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[music] >> Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
coming up on today show, we'll give you a breakdown of the latest Canadian Jobs Report and what it could mean for the Bank of Canada with MoneyTalk's Anthony Okolie.
He has been digging in. And TD Asset Management's Michael O'Brien will give us his view on the potential impact of OPEC's production cuts on Canada's energy sector. And TD Securities James Dixon will discuss the big three themes he's watching in this current market environment.
Plus, in today's WebBroker education segment, Caitlin Cormier is going to show us how you can research Index funds using the platform.
Before he gets all that, let's get you an update on the market. It looks like we have some modest momentum, or at least the markets are trying to push higher right now and indeed, the TSX Composite Index is up 21 points.
It's pretty modest, about 1/10 of a percent on the last day of the shortened trading week. Of course, we started the week on that surprise OPEC production cut which really sent a bid not only into the price of crude but a lot of the big energy names.
I want to see how Cenovus is performing today. That's calm down a bit. We still have crude above 80 bucks per barrel.
Cenovus right now and 2446 after big gains earlier in the week and down about 8%. Let's check in on Teck Resources, another big story of the week, that unsolicited bid from Glencore rebuffed by tech. The stock did pop on that news. Today it 5819, up a further 2 1/3% we will call that.
South of the border, the S&P 500, I want to see how it's varying. Modestly now in positive territory after a modest start in negative territory today. It's up about 1/10 of a percent. We have some green on the screen.
The tech heavy NASDAQ seems to be findings momentum as well, it's of 32 point, 1/4 of a percent.
We are seeing some chipmakers continues to be under pressure today. We do have AMD coming off the lows of the session, not quite positive yet but at 9230, it is now down just a very modest quarter of a buck. And that your market update.
March saw another strong month of job gains in Canada that has some people wondering whether this is going to complicate the Bank of Canada's plans when it comes to interest rate.
Joining me now to discuss, money talks Anthony Okolie.
Let'sstart with the jobs number. Another surprise to the upside.
>> Employment grew by 35,000 in March after being little changed in February and we had of course strong growth in January and December. Again, this extends a streak of gains to seven months in a row and as this next chart shows, the Canadian jobs market is showing no signs of slowing.
Employment has generally trended up since September of last year. Last month, gains were concentrated mainly in the private sector. Now, the next chart, we will take a look at the unemployment rate. The unemployment rate actually held steady at 5% in February.
in, sorry, March.
That's the fourth straight month that we have seen unemployment holding steady. That's just about the record low of 4.9% that we saw back in June and July 2022.
in this final chart, we breakdown by industry and, as the chart shows, the jobs were up primarily a in three industries and was really led by transportation and warehousing.
Now, in terms of losses, losses were seen in construction, healthcare, personal repair services.
wage growth was up 5.2% year-over-year in March but that slightly down versus February.
>> Another stronger than expect a jobs report after your very aggressive rate hikes from the Bank of Canada trying to tame inflation. And he thought from TD Economics as to how the Bank of Canada might read a report like this?
>> I think the Bank of Canada is not going to be happy seeing this report. They don't want to see such a strong report because they have, as you mentioned, been increasing interest rates aggressively in order to tame or tamp down inflation. TD Economics says that this is not likely going to push the Bank of Canada off the sidelines. They are likely to stay on the sidelines and hold interest rates steady so they can see their interest rates continuing to work to the economy.
>> It feels like Canada is a bit of an opening act this week for the United States.
Of course, despite the holiday weekend, we are going to get the US jobs report tomorrow.
>> That's a big one. The US job supports coming up tomorrow. TD Securities is looking at net job gains of 270,000 jobs. That's slightly above consensus around 240,000 jobs.
Keep in mind, we have also seen some other job data this week and it's pointing to signs in the job market.
We got the jewel jobreport which fell 10 million in February for the first time in nearly 2 years.
Yesterday, the US private payrolls came in much lower-than-expected. Today, we got the latest weekly jobless cames which came in higher-than-expected and, of course,job cuts have soared this year.
They are up nearly 400% year-over-year, fivefold this year, with Taku leading the way. All of this is pointing to recent signals of a slowing job market.
In the past few months, whenever we saw signs of weakness in the economy, we would see the markets cheering that because it could potentially lead to lower interest rates but it seems like now bad news is bad news and investors are worried that the Fed may have hiked interest rates too far and that this could push the economy into a recession.
>> Very interesting times, even though tomorrow is a holiday, I have a feeling I'm gonna be checking my phone around 8:30 AM Eastern time just to see how those US job numbers later.
>> That's what I'll be focusing on as well.
>> Thank for that. Stay tuned. Later in the show, Anthony will be back in taking a look at how US auto sales are holding up.
Let's stick with the jobs picture. Earlier this week, I spoke with Peter Hodson, the founder and head of research at 5i research but About what a weakening US labour market could mean for the markets.
>> This is one of those scenarios were good news is bad news and then bad news is good news. And so the market's been very worried about the labor market and labor pressure. And so to see some of the labor strength come off will be a positive sign.
And of course, if companies don't hire people, then their profit margins can actually improve, assuming their revenues are not falling apart as well.
So it's a little bit of good, little bit of bad. You've got a situation where investors are concerned about this looming recession, yet we're not there yet. And yet, the market's sort of valuing it as if we were already in a recession.
So if you compare it to '08, we were losing 400,000 jobs a month, and we're still creating jobs in the US.
So we're not quite in crisis mode, but investors are preparing for a crisis. That's what it seems like to us, anyway.
>> Now as this all unfolds, obviously this is what the Fed has been watching in terms of trying to control inflation, and our central bank, the Bank of Canada.
And they warned us all along, there'd be some pain in the economy, mostly pain in the labor market if we're going to tame those price pressures.
The soft landing, the hard landing, where does this take us?
>> I think we'll probably do soft. Really, the corporate balance sheets-- and we won't talk about some of the problems in the US in specific regions and sectors-- but on average, corporate balance sheets are in really, really good shape compared to past cycles.
Profit margins are good. You've got automation.
Robotics is really helping productivity. And you've got a situation where the labor market, even though it's slightly weaker this month versus last month, there's still a job out there if you want a job.
And so as long as asset prices sort of stay there and there's not collapse in housing, or there's a collapse in this, that, and the other, I think we're going to be OK. And I think the market is sort of worried a little bit too much about a hard landing.
And honestly, most recessions last less than a year and they're priced in ahead of time in the stock market.
