks are scratching their heads right now that we are still not seeing it.
>> I think that's a good question. I think always we have seen that the labour market legs some of the other indicators of real economic activity and we have certainly seen signs that real activity has slowed.
But definitely, I think the pandemic and some of the disruption that we have seen there has made reading tea leaves even more difficult and that's probably changed some of the leading legs and some of the economic variables and it's a little bit of a mystery.
We have seen economic activity slow and job growth not show any signs of slowing.
In fact, accelerate.
Some of it has been in some strange sectors that are not all that cyclical.
We've seen especially in Canada hiring and government sectors and other places where you could say it's a one-off and probably not going to be maintained.
but I agree that it is a little bit of a mystery.
In all the forecast for affecting the slowdown we've seen, we would expect that margin compression, scene demands her to come in, that is going to show up in the labour market in terms of a slowdown in hiring and an increase in the employment rate. One thing I think that's important in Canada that is a big difference versus the US is the rate at which the population is growing.
>> We got over million people for the first time last year.
>> Exactly.
So that very strong population and therefore labour force growth. It creates a higher bar for the number of jobs you have to create before you see some upward pressure on the employment rate.
So in Canada I think it's quite possible that we see the unemployment rate go up as the economy is slowing, even if you don't see outright job losses or significant job losses just because you are moving against an increasing target for the number of jobs you have to create just to stay still in the implement rate.
>> Interesting points in deed and a great start to the program. You will get your questions about the economy for James Marple in just a moment's time.
A reminder that you get in touch with us anytime.
Just email moneytalklive@td.com or follow the viewer response box under the video player on Whataburger.
Before we get you updated on all that, let's get you an update on top stories in the world of business and take a look at how the markets are trading. Ford says it's electric vehicle unit lost $2 million last year and it's forecasting a $3 billion loss for that division this year. The Detroit automakers now breaking it results into three categories: EVs, Electra vehicles, traditional internal combustion engine vehicles which we are accustomed to and fleet sales to business and government. Now, those other two divisions saw combined operating profits of some $10 billion. The maker of Ski-Doo's and Sea-Doo's is forecasting continued growth in sales for this year.
BRP is reporting a more than 30% jump in sales for its most recent quarter, that was helped in part by the introduction of the Sea-Doo switch, I had to look this up, it's a small pontoon boat.
And the Québec-based company forecasting sales growth ahead of the streets estimates for this year.
Business jet maker Bombardier lifting its revenue and free cash flow targets. The forecast came at the company's investor day where it laid out a target of more than $9 billion annual revenue by 2025. Bombardier of course shifted its business to become a pure play business jet company in 2021.
Let's check in on the markets now. We will start here at home on Bay Street with the TSX Composite Index.
triple digit gain of 127 points we will call that, a little firmer than half a percent.
South of the border, as investors take a look at the macro climate and all the moves we are seeing from central banks and put it all together, there seems to be a reason to buy stocks today. We are up 60 points on the broader read of the American market, about 1 1/2%.
We are back now with James Marple, we are taking your questions about the economy. Let's get to them. Here's an interesting one.
How will falling home prices hit the Canadian economy?
>> Well, they already have in the way that we have seen noticeably in the economic data over the course of 2022 even. Residential construction activity, which has been an increasingly important share of GDP over the last several decades, pulled back, has been declining. We have seen in over 30% decline in home sales and, of course, with that, comes other activity, Renovation and spending activity.
last year growth went from about 3% over the course of 21 to 2% in 2022 and all of that can be explained by the contraction or subtraction from growth or from activity in residential construction. So it's already been a meaningful slowing in that activity and therefore going to the economy.
It sort of interesting you haven't seen the same thing in terms of the job market.
So this is one of the areas where we have that disconnect where you haven't seen layoffs or a decline in activity there to the same extent as if seen elsewhere.
So maybe that is to come and we will still see some of that going forward. Home prices declining obviously when consumer sentiment and consumer ability… > And the wealth effect.
