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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 will only see here.
We'll take you through it's moving the markets and answer your questions about investing.
Coming up on today's show: will discuss why these Fed rate hikes haven't had a bigger impact on the economy and what it could mean for the markets ahead with Justin Flowerday, Head of Public Equities at TD Asset Management.
And MoneyTalk's Anthony Okolie will have a new look at a report on the state of Canadian household finances.
And in today's WebBroker education segment, Bryan Rogers will show us how you can find information about corporate earnings on the platform.
You can get in touch with us by emailing moneytalklive@td.com or Philip that your response box right under the web player here on WebBroker. Now let's get you an update of the markets. We saw a rally yesterday afternoon off the back of Jerome Powell.
With comments about the economy, the strength of the labour market, whether as a terminal rate could end up where and bundling it all together, there are a lot of things we already heard.
Real-time reactions in the market in the afternoon but ended on a positive note.
A bit of a giveback today on Bay Street. Down 64 points let's call it, down almost 1/3 of a percent. We did notice some copper itself getting some play. Supply concerns out there, feeding into names like Hudbay up a little more than 2%.
Intact financial came out with earnings I believe after the closing bell was yesterday. This is how the street is receiving them at 191 box and change, down a little more than 3% on the name.
South of the border, investors with Jerome Powell saying what it means for the economy going forward, there is some giveback after that strong rally yesterday afternoon.
The S&P 500 right now fading down almost 1%. The tech heavy NASDAQ, some of the MegaCap names getting hit today after a pretty impressive rally today. You have the NASDAQ down 1.
7% and Alphabet definitely standing out in the session.
99 box and change. Alphabet shares down almost 8%.
And that you market update.
Markets rally to start to the year on hopes Fed rate hikes were nearing an end.
But Blooming US job creations may have some investors wondering why aggressive hikes are having a bigger impact on the economy.
More now is with Justin Flowerday, Head of Public Equities at TD Asset Management.
Great to have you.
>> Great to be here Greg.
>> A lot to go through. We definitely saw the impact of an aggressive rate hike cycle on asset classes.
But the labour market is so resilient. How do we square these ideas?
>> That's the mystery. You look back over the last 150 years and the impact of 450 basis points of that hiking is clear.
Credit creation slows.
Aggregate demand slows.
Business owners lose confidence. They stop hiring as much and obviously unemployment begins to rise.
And that's the series of events that typically takes place. This year is a little different.
We saw the first few Domino's structure job right?
Credit rates has slowed. Business owners are not as positive but that kind of last half of that equation just has not played out.
I think it's due to a couple of reasons. Number one is this really big kind of shrunk of… That consumers have over their balance sheets. They worked it over COVID. I think at some of the impact that higher food costs have had and gasoline prices have had. They were able to offset that and demanded not slow as much because they used their excess savings.
I think the other part of it is re-engagement with the real economy.
You know, all the pent up demand to do stuff.
To travel. To go to restaurants.
You really saw that last Friday with the huge job numbers that you're referencing. Over 20% of the new job creations last month wa in the accommodations and food services category. So I think that plays a big part of it. Then the last one I would add relates to just the fact that we came in with a really tight labour market.
And we saw obviously, a big discrepancy between the amount of people looking for jobs in the amount of jobs available.
That just takes a long time to work through.
So I don't think it's necessarily that this time is totally different. I just think this time the timing and sequence of events may take a little longer.
>> That leads us to what the Fed might have to say or do about it.
We heard from Jerome Powell.
He said and I'm paraphrasing, "we can use all the strength of the labour market and maybe the place we end is going to be a little bit higher." That still seems that that card is in play.
>> Yes and look.
It's funny because just when you thought we have inflation under control and the Fed will not have as big an impact on the markets, everyone yesterday was hanging off every word as you saw during the announcement that Powell had to say.
That's still the question. What is the terminal rate?
What is the set of cuts once we start to see the economy slow?
People are trying to get their head around it. I think what Powell did yesterday as he push that out, particularly in the US, late this year, cutting. Which was in expectations to sometime early next year. I think the market is starting to realize "we might not generate cut this year". I think that's a bit of news for the market.
>> Indeed. Let's talk of more news.
We are in the thick of earnings season. You and I had discussions last year of when we will finally see what's being built as a recession? Are we starting to actually see some more realistic commentary from corporations?
>> Absolutely.
It's funny because this is the first quarter of that earnings recession in three years that your career earnings have actually declined thus far.
You know, a lot of it has to do with the negative operating leverage that is in the system.
It's not that companies are not growing their revenues anymore. They are still growing the revenues it's just the cost profile is, with the growth of the cost is just a little bit higher.
You are seeing kind of across-the-board in terms of companies coming out and saying "yeah.
McDonald's.
People are still buying burgers and shakes and fries and I'll get the Nuggets to…" The demand is still there.
The labour costs are higher and the margins are suffering.
They are actually taking it as an opportunity to push out, push down full-year guidance in terms of operating margin expectations.
Magna had the same thing, expecting $38 billion in revenue.
A nice healthy number.
But we are going to see higher costs and so higher operating margin profile will come down a little bit.
And a lot of these companies are setting this up now in order to lower the expectations which, again as a really positive thing. We needed to see that coming into this year.
We had particularly mid-last year, expectations from earnings and margins that were way too high.
They have started to come down and it's a healthy reset for the market.
>> Now the markets are supposed to be forward-looking instruments. We saw a pretty healthy start to the year in January. We had these concerns about what were going to get out of corporations when they start to realize what rising costs will do to them.
I guess the question is did they price it in already?
In last year's selloff or beyond that at least from an equity perspective?
>> Yes or January's are typically wild and this one was really wild. You saw some big, big moves. Some really big short covering some of the companies that got hammered last year.
So if you look at the sectors that were up in January, you have consumer discretionary, communication services and those consumer discretionary is… Tesla, Amazon, communication services is Meta.
Meta is up 60% year to date. Alphabet.
And so these sectors, real estate had a big run.
Technology is had a big run. These sectors have been leading it and they were the weakest last year.
So this is a big short covering rally. We did not hear anything from management teams during earnings season that gave us the impression that fundamentals have bottomed and everything will be rosy going forward.
I mean, if anything, a lot of these tech companies are using this as an opportunity to reset expectations as well.
Think about some of the layoffs we've heard in January.
I think we counted over 100,000 new, just in the US, layoff announcements across businesses in the US. And, you know, that's not necessarily a thing that will drive revenue and drive new growth for the market.
But it is going to help protect margins and so it is a positive.
But in the very short term, we need to see how demand settles out.
>> As far as the rest of the year goes, it's very hard to forget.
January can be wild and this was a particularly wild one.
Does it give us any sort of, you know, guide, map to follow for the rest of this year or should we just buckle up and not get used to wild swings?
>> Yeah.