So you're really looking at maybe a six-month window, if you want to exit and then come back in. And that might work once or twice, but-- >> Yeah, timing the market gets awful hard.
>> Exactly. It's not going to work consistently. So if you've got a dividend stock that keeps paying you money, you've got a company that's still making money, you don't really have to worry that much about what's happening. This is just a regular economic cycle.
Things are strong. They hike rates, slow things down, and carry on.
>> Let's talk a little bit about the labor market.
Because while it has been resilient through all this, you do get then a lot of headlines, and I'm thinking about the tech community in the States, like big numbers, 7,000 9,000, 10,000 jobs being trimmed at these behemoth tech companies. How do we put that in context with the overall labor market?
>> Well, first off, you have to wonder what these people were doing, if you can fire 10,000 people at one day. But a lot of it's coming from COVID. So COVID in the tech world, the demand surged and people were just scrambling to try and fill demand as everything changed in the pandemic.
And they went on a massive hiring spree on anticipation of that trend continuing.
And then when things kind of got back to normal a little bit, that's like, hey, we don't need another 5,000 engineers to build this new app. And so there's a lot of that going on.
And this is really interesting, because whenever a tech company announces a layoff, their stock usually goes up.
Because again, it's all about profit margins. And if you can save 10,000 people making very high salaries, these engineers, your margins are going to improve dramatically.
So that is good for the headlines. It's good for psychology. But let's be fair.
Most of these people that get laid off from a tech company, they're going to find another job pretty soon, pretty fast. There's still a shortage of talent out there.
>> Now we mentioned off the top that despite all the things we have to worry about that the S&P 500 is still in positive territory for the year. But if you look at it year to date, it's been a pretty choppy ride.
Should we expect that kind of volatility going forward till we sort of settle out all of our fears and try to find a path forward?
>> I think, so if you look at the VIX volatility index, it's back below 20. And it was spiking above 30 not that long ago.
So I think people are-- it's more of a calmer year. And so people have accepted the fact that rates have risen.
They've accepted the fact that inflation is higher than what everybody wants it to be. But now they're used to that.
And so I think the next part of the market will be what happens next. Do we enter a recession? Is it deep? Is it shallow?
Do we get another problem? Do we get an oil shock, like we had just the other day?
And so it's a situation where I think the inflation interest rate scenario, that's going to be old news.
It's going to be priced in, and the market will look at the next crisis.
>> For a while, for a long while, it felt like what the Fed was telling us about the path of rates and what the bond market was actually pricing in were pretty widely apart, widely divergent.
. I felt like, was there a brief week maybe at the beginning of the year where they came back together before they diverged again?
>> They agreed for about 10 days. And now the bond market is pricing in lower rates by the end of this year.
And I think that would be a little too aggressive in terms of easing yet.
I mean, the Fed's going to make sure that inflation's under control and the job market's under control before they do any sort of easing.
But I think we're on a path to seeing peak rates.
We might get one or two more hikes, and then we might flatline for a period of time.
And again, that's all about, it's about uncertainty in the market.
If the investor thinks that we're out of the rate hike cycle, then you can plan for that.
You can do some modeling. The analysts can sort of predict cash flows.
And it just becomes a little bit more of a normal market, where last year it was just a one inflation number and it really didn't matter if your company was good or bad or if you made money or didn't money. It was all about those one numbers.
And so now we're getting back to fundamentals. So it's much easier, as an analyst, to look at a company these days, because you're not going to get blindsided by something.
>> Yeah. We got another earnings season right around the corner, but we had one behind us. And I think heading into these earnings season, given the heightened volatility and the concerns we have, we say, oh, this is going to be the one where they come out with the tough medicine, tell us. Did we actually see that from corporate America?
>> We didn't. We were really expecting kind of a kitchen sink outlook, basically. Companies, everybody looking at the stock was aware of what's happening in the economy. And it was such an easy quarter for them to say, you know what, we're going to be conservative, it's going to be a tough year, it's going to be a tough quarter. We're going to take this writedown. We're going to fire these people. And that didn't happen nearly to the extent that we thought.
So there's two things that could happen from that.
Either the corporations have no idea what's going on in their business, or things are better than what they thought.
And I think it's the latter. You're seeing inventory get drawn down, especially in the tech world, some of the tech semiconductor inventory is going down, and profit margins are holding up.
And so we've seen quite a few companies guide up. And so if you're guiding up when everyone's worried about a recession, that's a pretty positive statement of confidence from that particular company. So that's what we're looking for right now.
>> What will you be looking at for the next earnings season?
Any sign that perhaps they were a little too optimistic in the previous one?
>> Yeah, absolutely. I mean, you have to sort of guide and then beat.
I mean, you have to sort make sure you can meet those expectations. But I think one thing to watch out for is going to be actually interest costs.
I mean, there's a lot of companies that have a lot of debt, and some have hedged it and some have not. And so I think you're going to see a big divergence in companies that have managed the interest rate cycle well and those that were caught offside and suddenly are getting absolutely squeezed because their interest costs have doubled in the past year.
So that's OK if your regular business is growing and you can sort of offset it with growth. But if you're not growing, then that's going to be a problem.
>>That was Peter Hodson, founder and head of research at 5i Research.
Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
Higher costs for materials and discounts in moving inventory weighing onmargins at Levi Strauss.
While the Jean apparel company did beat sales expectations in his most recent quarter, it's adjusted gross profit margin was down 360 basis points compared to the same period last year, so the stock is down a little bit more than 15%.
Now this margin pressure came despite Levi's having raised selling prices for many of its products.
Shifting consumer behaviours in the face of high inflation appear to be weighing on sales or Costco Wholesale. The company missed revenue estimates for its most recent quarter, noting it is seeing weakness and more expensive discretionary items such as electronics and jewelry. The high cost of living has seen many consumers shift their spending to essentials, such as groceries.
Right now you got Cosco down a little more than 2%.
The maker of Corona beer is providing investors with an optimistic forecast for the year.
Constellation Brands says demand for its premium beer brands remains strong in spite of inflationary pressures on consumers. The beverage makers also boosting its quarterly dividend payout to investors.
The stock right now up a modest 1%.
A quick check in on the market. We'll start your at home on Bay Street with the TSX Composite Index, 27 points in the green. Nothing too dramatic but on this last day of a shortened trading week, it is green on the screen. A little more than 1/10 of a percent.
