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[music] >> Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought you by TD Direct Investing. Coming up on today show: it was a big week for the US Federal Reserve, with the central bank hiking rates by another 75 basis points. But while the Fed's statement seemed to take on a bit of a it dovish tone, fed chair Jerome Powell sounded a bit more hawkish at the press conference that followed. It TD senior economist, James Marple, is going to tell us what stood out for him. Also on the show, markets have certainly had a rough go your today, but that doesn't mean there aren't some pockets of strength if you know where to look. Ben Gossack, portfolio manager at TD Asset Management, has been looking. He's going to share with us what he's found. And with all that volatility, you might be inclined to consider the relative safety of GICs. In today's WebBroker education segment, we learn all about the GIC options available to self-directed investors with Bryan Rogers, Senior client education instructor at TD Direct Investing, he will walk us through. That's all ahead but first, let's say you updated on the markets. It is jobs Friday on both sides of the border. We are going to dig a little deeper into thatin the next couple of minutes, but an interesting reaction to stronger-than-expected reports, particularly on Wall Street. We will start here at home with the TSX Composite Index, we have a firm price rally and crew today, which is feeding and some of the energy names. We are actually seeing gold up as well earlier today, that US dollar on relentless strength actually relented for a little bit. We are actually seeing a pullback of more than a percent in the trade weighted US bucket, so that does have a lot of others rallying as well. So we are still up more than half a percent in Toronto, hundred and 16 points to the upside. Let's check in on Kinross Gold and see how it is faring. It is up 10%, $5.11 per share. American benchmark crude of more than a 3 1/2%. We had names like Crescent Point in the energy strength showing some strength today, but that strength is starting to fade. At $11, they are coming off the highs of the session. The same could be said for the American benchmark. Let's check in on the S&P 500, that broader read of the American market. This rally that we saw this morning off the back of the jobs report. Right now it is starting to fade. Still positive territory before the S&P 500 but it is off the highs of the session, up just a little bit more than 1/10 of a percent. The tech heavy NASDAQ, the last time I looked, had turned into negative territory. It now seems to be bouncing back and forth on the breakeven that line and is up 1/3 of a percent. Twilio, there is a name in the cloud communications space offering a soft sales outlook, that's waiting on the name. They are down 36%, 41 bucks and change. That's your market update. of course, it is jobs Friday on both sides of the border, but we had a beach and a pretty healthy one in Canada and in the United States. The market reaction curious off the hop but a bit of a fade right now. It let's bring in MoneyTalk's Anthony Okolie to try to break it all down for us. Let start with the numbers. >> Some strong numbers. We will start in Canada. From every vantage point this was a blowout report, 108,000 jobgain in October. It most of the day jobs were in full time in the private sector. Where you look at strong gains, its construction, manufacturing, accommodation and food services. They also the biggest gains and hiring, when you break it down by geographic region, hiring was really a concentrated into provinces, Ontario and Québec, they brought the most jobs last month. What will likely grab the attention of the Bank of Canada, not just here in Canada but the Fed is wage growth, and wage growth continues to be strong, again, despite the fact that the central bank has been increasinginterest rates to cool inflation. In October, average earnings up 4.6% instead of 5.6% in September. The Bank of Canada will watch closely. In the US market, surprised to the upside. Despite seeing signs of cooling, 261000 Jobs Gained in October, well above estimates. But this was a market decline from the prior month's, 315,000 jobs gained points to job growth running well in excess of a pace consistent with growth in labour supply. We look at sectors healthcare, professional technical services along with the manufacturing sectors, they locked in gains. Meanwhile, we continue to see stronger rule age growth in October, average earnings accelerated 4.1% in October, that's up from 4.2% in September. I spoke earlier with James Marple shortly after the fed announcement and I asked him what it set for him. >> The message is still that they don't think they are at the end yet. They think further rate hikes are comingwhat they want to at least assess how these rate hikes have affected the economy, tighten financial conditions. They will perhaps be more little bit more forward-looking are attentive to how the data is coming in it rather than committing to a certain piece of hikes going forward. > So if the rate hikes haven't stopped yet, there still more to come. Where do you see rate hikes going in the future? >> Certainly higher. I think it's a bit more of an open question what