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Hello I'm Greg Bonnell and welcome to MoneyTalk Live brought to you by TD Direct Investing. Coming up on today's show we will discuss the outlook
for rates after the hawkish signals we got from the Fed this week with TD Securities' Chris Wheelan. Chris Graija from Argus research will give us his view
on the retail sector is a holiday shopping season continues. And with fears of a recession on the horizon will hear from TD Asset Management Hussein Allidina on the outlook for commodities heading into next year. Plus in today's WebBroker segment Bryan Rogers will
show us how you can find information about Canadian depository receipts on the platform. But first the markets.
The US Federal Reserve's rate decision on Wednesday, of course raising rates fully as expected. The tone needed to raise rates going forward and how
long they have to keep them there and where they might end up in terms of a terminal rate. A little higher than we thought before Wednesday's meeting. Also taking in an effect on the market. Right now
Toronto the TSX a little weaker than before. Let's check in on Cenovus Energy. It down more than 3
1/2% with 23 bucks and $0.95 a share. CP Rail, a bit of pressure, nothing too dramatic with
103 bucks and change down a little more than a percent. South of the border of course who have investors now
saying if this is the path the Fed is on, what does that mean for the economy next year? Does that mean a recession? A lot of concerns heading
into 2023. The tech heavy NASDAQ, let's take a look on that one and see how it's stacking against the broader American market. The energy names feeling a little bit of pressure on
the other side of the border as well. Checking on Exxon at 104 bucks and $0.80 a share. It down one at 1/4 of a percent. An aftermarket update. Markets are still reacting to the latest US Federal
Reserve rate decision as Jerome Powell signalled that more hikes are ahead. Earlier, I spoke with Chris Wheelan, Senior Canada
Rates Strategist at TD Securities to get his view on the future path of rates. I think we are tired of the broken record the market
resisting inflation… We need to bring rates higher… I think yesterday's bond market reaction and I think the stock market reaction we are seeing is telling us that these rate hikes are going to be tough for the economy to absorb. I think we definitely have a highly indebted world and
I think we are quite sensitive to interest rates. So I think the markets are bracing for what's probably
not going to be a wonderful 2023 economically. On our side, we think that the Federal Reserve can
still raise rates and other 1% from here. On the Fed effective rate.
So still more pain ahead, I guess, we will call it. Until things can resolve themselves, jobs will come
down in the labour market…
What surprises me with all of this is the message is it really far from the other message. Really when you think going back to Jackson Hole,
Jerome Powell said you have to listen to what they are saying but in between those events, you get the market sort of thing: "they are probably close to being done." The market sort of creeps in. What about the market saying maybe we don't believe you? Until we hear again?
I think the market is starting to get a good idea of
where terminal rates are going to be. I think they are comfortable with them getting to somewhere in the 4.75 to 5% or we think a little higher than that. I think the market is starting to get a more narrowband on where they see the terminal rate ending up. I think that's providing some clarity to the bond
market and giving some stability further up the curve. So I think, you make a good point.
Where we kind of, we have been kind of going in and out. is there going to be a pause?
A pivot? Now the market is gearing up for that pivoted pause.
But now it is paused away now so there is a bit of a
change in tone. If they will pause imminently or there is going to be a
pivot imminently now. We are thinking of a pause at least 50 beeps. At least
half a percent higher than where we are currently. So I think we are on a bit of a different regime and I think that the market is acting like we have some clarity and a kind of consensus on where we went up on the overnight rate. I think we know that we can't go to 10%. I don't think we are going to make it through that. So
I think we are starting to be comfortable with this five-ish area on the arete in the US.
We have new economic projections as well. The Fed
seems to be assured that even though there than to continue raising rates to try to tamp down inflation slowly, they won't throw the economy over the cliff. They will find this perfect place where they can, you
know, bring consumer costs in line without doing too much economic damage. Without doing too much damage to the labour market. Is that possible?
I think there is definitely an argument to be made
that we can do it. Because the data, the economic… There are components of
the economic data that have been holding up well so it kind of depends on how the job market evolves. We have seen job turnover and dynamics turning up in
the technology sector. We will see how that, how 2023 realizes. We all know there is a delay in effect on the higher
interest rates. So it depends. It really depends how that realizes. I
think nobody is really comfortable with what they know. On our side, we think that a soft landing becomes very
difficult as we move through the year next year. But at the moment, the data may just unfortunately hold
up just a bit too long to get them to hike a bit too far. To then give us a bit more pain than we would've liked.
We will see how that evolves. But the soft landing scenario is so difficult and when
we are hiking to the magnitude we are with the levels we have today… I think that engineering the soft landing is a lower probability than not. > Do you think the banks are operating right now with
an extra dose of humility? If we backup a year ago, you are the central bank
saying more transitory… Once we work through this destruction of this destruction at some point it will be fine. Everything is not to be fine" is there more humility in
the work now?
I think there is some humility in their work but I
think we are, I'm surprised we are not acknowledging downside risks as much as we are. So we have kind of shifted from "it's transitory, it's
transitory" which got us behind the ball so we should have been hiking earlier in the year at a stronger rate than we are now. Now we are in a catch up.
Now we are sustaining these at least 50 beeps hikes each time which is still a notable pace. As we move forward, I'm surprised we don't have
humility to the downside risk that this poses. And that we are becoming so confident that we need to
keep going and that's the way forward. I'm not sure that humility is there.
I think we have shifted from it's transitory to "this will keep going" to "maybe this won't keep going". I'm not sure that humility is totally there but there is definitely some humility there because that transitory call was not the best call.
Could that be one of the reasons why the markets
don't seem to fully believe between inflation reports and in between fed announcements? The federal bank announcements and what they are being told? They seem to believe today in the aftermath of the Fed
but sometimes the market participants think "you got it wrong a couple times. Why should we trust you this time?"