If your home prices going up, you feel you are richer, may be put more money into the economy.
>> Yeah, you were able to borrow against the increasing value of your home in a way that maybe you don't want to do in a declining price environment.
So all of that suggest that we will continue to see a way to on the Canadian economy due to housing. But I would say that we are pretty through the worst in terms of where we see home prices. We have already seen a close to 20% contraction in the average transacted price from peak was way back at the start of 2022 so we've already, we are a year through that and going forward, we have mortgage rates that are probably not going to go up much more. The Bank of Canada is now on hold and we have, in many markets still, the balance of supply and demand is actually still towards sellers market. That's not true in major cities, in Toronto and Vancouver, where maybe those areas where affordability is the most stretched and you still see demand weakest could still see some price declines. But overall, for the Canadian housing market in aggregate, I don't think we will see the kind of declines we've seen to date and so that seems to suggest that at least much of the pain is in the rearview mirror.
>> Is part of the story going forward, ambitious immigration targets? You mentioned off the top of the show 1 million new Canadians in a year for the first time in our history.
>> That's a good point.
There is demand in population growth. There is evidence that we have been under building relative to the population growth we have seen and outside of some of the cyclical factors and the very swift adjustment in mortgage rates would obviously cut into demand, I think we will see strong housing demand over the next several years and without the supply coming online that will mean a prices have to go up.
>> Let's get to another question now. Got lots coming in from the audience. This one, they want to know your expectation for Canada's economy versus the United States to the rest of the world this year.
How are we going to say her?
>> I think in both cases, thinking about advanced economiesmaybe in one bucket, the Canadian economy slightly underperforming the US as mentioned, given the high levels of household debt, interest rate sensitive and we also lose out when the US lows as doubts an important export market. So we have not a ton of underperformance but closer to zero growth in Canada and around half a percent if we look on through the year basis. And then in Europe, the Outlook in Europe had improved a fair bit over the past few months thanks in part to good weather.
We did get the kind of extreme weather or even normal weather patterns that would have potentially caused real shortages andshut-ins due to the war in Ukraine.
But that hasn't come through so I mean Europe's probably just on a secular base is growing at a slower ratethen North America but over the next year, we have a similar, basically zero growth in the economy and then if we think about the rest of the world, the Chinese growth outlook has improved just by nature of coming off COVID restrictions. We have seen that show up in the economic data early this year and there probably is just a bit of pent-up demand therefrom being locked down for so long. They are, they continue to face some growth challenges with respect to their real estate market and those certainly aren't going away. And just the loss of trade with Western countries that that would be the source of growth that we've seen in the past. But still probably seeing something like 5% growth in emerging market economies seeing some positive growth, though much slower than we have seen in the past. So I would say all told, Canada's economy is right in the middle of where advanced economies are with a very slow growth reflecting higher interest rates and just the need to see slow growth in order to bring inflation down.
>> Even let me take some of these macro concerns, cyclical concerns about economic growth, pullbacks out of the picture, it seems to be interesting commentary lately on the fact that our ambitious growth of our population through immigration is supporting GDP and perhaps a way that doesn't reflect productivity in this country. If you sure about the effects of new Canadians coming in and contributing to the economy and growing the GDP, they haven't been doing a great job with productivity.
>> Absolutely.
That is what growth in living standards comes from which is productivity.
We might see headline growth that is similar to other countries but given the stronger labour force growth that we have seen that implies lower productivity growth which does means lower income growth for every household, household income growth and… That has been a challenge and a long-term challenge of the Canadian economy.
We need to see higher investment to get higher… To get the higher productivity growth.
Hopefully, that is something that changes going forward. Yes, that will continue to be a challenge that limits the pace of growth in Canada relative to places like the US.
>> Interesting stuff.
Let's get another question in now. It may be someone planning on going on vacation.
Outlook for the loonie?
>> I think the loonie obviously had been hit over the past of the course year just by the overall strength of the US dollar.