So the border, the S&P 500 right now up 5 1/2 points, about 1/10 of a percent as well.
Got the price of oil holding over $80 per barrel, this after this week's surprise production cut from the OPEC nations. Earlier I spoke with Michael O'Brien, portfolio manager with TD Asset Management, to discuss with the move may mean for the Canadian energy sector.
>> Well, I think if you looked at what was happening to energy for the last month and a half, two months, up until the OPEC announcement, really, the narrative had been captured by concerns around the economic outlook.
So it was a much darker, much more bearish narrative, a lot of people focusing on if there is a recession, how much demand destruction.
And then the weak oil price kind of made people just think that this was definitely where we were heading.
I think the OPEC announcement, which caught people a bit by surprise, it basically reminded investors that this is a two-way street.
People were getting a little too carried away with all the bad things that could happen.
What investors kind of forgot, and the Saudis reminded us in no uncertain terms, is there's somebody looking out for this market. OPEC, I think, communicated in no uncertain terms that they don't want to see oil prices with a 7 in front of it or a 6 in front of it. They put their money where their mouth is.
They're going to defend these prices.
And that shifts the conversation or the debate into a much more balanced one now.
Obviously concerns about the economy haven't gone away.
Concerns about potential impacts on demand haven't gone away.
It's just we're now reminded that the supply side of the equation is quite constrained, and the leading players are going to do their part to make sure that oil prices don't fall out of bed completely.
When you bring this back to the stocks, we're sitting here today, oil's in the $80 range.
And when you think about light-heavy differentials in western Canada have improved a lot-- they spent most of the winter between $25 and $30 discounts, today they're $14, $15.
With that kind of a backdrop, these companies are very profitable.
Despite all the negativity, despite all the concerns around the economic and macro headlines, we're left with a basket of stocks that is still very, very profitable and will be returning a lot of cash to shareholders one way or another this year.
>> So energy has its own thesis to trade off of now.
Because up to, I guess, the weekend and the surprise production cut, it was-- the concerns that were weighing on the financial sector seemed to be weighing on energy as well. Have we shaken off-- I mean, I was showing a US regional bank to the audience to start off with, and they seem to be a bit under pressure. Have we moved past that story, or are there lingering concerns?
>> I think what you're seeing today is there are lingering concerns. JP Morgan's CEO Jamie Dimon, who's kind of viewed as the elder statesman for the American banking industry, his letter to shareholders today, his prediction was that we're not done. There'll still be some bumps in the road as we go through this.
If you think back to the financial crisis, it seemed to come in waves.
So I think we'd be remiss not to expect a few flare-ups as we go forward.
That said, I do feel that the authorities, the central banks, the regulators, move pretty quickly in this situation.
Things do seem to be stabilizing in terms of at least the data investors can see around deposit flows and what the bank lending facilities are being drawn on in the US. They would indicate that things aren't back to normal. There are still some pressures out there.
But at least those worst fears seem to have been headed off. This idea of cascading bank runs does not seem to be happening.
Deposit flows are stabilizing.
So I would say we're not out of the woods, but clearly we're in a better place than we were two or three weeks ago, which is what we would have hoped, in other words, that you can contain this, that one or two banks that mismanaged their balance sheet aren't going to infect the whole system.
>> Yeah, one of the words I was hearing off the bat whether it was Silicon Valley Bank or Signature or the others, was "idiosyncratic," that these banks sort of organized their affairs in a way that wasn't the most prudent way, and that other banks weren't going to fall to the same-- into the same trap, really.
>> Yep. And anybody who lived through the financial crisis of 2008-2009, we all learned the hard way to be careful when you say something is idiosyncratic.
Because what often appears to be idiosyncratic, it turns out to be not so unique after all.
>> And maybe other people were up to the same thing, yeah.
>> Exactly. And so in this case, again, I think we're in a good place here. And when you do go back and do the autopsy, so to speak, on Silicon Valley Bank and what went wrong, I mean, there are some glaring mistakes that they made. And it is a unique franchise where it was far too concentrated with a specific customer base, venture capital. Their deposit base wasn't diversified. Their assets and liabilities were mismatched.
There were some glaring mistakes there.
And it is a very idiosyncratic situation.
However, some of, I guess what I would say the root cause of what forced this on Silicon Valley Bank, which is a rapid rate hike cycle, that is not unique to Silicon Valley Bank. And some of the pressures that we saw that impacted a number of US regional banks very hard, to a greater or lesser extent, you can find those same impacts across many of the banks.
And one of the areas specifically that people are looking at right now and investors are-- with a very microscopic attention to detail is these assets on their balance sheet.
So in other words, you took in a deposit, and you invested it in, say, a 5-year US Treasury or a 10-year US Treasury back when interest rates were at 1% or 2%.
That wasn't unique to Silicon Valley Bank. They did more of it. It was more egregious.
It was less well managed. But to a greater or lesser extent, you're going to see that in a lot of the other banks.
And so that's where it really becomes important, as an investor, is to try to differentiate between the situation Silicon Valley Bank found itself in and the other banks that you want to own, you want to invest in, or you do invest in.
And so we'll flow this into the Canadian Bank discussion-- >> I wanted to ask you about that, right?
Because we're talking Silicon Valley Bank. We're talking US financials. Then we might talk Credit Suisse, and we're talking about the other side of the world. But back here at home, our financials did feel some downward pressure because of all this.
>> Absolutely. And again, the root cause of all these issues is a very rapid rate hike cycle, both in the Bank of Canada and the US Federal Reserve. That creates pressure on the system. But then when it comes to, OK, how do we differentiate? How do we separate the banks that are in real trouble versus the banks that are going to be more resilient?
I mean, I could go down a long list in terms of why the Canadian banks are different.
But I think the most basic and simple difference is if you look at the nature of our deposit base for the big five, the big six banks, very diverse, very sticky deposit bases.
Whereas Silicon Valley Bank, the root of the issue there was you had massive depositor flight, and basically the vast majority of Silicon Valley's deposit base was venture capital investors and tech startup companies that were burning cash rapidly and needed their money back.
If you look at, whether it's TD Bank, Royal Bank, Bank of Montreal, the sources and the diversity of the funding sources that we have to run our banks here in Canada, far more stable. And so everything that I've been hearing to date, you're not seeing the same type of disruptive drawdown of deposits in the Canadian banking system.