I'd say, from what we heard from companies that have reported CEOs, we speak with management teams every single day, I would say that the biggest positive coming out of this is there is a huge focus on efficiency. A huge focus on making sure that their operations are a little more streamlined.
It goes back to the job's comment.
All these companies had baked pet projects.
And a lot of these pet projects are getting shelves.
Because in a world of a higher cost per capital, the focus is on efficiency and balance sheet flexibility.
Financial strength.
And so, I think what this does is, if we are able to have the soft landing… These companies will have a much better starting point in terms of their cost structure to allow that positive operating leverage to come out.
You know, the issue is this is going to happen next quarter.
It won't happen probably in the second quarter. It's probably a back half to 2024 thing.
Where you get through a lot of the cost cuts and then you start to see demand, you start to recover as people start to anticipate the Fed pivot.
>> Fascinating stuff and a great start to the show.
We will get your questions about the market with Justin Flowerday in just a moment's time. Including the outlook for pipeline stocks, the Canadian dollar in the banks.
A reminder that you can get in touch with us any time by emailing moneytalklive@td.
com or Phil at the viewer response box on the video player on WebBroker.
Right now let's get you updated on some of the top stories in the world of business and take a look at how the markets are trading.
Brookfield Asset Management says it has $93 billion US to invest following a record-breaking year of fundraising.
CEO Bruce Flat says the fundraising outlook remains strong and they expect to have three flagship funds in the market this year.
Brookfield Asset Management also reported a 6% rise and distributable earnings for the quarter.
Shares of Uber are in the spotlight today, that after the ride hailing company B earnings expectations as monthly active users jumped 11% to 131 million. And the food delivery business, Cooper eat, now represents almost half of the worst overall revenue a disappointing holiday season is pressuring the bottom line of Chipotle Mexican Grill. The fast food restaurant chain says consume customers rather pulled back on spending heading into the end of last year.
Chipotle says it's restaurants just didn't see the momentum they usually see around the holidays.
We'll call that down 6%.
And a bit of a giveback of yesterday's rally. Down about 1/3 of a percent. Nothing too extreme.
Just 68 points.
Below breakeven. The S&P 500, right now, down almost a full percent, just sort of trickling lower throughout the morning session into the lunch hour session done 41 points on that broader read of the US market.
Back now with Justin Flowerday, head of ppublic equities at TD Asset Management.
One of the potential applications for the markets from a iTech?
>> It's hard to remember a new innovation that capture the attention in the media and the world like it has.
We get asked this question. What will you do for businesses?
What will he do for the earnings profile accompanies over time?
I think the importance, the starting point is to understand what it is.
A lot of people get confused about what this actually is.
Some people, I think still, after all the media attention, stillness label it.
When you think about it it's a fancy chat box.
In some ways kind of correct but in its essence, it's way, way more than a fancy chat bough It doesn't have the ability to learn t. If you think about what a chat bot is, it's something that will interact with the customer and basis responses on a predetermined set of rules. So it will answer a question but all the rules are there and it will refer to those rules when it answers the question.
it's a new development in AI which is based on neuro networks which is a simulation of computers trying to re-create how humans think, human brains think. I think this shows that these networks have a real application that can actually solve some real business issues.
And so CHAT GPT is one of the first commercial programs to actually display that.
If you think of the use of CHAT GPT in terms of helping business problems, the big one is customer service.
Obviously, this is where a lot of the companies that are dealing with customer service in a day, they will be upgrading those chat bots and helping the call centre is and helping all of those people who want to help customers solve their problems. I can imagine a scenario where right now, you have a chat bot and you probably have one person who is managing a couple of chat bots. You might have one person managing 10 but they still need to filter. So there has to be some efficiency.
>> It sounds like some of the fears people have of AI taking our jobs, being told it will simply help them, will that be a real thing? It will help you and not displace you?
>> It will. It will help you and not displace you.
There are certain aspects where I think there will be efficiencies for streamlining in some operational things that happen in organizations which don't really require… A ton of human collaboration.
The way decisions are made, a lot of people come together but it's more based on "I need to answer questions and sound like a human.
" I think that will help. So customer service related tasks, they will get more efficient.
I think when it comes to some of the other areas, I think this is an area of job growth. So when you think about all the things, there will be a whole bunch of money that's going to go into AI. It's been piling in for years.
It's just going to accelerate based on this.
What that is going to allow companies to do is sell new products. So computers that will simulate drug discovery a lot faster… We can try and determine what drugs will work to help cure diseases a lot quicker.
Sequencing DNA… All kinds of things where it took a lot of humans and computers working together, you will probably see a greater application of computers being able to do a lot more heavy lifting in some different fields.
But in order to do that, you need human oversight.
And you need human supervision and you need to figure out ways to use the data that is coming out and interpret the data. So it's going to change the way we work but I think it's going to be in a better way.
>> Fascinating stuff and we are in the opening innings of that.
Next question is when does Justin think the Bank of Canada or federal lower interest rates?
>> We talked a little about the US and I think with the US, I think we will see that it's been pushed out to next year. Bank of Canada, I think, is going to be this year.
My first impression is that the Bank of Canada was the first to hike. It will probably be the first to cut and it's based on a few different things.
One of them is just the dynamics within the Canadian housing market. We are probably a little more susceptible, just given the amount of debt on consumer balance sheets to higher interest rates in terms of causing a little more pain in housing and a little more pain for consumers. I think once, and Tim talked about this, once the Bank of Canada has inflation under control, they will be ready to loosen financial conditions a little more and a little quicker than I think they will in the US. So I'm not sure exactly whether it's September, October, November or December.
But I think in the last quarter of this year we may see the first cut.
>> Interesting stuff. Let's get to another question now, lots coming in.
This one about what we might have in store for us for the 11 months of the year.
How do you prepare for this year's market volatility?
>> Well, I mean, that's a tricky one. It's obviously going to depend on the profile of your financial profile and what you're trying to accomplish.
The way I think about it, if you want to try and manage through volatility, you start at the first principle which is you need to diversify portfolio.
You diversify across sectors and industries.
You diversify across business models and part of what you want to do is have a tilt towards the highest quality business models companies that generate really high for cash flow that you possibly can.
Then you're going to want to have some allocation for fixed income. Some allocation to real assets. You may want to have a bit of a higher cash balance.
Now, I would not at all recommend the GICs for someone who is looking to deploy cash.
You don't want to lock it up because there are opportunities. This volatility will create opportunities for investors to put money to work at really, really good prices. So you want to keep a little capital handy to take advantage of that.
>> Is always at home, make sure you do your own research before making any investment decisions.
We will get back to your questions with Justin Flowerday and the markets on just a moment's time. A reminder to get in touch with us anytime, email moneytalklive@td.com.
Now let's get to our educational segment of the day.