I think part of the bond market reaction with yields moving lower at the curve or at least flattening, is you can argue that it's one part… The market not believing them. And on the flipside, the market believing them and
knowing that that's going to cause pain. But I think either way, the markets telling you that long-term interest rates are not were going to end up this cycle. This is, like we said, we talked about this before:
this is more of an adjustment. This is we overshoot here and take the wind out of the
sale and we bring this back into check and then we see what we can do to manage damage when we are back there. But at least we are not fighting an inflation problem.
I think it's kind of a broken record. Just fight inflation at the expense of all else.
That seems to be the motivation and the overarching framework here.
ERRIS Chris Wheelan, Senior Canada Rates Strategist
at TD Securities. Now let's get an update on some of the top stories in business today and take a look at how the markets are trading. Shares of Maxar technologies are in the spotlight
today. That on the news the satellite companies being acquired
by a private equity firm, Advent international for $53 a share. Maxar has some 90 satellites in orbit with customers
including Sirius XM and the US government. First Quantum Minerals says it's pursuing all legal
means after Panama ordered a halt to operations at its cobra Panama Coppermine. The two sides had been negotiating a deal to increase
annual payments made to the government of Panama. First Quantum says they came close to an agreement over time to the mind which represents more than 3% of Panama's GDP. The parent company of the Olive Garden has beat earnings expectations for its latest quarter. Darden restaurants is also raising its earnings
outlook, saying it expects sales to remain strong for the holidays. Darden did not however post higher expenses for the
quarter, citing food and labour costs. Let's check on the markets, the
benchmark index on pastry, the TSX Composite Index another down day. Slightly under a full percent, south of the border, investors still thinking of we heard of from the Fed on Wednesday, the path forward for rates and what it could mean for the economy ultimately, another down day. That brought her in the American market, about 1 1/2%. All year we've been hearing about tight supply for many
commodities but with concerns of a recession on the horizon, we, will demand be the real issue 2023? Hussein Allidina Head of Commodities TD Asset
Management join me earlier to discuss.
I think if we look over the past couple of months,
the market is been very focused on global growth in slowing and the impact that will have on the market. When I look at the oil balance in particular for next
year, the IA went up demanding for growth… We talked with us before. The supply side, your imagery, your spare capacity, your incremental supply growth picture is relatively constrained in 2023, 2024, 2025. A symptom of the lack of investment over the course of the last 10 years. So that's relatively, I would say, well defined.
The question, now, is how challenge to the federal demand will be in 2023. It grows by 1.
7 million barrels a day that the IA is forecasting next year. You still have an image that will be lower than at the end of next year than we are right now. We talked before if we look at global oil demand going
back to 1970, there's really only three or four occasions were demand contracted an absolute turbulent. You need to have a material contraction in economic
growth comparable to what we saw at the height of the pandemic. In March 2020. Or during the financial crisis.
Even in those episodes, we had demand contracted was a relatively short-term contraction and a bounce back. We are looking at demand today, reaching 100 million
barrels a day notwithstanding the fact that the weather has been materially warmer than normal which is tempered demand. I do think the focus next year is very much on the
demand side. My base case right now is that economic growth is probably going to be robust enough to continue to point to tighter balances through the course of 23.
It sounds like we have some wildcards to play. I
mean, the weather. Winter always plays into the sort of consumption needs.
But even economically, as you said, we see demand go up in the face of economic softening. What could go in the other direction in terms of
demand? China reopening? A few wildcards…
Yeah. So I think one thing we have to remember, and this year has been an incredible your volatility in commodity price action broadly speaking, this is also a year when China has been closed. Chinese demand has not been this week since 1994, 1995, on a growth basis. There are signs that China is opening up. I don't think
it will be a straight line higher but I'm pretty comfortable with the view of the Chinese demand in 2023 will be higher. Their impact on the world market on the commodity market, from the consumption point of view should be higher in 23, relative to 22. There are early signs again, if we look at flight data or congestion data, China is picking up and people, like in the rest of the world, with things open up, they want to get out.
One of the concerns this year obviously has been
inflation. Energy costs has been part of that inflationary story. If you had a situation next year we have obviously a
lot of reasons in the system was supply is pretty tight and if demand does pick up, at least old study, could we be pushing ourselves back into an environment that the central banks will let March? Higher price of mark racks absolutely. I think some of the sappers with inflation has been commodity price moving lower. Until you address that supply side, if you have
positive commodity demand, I think it will push these prices materially higher again. One of the reasons why demand is maybe not as weak today as it would've been if prices were at the levels we saw in the Summer is because that price relief has encouraged consumption. When I look at 2023, is my view on demand is correct,
if my view on supplies correct, I do think we see oil prices moving back towards the highs we've seen this year, potentially higher depending on how the supply situation plays out and I think it will be a focus again. I think the inflation story is not done. It does appear that inflation is weakening. But the underlying commodity inflation, I think we are probably in the early innings of it because again, a broken record, but we have not addressed the supply. It is simply not taking place notwithstanding the
increase in commodity prices. And for that reason Greg, I do think inflation will
remain a concern. Maybe not eight or 9% of inflation but the idea of 2% inflation on a sustained basis I think is a bit of a stretch.
What is it take to start seeing that investment in
the oil and gas industry? Even the mining industry? We have the needs for several minerals and
electrification but we don't have the oil that is been extracted. Is that era behind us of exploration I think we have to
break it down almost by commodity or sub commodity category. I think there is a… We know that if we go and make an investment today, it's not going to lead to incremental production for five, seven, eight years. So you have to think longer term when making these
investment decisions. I also think there is a big ESG sort of focus.