Now, we have started to see, and combined with the Bank of Canada being on hold and some speculation that the federals reserve will continue to hike interest rates, some of that now has come off the boil. It looks like the said is taking its foot off the gas pedal. The market is pricing in some cuts. I think the downward pressure on the loonie is probably mostly done and we anticipate that if we see our forecast layout where both economies face a slowdown, very little economic growth but we don't see a typical recessionary environment or a large increase in unemployment that would require hiring rates the loonie will stay closer to where it is and appreciate over the course of 2024.
That's going to be too far in the future to make confident predictions, but we think we probably are below what we would call fair value given differences in prices.
So that suggests we could see some rebound.
>> There were worries that if the weakening continued… So much of what we buy from the states would just get that much more expensive and give us a bigger problem than inflation.
>> It's certainly something the Bank of Canada has to take into consideration. That feeds into their inflation outlook.
If they see that the dollar is weakening to the point that it's changing their inflation outlook, then yes, they would have to address that with tighter policy.
There are limits to how far below you can see policy diverge between the two countries just reflecting that dynamic.
>> Interesting stuff. As always, make sure you do your own research before making any investment decisions.
we are going to get back your questions on the economy for James Marple in just a moment time.
A reminder that you get in touch with us anytime.
Email moneytalklive@td.com.
Now, look at our educational segment of the day.
Of course, when investing, it's helpful to stay on top of all the market moving news. WebBroker has tools that can help you do that. It joining us now, Nugwa Haruna, Senior client education instructor with TD Direct Investing.
Nugwa, always great to see you.
Let's talk about WebBroker, breaking news and how it can help us stay on top of it all.
>> You mentioned this at the start of the show, Greg, the impact of the feds news on the market yesterday.
So for investors who want to stay up-to-dateon how major news impacts the markets themselves, they can do that using different tools within WebBroker.
Let's happen to WebBroker and we will take a look at where investors can find use.
So once in WebBroker, right on the main page there, investors are able to get the market update for both Canadian and US stocks. So for investors, yesterday, there was a dip in the markets after around 2 PM, after that announcement. For investorsyou want to stay up-to-date about what to expect in the markets today, they can do that using some of these featured reports we have on screen here. So for instance we have one called the US morning news call or the Canadian.
I opened the US one for us so we can take a quick look.
What this report shows investors is just the top news for that specific day.
It also gives investors an idea of the stocks and securities to watch in that market which would be the US market.
There are still a few places investors can stay up-to-date when it comes to Newman's.
I will take you directly to the news page and WebBroker. So we're going to click on research.
And news and commentary.
So on this page once again, I can select US Or Canadian markets. We will stick with the US for today. I can get information about global news and commentary.
if I'm interested in specific business news, I can get that information down here.
I can also type in the keywords to see any news articles about specific topics.
So once again, still talking about interest rates here, I'm just going to put interest rate, I'm going to search and there's over 800 articles today giving me up-to-date information. I can see how the US rate increase yesterday will impact different sectors.
And finally, while I'm still on this page, if I want to actually watch this information, I can do that focusing on the right side of the screen.
So I'm able to see different short video updates like MoneyTalk. I can see updated information from MorningStar.
This will help me stay up-to-date as well because these are recent video releases.
>> Alright Nugwa, one of the reasons we like to stay on top of the news as investors is becauseit can move the markets. Throughout the day, some use has landed. We sort of know what it is.
How do we stay on top of the market reaction?
>> Right. So as you mentioned about yesterday, the Fed made that announcement, the markets dropped, some dropped as much is 1.
6%. So for investors who don't have the time to be in WebBroker all the time,they are able to utilize alerts.
So let's go into a broker and take a look on how investors can set alerts to keep themselves up-to-date.
So in WebBroker, I'm going to select a specific index.
Let's say I track that Index.
So let's go indices.
I will scroll down you and I will selected the Dow Jones industrial average for this example. This is an index that tracks the 30 most prominent companies in the United States.