We are in the thick of earnings season and if you're looking to see which companies are reporting WebBroker has tools which can help. Joining us now with Maurice Bryan Rogers, Senior Client Education Instructor with TD Direct Investing.
Great to see Ryan let's talk about if there's a calendar of this platform that can help tell us what earnings are coming from what companies?
>> Absolutely great. If your house is like mine, you always attend that calendar and it has to be pretty accurate as well right?
>> So with earnings season coming in full force, some investors may look for opportunities to buy or if Justin, as Justin was saying, some opportunities… If you want to see what's going on with earnings there is a calendar available.
If you jump into WebBroker, you will go into research.
You will see there is earnings available for both Canadian and US stocks. You first want to go to "research" and you click on the events.
This is available for every stock individually as well.
If you want to just know if you don't know what stock you're looking for, if you're wanting to look for an opportunity, maybe on something you don't own yet and you're saying "hey, I want to see what's coming up", you can always look for if you always if you already own interest in stock, it's easier to put the symbol at the top and I'll show you in a moment where you can look for a stock you already own.
But this can be one that you can look at when you want to see what's going on in terms of earnings. The Canadian flag is selected on here and you can see we have a list of some of the earnings that are happening today.
You can see the date appear in the calendar. February 8.
Then you can see we have constellation software.
This is just a few within the Canadian highlights.
So will go to the highlights tab first. If you're looking for earnings announcements, click on that and it will give you a list, a little bit of a broader list to show the actual announcements today. Not as many in Canada as the US. The US is a lot bigger earnings season with much more reporting in its companies. If you go here, it shows you there's a ton of announcements and quick highlights first.
Then you want to click on earnings announcements. In the listings, there are 170 list for today.
You can sort these like everything else.
If you want to look at any of these particular Collins and look for the highest to lowest and lowest to highest, you can also click on a particular company, let's say if you look at Walt Disney, if you want to look at more, you just click on the company and it will go, you can either add this to your watchlist later on or you can go to overview.
And then from there there's another section where you can do more research.
You can click on the earnings tab here or go on the events and it will show additional past earnings and things of that nature.
>> Alright so we see through the platform what's coming up and we know it's been a hit on what day.
But my memory is not what it used to be.
Reporting after hours… Then I forget the next day.
In the platform then sort of remind me?
Give me a little kick.
>> Absolutely. Reminders are key. If I don't put it in my phone or write it down I will remember.
At the same time, you don't want to have it where it's happening today and you have no plan set up of what you will do with this if it is a thing where you will try and capitalize on earnings either if it's going up or down.
But, what you can do, if we jump back into WebBroker really quickly, in the same location I'm in right now, I've been on the stock of Walt Disney right now but when I want to do is go back to those earnings events.
So research, and events. And if I click, let's say, the US calendar again, there's your list of earnings announcements.
What you might want to do first is go ahead and find something that is further into the future.
If you're finding the one you're looking for, let's say if you click on the calendar here, you go to next Wednesday as an example or even further, you can go with whatever you want to do in the day but we are in the thick of earnings season so if I click on the 15th, for example, I see that there are Cisco systems.
You want to click on the stock itself and click on "overview" or actually go right here and go to "set alerts.
Given want to go to events and it will say earnings to be announced.
It doesn't really give you an option to set a specific day so you can do a number of days before. So at least it has to be in a minimum of five and you can go to 10 and 15.
Once you set that, that will email it to you on the email you have established in your account and you get a reminder and you won't have that idea as soon as it happens.
That's when you remember.
Then you remember, you forgot something and at least that won't happen to you in this case Greg.
> Indeed.
I only have so many fingers.
WebBroker and couldn't do the lifting for me.
Great stuff as always Bryan thanks.
>> My pleasure Greg.
>> Bryan Rogers, Senior Client Instructor at TD Direct Investing.
Make sure to check out the Learning Center in WebBroker for more educational videos, live interactive master classes and upcoming webinars.
Before we get back to Justin Flowerday, a reminder of how you can get in touch with us.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live.
We are back with Justin Flowerday, Head of Public Equities at TD Asset Management taking your questions about the markets.
What is the outlook for the near term and medium term?
>> Yeah so we have seen some volatility, obviously over the last little while in the USD, CAD and then I think we've settled to this middle of the. If it gets to the upper range I think there's a chance to make some moves to the lower end as well. We are in the low 130s, mid-one 30s.
I don't think there's a huge impetus. Two things will dictate the direction. One, interest rates and the second will be oil and commodities.
When it comes to interest rates, we talked earlier, the Canadian central bank is going to be one of the first to lower interest rates. That's potentially a bit of a headwind. Meaning the interest rate differential between Canada and the US may swing in favour of the US a little bit.
On the other hand, you think about oil and I would be in the camp where the price of oil is probably going to stay a little firmer for longer.
When you look at the future curve for WTI, you look out and it's in backwardation. Next year, 60, below 60, in terms of what the future curve is pricing… Lower than 50. If I were to have my two cents, I think $70 is a good level. It's a healthy level. Marginal cost of increase for producers.
The base is not generating the incremental barrel at the rate used to in terms of the slowdown in growth there. So there is still supply issues we need to work through.
I just don't think, unless we were to enter into a deeper recession, oil gets down to than $50 range.
Which means, at $70, that's still a pretty healthy level and will probably provide some support for the Canadian dollar. So going back to the original question, low 30s, low 130s. I think it's a fair level.
If we get into the high one 30s,… >> Let's take another question right now. Someone wants to get your views on TC energy going forward.
A pipeline.
Roughly the space, perhaps a price for crude staying firm. Perhaps a price for pipelines?
>> I can make a general comment on the pipelines.
They are really good businesses.
The growth rate of those companies has slowed down but there is still really high quality companies with consistent free cash flow and consistent volume and price thing that gets indexed to inflation. So really good businesses. You think about what they're yielding, their yields have jumped up a little bit on the back of the higher rates. So they are above 6%. For most huge Enbridge… So value yields are starting to get a little bit attractive.
But the downside is everyone of us equines does have their operational issues and unique challenges.
For TC, the big one is the coastal gas and some of the cost overruns taking place there.
You just, you've heard how it backfired five years ago, $6 billion in terms of what it's going to cost. They have ramped up, ramped up : it's recently that we are now up up above 11 and at the end of the day we will probably be maybe close to 15 or 14 billion. So those cost runs are going to present a sentiment challenge.
A lot of the cost overruns at the end of the day, the final phase of a pipeline project and so that could be a bit of a headwind. But still, once we get through that, there is some growth.
You think about some of the volumes that that's going to attract in terms of buyers from Asia. So I have no doubt that that pipeline is going to be successful in the project will be successful.
We just need to get it done.
And so Enbridge, similar thing, great company, similar growth than it used to. It has its unique challenges but these are high quality, defensible companies. They have spots in people's portfolios.
>> Another question now just came in the past couple of minutes.