And at the end of the day, if you don't have that pressure on the deposit base, there's no reason to worry about some of these other problems that Silicon Valley Bank had with held to maturity, securities portfolios that were underwater. If you don't have the deposit pressure, you can hold those. It's not an issue.
So I think, at least what we've seen so far, "idiosyncratic" a dangerous word, but when you sort of flow it and compare it to the Canadian situation, I think the Canadian banks are in in far better shape in terms of that liquidity pressure.
>> That was Michael O'Brien, portfolio manager with TD Asset Management.
Now, let's get our educational segment of the day.
Index funds are one potential asset class and investor may consider; if you're interested in researching the space, WebBroker has tools which can help. Joining us now for more is Caitlin Cormier, client education instructor with TD Direct Investing.
Good to see you. Walk me through it all.
>> Great to see you too, Greg. One thing I'm going to cover today is talking about index funds. A lot of investors may choose index funds to add to their portfolio, add diversification, kind of in a quick and easy manner. Let's go ahead and hop into WebBroker and see how you can find these particular types of investments within the platform.
Today we are going to go to research. We are going to go under screeners and once we get to this page, we are going to choose specifically ETFs.
So once we get here, we are going to go ahead, there are some featured screens that you could look at if you want to but for today, let's go ahead and create our own custom screen.
So I have a couple of things that I'm going to choose today for categories. I'm going to go first to index and I'm going to choose to only add index funds, so show only index fund.
You can see 2700 matches for index funds so we will have to narrow it down more than that otherwise you will be here all day.
Let's go in underperformance, let's go ahead and choose tracking error, this is basically measuring how close this particular fund itis going to track the underlying benchmark. Left click to add and let's say in this case that we are looking for the lowest tracking error, meaning that it stays pretty true to the underlying index. Let's go into fund category as well.
So fund category, and for today, let's just choose, we are still at 416, let's choose Canadian US equities.
Let's scroll all the way down here, we are alphabetical, so we are going to go all the way to the bottom.
Canadian US equity. Alright. So we got 37 matches.
I'm going to actually unplug your mutual funds so we only see ETFs and we are down to 31.
That's not too too bad. Once we click to view results, this is showing us all of those results that match the specific criteria that we put in on the previous screen.
so they are all based in Canada, they are all index funds.
It shows their tracking error and the category which we have already chosen.
We can see there's a whole host of different ETFs here, including those S&P 500 type of ones as well as other diverse vacations, large-cap, ESG funds, total market funds. There are lots of different ETFs that fall under that criteria.
But we have at least somewhere to kind of go as far as doing a little bit more research. Within this page, we can see a ton of information about these funds. We can simply click through and see some of the additional information that's available.
And we can also go back and say, for example, if we want to see it like the lowest tracking error ETF, we simply click tracking error and it will rearrange our results based on lowest to highest tracking error, for example.
>> Okay, so we're digging down, as you said. He took a very big number and pared it down to a smaller group.
You're going through all of this, you see some funds, you want to do a little bit more research. How do you do that?
>> Yeah, so maybe you are looking specifically for an S&P 500 ETF, for example.
We saw a few of those in our results. Why don't we go back and take a peek at those?
I'm just going to scroll through our results here.
Here's one that's S&P 500.
Let's just see, we've got another one here. Another when here.
And this one.
Okay. So let's go ahead and choose those for ETFs and what I'm going to do is I'm going to click this compare button.
This will take me out of my screener and into a direct comparison of these four ETFs.
So always important to keep in mind, you want to be able to compare it like investments because if they are completely different, then the comparison isn't usually that relevant so it's better to have them be a little similar to one another so that you can really make a good comparison.
Here we've got information from net asset value, MorningStar rating, how much money they have in assets under management, the MER, pretty comparable for these funds for example.
If we go down again, we can see information about the managers, how long they've been there. We can also see performance, for example, and compare performance of these funds.
Again, there may be more to the story than what we see directly so you always want to do a little bit further research than this but at least it gives you a kind of starting off point to see some of the information about these funds and kind of made to a further determination as to which one you might want to look into a little further, do that further research and then potentially at your portfolio.
>> Great stuff as always, Caitlin. Thanks that.
>> No problem.
>> Caitlin Cormier, client education instructor at TD Direct Investing.
And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Amid the recent market volatility, their three themes that investors may want to keep in mind.
That's according to James Dixon, director of family office solutions at TD Securities.
He joined me earlier to discuss those themes and teach us a little bit more about what his team does.
>> So what we try to do is deliver the full suite of Capital Market solutions to family offices and ultrahigh net worth individuals.
We do that by connecting with our partners, private banking, PIA, PIC, our TD Family Office, and of course, just directly through external family office.
So we really aim to just bring an institutional quality of coverage to the space, something that we feel the space has been lacking for a while.
>> OK, so that obviously puts you in a very interesting position in terms of watching sort of everything in the world that's happening and trying to distill it down to an essence. So you've got three big themes here.
. I want to start with what central banks have been doing and trying to tamp down inflation by hiking rates. And I just found such an interesting wrinkle over the weekend that, as we talk about inflationary pressures, they get OPEC in as partners with a surprise production cut. I mean, how does this all play out?
>> Yeah, you know, it's been a very, very interesting story. We've seen so much tightening over the last year, far more than we thought initially. And we saw all banks continuously revise their targets higher as central banks across the globe ramped up to fight inflation.
Now we're in this position where economies are breaking, and because rates have just been too high.
The question is really, does inflation continue to trend lower like we've seen, or is it sticky? On my desk, we have held the narrative of a sticky inflation theme persisting. In the short term, we do think the trend is lower, even with this OPEC cut.
I mean, it's a big cut, over a million barrels.
We think, overall, the inflation levels out around 3%, 4%.
And there's a few narratives driving that.
I mean, the oil supply is clearly a big issue, and OPEC Plus has made that worse.
We also think that we continue to see reshoring of supply chains on the back of COVID. We also think that this remilitarization efforts around the globe on the back of the war in Ukraine is a really big deal.
And this should keep demand for commodities high, and on the back of that inflation.
And I think, overall, central banks might actually even be OK with that because if you have a ballooned balance sheet, the easiest way to get rid of your debt is just to inflate it away.
>> OK, so an interesting point there, and obviously interesting developments to keep a track on.
Now that we've-- for the longest time, all we could talk about was inflation, the central bank action.