I think many of these oil companies are being challenged by shareholders when they go to make the conventional investments that they have made. I think you will need to have a cap X cycle. I think you have to see material increases in the
return on capital employee to see these companies go and make the investment and look, the date of this year notwithstanding the increase in pricing, we haven't seen that increase in investment. We see some of it from the private side. If we look at the US rate count, probably half the increase in we've seen this year had come from the private space. That has become a challenge because credit, the cost of money is increasing. A phenomenon that has not been an issue for the longest
period of time. On the metals and mining side, I think you will see more investment to the extent that prices remain elevated and encourage that investment because you have less of that negative ESG story there. Again, the volatility we've seen in the prices makes these investment decisions all the more challenging. If you are talking to a board about making an investment in oil, three months ago, you were using a price tag of $90 a barrel. If you do today, you are using the price of $70 a
barrel. I don't know where the price will be in three months
from now but that volatility increases effectively the return to justify the cost.
It does sound like several years down the road, we
are not going to have some of the things that we need unless there is some sort of magical transformation and energy sources, you know, minerals that provide us with electric vehicles and electrification. A tight space even further down the road.
I believe strongly that we've if we have economic
growth, that commodity balances in commodity prices whacked as a tax on that growth. Because, to your point, we don't have sufficient supply. We are not making the investment we need to make today
to the extent that we are not able to substitute away from conventional energy fast enough. I don't believe the data showing you that we are doing. You will end up in a position where the… Any sort of
supply disruption or demand to the upside, prices have to move materially higher to find equilibrium. I will have to ration demand in that tight environment. We saw some of that happening this Summer but I think
it's $70 a barrel you see little of that happening right now.
That was Hussein Allidina, Head of Commodities a TD
Asset Management. Now let's get to our educational segment of the day.
If you are interested in finding information about Canadian depository receipts, we have tools on WebBroker that can help. We have Bryan Rogers today. Let's start this by explaining what those are for
people who are not in the know it
Yes this is another acronym that our viewers can add to their collection. CVR, what it stands for is Canadian depository receipt. CDR. Canadians can buy potential shares of large US companies. If you look up at symbols at major US firms like Amazon or Home Depot, you notice they are pretty expensive. But at the same time you will notice in WebBroker there is a symbol that has a Canadian flag beside it. You may be a little confused on what's going on there.
If you click on their you may see different price. That's all related to Canadian depository receipts. If
you look into WebBroker right now, as you can see, I have Amazon right now. We see a Canadian flag there. You may think "wait a minute, I didn't think Amazon was
that cheap of the market." If you go into Amazon and you pull up the symbol, I have it already pulled up and ready to go. If you were to type in "Amazon", you would see the
Canadian flag in the US. If we move on to the US version, this is actually Amazon equity on the US market and you can see it's at the US flag there with the US dollar. It's trading at about $87 US. But what happens with the CDR, Canadian depository receipt is if I pull up the Canadian equivalent, we look at $87 for Amazon but if I pull up this one here, if I want to buy a partial share or a fractional share of Amazon, I can do that. This is an offering on the market with the exchange. You will see that $10.70, that's in Canadian dollars. It's also hedged as well. So it's almost as though you
were buying Amazon with your Canadian account and you didn't have to worry about foreign exchange either. They actually have a calculation that will adjust for
foreign exchange. It will adjust for that fractional formula that they have there. If you want to do it a little bit more… Whatever is
affordable for you. You can use these through that Canadian depository receipt.
Very interesting stuff.
You showed us the American listing, we have the depository receipt… A little north of 10 bucks. Is there a way to find out how they value the CDRs?
There is a way Greg. Let's go back into WebBroker.
We don't currently have a way to do it in WebBroker
itself. So there is not a way to calculate. You would have to probably do a little calculation
yourself. I'll show you a couple of other examples of some
stocks. I know looking at what I found online, Amazon is roughly just under 1/10 of the actual value. The reason it may not make sense, if I go back to Amazon… In the US, I can see it's $87 and you might think it's, $10 is not 1/10 of $87. Keep in mind this is a foreign-exchange adjusted rate so you have to think of that $87 converting to Canadian. We might close a little over 100 and that's why we are
valuing the Canadian version roughly at about $10 right? A quick example where you do the math yourself.
You can, although you can go to a search online. Look
for "CDR directory" or even look up Canadian depository receipts and you will find some of the sites that hold this information. It will actually have on their the conversion rate and
will have the corresponding foreign-exchange rate. It is updated daily. So you can get an idea if you're
interested in how they work. You can see that and they normally have the equivalent to a fun fact sheet that you can see, an ETF or a mutual fund available. But you can actually just look up on the site and you will have a whole listing. To give you another quick example, about 35 of them right now, these are some of the common ones that I know of. You can look up a whole list online. You can also look up Apple… About 134. If you go to the Canadian version, you have the Canadian flag: you see it for $20. So you see there's a different ratio there. If you want to say, for example, Home Depot… Here is
one that is fairly high-priced. Pretty expensive especially in US dollars. You can look at the equivalent in Canadian, I think
they are about 1/20 of the value because it's pretty close to around 400 Dollars in Canadian if you've converted that. About $20 on the stock.
So definitely something new to the market and available but if you are interested in you see that Canadian flag on there, that's what you're seeing is that Canadian depository receipt.
Great explanation in great useful stuff. Thanks
Bryan.
All right. Thanks Greg.
Our thanks to Bryan Rogers, Senior Client Education Instructor TD Direct Investing. Make sure to check out the learning centre on WebBroker
for master classes learning videos and upcoming webinars. December is one of the most important times of the year
for the retail space but with inflation and rising prices, many consumers are wondering if this holiday season will be disappointing when it comes to sales. I was joined by Chris Graja earlier.
We pricethe management… You need a change to see if it is above or below. You know, I would put the catalyst right now probably three categories. You know, to remember them easily. You know, innovation, relevance and strength.