Is it better to invest in North America or focus more international?
>> I will revert back to my earlier comment which is you probably want both, to diversify. Each one has unique characteristics.
Obviously a big group of countries that create an international market.
Typically… What's happened recently is the international market went through a period of considerable underperformance. It was on the back of Ukraine and some of the issues in terms of the oil market and the price of funding the energy consumption in Europe.
I think what's happened these people got their head around that this is going to cause a recession. This is going to not cause a recession rather.
It is adaptable and the world will provide with different means to allow the people in Germany and people in France to heat their homes and keep industry running.
That's been a sigh of relief.
The interesting thing about that with those markets, the valuations going into the Russia/Ukraine conflict, just incredibly cheap.
There was a lot of room for multiple connections. So you started in the last few months to see the multiple expansions.
There is still a valuation gap between the US and international.
That said, when it comes down to the quality of companies in these markets, and the stability of cash flows, the growth profile of these markets, I would still have a bias long term towards the US.
Simply because the technology sector is not going to grow 15, 20% like it used to but it's still going to grow at an above route and an above average rate once valuations compress a little more than will be some attractive opportunities there. Healthcare, also very attractive sector.
Consumer discretionary, global brands that sell throughout the world.
So you have a lot of really nice pockets of market that you can't find internationally.
To sum it up, maybe tactically, international has legs for performance but long term you want to be balanced and I think the US, if you were to look out over the next decade which market generated the highest level of earnings-per-share growth, I think the US will win that battle.
>> Fascinating stuff. We will get back to your questions for Justin Flowerday in just a moment's time.
A reminder to do your own research for making investment decisions in a reminder that you can get in touch with us at any time.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live.
The Bank of Canada may have hit pause on its rate hiking cycle but the pain for Canadian households bottom line is only just beginning. This according to TD Securities.
With more of their latest report on the situation, our Anthony Okolie.
>> Thanks so much Greg.
TD Securities said that Canadian households are facing larger headwinds against higher interest rates.
Particularly those of mortgages in 2023.
They say the fixed rate mortgages account for roughly 2/3 of the mortgage rate in Canada.
… Mortgage renewals becoming more costly.
Overall, TD Securities expects those who renew mortgages will see their rate at total interest payments rise by approximately 35% from last year.
That translates to an additional $3.5 billion in interest in 2023. That compares to only 13 billion of additional interest for variable rate mortgages.
Now, TD Securities is also forecasting that the debt for Canadian households to rise further, above the previous record, rise above previous records set in 2023. I brought a chart to show. Fixed rate mortgage renewals will put upward pressure on payments through 2024.
Even with some moderation in actual mortgage rates.
Now, TD Securities is also looking for the peak in the first quarter of 2024 as variable rate mortgages provide some relief over the second half of 2024.
Finally, TD Securities the excess savings that Canadians have built up during the pandemic will help mitigate the impact of rising mortgage payments for some households.
The household savings have not normalized to pre-pandemic levels however weaker economic conditions and consumer sentiment may discourage households from using savings in the first half of 2023.
Now, while excess savings offer a buffer against higher debt payments, TD Securities is still looking for real GDP to contract over the first half of this year and they are holding real tea to just about half a percent for the furlough full year. Greg.
>> That chart was pretty telling in terms of a forecast of what a housing full disposable income… That is the base case, what is the rate cuts for TD Securities?
>> TD Securities looking for the Bank of Canada to remain on hold of the terminal rate of 4 1/2% through 2023.
They note that the Bank of Canada has height cited household leverage as a key factor behind the move to pause in January. Of course, they are looking for more pressure on households to grow in 2023 as well.
>> Interesting stuff as well.
Thanks Anthony.
>> My pleasure.
>> MoneyTalk Live's Anthony Okolie. Let's take a look at the markets now with the TSX Composite Index, down 68 points right now or 1/3 of a percent.
Nothing too dramatic. We told you about Brookfield earlier with money to deploy this year into the tens of billions. You have Brookfield up about 1.8% right now.
And Barrick Gold, a bit of a laggard of the market nothing too dramatic.
You have Barrick down a little shy of a full percent.
South of the border, of course the markets once Jerome Powell finished speaking in the markets of a chance to digest, reacting to every little thing, they did rally a bit and they gave back on that today with the S&P 500 down almost a percent.
The tech heavy NASDAQ, seeing some big MegaCap tech names after the big rally giving back some ground.
Down 1 1/3% on the NASDAQ and META Platforms, we show you Google earlier being under pressure, Meta right now down to the tune of 3 1/3%.
Right now, back with Justin Flowerday, Head of Public Equities at TD Asset Management.
There is an intriguing question, as we finally get through earnings season, of course the Canadian banks, do you have a view on them?
>> Yeah.
Yeah.
Their valuation is looking attractive. I would say their earnings profile will likely slow.
We saw last year some growth on the interest margins coming back on the back of higher interest rates.
That's going to slow.
You do have a little bit of increased pressure in terms of provision for credit losses that will probably come through this year.
When it's all said and done, I think the big fear with Canadian banks, what is driving the lower valuation is there going to have to even the capital over time.
What I strongly believe is that the housing market might not be done in terms of coming down. It might have another five, 10% to go. But even in that scenario, the capital levels of the banks are so strong that there to be able to withstand another 5 to 10% down in the housing market. PCL's will rise and they might get to 40 or 50 basis points.
But that's can and need earnings and earnings growth but it won't lead it to capital. So going forward, these banks are well positioned to continue to grow their dividends over time, continue to allocate some additional free cash flow to shared buybacks and the starting valuation remains pretty compelling.
>> Actually we had a question that serves as a nice follow-up from a different viewer about what we've seen in residential sales activity. But not only that, prices as well.
Wondering how long you think we will continue to see prices fall off?
>>this is going back 10, 12 years I think it's probably, the worst might be down. I think Toronto is down about 20% year to date. You know, when you look back over a long I think that's a pretty healthy rate the house rate,given the population growth and lack of housing supply and demographics… Those supply dynamics are not changing. They will continue to evolve in a positive way. We will have 500,000 new immigrants coming into this country over the next five years every single year. That provide support for demand. What I don't think we'll do is"okay we will go back to double-digit house price increases anytime soon" because that's what we had before the downturn in housing.
It was double-digit. 11, 12, 13% of the year of house price increases.
I don't think we will go back there but the house market probably closer to a bottom and you know, I think over time there will be decent support for stability in housing and over time, an asset that will grow.
You know, we are not done yet though.
>> Justin, always fascinating to get your thoughts and ideas.
>> Thanks great.
>> Our thanks to Justin Flowerday, head of public asset management.
And stay tuned, on Thursday, Francis Fong, Senior Economist with TD will be our guest taking your questions about the economy. A reminder you get a head start, email moneytalklive@td.com.
That's all for our show today. Take care!