And then in the recent weeks, something stole the spotlight, the banking crisis, the failure of some US banks, or the whole Credit Suisse situation. Now, what should we be thinking about in terms of that?
>> Well, it's interesting. Initially, I thought about rehashing what actually caused this banking crisis. But I think what's more pertinent is, what's next? There was some chatter about a run on A1 bonds after the big write down with Credit Suisse.
But I think the bigger issue right now is a theme that's gaining momentum, and that is commercial real estate. These regional banks have circa 70% of commercial real estate loans. Now, this is a big deal.
Commercial real estate has been struggling because of work-from-home policies, a change in the way consumers spend.
A lot of it's online now, so revenues are down.
Financing costs are up.
And at the same time, we have a lot of loans maturing.
To put things into perspective, just this year, there's $450 billion of loans maturing.
And the pain doesn't end there. In the years to come, it's around $550 a year.
By 2027, that's around $2 and 1/2 trillion in debt that's maturing.
And this is a big deal because commercial real estate works a little bit different to residential real estate.
These loans are not amortized, so there's usually a balloon payment at the end, whether it's in 5 or 10 years.
And when it comes to refinancing these loans, I don't know how you do it because the bid-offer spread on these buildings is huge.
The banks say they're worth one amount because revenues are down, and the owners say they're worth something completely different.
So I think this is the underlying issue now that we are all trying to chop through.
Are we facing a balance sheet crisis, or is loose policy going to alleviate the problem we have and we drive on?
Certainly, markets seem to be thinking loose policy will be OK.
>> OK, so two interesting things. We promised three themes, and the big one, of course, as we plow ourselves through all of this, try to bring inflation down. Live with higher borrowing costs.
Worry about some of those US regional banks.
People are trying to figure out, are you getting a recession? If you do, what kind of recession is it going to be?
What are the signs that they're telling us?
>> Well, it's interesting. Everybody's been pointing to 2s/10s that have been inverted for a while and 5/30s.
5/30s have actually started to steepen again, which suggests inflation is around-- sorry, recession is about six weeks away.
I think we're in a very difficult position. You've got tighter lending standards, which slows growth.
You've got weaker consumer balance sheets. So I think the signs are there.
I think it's going to be a recession. The question is how hard it's going to be. Is it soft, or is it a hard landing?
My gut says it's probably a softer landing, and just because we believe that China reopening is a big story.
And we've seen some strong growth there, and we think that they keep commodities bid, and they could fuel a bit of growth.
Is it enough to keep the world out of recession? We don't think so. But certainly a soft landing is on the cards.
>> How keen would the central banks be to race back to the rescue? This is sort of the job, but there's been some argument made that as they try to wrestle down inflation, they're going to tolerate, perhaps, a little bit more pain in the economy than they would during other cycles.
>> Correct. So we believe that there's not enough priced in terms of cuts. We saw huge hikes over the last year.
It started at 25. Then it went to 50. Then it was 75.
And we've just continued to see pain in the economy.
And all those hikes haven't even fed through into the data yet. So we believe that when the Fed starts to pivot, it's going to be aggressive. They'll have to unwind as quickly as they hiked.
>> So with all of this in mind-- and that is a lot-- a nice breakdown with what the state of the world is right now, what it means for investors, what should investors do about positioning themselves in an environment like this?
>> I've got to be careful of how I answer this one, Greg. What we have seen is we had a look at all the data since the 1930s. And what we have seen is when bonds and stocks sell off in lockstep, typically in the year that follows, bonds outperform stocks.
Will that happen again? We're not sure. If there is a recession, bonds tend to outperform stocks, just on a flight to safety. And if there is a recession, things like consumer staples, health care, utilities, those are the stocks that outperform. For commodities, well, I think you've got to ask yourself if you believe in the militarization theme that we do. Do you believe in the rebuilding of critical infrastructure? Because if you do, then commodities should outperform.
>> That was James Dixon, director of family office solutions at TD Securities.
Let's check in on the markets right now.
We seem to be building to the upside again. Nothing too dramatic but you got 30 points on the shortened trading week for the last day of the trading week. Of course, tomorrow is a holiday. We are up a little more than 1/10 of a percent. I noticed Nutrien was under pressure earlier. I want to check in on the name.
It still hasn't turned with the broader market, 9284, you're down about 3 1/2%. First Quantum was weak earlier in the session. It is coming off the lows but at 3162, it is down about $0.16 per share. So the border, we got the S&P 500 moving higher to the tune of 10 points, about 1/4 of a percent of the tech stocks seem to be getting a bit of a bid today.
You are up on the NASDAQ to a tune the tune of almost half a percent were 51 points.
Alphabet, Google, it's one of the winners in the tax base. Hundred and seven bucks per share today, it's up to have bucks or about 2 1/2%.
The US vehicle sales began 2023 on a strong footing, easing supply constraints and continues to drive some improvements in production. Our Anthony Okolie has been digging in on the latest figures for March and what TD Economics makes of it all. Anthony.
>> Thanks very much, Greg. It March vehicle sales fell 1.2% to just under 15 million annualized units.
That came in slightly below consensus forecasts. Now when we break it down by the type of vehicle, light trucks edged higher by 9.7% year-over-year.
And light trucks again accounted for the bulk of March sales at about 79%, that's equal to March 2022.
with dealership inventories continuing to bounce back from last summer's lows, we also saw an improvement in the average daily selling rate which rose to about 50,000 cars sold across 27 days, that's up from 46000 Daily Rate in March of last year. Now TD Economics does note that while inventory levels have improved, they are are still about 55% below the March 2019 levels.
When we look at the best-selling models in March, the light trucks gained the top three spots with the Tesla model Y sat in fourth position.
Of course the Ford F-series was number one again, followed by Chevrolet Silverado and ram pickup trucks.
Running up the top 10 were Nissan, Honda, Toyota, Ford and GMC. Tesla's model fell out of the top 10 last month.
Sales continue to trend upwards compared to one year ago because we are seeing supply improvement and that's helping to offseta lot of the pent-up demand for vehicles that we've seen since the beginning of COVID.
Now, as on production increases this year on improving supply chain pressures, TD Economics is that inventory levels are also expected to continue to improve gradually over time. Greg it?
>> Okay.
Let's to take on what happened and what about the rest of the year and perhaps some risks to the outlook for the year?
>>'s over 2023, TD Economics expect sales to rise 12% year-over-year to just over 15 million units. Now while this is an improvement over 2022, it still lags the pre-pandemic levels of about 17 million units.