The reason innovation is so important is, we spoke about it in the introduction, companies need pricing power to overcome all of the inflation that is out there. We see right now is companies that have innovative
products or have invested in doing unique things have the greatest pricing power and the greatest ability to preserve margins. So as the reports come out of the fourth quarter, the question is going to be: who was able to drive sales? Questions about elasticity… So when you raise prices,
how much do your sales trail off? How much margin do companies need to sacrifice? You know, and above expected result on any of those
things could be positive for stocks. In terms of relevance, one of the reasons I look at relevance is that it translates into store traffic. Mathematically, in retail world, same-store sales are a
main driver of how people look at the retail stocks. It's a combination of traffic and ticket.
Over the long-term, ticket is kind of a combination of a bunch of things but some of it is pricing. It will be hard to do on long term. So companies need to draw people into their stores. Whether it's with a treasure hunt atmosphere, whether
it's education, whether it's new product drops as companies like to say. Whether it's convenience, all of those things, particularly in this environment where people are going to be increasingly challenged in how much they can pay is how do you draw people into stores? If you get them into stores and get them excited, given people only have so many dollars to spend, how do you get more and more of those scarce dollars? Maybe they intended to spend with excellent merchandising. Then you know, the third one to talk about right now is financial strength. This can be both positive catalyst and an anti-catalyst. In a tough market environment, showing you have the
ability to raise dividends or to be a little bit stronger in strict in terms of purchasing stock… Those things are all very important on the positive side. With interest rates higher and all of us looking at
companies balance sheets, a company that has debt to rollover and the possibility of doing it several basis points higher than they did previously, the possibility that somebody, when rates were low, may have been a little more aggressive and took on rate debt. Now that flowing rate debt will be a lot more expensive. And the ability to make an acquisition up, the number
of companies beaten down and challenges have been had for some of the business models. So the companies that have a war chest if you will. The ability to make a smart acquisition, that can also be a catalyst going forward. And then maybe one tactical one. You know, as we look
to the end of the year, one of the questions is going to be: whose inventories are clean? There's a big change this year. The big change was, we went at the beginning of the year where everyone was scrambling with supply chain issues trying to get their inventory stocked up. Then consumer demand kind of turned on the dime and the game became "how do we clear through all of these inventories"? So I think investors want to see companies going into 2023 with clean inventories. That means a couple things: first is there will be marked down risk on the balance sheets. Number two, companies, if they have old merchandise out, they will have the ability to flow in new merchandise. That has become particularly important for the day after Christmas. Shoppers, gift cards are an increasingly popular gift
item. So when people go to the stores with their gift cards, the best retail is one of fresh new merchandise out. So the people are buying new things at full price rather than just combing through the discount racks. So those are some of the near-term catalysts and ways
to think about them right now, going into next year.
So let's say you have a company that is perhaps
innovating, one that is still relevant to the customers… Watching our dollars pretty carefully I want to make sure I don't spend them here… They have that financial strength. What is the overall atmosphere for holiday shopping looking like? Some are taking a better position than others but at
the end the shopper has to show up. How do we think about that so far?
Right now my forecast for holiday shopping is a 5%
increase over last year. The National retail Federation US trade group is in the
6 to 8% range. So I'll give you the pros and cons: on the pros, employment is still relatively strong. Household balance sheets come out. At an aggregate
level certainly. In a pretty strong position. One of the things we see
covering this sector for a long time. People genuinely want to make the holidays and special
for their family and their friends and people they care about. And that's probably even more true coming out of the
pandemic. The people want to get back to normal. Things are normal and kind of… Happy holidays like the
ones we used to know. On the con side, the challenge is first that inflation
will cause people to spend more more of their money on food and staples and basics. So back to less money available for discretionary purchases. Those things have more margins for the retailers.
So you kind of have to go through the forecast line by line and category by category. So for me, I've got grocery stores up for the holidays. I've got, it's normally a slow-growing category.
Two, 3%. Grocery stores are up seven. For the necessity of buying groceries and the additional advantage of dining at home, being cheaper than eating out at restaurants. I think were going to see stronger growth than we
normally see at grocery stores. About 4% with general merchandise. Some of that is
inflation. So that is staples.
But that's a bit of a question. But I think 4% is a reasonable number and then e-commerce is probably the most difficult to forecast. My forecast there is for a 5% increase. It's been
growing faster than that but we are lapping really strong in the past two years. I think one thing we are likely to see is the people going back to stores. After many years of people sitting on the couch and
buying online. We seem to see Black Friday weekend… The return of some
door busters and people wanting to get back to the experience of being in stores and buying things that way. So I would say 5% and we will take a look at that as the season evolves.
That was Chris Graija of the people coming to the
table think it's a little higher than people thought it was going tea Senior analyst TD market research. … It's really the commentary around that the Fed chair
Jerome Powell was saying that there will be a need for further rate hikes to try to bring inflation back down to that 2% area and a terminal rate, the place that the Fed ends up at the end of this cycle, esteemed minds I guess. … El Dorado gold moving in the other direction.
The last time I checked about 3%, 11 bucks and change a share. South of the border, investors have to weigh what's to
come next year in terms of the economy. This is the path that the Fed is indeed on. Indeed you have the S&P 500 down 1% today after yesterday selling pressure. The tech heavy NASDAQ how does it stack against the broader market? About one the third.
Some sort of keeping pace.
Final American stock to take a look at, Ford Motor Company. We will call that down almost 6%. We want to stay tuned on Monday, Marissa Jones
utilities credit analyst at TD Asset Management will be our guest. Talking to us about utilities. A reminder that you can get a head start by emailing us your questions. Email moneytalklive@td.com.