[music]
Every day I'll be joined by guests from across TD, many of whom you will only see here.
We'll take you through it's moving the markets and answer your questions about investing.
Coming up on today's show: will discuss why these Fed rate hikes haven't had a bigger impact on the economy and what it could mean for the markets ahead with Justin Flowerday, Head of Public Equities at TD Asset Management.
And MoneyTalk's Anthony Okolie will have a new look at a report on the state of Canadian household finances.
And in today's WebBroker education segment, Bryan Rogers will show us how you can find information about corporate earnings on the platform.
You can get in touch with us by emailing moneytalklive@td.com or Philip that your response box right under the web player here on WebBroker. Now let's get you an update of the markets. We saw a rally yesterday afternoon off the back of Jerome Powell.
With comments about the economy, the strength of the labour market, whether as a terminal rate could end up where and bundling it all together, there are a lot of things we already heard.
Real-time reactions in the market in the afternoon but ended on a positive note.
A bit of a giveback today on Bay Street. Down 64 points let's call it, down almost 1/3 of a percent. We did notice some copper itself getting some play. Supply concerns out there, feeding into names like Hudbay up a little more than 2%.
Intact financial came out with earnings I believe after the closing bell was yesterday. This is how the street is receiving them at 191 box and change, down a little more than 3% on the name.
South of the border, investors with Jerome Powell saying what it means for the economy going forward, there is some giveback after that strong rally yesterday afternoon.
The S&P 500 right now fading down almost 1%. The tech heavy NASDAQ, some of the MegaCap names getting hit today after a pretty impressive rally today. You have the NASDAQ down 1.
7% and Alphabet definitely standing out in the session.
99 box and change. Alphabet shares down almost 8%.
And that you market update.
Markets rally to start to the year on hopes Fed rate hikes were nearing an end.
But Blooming US job creations may have some investors wondering why aggressive hikes are having a bigger impact on the economy.
More now is with Justin Flowerday, Head of Public Equities at TD Asset Management.
Great to have you.
>> Great to be here Greg.
>> A lot to go through. We definitely saw the impact of an aggressive rate hike cycle on asset classes.
But the labour market is so resilient. How do we square these ideas?
>> That's the mystery. You look back over the last 150 years and the impact of 450 basis points of that hiking is clear.
Credit creation slows.
Aggregate demand slows.
Business owners lose confidence. They stop hiring as much and obviously unemployment begins to rise.
And that's the series of events that typically takes place. This year is a little different.
We saw the first few Domino's structure job right?
Credit rates has slowed. Business owners are not as positive but that kind of last half of that equation just has not played out.
I think it's due to a couple of reasons. Number one is this really big kind of shrunk of… That consumers have over their balance sheets. They worked it over COVID. I think at some of the impact that higher food costs have had and gasoline prices have had. They were able to offset that and demanded not slow as much because they used their excess savings.
I think the other part of it is re-engagement with the real economy.
You know, all the pent up demand to do stuff.
To travel. To go to restaurants.
You really saw that last Friday with the huge job numbers that you're referencing. Over 20% of the new job creations last month wa in the accommodations and food services category. So I think that plays a big part of it. Then the last one I would add relates to just the fact that we came in with a really tight labour market.
And we saw obviously, a big discrepancy between the amount of people looking for jobs in the amount of jobs available.
That just takes a long time to work through.
So I don't think it's necessarily that this time is totally different. I just think this time the timing and sequence of events may take a little longer.
>> That leads us to what the Fed might have to say or do about it.
We heard from Jerome Powell.
He said and I'm paraphrasing, "we can use all the strength of the labour market and maybe the place we end is going to be a little bit higher." That still seems that that card is in play.
>> Yes and look.
It's funny because just when you thought we have inflation under control and the Fed will not have as big an impact on the markets, everyone yesterday was hanging off every word as you saw during the announcement that Powell had to say.
That's still the question. What is the terminal rate?
What is the set of cuts once we start to see the economy slow?
People are trying to get their head around it. I think what Powell did yesterday as he push that out, particularly in the US, late this year, cutting. Which was in expectations to sometime early next year. I think the market is starting to realize "we might not generate cut this year". I think that's a bit of news for the market.
>> Indeed. Let's talk of more news.
We are in the thick of earnings season. You and I had discussions last year of when we will finally see what's being built as a recession? Are we starting to actually see some more realistic commentary from corporations?
>> Absolutely.
It's funny because this is the first quarter of that earnings recession in three years that your career earnings have actually declined thus far.
You know, a lot of it has to do with the negative operating leverage that is in the system.
It's not that companies are not growing their revenues anymore. They are still growing the revenues it's just the cost profile is, with the growth of the cost is just a little bit higher.
You are seeing kind of across-the-board in terms of companies coming out and saying "yeah.
McDonald's.
People are still buying burgers and shakes and fries and I'll get the Nuggets to…" The demand is still there.
The labour costs are higher and the margins are suffering.
They are actually taking it as an opportunity to push out, push down full-year guidance in terms of operating margin expectations.
Magna had the same thing, expecting $38 billion in revenue.
A nice healthy number.
But we are going to see higher costs and so higher operating margin profile will come down a little bit.
And a lot of these companies are setting this up now in order to lower the expectations which, again as a really positive thing. We needed to see that coming into this year.
We had particularly mid-last year, expectations from earnings and margins that were way too high.
They have started to come down and it's a healthy reset for the market.
>> Now the markets are supposed to be forward-looking instruments. We saw a pretty healthy start to the year in January. We had these concerns about what were going to get out of corporations when they start to realize what rising costs will do to them.
I guess the question is did they price it in already?
In last year's selloff or beyond that at least from an equity perspective?
>> Yes or January's are typically wild and this one was really wild. You saw some big, big moves. Some really big short covering some of the companies that got hammered last year.
So if you look at the sectors that were up in January, you have consumer discretionary, communication services and those consumer discretionary is… Tesla, Amazon, communication services is Meta.
Meta is up 60% year to date. Alphabet.
And so these sectors, real estate had a big run.
Technology is had a big run. These sectors have been leading it and they were the weakest last year.
So this is a big short covering rally. We did not hear anything from management teams during earnings season that gave us the impression that fundamentals have bottomed and everything will be rosy going forward.
I mean, if anything, a lot of these tech companies are using this as an opportunity to reset expectations as well.
Think about some of the layoffs we've heard in January.
I think we counted over 100,000 new, just in the US, layoff announcements across businesses in the US. And, you know, that's not necessarily a thing that will drive revenue and drive new growth for the market.
But it is going to help protect margins and so it is a positive.
But in the very short term, we need to see how demand settles out.
>> As far as the rest of the year goes, it's very hard to forget.
January can be wild and this was a particularly wild one.
Does it give us any sort of, you know, guide, map to follow for the rest of this year or should we just buckle up and not get used to wild swings?
>> Yeah.