And I'm going to choose the chart feature here. Just to give us an idea of what that movement looked like yesterday. So want him on this page, I can see yesterday after 2 PM, you see that dip in the markets.
I also put on the screen here a comparison with the TSX. So you're able to see how the TSX responded as well.
Down here, we also have volume. So you will see there was a huge spike in volume this morning and as you mention, Greg, the markets are recovering from yesterday's day.
But if I want to stay up-to-date, I don't have time to do this analysis, I can just go to the top here and click on set alerts.
And once I do that, the alert feature will pop up. So this is where I have an opportunity to anytime let's say there's a 2.5% change in that specific index I have on the screen, I can have that information emailed to me or I can get a push notification on my mobile device. I may also want to be alerted when there is a change in trading volume.
So let's say over a 10 day average we see a 10% increase about the 10 day average, I want to be notified so I can find out why.
If I want to find out why a specific index or if a specific index is doing better than another one over a certain period, I can be alerted to things like that as well. So just a great way as well for investors to stay on top of the markets with any major news announcements out there.
>> Great stuff as always, Nugwa. Thanks for that.
>> It was a pleasure being here.
>> Nugwa Haruna, Senior client education instructor at TD Direct Investing.
And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Before we get back to your questions about the economy for James Marple, a reminder of how you get in touch with us.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker.
Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
We are back with James Marple, taking your questions about the economy. Let's get to them.
This one just coming in in the past couple of minutes.
Do you think that what happened to the US regional banks is idiosyncratic or systemic? And how serious will it need to get for us to realize things are getting worse before we need to act?
The last part might be a: what's going on. So was it specific to some of these banks or something else going on?
>> Yeah, I think all that I have read and seen especially about the stresses in Silicon Valley Bank were very idiosyncratic to that bank, especially how quickly they saw their deposits light. It was very unprecedented but also just the mismatch that they had had on the asset side of their balance sheet and totally unhedged. That I think was reflective of that institution and not necessarily something we see across the board. But obviously, whenever you have a new story that there is this failure at a time when interest rates are rising, their worries about recession, there is a chance that just through the confidence channel that you see cascading events.
And I think that's why policymakers took the action that they did to really say, we are going to ensure all deposits of these institutions, we want to try to instill confidence in the broader financial sector and I think there is good reason to have that but when you are fighting this sort of panic and that kind of confidence shot, obviously there are worries and risks that it could go in the wrong direction.
But I would say for the most part that there is good reason to think that this was unique to these institutions.
>> To a certain degree, it did influence the Fed decision only in the sense that we were raising only two weeks ago for a higher terminal rate, perhaps even 50 basis points, continuation of the tough talk. They did have to soften up just a little from where they were, recognizing we had some events here, we think the banking system is sound, but we need to recognize it.
> I think that's right. They are treating it as, we have now seen that credit is becoming more expensive, especially for many of these community and midsize banks that are important sources of credit availability to the economy. We have seen even in measures that the Fed takes a senior loan officer survey and asks loan officers, how are your standards for credit changing?
And they have tightened in a way that if you look at its relationship with economic activity, when that happens, you don't see the same, with a bit of a leg, obviously, but you don't see the same kind of growth in investment and in spending on credit sensitive items and so in some ways, it is akin to exactly an interest rate hike.
So they don't know exactly its magnitude, but definitely there is reason to say, this event has changed the calculus for what policy has to do.
Ultimately, they are trying to bring inflation down to target. That means tighter financial conditions. It means slowing demand and some of that is being achieved just by the events of the day.
>> This next question here must be someone who follows central banks, try to figure out why in the general media we are always talking about CPI, the Consumer Price Index, but sometimes central bankers look at other things.
Can your guest discuss the major differences and uses between the Consumer Price Index, CPI, and the Personal Consumption Expenditure Price Index, PCE?
>> The CPI is the one that is often quoted in the press and the one the Bank of Canada talks about more than in the US where there tends to be more focused on the PCE.