Thank you for joining us and we will see you next week. [music]
Hello I'm Greg Bonnell and welcome to MoneyTalk Live brought to you by TD Direct Investing. Coming up on today's show we will discuss the outlook
for rates after the hawkish signals we got from the Fed this week with TD Securities' Chris Wheelan. Chris Graija from Argus research will give us his view
on the retail sector is a holiday shopping season continues. And with fears of a recession on the horizon will hear from TD Asset Management Hussein Allidina on the outlook for commodities heading into next year. Plus in today's WebBroker segment Bryan Rogers will
show us how you can find information about Canadian depository receipts on the platform. But first the markets.
The US Federal Reserve's rate decision on Wednesday, of course raising rates fully as expected. The tone needed to raise rates going forward and how
long they have to keep them there and where they might end up in terms of a terminal rate. A little higher than we thought before Wednesday's meeting. Also taking in an effect on the market. Right now
Toronto the TSX a little weaker than before. Let's check in on Cenovus Energy. It down more than 3
1/2% with 23 bucks and $0.95 a share. CP Rail, a bit of pressure, nothing too dramatic with
103 bucks and change down a little more than a percent. South of the border of course who have investors now
saying if this is the path the Fed is on, what does that mean for the economy next year? Does that mean a recession? A lot of concerns heading
into 2023. The tech heavy NASDAQ, let's take a look on that one and see how it's stacking against the broader American market. The energy names feeling a little bit of pressure on
the other side of the border as well. Checking on Exxon at 104 bucks and $0.80 a share. It down one at 1/4 of a percent. An aftermarket update. Markets are still reacting to the latest US Federal
Reserve rate decision as Jerome Powell signalled that more hikes are ahead. Earlier, I spoke with Chris Wheelan, Senior Canada
Rates Strategist at TD Securities to get his view on the future path of rates. I think we are tired of the broken record the market
resisting inflation… We need to bring rates higher… I think yesterday's bond market reaction and I think the stock market reaction we are seeing is telling us that these rate hikes are going to be tough for the economy to absorb. I think we definitely have a highly indebted world and
I think we are quite sensitive to interest rates. So I think the markets are bracing for what's probably
not going to be a wonderful 2023 economically. On our side, we think that the Federal Reserve can
still raise rates and other 1% from here. On the Fed effective rate.
So still more pain ahead, I guess, we will call it. Until things can resolve themselves, jobs will come
down in the labour market…
What surprises me with all of this is the message is it really far from the other message. Really when you think going back to Jackson Hole,
Jerome Powell said you have to listen to what they are saying but in between those events, you get the market sort of thing: "they are probably close to being done." The market sort of creeps in. What about the market saying maybe we don't believe you? Until we hear again?
I think the market is starting to get a good idea of
where terminal rates are going to be. I think they are comfortable with them getting to somewhere in the 4.75 to 5% or we think a little higher than that. I think the market is starting to get a more narrowband on where they see the terminal rate ending up. I think that's providing some clarity to the bond
market and giving some stability further up the curve. So I think, you make a good point.
Where we kind of, we have been kind of going in and out. is there going to be a pause?
A pivot? Now the market is gearing up for that pivoted pause.
But now it is paused away now so there is a bit of a
change in tone. If they will pause imminently or there is going to be a
pivot imminently now. We are thinking of a pause at least 50 beeps. At least
half a percent higher than where we are currently. So I think we are on a bit of a different regime and I think that the market is acting like we have some clarity and a kind of consensus on where we went up on the overnight rate. I think we know that we can't go to 10%. I don't think we are going to make it through that. So
I think we are starting to be comfortable with this five-ish area on the arete in the US.
We have new economic projections as well. The Fed
seems to be assured that even though there than to continue raising rates to try to tamp down inflation slowly, they won't throw the economy over the cliff. They will find this perfect place where they can, you
know, bring consumer costs in line without doing too much economic damage. Without doing too much damage to the labour market. Is that possible?
I think there is definitely an argument to be made
that we can do it. Because the data, the economic… There are components of
the economic data that have been holding up well so it kind of depends on how the job market evolves. We have seen job turnover and dynamics turning up in
the technology sector. We will see how that, how 2023 realizes. We all know there is a delay in effect on the higher
interest rates. So it depends. It really depends how that realizes. I
think nobody is really comfortable with what they know. On our side, we think that a soft landing becomes very
difficult as we move through the year next year. But at the moment, the data may just unfortunately hold
up just a bit too long to get them to hike a bit too far. To then give us a bit more pain than we would've liked.
We will see how that evolves. But the soft landing scenario is so difficult and when
we are hiking to the magnitude we are with the levels we have today… I think that engineering the soft landing is a lower probability than not. > Do you think the banks are operating right now with
an extra dose of humility? If we backup a year ago, you are the central bank
saying more transitory… Once we work through this destruction of this destruction at some point it will be fine. Everything is not to be fine" is there more humility in
the work now?
I think there is some humility in their work but I
think we are, I'm surprised we are not acknowledging downside risks as much as we are. So we have kind of shifted from "it's transitory, it's
transitory" which got us behind the ball so we should have been hiking earlier in the year at a stronger rate than we are now. Now we are in a catch up.
Now we are sustaining these at least 50 beeps hikes each time which is still a notable pace. As we move forward, I'm surprised we don't have
humility to the downside risk that this poses. And that we are becoming so confident that we need to
keep going and that's the way forward. I'm not sure that humility is there.
I think we have shifted from it's transitory to "this will keep going" to "maybe this won't keep going". I'm not sure that humility is totally there but there is definitely some humility there because that transitory call was not the best call.
Could that be one of the reasons why the markets
don't seem to fully believe between inflation reports and in between fed announcements? The federal bank announcements and what they are being told? They seem to believe today in the aftermath of the Fed
but sometimes the market participants think "you got it wrong a couple times. Why should we trust you this time?"