I'd say, from what we heard from companies that have reported CEOs, we speak with management teams every single day, I would say that the biggest positive coming out of this is there is a huge focus on efficiency. A huge focus on making sure that their operations are a little more streamlined.
It goes back to the job's comment.
All these companies had baked pet projects.
And a lot of these pet projects are getting shelves.
Because in a world of a higher cost per capital, the focus is on efficiency and balance sheet flexibility.
Financial strength.
And so, I think what this does is, if we are able to have the soft landing… These companies will have a much better starting point in terms of their cost structure to allow that positive operating leverage to come out.
You know, the issue is this is going to happen next quarter.
It won't happen probably in the second quarter. It's probably a back half to 2024 thing.
Where you get through a lot of the cost cuts and then you start to see demand, you start to recover as people start to anticipate the Fed pivot.
>> Fascinating stuff and a great start to the show.
We will get your questions about the market with Justin Flowerday in just a moment's time. Including the outlook for pipeline stocks, the Canadian dollar in the banks.
A reminder that you can get in touch with us any time by emailing moneytalklive@td.
com or Phil at the viewer response box on the video player on WebBroker.
Right now let's get you updated on some of the top stories in the world of business and take a look at how the markets are trading.
Brookfield Asset Management says it has $93 billion US to invest following a record-breaking year of fundraising.
CEO Bruce Flat says the fundraising outlook remains strong and they expect to have three flagship funds in the market this year.
Brookfield Asset Management also reported a 6% rise and distributable earnings for the quarter.
Shares of Uber are in the spotlight today, that after the ride hailing company B earnings expectations as monthly active users jumped 11% to 131 million. And the food delivery business, Cooper eat, now represents almost half of the worst overall revenue a disappointing holiday season is pressuring the bottom line of Chipotle Mexican Grill. The fast food restaurant chain says consume customers rather pulled back on spending heading into the end of last year.
Chipotle says it's restaurants just didn't see the momentum they usually see around the holidays.
We'll call that down 6%.
And a bit of a giveback of yesterday's rally. Down about 1/3 of a percent. Nothing too extreme.
Just 68 points.
Below breakeven. The S&P 500, right now, down almost a full percent, just sort of trickling lower throughout the morning session into the lunch hour session done 41 points on that broader read of the US market.
Back now with Justin Flowerday, head of ppublic equities at TD Asset Management.
One of the potential applications for the markets from a iTech?
>> It's hard to remember a new innovation that capture the attention in the media and the world like it has.
We get asked this question. What will you do for businesses?
What will he do for the earnings profile accompanies over time?
I think the importance, the starting point is to understand what it is.
A lot of people get confused about what this actually is.
Some people, I think still, after all the media attention, stillness label it.
When you think about it it's a fancy chat box.
In some ways kind of correct but in its essence, it's way, way more than a fancy chat bough It doesn't have the ability to learn t. If you think about what a chat bot is, it's something that will interact with the customer and basis responses on a predetermined set of rules. So it will answer a question but all the rules are there and it will refer to those rules when it answers the question.
it's a new development in AI which is based on neuro networks which is a simulation of computers trying to re-create how humans think, human brains think. I think this shows that these networks have a real application that can actually solve some real business issues.
And so CHAT GPT is one of the first commercial programs to actually display that.
If you think of the use of CHAT GPT in terms of helping business problems, the big one is customer service.
Obviously, this is where a lot of the companies that are dealing with customer service in a day, they will be upgrading those chat bots and helping the call centre is and helping all of those people who want to help customers solve their problems. I can imagine a scenario where right now, you have a chat bot and you probably have one person who is managing a couple of chat bots. You might have one person managing 10 but they still need to filter. So there has to be some efficiency.
>> It sounds like some of the fears people have of AI taking our jobs, being told it will simply help them, will that be a real thing? It will help you and not displace you?
>> It will. It will help you and not displace you.
There are certain aspects where I think there will be efficiencies for streamlining in some operational things that happen in organizations which don't really require… A ton of human collaboration.
The way decisions are made, a lot of people come together but it's more based on "I need to answer questions and sound like a human.
" I think that will help. So customer service related tasks, they will get more efficient.
I think when it comes to some of the other areas, I think this is an area of job growth. So when you think about all the things, there will be a whole bunch of money that's going to go into AI. It's been piling in for years.
It's just going to accelerate based on this.
What that is going to allow companies to do is sell new products. So computers that will simulate drug discovery a lot faster… We can try and determine what drugs will work to help cure diseases a lot quicker.
Sequencing DNA… All kinds of things where it took a lot of humans and computers working together, you will probably see a greater application of computers being able to do a lot more heavy lifting in some different fields.
But in order to do that, you need human oversight.
And you need human supervision and you need to figure out ways to use the data that is coming out and interpret the data. So it's going to change the way we work but I think it's going to be in a better way.
>> Fascinating stuff and we are in the opening innings of that.
Next question is when does Justin think the Bank of Canada or federal lower interest rates?
>> We talked a little about the US and I think with the US, I think we will see that it's been pushed out to next year. Bank of Canada, I think, is going to be this year.
My first impression is that the Bank of Canada was the first to hike. It will probably be the first to cut and it's based on a few different things.
One of them is just the dynamics within the Canadian housing market. We are probably a little more susceptible, just given the amount of debt on consumer balance sheets to higher interest rates in terms of causing a little more pain in housing and a little more pain for consumers. I think once, and Tim talked about this, once the Bank of Canada has inflation under control, they will be ready to loosen financial conditions a little more and a little quicker than I think they will in the US. So I'm not sure exactly whether it's September, October, November or December.
But I think in the last quarter of this year we may see the first cut.
>> Interesting stuff. Let's get to another question now, lots coming in.
This one about what we might have in store for us for the 11 months of the year.
How do you prepare for this year's market volatility?
>> Well, I mean, that's a tricky one. It's obviously going to depend on the profile of your financial profile and what you're trying to accomplish.
The way I think about it, if you want to try and manage through volatility, you start at the first principle which is you need to diversify portfolio.
You diversify across sectors and industries.
You diversify across business models and part of what you want to do is have a tilt towards the highest quality business models companies that generate really high for cash flow that you possibly can.
Then you're going to want to have some allocation for fixed income. Some allocation to real assets. You may want to have a bit of a higher cash balance.
Now, I would not at all recommend the GICs for someone who is looking to deploy cash.
You don't want to lock it up because there are opportunities. This volatility will create opportunities for investors to put money to work at really, really good prices. So you want to keep a little capital handy to take advantage of that.
>> Is always at home, make sure you do your own research before making any investment decisions.
We will get back to your questions with Justin Flowerday and the markets on just a moment's time. A reminder to get in touch with us anytime, email moneytalklive@td.com.
Now let's get to our educational segment of the day.