On the production side, they are expecting production to increase 5.2% year-over-year to just over 10 million new units. Supply constraints continue to ease.
They expect full normalization to pre-pandemic levels, that is expected to happen in 2024.
Now in terms of risks, one of the risks is of course inflation.
If inflation remains higher for longer, that could prompt the Federal Reserve to raise rates further. Of course, that could lead to higher levels of demand destruction and therefore lower sales for vehicles.
They also point to an additional stress, if they do see additional stress, in the banking sector. At that could cause lending conditions to tighten more quickly and of course that would weigh on demand going forward.
>> Thanks, Anthony.
>> My pleasure.
>> MoneyTalk Anthony Okolie paid stay tuned. We'll be having a show tomorrow because of the holiday but on the other side of the long weekend, on Monday, Jim Kelleher, director of research at Argus Research will be our guest.
He wants to take your questions about technology stocks. A reminder that you can get a head start with that. A three day headstart, really. Just email moneytalklive@td.com. That's all the time we have for the show today. On behalf of me and Anthony here on the desk and everyone behind the scenes that brings you the show every day, thanks for watching, and we'll see you on Monday.
[music]
coming up on today show, we'll give you a breakdown of the latest Canadian Jobs Report and what it could mean for the Bank of Canada with MoneyTalk's Anthony Okolie.
He has been digging in. And TD Asset Management's Michael O'Brien will give us his view on the potential impact of OPEC's production cuts on Canada's energy sector. And TD Securities James Dixon will discuss the big three themes he's watching in this current market environment.
Plus, in today's WebBroker education segment, Caitlin Cormier is going to show us how you can research Index funds using the platform.
Before he gets all that, let's get you an update on the market. It looks like we have some modest momentum, or at least the markets are trying to push higher right now and indeed, the TSX Composite Index is up 21 points.
It's pretty modest, about 1/10 of a percent on the last day of the shortened trading week. Of course, we started the week on that surprise OPEC production cut which really sent a bid not only into the price of crude but a lot of the big energy names.
I want to see how Cenovus is performing today. That's calm down a bit. We still have crude above 80 bucks per barrel.
Cenovus right now and 2446 after big gains earlier in the week and down about 8%. Let's check in on Teck Resources, another big story of the week, that unsolicited bid from Glencore rebuffed by tech. The stock did pop on that news. Today it 5819, up a further 2 1/3% we will call that.
South of the border, the S&P 500, I want to see how it's varying. Modestly now in positive territory after a modest start in negative territory today. It's up about 1/10 of a percent. We have some green on the screen.
The tech heavy NASDAQ seems to be findings momentum as well, it's of 32 point, 1/4 of a percent.
We are seeing some chipmakers continues to be under pressure today. We do have AMD coming off the lows of the session, not quite positive yet but at 9230, it is now down just a very modest quarter of a buck. And that your market update.
March saw another strong month of job gains in Canada that has some people wondering whether this is going to complicate the Bank of Canada's plans when it comes to interest rate.
Joining me now to discuss, money talks Anthony Okolie.
Let'sstart with the jobs number. Another surprise to the upside.
>> Employment grew by 35,000 in March after being little changed in February and we had of course strong growth in January and December. Again, this extends a streak of gains to seven months in a row and as this next chart shows, the Canadian jobs market is showing no signs of slowing.
Employment has generally trended up since September of last year. Last month, gains were concentrated mainly in the private sector. Now, the next chart, we will take a look at the unemployment rate. The unemployment rate actually held steady at 5% in February.
in, sorry, March.
That's the fourth straight month that we have seen unemployment holding steady. That's just about the record low of 4.9% that we saw back in June and July 2022.
in this final chart, we breakdown by industry and, as the chart shows, the jobs were up primarily a in three industries and was really led by transportation and warehousing.
Now, in terms of losses, losses were seen in construction, healthcare, personal repair services.
wage growth was up 5.2% year-over-year in March but that slightly down versus February.
>> Another stronger than expect a jobs report after your very aggressive rate hikes from the Bank of Canada trying to tame inflation. And he thought from TD Economics as to how the Bank of Canada might read a report like this?
>> I think the Bank of Canada is not going to be happy seeing this report. They don't want to see such a strong report because they have, as you mentioned, been increasing interest rates aggressively in order to tame or tamp down inflation. TD Economics says that this is not likely going to push the Bank of Canada off the sidelines. They are likely to stay on the sidelines and hold interest rates steady so they can see their interest rates continuing to work to the economy.
>> It feels like Canada is a bit of an opening act this week for the United States.
Of course, despite the holiday weekend, we are going to get the US jobs report tomorrow.
>> That's a big one. The US job supports coming up tomorrow. TD Securities is looking at net job gains of 270,000 jobs. That's slightly above consensus around 240,000 jobs.
Keep in mind, we have also seen some other job data this week and it's pointing to signs in the job market.
We got the jewel jobreport which fell 10 million in February for the first time in nearly 2 years.
Yesterday, the US private payrolls came in much lower-than-expected. Today, we got the latest weekly jobless cames which came in higher-than-expected and, of course,job cuts have soared this year.
They are up nearly 400% year-over-year, fivefold this year, with Taku leading the way. All of this is pointing to recent signals of a slowing job market.
In the past few months, whenever we saw signs of weakness in the economy, we would see the markets cheering that because it could potentially lead to lower interest rates but it seems like now bad news is bad news and investors are worried that the Fed may have hiked interest rates too far and that this could push the economy into a recession.
>> Very interesting times, even though tomorrow is a holiday, I have a feeling I'm gonna be checking my phone around 8:30 AM Eastern time just to see how those US job numbers later.
>> That's what I'll be focusing on as well.
>> Thank for that. Stay tuned. Later in the show, Anthony will be back in taking a look at how US auto sales are holding up.
Let's stick with the jobs picture. Earlier this week, I spoke with Peter Hodson, the founder and head of research at 5i research but About what a weakening US labour market could mean for the markets.
>> This is one of those scenarios were good news is bad news and then bad news is good news. And so the market's been very worried about the labor market and labor pressure. And so to see some of the labor strength come off will be a positive sign.
And of course, if companies don't hire people, then their profit margins can actually improve, assuming their revenues are not falling apart as well.
So it's a little bit of good, little bit of bad. You've got a situation where investors are concerned about this looming recession, yet we're not there yet. And yet, the market's sort of valuing it as if we were already in a recession.