I think part of the bond market reaction with yields moving lower at the curve or at least flattening, is you can argue that it's one part… The market not believing them. And on the flipside, the market believing them and
knowing that that's going to cause pain. But I think either way, the markets telling you that long-term interest rates are not were going to end up this cycle. This is, like we said, we talked about this before:
this is more of an adjustment. This is we overshoot here and take the wind out of the
sale and we bring this back into check and then we see what we can do to manage damage when we are back there. But at least we are not fighting an inflation problem.
I think it's kind of a broken record. Just fight inflation at the expense of all else.
That seems to be the motivation and the overarching framework here.
ERRIS Chris Wheelan, Senior Canada Rates Strategist
at TD Securities. Now let's get an update on some of the top stories in business today and take a look at how the markets are trading. Shares of Maxar technologies are in the spotlight
today. That on the news the satellite companies being acquired
by a private equity firm, Advent international for $53 a share. Maxar has some 90 satellites in orbit with customers
including Sirius XM and the US government. First Quantum Minerals says it's pursuing all legal
means after Panama ordered a halt to operations at its cobra Panama Coppermine. The two sides had been negotiating a deal to increase
annual payments made to the government of Panama. First Quantum says they came close to an agreement over time to the mind which represents more than 3% of Panama's GDP. The parent company of the Olive Garden has beat earnings expectations for its latest quarter. Darden restaurants is also raising its earnings
outlook, saying it expects sales to remain strong for the holidays. Darden did not however post higher expenses for the
quarter, citing food and labour costs. Let's check on the markets, the
benchmark index on pastry, the TSX Composite Index another down day. Slightly under a full percent, south of the border, investors still thinking of we heard of from the Fed on Wednesday, the path forward for rates and what it could mean for the economy ultimately, another down day. That brought her in the American market, about 1 1/2%. All year we've been hearing about tight supply for many
commodities but with concerns of a recession on the horizon, we, will demand be the real issue 2023? Hussein Allidina Head of Commodities TD Asset
Management join me earlier to discuss.
I think if we look over the past couple of months,
the market is been very focused on global growth in slowing and the impact that will have on the market. When I look at the oil balance in particular for next
year, the IA went up demanding for growth… We talked with us before. The supply side, your imagery, your spare capacity, your incremental supply growth picture is relatively constrained in 2023, 2024, 2025. A symptom of the lack of investment over the course of the last 10 years. So that's relatively, I would say, well defined.
The question, now, is how challenge to the federal demand will be in 2023. It grows by 1.
7 million barrels a day that the IA is forecasting next year. You still have an image that will be lower than at the end of next year than we are right now. We talked before if we look at global oil demand going
back to 1970, there's really only three or four occasions were demand contracted an absolute turbulent. You need to have a material contraction in economic
growth comparable to what we saw at the height of the pandemic. In March 2020. Or during the financial crisis.
Even in those episodes, we had demand contracted was a relatively short-term contraction and a bounce back. We are looking at demand today, reaching 100 million
barrels a day notwithstanding the fact that the weather has been materially warmer than normal which is tempered demand. I do think the focus next year is very much on the
demand side. My base case right now is that economic growth is probably going to be robust enough to continue to point to tighter balances through the course of 23.
It sounds like we have some wildcards to play. I
mean, the weather. Winter always plays into the sort of consumption needs.
But even economically, as you said, we see demand go up in the face of economic softening. What could go in the other direction in terms of
demand? China reopening? A few wildcards…
Yeah. So I think one thing we have to remember, and this year has been an incredible your volatility in commodity price action broadly speaking, this is also a year when China has been closed. Chinese demand has not been this week since 1994, 1995, on a growth basis. There are signs that China is opening up. I don't think
it will be a straight line higher but I'm pretty comfortable with the view of the Chinese demand in 2023 will be higher. Their impact on the world market on the commodity market, from the consumption point of view should be higher in 23, relative to 22. There are early signs again, if we look at flight data or congestion data, China is picking up and people, like in the rest of the world, with things open up, they want to get out.
One of the concerns this year obviously has been
inflation. Energy costs has been part of that inflationary story. If you had a situation next year we have obviously a
lot of reasons in the system was supply is pretty tight and if demand does pick up, at least old study, could we be pushing ourselves back into an environment that the central banks will let March? Higher price of mark racks absolutely. I think some of the sappers with inflation has been commodity price moving lower. Until you address that supply side, if you have
positive commodity demand, I think it will push these prices materially higher again. One of the reasons why demand is maybe not as weak today as it would've been if prices were at the levels we saw in the Summer is because that price relief has encouraged consumption. When I look at 2023, is my view on demand is correct,
if my view on supplies correct, I do think we see oil prices moving back towards the highs we've seen this year, potentially higher depending on how the supply situation plays out and I think it will be a focus again. I think the inflation story is not done. It does appear that inflation is weakening. But the underlying commodity inflation, I think we are probably in the early innings of it because again, a broken record, but we have not addressed the supply. It is simply not taking place notwithstanding the
increase in commodity prices. And for that reason Greg, I do think inflation will
remain a concern. Maybe not eight or 9% of inflation but the idea of 2% inflation on a sustained basis I think is a bit of a stretch.
What is it take to start seeing that investment in
the oil and gas industry? Even the mining industry? We have the needs for several minerals and
electrification but we don't have the oil that is been extracted. Is that era behind us of exploration I think we have to
break it down almost by commodity or sub commodity category. I think there is a… We know that if we go and make an investment today, it's not going to lead to incremental production for five, seven, eight years. So you have to think longer term when making these
investment decisions. I also think there is a big ESG sort of focus.