We are in the thick of earnings season and if you're looking to see which companies are reporting WebBroker has tools which can help. Joining us now with Maurice Bryan Rogers, Senior Client Education Instructor with TD Direct Investing.
Great to see Ryan let's talk about if there's a calendar of this platform that can help tell us what earnings are coming from what companies?
>> Absolutely great. If your house is like mine, you always attend that calendar and it has to be pretty accurate as well right?
>> So with earnings season coming in full force, some investors may look for opportunities to buy or if Justin, as Justin was saying, some opportunities… If you want to see what's going on with earnings there is a calendar available.
If you jump into WebBroker, you will go into research.
You will see there is earnings available for both Canadian and US stocks. You first want to go to "research" and you click on the events.
This is available for every stock individually as well.
If you want to just know if you don't know what stock you're looking for, if you're wanting to look for an opportunity, maybe on something you don't own yet and you're saying "hey, I want to see what's coming up", you can always look for if you always if you already own interest in stock, it's easier to put the symbol at the top and I'll show you in a moment where you can look for a stock you already own.
But this can be one that you can look at when you want to see what's going on in terms of earnings. The Canadian flag is selected on here and you can see we have a list of some of the earnings that are happening today.
You can see the date appear in the calendar. February 8.
Then you can see we have constellation software.
This is just a few within the Canadian highlights.
So will go to the highlights tab first. If you're looking for earnings announcements, click on that and it will give you a list, a little bit of a broader list to show the actual announcements today. Not as many in Canada as the US. The US is a lot bigger earnings season with much more reporting in its companies. If you go here, it shows you there's a ton of announcements and quick highlights first.
Then you want to click on earnings announcements. In the listings, there are 170 list for today.
You can sort these like everything else.
If you want to look at any of these particular Collins and look for the highest to lowest and lowest to highest, you can also click on a particular company, let's say if you look at Walt Disney, if you want to look at more, you just click on the company and it will go, you can either add this to your watchlist later on or you can go to overview.
And then from there there's another section where you can do more research.
You can click on the earnings tab here or go on the events and it will show additional past earnings and things of that nature.
>> Alright so we see through the platform what's coming up and we know it's been a hit on what day.
But my memory is not what it used to be.
Reporting after hours… Then I forget the next day.
In the platform then sort of remind me?
Give me a little kick.
>> Absolutely. Reminders are key. If I don't put it in my phone or write it down I will remember.
At the same time, you don't want to have it where it's happening today and you have no plan set up of what you will do with this if it is a thing where you will try and capitalize on earnings either if it's going up or down.
But, what you can do, if we jump back into WebBroker really quickly, in the same location I'm in right now, I've been on the stock of Walt Disney right now but when I want to do is go back to those earnings events.
So research, and events. And if I click, let's say, the US calendar again, there's your list of earnings announcements.
What you might want to do first is go ahead and find something that is further into the future.
If you're finding the one you're looking for, let's say if you click on the calendar here, you go to next Wednesday as an example or even further, you can go with whatever you want to do in the day but we are in the thick of earnings season so if I click on the 15th, for example, I see that there are Cisco systems.
You want to click on the stock itself and click on "overview" or actually go right here and go to "set alerts.
Given want to go to events and it will say earnings to be announced.
It doesn't really give you an option to set a specific day so you can do a number of days before. So at least it has to be in a minimum of five and you can go to 10 and 15.
Once you set that, that will email it to you on the email you have established in your account and you get a reminder and you won't have that idea as soon as it happens.
That's when you remember.
Then you remember, you forgot something and at least that won't happen to you in this case Greg.
> Indeed.
I only have so many fingers.
WebBroker and couldn't do the lifting for me.
Great stuff as always Bryan thanks.
>> My pleasure Greg.
>> Bryan Rogers, Senior Client Instructor at TD Direct Investing.
Make sure to check out the Learning Center in WebBroker for more educational videos, live interactive master classes and upcoming webinars.
Before we get back to Justin Flowerday, a reminder of how you can get in touch with us.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live.
We are back with Justin Flowerday, Head of Public Equities at TD Asset Management taking your questions about the markets.
What is the outlook for the near term and medium term?
>> Yeah so we have seen some volatility, obviously over the last little while in the USD, CAD and then I think we've settled to this middle of the. If it gets to the upper range I think there's a chance to make some moves to the lower end as well. We are in the low 130s, mid-one 30s.
I don't think there's a huge impetus. Two things will dictate the direction. One, interest rates and the second will be oil and commodities.
When it comes to interest rates, we talked earlier, the Canadian central bank is going to be one of the first to lower interest rates. That's potentially a bit of a headwind. Meaning the interest rate differential between Canada and the US may swing in favour of the US a little bit.
On the other hand, you think about oil and I would be in the camp where the price of oil is probably going to stay a little firmer for longer.
When you look at the future curve for WTI, you look out and it's in backwardation. Next year, 60, below 60, in terms of what the future curve is pricing… Lower than 50. If I were to have my two cents, I think $70 is a good level. It's a healthy level. Marginal cost of increase for producers.
The base is not generating the incremental barrel at the rate used to in terms of the slowdown in growth there. So there is still supply issues we need to work through.
I just don't think, unless we were to enter into a deeper recession, oil gets down to than $50 range.
Which means, at $70, that's still a pretty healthy level and will probably provide some support for the Canadian dollar. So going back to the original question, low 30s, low 130s. I think it's a fair level.
If we get into the high one 30s,… >> Let's take another question right now. Someone wants to get your views on TC energy going forward.
A pipeline.
Roughly the space, perhaps a price for crude staying firm. Perhaps a price for pipelines?
>> I can make a general comment on the pipelines.
They are really good businesses.
The growth rate of those companies has slowed down but there is still really high quality companies with consistent free cash flow and consistent volume and price thing that gets indexed to inflation. So really good businesses. You think about what they're yielding, their yields have jumped up a little bit on the back of the higher rates. So they are above 6%. For most huge Enbridge… So value yields are starting to get a little bit attractive.
But the downside is everyone of us equines does have their operational issues and unique challenges.
For TC, the big one is the coastal gas and some of the cost overruns taking place there.
You just, you've heard how it backfired five years ago, $6 billion in terms of what it's going to cost. They have ramped up, ramped up : it's recently that we are now up up above 11 and at the end of the day we will probably be maybe close to 15 or 14 billion. So those cost runs are going to present a sentiment challenge.
A lot of the cost overruns at the end of the day, the final phase of a pipeline project and so that could be a bit of a headwind. But still, once we get through that, there is some growth.
You think about some of the volumes that that's going to attract in terms of buyers from Asia. So I have no doubt that that pipeline is going to be successful in the project will be successful.
We just need to get it done.
And so Enbridge, similar thing, great company, similar growth than it used to. It has its unique challenges but these are high quality, defensible companies. They have spots in people's portfolios.
>> Another question now just came in the past couple of minutes.