that terminal rate is. I would guess that they still are raising at the next meeting and probably the meeting after that. They have taken the level of interest rates now to a rate above their expected long-term rates, so that is telling you that the Fed themselves think that the rate is into restrictive territory. Of course, it is still under the rate of inflation, and there is a debate about how much over the rate of inflation has to get to be truly restrictive so that's a bit more of a moving target, and makes watching the inflation data that much more important as well as other indicators of how the economy may be reacting to the rate hikes we have seen. >> We talk about inflation because it is still high. Most US labour market data has just come out and it is showing very strong. So how does that factor into the Fed possibly overshooting and causing a hard landing for the US economy? >> Certainly the fact that we haven't seen any signs really of slowing in the labour market, I mean, you have a little bit under the surface, the rate of job openings is not as high as it was at its peak but last month it went up instead of down, so signalling the labour market is still at the moment very very tight. They would like to see some signs that that is starting to slow, slave seen in the economy, the housing market is definitely slowing. GDP growth is pretty much flat to over the last three quarters. It bounced back in Q3, but over the last year it has definitely slowed. But as long as the labor market is strong, they can't really say that they've had the effect that they want to see. So I think it does increase the likelihood of going until something breaks because you're not getting a little bit of the forward indicators that look, the things are actually starting to slow. Maybe we can now finally pause. And so I think it means that until we see the labor market actually showing some signs of slowing-- > Especially with wages as well, they are particularly strong. >> Exactly. I mean, wage growth and the pace of job growth. I mean, the pace of job growth has is still higher than it was in 2019, even as the level of employment is back above its pre-pandemic peak. So yeah, I think the longer that goes, the higher rates get and the higher the likelihood that you get unfortunately, something breaking and a hard landing. >> OK. Now there's been a lot of chatter, including from lawmakers, about the economic impacts of aggressive rate hikes by the Federal Reserve and whether that has been the best approach. Now, is that starting to factor into the decision making by policymakers? >> I don't think so. I don't think the Fed responds to the way elected politicians are reacting. I mean, it may make things a little difficult. If anything, it can be counterproductive because the Fed has to assert its independence and make sure that they're not reacting to what politicians are telling them to do. I would say, though, that the fiscal situation does matter. And in terms of the more we get in terms of deficits and additional measures, the more they have to do to raise interest rates. So if politicians really want to make it easier on the Fed, the best thing to do is to sort of get the fiscal house in order. And then maybe we don't have to see as many rate hikes to get the economy on an even keel. >> What other potential risks do you see to the Fed's outlook going forward? >> Well, certainly, we've seen these pockets of risk in financial markets. What we've seen in the UK. We still have a lot of geopolitical risks. The dollar is very strong, and we've seen some of the impacts of that around the world. I mean, I think it's hard to know what the next kind of shock is. But the higher rates go, the more likelihood that you have some kind of issue in financial markets. And that's what I'd be watching for. I mean, again, if you're not seeing it come through in a gradual slowing in the data, the worry is that it happens more abruptly. >> And I want to talk a little bit about the US dollar, which again, continues to outperform against a basket of currencies. But certainly after this, we had have seen a little bit of weakness in the US dollar. Where do you see the US dollar going in the next little while? >> I don't think it's going down. I mean, I think relative to the Canadian dollar, especially we've seen that there are more limits on the Bank of Canada's ability to raise interest rates than we see in the US. We have more variable rate mortgages. We have higher levels of household debt. We have debt servicing costs that are going to increase pretty rapidly over the next year. And I think the Bank of Canada is aware of that. And so we will see now probably a bit of a gap between policy rates in Canada and the United States. That's going to continue to put upward pressure on the US dollar. You could tell the same kind of story vis-a-vis the euro, where they're seeing still this headline inflation. They don't have core inflation quite as strong, but they have their economy continuing to suffer from the direct effects of the war in Ukraine. So they will be limited in terms of their policy response. All of that seems to suggest the US dollar remains remain strong. And of course, if we do get any kind of risk event, the flight to safety is going to benefit the US dollar as well. So I would say