Both are price indexes that try to follow ita basket of goods.
the PCE is the price index for spending that goes into GDP. So it is what is spent at any point in time. So as those spending patterns change,that basket is changing and therefore with the prices met her change and CPI is more of a fixed weight.
They do change the ways periodically but not quite as often. So it tends to happen is that you can see faster price growth in the CPI relative to the PCE because the tenancy is as the prices of some items go up, people consume less of it and so you don't get the same price increase in that overall basket as he would if you kept that consumption pattern unchanged.
So for that reason, the CPI tends to grow a little bit faster than the PCE price index. That update, that constant updating of the basket is the reason that the Federal Reserve prefers it as a price measure because it is more reflective of what consumers are actually doing today.
there are some other differences just in the weighting of various items.
the big one is spending on healthcare, which, in the CPI, has a lower weighting. In the PCE, they include spending that is done from things like insurance agencies for household but it is still being consumed ultimately by households but those different weightings can make a difference. There are some things that are in the scope of the CPI but not the PCE that can from day-to-day make a difference in the price Index and we actually had seen that over the past year that just higher waiting for energy in the CPI when energy prices were really rising that resulted in a larger deviation between the two indexes.
Other times, they will grow very similarly to one another but I think the main thing is that constantly updated basket is why the PCE is preferred and why it is talked about by the Fed and why they have made their core inflation measure.
>> That explanation was a great one. Here's the next one. This is a big topic as well.
Do you think interest rate cuts her off the table this year?
The central banks, I think Powell yesterday afternoon near the end of the press conference, he said, we are not planning any cuts this year.
>>it depends on who you ask.
If you ask the OAS futures or the fed funds futures, they are protecting cuts as soon as me, not a full cut but some chance of a cut.
Some positive probability of one. And the fed has been consistent in its messaging that as long as inflation is elevated, the economy continues to perform relatively well, they will continue to raise rates. One more rate hike is expected.
I would say that given where inflation is, the likelihood of a cut is reduced unless we were to see some serious deterioration in economic activity.
Obviously, there is some increased uncertainty around that especially given the recent events in the banking sector but our baseline forecast is that we see growth slow, some increase in unemployment, but that goes towards bringing inflation toward target and central banks remain on hold through the end of this year.
we do have one more hike from the Federal Reserve in May and then on hold until the end of this year.
But eventually, they probably will cut rates because they have moved policy into an area that is restrictive and if they get the results they want in terms of a slowing economy and slowing inflation, they will move to bring those rates closer to what they think is a neutral rate.
And when that happens, I think there is some uncertainty but we probably will at some point in the future see rates come down. Maybe not this year, but at some point.
>> We will get back to your questions for James Marple on the economy in just a moment's time.
As always, make sure you do your own research before making any investment decisions.
And a reminder that you can get in touch with us any time.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
Let's check in on the markets.
We will start your own Bay Street with the TSX Composite Index.
Still in positive territory, perhaps not as firmly as earlier in the show. Up to 92 points, about half a percent. I did notice that West Texas intermediate which had been up modestly at the start of our program and in the morning session is still down a little bit right now. It's over $70 per barrel but that might be leeching through to the energy trade.
Let's check in on Bombardier. They are all about the business jets now.
They are at 6681, Bombardier up 8%. A quick check in on Baytex energy. Some energy names are making modest gains earlier. Baytex was a little bit firmer than this in the morning session. At $4.66 per share, is still positive but just barely. Up to Penny's.
That might have to do with the pullback in the price of American benchmark rate. South of the border, the rally is still intact. The S&P 500 is up almost 1 1/2%. The tech heavy NASDAQ was up more than 2% so there was some risk appetite up there, a little bit of a pullback but still of a pretty healthy 1.95%.
Checking in on Nvidia, Jamaica's making gains last week.
274 bucks and change for Nvidia, a 3 1/2% gain.
We are back now James Marple from TD, talking about the economy. Let's get back to the questions.