Is it better to invest in North America or focus more international?
>> I will revert back to my earlier comment which is you probably want both, to diversify. Each one has unique characteristics.
Obviously a big group of countries that create an international market.
Typically… What's happened recently is the international market went through a period of considerable underperformance. It was on the back of Ukraine and some of the issues in terms of the oil market and the price of funding the energy consumption in Europe.
I think what's happened these people got their head around that this is going to cause a recession. This is going to not cause a recession rather.
It is adaptable and the world will provide with different means to allow the people in Germany and people in France to heat their homes and keep industry running.
That's been a sigh of relief.
The interesting thing about that with those markets, the valuations going into the Russia/Ukraine conflict, just incredibly cheap.
There was a lot of room for multiple connections. So you started in the last few months to see the multiple expansions.
There is still a valuation gap between the US and international.
That said, when it comes down to the quality of companies in these markets, and the stability of cash flows, the growth profile of these markets, I would still have a bias long term towards the US.
Simply because the technology sector is not going to grow 15, 20% like it used to but it's still going to grow at an above route and an above average rate once valuations compress a little more than will be some attractive opportunities there. Healthcare, also very attractive sector.
Consumer discretionary, global brands that sell throughout the world.
So you have a lot of really nice pockets of market that you can't find internationally.
To sum it up, maybe tactically, international has legs for performance but long term you want to be balanced and I think the US, if you were to look out over the next decade which market generated the highest level of earnings-per-share growth, I think the US will win that battle.
>> Fascinating stuff. We will get back to your questions for Justin Flowerday in just a moment's time.
A reminder to do your own research for making investment decisions in a reminder that you can get in touch with us at any time.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live.
The Bank of Canada may have hit pause on its rate hiking cycle but the pain for Canadian households bottom line is only just beginning. This according to TD Securities.
With more of their latest report on the situation, our Anthony Okolie.
>> Thanks so much Greg.
TD Securities said that Canadian households are facing larger headwinds against higher interest rates.
Particularly those of mortgages in 2023.
They say the fixed rate mortgages account for roughly 2/3 of the mortgage rate in Canada.
… Mortgage renewals becoming more costly.
Overall, TD Securities expects those who renew mortgages will see their rate at total interest payments rise by approximately 35% from last year.
That translates to an additional $3.5 billion in interest in 2023. That compares to only 13 billion of additional interest for variable rate mortgages.
Now, TD Securities is also forecasting that the debt for Canadian households to rise further, above the previous record, rise above previous records set in 2023. I brought a chart to show. Fixed rate mortgage renewals will put upward pressure on payments through 2024.
Even with some moderation in actual mortgage rates.
Now, TD Securities is also looking for the peak in the first quarter of 2024 as variable rate mortgages provide some relief over the second half of 2024.
Finally, TD Securities the excess savings that Canadians have built up during the pandemic will help mitigate the impact of rising mortgage payments for some households.
The household savings have not normalized to pre-pandemic levels however weaker economic conditions and consumer sentiment may discourage households from using savings in the first half of 2023.
Now, while excess savings offer a buffer against higher debt payments, TD Securities is still looking for real GDP to contract over the first half of this year and they are holding real tea to just about half a percent for the furlough full year. Greg.
>> That chart was pretty telling in terms of a forecast of what a housing full disposable income… That is the base case, what is the rate cuts for TD Securities?
>> TD Securities looking for the Bank of Canada to remain on hold of the terminal rate of 4 1/2% through 2023.
They note that the Bank of Canada has height cited household leverage as a key factor behind the move to pause in January. Of course, they are looking for more pressure on households to grow in 2023 as well.
>> Interesting stuff as well.
Thanks Anthony.
>> My pleasure.
>> MoneyTalk Live's Anthony Okolie. Let's take a look at the markets now with the TSX Composite Index, down 68 points right now or 1/3 of a percent.
Nothing too dramatic. We told you about Brookfield earlier with money to deploy this year into the tens of billions. You have Brookfield up about 1.8% right now.
And Barrick Gold, a bit of a laggard of the market nothing too dramatic.
You have Barrick down a little shy of a full percent.
South of the border, of course the markets once Jerome Powell finished speaking in the markets of a chance to digest, reacting to every little thing, they did rally a bit and they gave back on that today with the S&P 500 down almost a percent.
The tech heavy NASDAQ, seeing some big MegaCap tech names after the big rally giving back some ground.
Down 1 1/3% on the NASDAQ and META Platforms, we show you Google earlier being under pressure, Meta right now down to the tune of 3 1/3%.
Right now, back with Justin Flowerday, Head of Public Equities at TD Asset Management.
There is an intriguing question, as we finally get through earnings season, of course the Canadian banks, do you have a view on them?
>> Yeah.
Yeah.
Their valuation is looking attractive. I would say their earnings profile will likely slow.
We saw last year some growth on the interest margins coming back on the back of higher interest rates.
That's going to slow.
You do have a little bit of increased pressure in terms of provision for credit losses that will probably come through this year.
When it's all said and done, I think the big fear with Canadian banks, what is driving the lower valuation is there going to have to even the capital over time.
What I strongly believe is that the housing market might not be done in terms of coming down. It might have another five, 10% to go. But even in that scenario, the capital levels of the banks are so strong that there to be able to withstand another 5 to 10% down in the housing market. PCL's will rise and they might get to 40 or 50 basis points.
But that's can and need earnings and earnings growth but it won't lead it to capital. So going forward, these banks are well positioned to continue to grow their dividends over time, continue to allocate some additional free cash flow to shared buybacks and the starting valuation remains pretty compelling.
>> Actually we had a question that serves as a nice follow-up from a different viewer about what we've seen in residential sales activity. But not only that, prices as well.
Wondering how long you think we will continue to see prices fall off?
>>this is going back 10, 12 years I think it's probably, the worst might be down. I think Toronto is down about 20% year to date. You know, when you look back over a long I think that's a pretty healthy rate the house rate,given the population growth and lack of housing supply and demographics… Those supply dynamics are not changing. They will continue to evolve in a positive way. We will have 500,000 new immigrants coming into this country over the next five years every single year. That provide support for demand. What I don't think we'll do is"okay we will go back to double-digit house price increases anytime soon" because that's what we had before the downturn in housing.
It was double-digit. 11, 12, 13% of the year of house price increases.
I don't think we will go back there but the house market probably closer to a bottom and you know, I think over time there will be decent support for stability in housing and over time, an asset that will grow.
You know, we are not done yet though.
>> Justin, always fascinating to get your thoughts and ideas.
>> Thanks great.
>> Our thanks to Justin Flowerday, head of public asset management.
And stay tuned, on Thursday, Francis Fong, Senior Economist with TD will be our guest taking your questions about the economy. A reminder you get a head start, email moneytalklive@td.com.
That's all for our show today. Take care!
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