ongoing strength and possibly a little higher from here. >> That was TD Senior economist James Marple speaking with our own Anthony Okolie. James will actually be a guest on the show on Monday talking all things about the economy. let's get you an update right now on the top stories in the world of business in a look at how the markets are trading. Shares of Yamana Gold are in the spotlight today. That as to other mining companies, Pan American Silver and Agnico Eagletteam up with a US$4.8 billion offer to buy Yamana. And there's another player in this story. Oldfield already has an offer to buy you manna, and said today it will continue to work on that purchase. You manna up about 15% at this hour. Home-improvement giant Lowe's is selling his Canadian operations to private equity firm Sycamore Partners. The US-based company says the sale is part of its overall strategy of simplifying the business model at Lowe's. The sale include stores operating under the Broner banner. Of course, Lowe's purchased Rona in 2016 for some $3.2 billion. Pipeline giant Enbridge says a delivered higher shipment volumes in its most recent quarter compared to the samequarter last year. That helps power of higher profits for the third quarter. Canada's energy companies have benefited from soaring energy costs bird by the conflict in Ukraine. Let's check in on the trading action on Bay Street and Wall Street. We will start here at home with the TSX Composite Index. It is hanging onto its gains. We are seeing money move pretty aggressively and some of the mining stocks, some of the energy stocks are coming off their highs and we have the price of the American benchmark crude firming up nicely today. South of the border, this rally that we got off the backOf the jobs report this morning, which came in with stronger-than-expected, it is starting to fade. The S&P 500 is hanging onto positive territory but just barely, but three points of bouncing on the other side of the breakeven line right now, less than 1/10 of a percent. Let's stick with the S&P 500, it's been down more than 20% year to date as markets grapple with high inflation and central-bank actionMeant to, of course, try to bring all this inflation to heal. Earlier, I spoke with Ben Gossack, portfolio manager with TD Asset Management about the S&P 500's performance this year. >> I mean, the S&P 500 is supposed to represent the top 500 companies in the US. However, it's not equally weighted, and some companies take up a bigger share. So, for example, Apple is about 7% of the index. And so while most people will say that the market had peaked January 3, January 4 of this year, that's, I would argue, is when Microsoft or Apple peaked. Many stocks or sectors within the S&P 500 had already peaked and had been falling well into 2021, which was sort of picking up the reasons why we are where we are today. What's interesting about this year, yes, I think we were down almost as much as 20% to 30%-- 25% to 30%. We're at 20% today. We'll see where we go with the next couple of risk events. But it doesn't mean that there are not opportunities inside the market for you to invest and for you to create value. One of the areas that's seen the biggest amount of strength is in energy. I think it's the only sector now, today, that's up year-to-date. All the other sectors are below zero. But when we compare it to the S&P 500-- >> As we're doing in this chart here, right? This is comparing what we've seen out of energy versus the S&P 500, or the broader market. >> Right. So what you're looking at here is, I take the sector and I put it over the S&P 500. And so the scale itself doesn't really matter, Greg. What really matters is the direction. So think of it as the first derivative, second derivative. We're looking for a change in trend. And for the longest time, energy had been underperforming the S&P 500. At its lowest point, it was 2% of the index. We've seen energy rally 2021, 2022. It's only at 5% of the index. So you think, OK, can these stocks continue to do well? Yeah, they've just started. And so while we're off the peak of oil, at $120, supply has remained constrained. OPEC has demonstrated discipline. And so while there are still unknowns about a recession, the companies are delivering in the financial results, and shareholders are being rewarded with dividends and buybacks. And that's why the sector has continued to work. >> All right, so that's the energy sector. You have a few more to go through here. Let's talk about the financials. What do they look like in this environment? >> So financials are interesting. And if I were to tell you, Greg, the economy is slowing down, there's a lot of debt out there, while interest rates are going up, you're like, I get that. I'm a little bit more worried about the credit provisions because they come right off the bottom of a financial model. And so we have seen a weakness in, particularly, the US banks early in the year. And that has helped to sort of weigh down the performance of financials relative to the S&P. But what we're seeing lately is that there is a pocket of strength right now in the financials. Now, when I say financials, most people think of banks. But what they often overlook is insurance companies. And so while the market, again, down 20%, insurance companies are breaking to new