Timely.
We just talked about the price of crude. Our lower oil prices a headwind for the Canadian economy?
>> Less so today than probably the heyday of 2014 before we saw the big decline.
But there are both positives and negatives.
Higher oil prices are very important to the oil Pat Shea and investment in that sector. Obviously given longer-term issues in the energy transition,we haven't seen that investment driver that in the past has , alongside energy prices. So that might be the part about the energynot being the same. At the same time, lower energy prices will help bring down inflation.
It will help the consumer in their pocketbook. There are certainly benefits to households and consumers for lower energy prices even as there are negatives to producers.
Canada exports a lot of energy.
On net, it's probably a slight negative just because of that export, that strong export orientation. But again, probably quite close to neutral where we are today.
>> We've been talking about the issue throughout the show but point-blank someone wants to know, is this still a risk of the recession this year?
>> I'd be lying if I said no.
>> There is always a risk.
>> There is always a risk at any time.
Risks arise when central banks are trying to fight inflation and have to be less responsive to changes in economic activity naturally because they have that part of their mandate that they are trying to meet. And we have also seen one central banks are raising rates, there is a greater chance of something breaking and we have seen something break in the banking sector.
Hopefully contained but that is something that I think it makes sense to say that all told that raises the risk of a recession.
I think we've moved forecasts down to the point where whether you call it a recession or a soft landing, there is going to be some noticeable and material slowdown in economic activity and increase in unemployment.
So that I would say has become the base case. Whether you call that a recession or not, it certainly reflective of the odds of where we are in terms of the economic cycle.
>> This next question is interesting. It will help me heading into next week.
What are your expectations for the budget?
The federal budget, not the Ontario budget which I believe is today.
Won't more spending just drive inflation higher?
They're trying to find out where the government will be spending.
What we think might be delivered next week?
>> We have heard some of the priorities of the government already.
I have been well telegraphed in terms of spending on green initiatives, especially following what we have seen in the US with the inflation reduction act, with a lot of that spending toward green energy and electrification. I would expect that to be something that is heavily in this budget, at least in terms of the tone. Obviously healthcare is another area where we have seen initiatives already with the provinces and we'll probably see some focus there.
I think the other thing, and we have heard this telegraphed from the finance minister, is some fiscal restraint for that reason. We have seen obviously over the course of the pandemic a big increase in government spending. A lot of that has come in and deficits have committed a lot over the last several years. We are close to a small deficit relative to our GDP, but between half percent and 1% of GDP which is a far cry from the double-digit deficits we had during the pandemic.
So there's already been some move towards fiscal restraint but I think that will be emphasized.
We want to see policy growing in the same direction and obviously if we had a lot more fiscal stimulus, it does make it harder towell inflation but I don't think we are going to get that. I think the changes will be potentially on the margin. Revenues, because of the cautiousness that governments have had in the federal government has had in their projections with the uncertainty on the economic front, they will have revenues come in a little bit better, so they may have some additional spending that they have as a result of that.
But we have seen in the past, past budgets, that they at least bring some of that. They haven't spent it all and used some of the towards deficit reduction. I would expect to see overall a similar path to the trajectory of deficits toward surplus. We will be looking at how much they build in terms of an uncertainty premium.
>> A rainy day fund.
>> Yeah, exactly, just given what we have seen in terms of ongoing economic uncertainty, worries about recession. I wouldn't expect to see a bunch of fiscal issues coming out of this budget.
>> Great to have you as always. Look forward to the next time.
>> Thank you.
>> Our thanks to James Marple, Senior economist with TD. We will be back tomorrow with an update on the markets and some of our top interviews of the week.
Then stay tuned, on Monday, David Mau, portfolio manager with TD Asset Management will be our guest taking your questions about industrial stocks, the rails, the airlines and such. A reminder that you can get a head start with your questions. Email moneytalklive@td.com.
That's all the time have the show today. Thanks for watching. We will see you tomorrow.
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