I think many of these oil companies are being challenged by shareholders when they go to make the conventional investments that they have made. I think you will need to have a cap X cycle. I think you have to see material increases in the
return on capital employee to see these companies go and make the investment and look, the date of this year notwithstanding the increase in pricing, we haven't seen that increase in investment. We see some of it from the private side. If we look at the US rate count, probably half the increase in we've seen this year had come from the private space. That has become a challenge because credit, the cost of money is increasing. A phenomenon that has not been an issue for the longest
period of time. On the metals and mining side, I think you will see more investment to the extent that prices remain elevated and encourage that investment because you have less of that negative ESG story there. Again, the volatility we've seen in the prices makes these investment decisions all the more challenging. If you are talking to a board about making an investment in oil, three months ago, you were using a price tag of $90 a barrel. If you do today, you are using the price of $70 a
barrel. I don't know where the price will be in three months
from now but that volatility increases effectively the return to justify the cost.
It does sound like several years down the road, we
are not going to have some of the things that we need unless there is some sort of magical transformation and energy sources, you know, minerals that provide us with electric vehicles and electrification. A tight space even further down the road.
I believe strongly that we've if we have economic
growth, that commodity balances in commodity prices whacked as a tax on that growth. Because, to your point, we don't have sufficient supply. We are not making the investment we need to make today
to the extent that we are not able to substitute away from conventional energy fast enough. I don't believe the data showing you that we are doing. You will end up in a position where the… Any sort of
supply disruption or demand to the upside, prices have to move materially higher to find equilibrium. I will have to ration demand in that tight environment. We saw some of that happening this Summer but I think
it's $70 a barrel you see little of that happening right now.
That was Hussein Allidina, Head of Commodities a TD
Asset Management. Now let's get to our educational segment of the day.
If you are interested in finding information about Canadian depository receipts, we have tools on WebBroker that can help. We have Bryan Rogers today. Let's start this by explaining what those are for
people who are not in the know it
Yes this is another acronym that our viewers can add to their collection. CVR, what it stands for is Canadian depository receipt. CDR. Canadians can buy potential shares of large US companies. If you look up at symbols at major US firms like Amazon or Home Depot, you notice they are pretty expensive. But at the same time you will notice in WebBroker there is a symbol that has a Canadian flag beside it. You may be a little confused on what's going on there.
If you click on their you may see different price. That's all related to Canadian depository receipts. If
you look into WebBroker right now, as you can see, I have Amazon right now. We see a Canadian flag there. You may think "wait a minute, I didn't think Amazon was
that cheap of the market." If you go into Amazon and you pull up the symbol, I have it already pulled up and ready to go. If you were to type in "Amazon", you would see the
Canadian flag in the US. If we move on to the US version, this is actually Amazon equity on the US market and you can see it's at the US flag there with the US dollar. It's trading at about $87 US. But what happens with the CDR, Canadian depository receipt is if I pull up the Canadian equivalent, we look at $87 for Amazon but if I pull up this one here, if I want to buy a partial share or a fractional share of Amazon, I can do that. This is an offering on the market with the exchange. You will see that $10.70, that's in Canadian dollars. It's also hedged as well. So it's almost as though you
were buying Amazon with your Canadian account and you didn't have to worry about foreign exchange either. They actually have a calculation that will adjust for
foreign exchange. It will adjust for that fractional formula that they have there. If you want to do it a little bit more… Whatever is
affordable for you. You can use these through that Canadian depository receipt.
Very interesting stuff.
You showed us the American listing, we have the depository receipt… A little north of 10 bucks. Is there a way to find out how they value the CDRs?
There is a way Greg. Let's go back into WebBroker.
We don't currently have a way to do it in WebBroker
itself. So there is not a way to calculate. You would have to probably do a little calculation
yourself. I'll show you a couple of other examples of some
stocks. I know looking at what I found online, Amazon is roughly just under 1/10 of the actual value. The reason it may not make sense, if I go back to Amazon… In the US, I can see it's $87 and you might think it's, $10 is not 1/10 of $87. Keep in mind this is a foreign-exchange adjusted rate so you have to think of that $87 converting to Canadian. We might close a little over 100 and that's why we are
valuing the Canadian version roughly at about $10 right? A quick example where you do the math yourself.
You can, although you can go to a search online. Look
for "CDR directory" or even look up Canadian depository receipts and you will find some of the sites that hold this information. It will actually have on their the conversion rate and
will have the corresponding foreign-exchange rate. It is updated daily. So you can get an idea if you're
interested in how they work. You can see that and they normally have the equivalent to a fun fact sheet that you can see, an ETF or a mutual fund available. But you can actually just look up on the site and you will have a whole listing. To give you another quick example, about 35 of them right now, these are some of the common ones that I know of. You can look up a whole list online. You can also look up Apple… About 134. If you go to the Canadian version, you have the Canadian flag: you see it for $20. So you see there's a different ratio there. If you want to say, for example, Home Depot… Here is
one that is fairly high-priced. Pretty expensive especially in US dollars. You can look at the equivalent in Canadian, I think
they are about 1/20 of the value because it's pretty close to around 400 Dollars in Canadian if you've converted that. About $20 on the stock.
So definitely something new to the market and available but if you are interested in you see that Canadian flag on there, that's what you're seeing is that Canadian depository receipt.
Great explanation in great useful stuff. Thanks
Bryan.
All right. Thanks Greg.
Our thanks to Bryan Rogers, Senior Client Education Instructor TD Direct Investing. Make sure to check out the learning centre on WebBroker
for master classes learning videos and upcoming webinars. December is one of the most important times of the year
for the retail space but with inflation and rising prices, many consumers are wondering if this holiday season will be disappointing when it comes to sales. I was joined by Chris Graja earlier.
We pricethe management… You need a change to see if it is above or below. You know, I would put the catalyst right now probably three categories. You know, to remember them easily. You know, innovation, relevance and strength.