highs. So they haven't seen the impact of a Russia-Ukraine war. They've benefited from rising interest rates. They haven't had to worry about the fears of provisions. We have had natural disasters, like the recent hurricane in Florida. But sometimes that's treated as a one-off event. But for the insurance companies, especially companies that do property and casualty, their asset book is quite short in duration, so they're able to reprice their book. And a 4% interest rate world is a lot better than a 0% interest rate world. And then as the rates rise, insurance liabilities start to look a lot better. And so insurance on both sides of the border, we're seeing in Canada, we're seeing in the US, perform. And then recently, for the US banks with earnings, while credit provisions are a concern, they're not a concern yet. Probably in 2023 it looks more. And then in the meantime, they're able to lend at great rates and they're still offering sort of meager interest on our deposits. And that's creating a nice spread for net interest income. >> All right, so a great look at the financials there. This next one, I'm not going to prejudge what this chart is going to look like, but I think I'm going to have an idea finan-- sorry, the tech space. >> Right. So we're looking at, again, technology relative to the S&P 500. I would argue that this chart should look a lot worse. And the reason why the chart is not as bad as it seems is, again, you have to look through the contribution of certain stocks to the sector. So this is not equal weight. Apple is a large chunk of the exposure in US technology. Apple has been a source of strength, has remained a source of strength relative to the market, relative to its sector. Meanwhile, we have seen Microsoft take a step back after earnings. Most people are well aware of the underperformance of semiconductors. And so this is very important to understand the trends, the cycles. Technology as a sector should look a lot worse than it does right now. >> Now, this next one, will this be part of the reason, too, communication? So we talk about mega cap tech coming in with the big earnings of last week, the big disappointments. But some of those names find themselves in different compartments, don't they? >> Right. So the company-- the organization that classifies companies into sectors decided that the telecommunication sector had gotten too small. And years ago, they had moved companies such as Google, Facebook, now Meta, into the communications sector. This is one of those situations, when you look at the performance of communications relative to the S&P 500, where you say it can't get worse, and then it gets worse. And so we've seen the challenges. Snap is not in the S&P 500, but the same challenges for Snap extended to Meta. We've seen the challenges for Netflix as well. This is a sector that continues to try to fight headwinds. And what has made matters worse is that Google has held up, and now Google is struggling with many of the same issues that Meta has been struggling with as well. And so communication just continues to weaken. >> Let's take a look at health care. And, of course, if you're taking a look at health care south of the border, it's a different kind of composition of stocks than we have here at home. >> Yes. And most investors in Canada will look to US health care to sort of make up a more complete portfolio. What's interesting about health care is it's typically considered a defensive sector. But it has not been easy. If you look at health care relative to the S&P 500, you say, this is great. It's doing what we thought it was supposed to do, which is provide us relative outperformance. But there is a bifurcation. So the pharma-related businesses have been holding up well, and the reason why they've been holding up well is, I mean, most of their cost is in R&D, and it's the first pill that costs the most. After that, margins are quite strong. And so there's visibility from an earnings perspective. And so even if your drug might be coming off patent five or six years from now, that's not a problem right now. And I know the cash flows are steady. So a company like Merck is breaking out to new highs. However, the MedTech, which is really interesting, has a lot of secular trends, have moats, real competitive advantages, areas. Again, it could be orthopedics. It could be in diabetes. They've really struggled, and they've struggled on the margin side. And that's what we've seen for all of earnings. Any company that has issues with margins and cost pressures have underperformed. And so companies-- again, well-known companies, Abbott, Thermo Fisher, Stryker, have been underperforming. You can't see it within the sector, but you'll know it if you own those stocks. >> All right. And last, but not least, utilities. I won't even make a bet as to how this chart is going to look. Enlighten us. >> Sure. So I would lump utilities and REITs as sort of the same trend that we saw in the beginning of the year. It wasn't lost on anyone that the market was falling, growth is slowing, all of a sudden the central banks have to act. People were seeking defense, and defense is utilities and REITs. And so the stocks have been working, and people were sort of hiding in that area. And then now what we've seen is that it's come apart, and so the sector has just underperformed. And now I think it's the-- the interest rates are becoming a bigger issue now. So it was OK at 2%, at 3%. But now with inflation re-accelerating, and so the fed and other central banks really have to tighten. I would rather own the 4% US government bond than worry about a utility company, worry about their input costs, worry about how they might have been affected by hurricanes, worry about a government coming in and saying, hey, it's a problem that people have to pay these utilities bills, so we're going to cap your returns. And so I think that's starting to affect the utility companies, and that's why we're seeing the underperformance. >> That was Ben Gossack, portfolio manager at TD Asset Management. Of course, the pace of interest rate hikes has been a big theme in the markets this year, and of course that's off concerns about a possible recession. That, of course, raises questions about how financial stocks may hold up in the event of an economic downturn. I spoke earlier with Stephen Biggar, director of financial institutions research at Argus Research he said that there are three seems to look out for. >> Yeah, well, the lending side of the business has actually been pretty strong for banks here. We had that lull during the pandemic. A lot of people shied away from borrowing, obviously. There was high unemployment and a lot of uncertainty. So borrowing was not done at that time in any big way. But then roughly a year later or so, we have people going back to banks for lending. Housing was very strong for a while, autos, pent-up demand for other housing-related items, everything from vacations to you name it. So the Federal Reserve data we get once a week on lending activity, and it's up 10% year over year through very recently. So that's been a good part of the story that the consumer is feeling pretty good, despite what some of the consumer sentiment surveys have said. There's been a lot of activity with the exception of a real downtick more recently in housing, of course. Mortgage lending activity with rates going up as high as they are has been much lower. So we do expect a bit of a slowdown here as rates move up. That's the intended impact that the Fed's trying to get across to slow things down. And-- but the other-- a good part of the lending business story for banks has been that margin expansion based on the Fed rate hike. So we've had just this universal uplift in the yield curve, short and long-term rates have moved up dramatically over the past year. And that is favorable for banks, and you're seeing that in that interest margin expansion that they reported this most recent quarter. >> All right, so that's very interesting, not only has the loan book held up, but of course, that interest margins, which is so key to the banking business, have gotten a little richer as well, considering the moves we've seen from the Fed. So let's talk about the Fed. All these rate hikes we've seen, we've seen them here in Canada, these super-sized increases. Of course, that raises the fears of a recession. What do we need to think about in that part when we think about the financials? >> Well, that is the big risk we think right now is that and why some of these-- the stocks of some of the major banks are trading at some of these lower levels-- has been that the Fed will have to go too far, basically, to rein in inflation. And what happens is when you raise the cost of borrowing, obviously, you raise the chance of default in their attempt to slow the economy. You're going to sort of disrupt the good employment picture. There'll be fewer jobs available, more layoffs. And I would say in the banking world, there's probably no better correlation between unemployment and net charge offs or delinquencies for banks. So if you lose a job, and it's difficult to find a replacement job, you will often get behind on your bills and on your payments. So banks look at that, and have to, depending on how long you've not paid, generally like three months, they'll set it aside as delinquent and eventually have to charge off that loan. So that means loss provisions move up, and we did see that in the third quarter results. We saw banks getting a bit more cautious about-- not because charge offs had increased yet because they hadn't, but they're being more cautious in the forward outlook. And that's what loss provisions are designed to do, really. You're adding to your allowance for loan losses in anticipation of some weakness coming up next year. And I think that's where we're at too fast here, and by the middle of next year, they may even be in a period of having to reduce rates if they have gone too far. So really, it's the employment situation we're looking at closely here to the extent that that does not unwind. At last look two months ago, we had about twice the number of job openings relative to the number of unemployed, so that gives you an awful large buffer for unemployment to move down a little bit. Of course, there's always a mismatch between skill sets and between the job openings and job-- people that are eligible or able to take them. But-- so that's I think, really the major risk here at this point is that the economy starts to unwind a little bit. Credit costs for banks will move up, and that is a big swing factor for banks when things are not