The reason innovation is so important is, we spoke about it in the introduction, companies need pricing power to overcome all of the inflation that is out there. We see right now is companies that have innovative
products or have invested in doing unique things have the greatest pricing power and the greatest ability to preserve margins. So as the reports come out of the fourth quarter, the question is going to be: who was able to drive sales? Questions about elasticity… So when you raise prices,
how much do your sales trail off? How much margin do companies need to sacrifice? You know, and above expected result on any of those
things could be positive for stocks. In terms of relevance, one of the reasons I look at relevance is that it translates into store traffic. Mathematically, in retail world, same-store sales are a
main driver of how people look at the retail stocks. It's a combination of traffic and ticket.
Over the long-term, ticket is kind of a combination of a bunch of things but some of it is pricing. It will be hard to do on long term. So companies need to draw people into their stores. Whether it's with a treasure hunt atmosphere, whether
it's education, whether it's new product drops as companies like to say. Whether it's convenience, all of those things, particularly in this environment where people are going to be increasingly challenged in how much they can pay is how do you draw people into stores? If you get them into stores and get them excited, given people only have so many dollars to spend, how do you get more and more of those scarce dollars? Maybe they intended to spend with excellent merchandising. Then you know, the third one to talk about right now is financial strength. This can be both positive catalyst and an anti-catalyst. In a tough market environment, showing you have the
ability to raise dividends or to be a little bit stronger in strict in terms of purchasing stock… Those things are all very important on the positive side. With interest rates higher and all of us looking at
companies balance sheets, a company that has debt to rollover and the possibility of doing it several basis points higher than they did previously, the possibility that somebody, when rates were low, may have been a little more aggressive and took on rate debt. Now that flowing rate debt will be a lot more expensive. And the ability to make an acquisition up, the number
of companies beaten down and challenges have been had for some of the business models. So the companies that have a war chest if you will. The ability to make a smart acquisition, that can also be a catalyst going forward. And then maybe one tactical one. You know, as we look
to the end of the year, one of the questions is going to be: whose inventories are clean? There's a big change this year. The big change was, we went at the beginning of the year where everyone was scrambling with supply chain issues trying to get their inventory stocked up. Then consumer demand kind of turned on the dime and the game became "how do we clear through all of these inventories"? So I think investors want to see companies going into 2023 with clean inventories. That means a couple things: first is there will be marked down risk on the balance sheets. Number two, companies, if they have old merchandise out, they will have the ability to flow in new merchandise. That has become particularly important for the day after Christmas. Shoppers, gift cards are an increasingly popular gift
item. So when people go to the stores with their gift cards, the best retail is one of fresh new merchandise out. So the people are buying new things at full price rather than just combing through the discount racks. So those are some of the near-term catalysts and ways
to think about them right now, going into next year.
So let's say you have a company that is perhaps
innovating, one that is still relevant to the customers… Watching our dollars pretty carefully I want to make sure I don't spend them here… They have that financial strength. What is the overall atmosphere for holiday shopping looking like? Some are taking a better position than others but at
the end the shopper has to show up. How do we think about that so far?
Right now my forecast for holiday shopping is a 5%
increase over last year. The National retail Federation US trade group is in the
6 to 8% range. So I'll give you the pros and cons: on the pros, employment is still relatively strong. Household balance sheets come out. At an aggregate
level certainly. In a pretty strong position. One of the things we see
covering this sector for a long time. People genuinely want to make the holidays and special
for their family and their friends and people they care about. And that's probably even more true coming out of the
pandemic. The people want to get back to normal. Things are normal and kind of… Happy holidays like the
ones we used to know. On the con side, the challenge is first that inflation
will cause people to spend more more of their money on food and staples and basics. So back to less money available for discretionary purchases. Those things have more margins for the retailers.
So you kind of have to go through the forecast line by line and category by category. So for me, I've got grocery stores up for the holidays. I've got, it's normally a slow-growing category.
Two, 3%. Grocery stores are up seven. For the necessity of buying groceries and the additional advantage of dining at home, being cheaper than eating out at restaurants. I think were going to see stronger growth than we
normally see at grocery stores. About 4% with general merchandise. Some of that is
inflation. So that is staples.
But that's a bit of a question. But I think 4% is a reasonable number and then e-commerce is probably the most difficult to forecast. My forecast there is for a 5% increase. It's been
growing faster than that but we are lapping really strong in the past two years. I think one thing we are likely to see is the people going back to stores. After many years of people sitting on the couch and
buying online. We seem to see Black Friday weekend… The return of some
door busters and people wanting to get back to the experience of being in stores and buying things that way. So I would say 5% and we will take a look at that as the season evolves.
That was Chris Graija of the people coming to the
table think it's a little higher than people thought it was going tea Senior analyst TD market research. … It's really the commentary around that the Fed chair
Jerome Powell was saying that there will be a need for further rate hikes to try to bring inflation back down to that 2% area and a terminal rate, the place that the Fed ends up at the end of this cycle, esteemed minds I guess. … El Dorado gold moving in the other direction.
The last time I checked about 3%, 11 bucks and change a share. South of the border, investors have to weigh what's to
come next year in terms of the economy. This is the path that the Fed is indeed on. Indeed you have the S&P 500 down 1% today after yesterday selling pressure. The tech heavy NASDAQ how does it stack against the broader market? About one the third.
Some sort of keeping pace.
Final American stock to take a look at, Ford Motor Company. We will call that down almost 6%. We want to stay tuned on Monday, Marissa Jones
utilities credit analyst at TD Asset Management will be our guest. Talking to us about utilities. A reminder that you can get a head start by emailing us your questions. Email moneytalklive@td.com.
Thank you for joining us and we will see you next week. [music]