going well. And they have to add heavily to in terms of loss provisions that will unwind your earnings pretty quickly. >> Stephen, we got part 3 here, is when it comes to the big money-centered banks, I think some of the biggest names on Wall Street, we have already seen that slow down in the capital markets business. The deal making quite-- not quite as robust as one might hope. Well, what are we seeing in that space? What do we think we might be seeing going forward? >> Absolutely. It's been a dismal year, Greg, and particularly in the equity underwriting, but also fixed income underwriting, and a bit of M&A activity. The only thing that's held up well really has been trading volumes for banks, and that's because of the lots of volatility in the markets, and that's across equities and fixed income currencies, commodities. There's just been such massive volatility, so trading has held up well. But it has typical-- I mean, there's two things going on-- the comparisons are awful because '21 was such a good year for capital markets, underwriting. We had just kind of record years, or 20-- 20-plus-year highs in terms of equity underwriting activity, lots of IPOs coming out, secondaries rates were low. So you still had good fixed income issuance. And that is basically completely unwound this year. So, typically, when you have these downturns or downdrafts in the equity market, when you have a few IPOs that don't do well, then you have some hesitation on companies coming public. There's just not enough liquidity, and of course, the Fed had flooded the market with liquidity and made a lot of money available, some of which found its way into IPOs. So that has been unwinding for much of this year. And, again, the equity market downdraft where in a bear market after 20% down, so you just don't have a lot of owners of private companies that are willing to go to the public markets now and convert their shares there. So that's going to take probably a couple of quarters to improve. I think we need to see just some better-- some backing and filling of the equity markets, and not just for a week like we've had, or even a month. I think we need to see some sustained move upward. There have been some decent underwritings that have come through lately, like Mobileye, the Intel spinoff, did well on its debut IPO debut. So there are certainly some encouraging signs out there and-- but I think we need to lay some more groundwork here, and improve on that front. M&A activity as well, typically, when financing costs go up, we get-- there's a number of lever transactions, obviously, that would move to the back burner in anticipation of just better financing rates. So M&A activity has not quite fallen off a cliff like we've seen with IPOs, but it has been softer, and we've seen some strength in Europe and some specialty areas, and health care is still a bit of a bright spot. Some of the energy transition areas have been bright spots. But by and large, the big tech names, the consumer-type names have just not been very active, and I think it's going to take, again, another at least a couple of quarters for that to show some signs of rebound. >> That was Stephen Biggar, director of financials to do since research at Argus Research. Before we say goodbye for the week, let's check in on the market action. It is jobs Friday on both sides of the border, but the Canadian economy and the US economy had much stronger job creation last month than the street was anticipating. Right now, we are seeing positive activity on the TSX Composite Index. Are up 138 points, almost 3/4 of a percent. The US dollar has weakened considerably today against a basket of international currencies. The US dollar strength of this year has been a big driver of the market. Now, you we are seeing the price of gold surgeon, metals across the board, a lot of minors are getting a bid in the price of crude oil is up quite handsomely as well. Let's check in on Barrett cold. It they had a report this weekend a drawdown in shares of but are getting some the territory back with 1878, they are up 4 1/2%. List taken on Shopify. They got a big rally off of its recent earnings, getting back some of that in recent sessions, Shopify down about 5% on the session. South of the border, this is been an interesting one, you saw a big market rally off that stronger-than-expected jobs report. That considering Jerome Powell was pretty clear on Wednesday that without weakness in the labour market and economy, it's so much harder for… They are trying to decide whether they want to be in positive territory or negative. Right now, the S&P 500 pulling its way back up 14 points, a little more than 1/3 of a percent. The tech heavy NASDAQ, curious see what's happening in the space. Mostly negative at this hour, down 17 points or about 1/10 of a percent. To some of the make a Tech names got hit in their earnings recent days gaining some ground back today, 218 box per share, Microsoft was some modest gains, a little shy of 2%. It stay tuned on Monday, TD's Senior economist James Marple will be here taking your questions about the economy. A reminder that you can get a head start with your questions. Email moneytalklive@td. com. That's all the time we have for the show today. Thanks for watching the show today and we will see you next week. [music]