So if you compare it to '08, we were losing 400,000 jobs a month, and we're still creating jobs in the US.
So we're not quite in crisis mode, but investors are preparing for a crisis. That's what it seems like to us, anyway.
>> Now as this all unfolds, obviously this is what the Fed has been watching in terms of trying to control inflation, and our central bank, the Bank of Canada.
And they warned us all along, there'd be some pain in the economy, mostly pain in the labor market if we're going to tame those price pressures.
The soft landing, the hard landing, where does this take us?
>> I think we'll probably do soft. Really, the corporate balance sheets-- and we won't talk about some of the problems in the US in specific regions and sectors-- but on average, corporate balance sheets are in really, really good shape compared to past cycles.
Profit margins are good. You've got automation.
Robotics is really helping productivity. And you've got a situation where the labor market, even though it's slightly weaker this month versus last month, there's still a job out there if you want a job.
And so as long as asset prices sort of stay there and there's not collapse in housing, or there's a collapse in this, that, and the other, I think we're going to be OK. And I think the market is sort of worried a little bit too much about a hard landing.
And honestly, most recessions last less than a year and they're priced in ahead of time in the stock market.
So you're really looking at maybe a six-month window, if you want to exit and then come back in. And that might work once or twice, but-- >> Yeah, timing the market gets awful hard.
>> Exactly. It's not going to work consistently. So if you've got a dividend stock that keeps paying you money, you've got a company that's still making money, you don't really have to worry that much about what's happening. This is just a regular economic cycle.
Things are strong. They hike rates, slow things down, and carry on.
>> Let's talk a little bit about the labor market.
Because while it has been resilient through all this, you do get then a lot of headlines, and I'm thinking about the tech community in the States, like big numbers, 7,000 9,000, 10,000 jobs being trimmed at these behemoth tech companies. How do we put that in context with the overall labor market?
>> Well, first off, you have to wonder what these people were doing, if you can fire 10,000 people at one day. But a lot of it's coming from COVID. So COVID in the tech world, the demand surged and people were just scrambling to try and fill demand as everything changed in the pandemic.
And they went on a massive hiring spree on anticipation of that trend continuing.
And then when things kind of got back to normal a little bit, that's like, hey, we don't need another 5,000 engineers to build this new app. And so there's a lot of that going on.
And this is really interesting, because whenever a tech company announces a layoff, their stock usually goes up.
Because again, it's all about profit margins. And if you can save 10,000 people making very high salaries, these engineers, your margins are going to improve dramatically.
So that is good for the headlines. It's good for psychology. But let's be fair.
Most of these people that get laid off from a tech company, they're going to find another job pretty soon, pretty fast. There's still a shortage of talent out there.
>> Now we mentioned off the top that despite all the things we have to worry about that the S&P 500 is still in positive territory for the year. But if you look at it year to date, it's been a pretty choppy ride.
Should we expect that kind of volatility going forward till we sort of settle out all of our fears and try to find a path forward?
>> I think, so if you look at the VIX volatility index, it's back below 20. And it was spiking above 30 not that long ago.
So I think people are-- it's more of a calmer year. And so people have accepted the fact that rates have risen.
They've accepted the fact that inflation is higher than what everybody wants it to be. But now they're used to that.
And so I think the next part of the market will be what happens next. Do we enter a recession? Is it deep? Is it shallow?
Do we get another problem? Do we get an oil shock, like we had just the other day?
And so it's a situation where I think the inflation interest rate scenario, that's going to be old news.
It's going to be priced in, and the market will look at the next crisis.
>> For a while, for a long while, it felt like what the Fed was telling us about the path of rates and what the bond market was actually pricing in were pretty widely apart, widely divergent.
. I felt like, was there a brief week maybe at the beginning of the year where they came back together before they diverged again?
>> They agreed for about 10 days. And now the bond market is pricing in lower rates by the end of this year.
And I think that would be a little too aggressive in terms of easing yet.
I mean, the Fed's going to make sure that inflation's under control and the job market's under control before they do any sort of easing.
But I think we're on a path to seeing peak rates.
We might get one or two more hikes, and then we might flatline for a period of time.
And again, that's all about, it's about uncertainty in the market.
If the investor thinks that we're out of the rate hike cycle, then you can plan for that.
You can do some modeling. The analysts can sort of predict cash flows.
And it just becomes a little bit more of a normal market, where last year it was just a one inflation number and it really didn't matter if your company was good or bad or if you made money or didn't money. It was all about those one numbers.
And so now we're getting back to fundamentals. So it's much easier, as an analyst, to look at a company these days, because you're not going to get blindsided by something.
>> Yeah. We got another earnings season right around the corner, but we had one behind us. And I think heading into these earnings season, given the heightened volatility and the concerns we have, we say, oh, this is going to be the one where they come out with the tough medicine, tell us. Did we actually see that from corporate America?
>> We didn't. We were really expecting kind of a kitchen sink outlook, basically. Companies, everybody looking at the stock was aware of what's happening in the economy. And it was such an easy quarter for them to say, you know what, we're going to be conservative, it's going to be a tough year, it's going to be a tough quarter. We're going to take this writedown. We're going to fire these people. And that didn't happen nearly to the extent that we thought.
So there's two things that could happen from that.
Either the corporations have no idea what's going on in their business, or things are better than what they thought.
And I think it's the latter. You're seeing inventory get drawn down, especially in the tech world, some of the tech semiconductor inventory is going down, and profit margins are holding up.
And so we've seen quite a few companies guide up. And so if you're guiding up when everyone's worried about a recession, that's a pretty positive statement of confidence from that particular company. So that's what we're looking for right now.
>> What will you be looking at for the next earnings season?
Any sign that perhaps they were a little too optimistic in the previous one?
>> Yeah, absolutely. I mean, you have to sort of guide and then beat.
I mean, you have to sort make sure you can meet those expectations. But I think one thing to watch out for is going to be actually interest costs.
I mean, there's a lot of companies that have a lot of debt, and some have hedged it and some have not. And so I think you're going to see a big divergence in companies that have managed the interest rate cycle well and those that were caught offside and suddenly are getting absolutely squeezed because their interest costs have doubled in the past year.
So that's OK if your regular business is growing and you can sort of offset it with growth. But if you're not growing, then that's going to be a problem.
>>That was Peter Hodson, founder and head of research at 5i Research.
Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
Higher costs for materials and discounts in moving inventory weighing onmargins at Levi Strauss.
While the Jean apparel company did beat sales expectations in his most recent quarter, it's adjusted gross profit margin was down 360 basis points compared to the same period last year, so the stock is down a little bit more than 15%.
Now this margin pressure came despite Levi's having raised selling prices for many of its products.
Shifting consumer behaviours in the face of high inflation appear to be weighing on sales or Costco Wholesale. The company missed revenue estimates for its most recent quarter, noting it is seeing weakness and more expensive discretionary items such as electronics and jewelry. The high cost of living has seen many consumers shift their spending to essentials, such as groceries.
Right now you got Cosco down a little more than 2%.
The maker of Corona beer is providing investors with an optimistic forecast for the year.
Constellation Brands says demand for its premium beer brands remains strong in spite of inflationary pressures on consumers. The beverage makers also boosting its quarterly dividend payout to investors.
The stock right now up a modest 1%.
A quick check in on the market. We'll start your at home on Bay Street with the TSX Composite Index, 27 points in the green. Nothing too dramatic but on this last day of a shortened trading week, it is green on the screen. A little more than 1/10 of a percent.
So the border, the S&P 500 right now up 5 1/2 points, about 1/10 of a percent as well.
Got the price of oil holding over $80 per barrel, this after this week's surprise production cut from the OPEC nations. Earlier I spoke with Michael O'Brien, portfolio manager with TD Asset Management, to discuss with the move may mean for the Canadian energy sector.
>> Well, I think if you looked at what was happening to energy for the last month and a half, two months, up until the OPEC announcement, really, the narrative had been captured by concerns around the economic outlook.
So it was a much darker, much more bearish narrative, a lot of people focusing on if there is a recession, how much demand destruction.
And then the weak oil price kind of made people just think that this was definitely where we were heading.
I think the OPEC announcement, which caught people a bit by surprise, it basically reminded investors that this is a two-way street.
People were getting a little too carried away with all the bad things that could happen.
What investors kind of forgot, and the Saudis reminded us in no uncertain terms, is there's somebody looking out for this market. OPEC, I think, communicated in no uncertain terms that they don't want to see oil prices with a 7 in front of it or a 6 in front of it. They put their money where their mouth is.
They're going to defend these prices.
And that shifts the conversation or the debate into a much more balanced one now.
Obviously concerns about the economy haven't gone away.
Concerns about potential impacts on demand haven't gone away.
It's just we're now reminded that the supply side of the equation is quite constrained, and the leading players are going to do their part to make sure that oil prices don't fall out of bed completely.
When you bring this back to the stocks, we're sitting here today, oil's in the $80 range.
And when you think about light-heavy differentials in western Canada have improved a lot-- they spent most of the winter between $25 and $30 discounts, today they're $14, $15.
With that kind of a backdrop, these companies are very profitable.
Despite all the negativity, despite all the concerns around the economic and macro headlines, we're left with a basket of stocks that is still very, very profitable and will be returning a lot of cash to shareholders one way or another this year.
>> So energy has its own thesis to trade off of now.
Because up to, I guess, the weekend and the surprise production cut, it was-- the concerns that were weighing on the financial sector seemed to be weighing on energy as well. Have we shaken off-- I mean, I was showing a US regional bank to the audience to start off with, and they seem to be a bit under pressure. Have we moved past that story, or are there lingering concerns?
>> I think what you're seeing today is there are lingering concerns. JP Morgan's CEO Jamie Dimon, who's kind of viewed as the elder statesman for the American banking industry, his letter to shareholders today, his prediction was that we're not done. There'll still be some bumps in the road as we go through this.
If you think back to the financial crisis, it seemed to come in waves.
So I think we'd be remiss not to expect a few flare-ups as we go forward.
That said, I do feel that the authorities, the central banks, the regulators, move pretty quickly in this situation.
Things do seem to be stabilizing in terms of at least the data investors can see around deposit flows and what the bank lending facilities are being drawn on in the US. They would indicate that things aren't back to normal. There are still some pressures out there.
But at least those worst fears seem to have been headed off. This idea of cascading bank runs does not seem to be happening.
Deposit flows are stabilizing.
So I would say we're not out of the woods, but clearly we're in a better place than we were two or three weeks ago, which is what we would have hoped, in other words, that you can contain this, that one or two banks that mismanaged their balance sheet aren't going to infect the whole system.
>> Yeah, one of the words I was hearing off the bat whether it was Silicon Valley Bank or Signature or the others, was "idiosyncratic," that these banks sort of organized their affairs in a way that wasn't the most prudent way, and that other banks weren't going to fall to the same-- into the same trap, really.
>> Yep. And anybody who lived through the financial crisis of 2008-2009, we all learned the hard way to be careful when you say something is idiosyncratic.
Because what often appears to be idiosyncratic, it turns out to be not so unique after all.
>> And maybe other people were up to the same thing, yeah.
>> Exactly. And so in this case, again, I think we're in a good place here. And when you do go back and do the autopsy, so to speak, on Silicon Valley Bank and what went wrong, I mean, there are some glaring mistakes that they made. And it is a unique franchise where it was far too concentrated with a specific customer base, venture capital. Their deposit base wasn't diversified. Their assets and liabilities were mismatched.
There were some glaring mistakes there.
And it is a very idiosyncratic situation.
However, some of, I guess what I would say the root cause of what forced this on Silicon Valley Bank, which is a rapid rate hike cycle, that is not unique to Silicon Valley Bank. And some of the pressures that we saw that impacted a number of US regional banks very hard, to a greater or lesser extent, you can find those same impacts across many of the banks.
And one of the areas specifically that people are looking at right now and investors are-- with a very microscopic attention to detail is these assets on their balance sheet.
So in other words, you took in a deposit, and you invested it in, say, a 5-year US Treasury or a 10-year US Treasury back when interest rates were at 1% or 2%.
That wasn't unique to Silicon Valley Bank. They did more of it. It was more egregious.
It was less well managed. But to a greater or lesser extent, you're going to see that in a lot of the other banks.
And so that's where it really becomes important, as an investor, is to try to differentiate between the situation Silicon Valley Bank found itself in and the other banks that you want to own, you want to invest in, or you do invest in.
And so we'll flow this into the Canadian Bank discussion-- >> I wanted to ask you about that, right?
Because we're talking Silicon Valley Bank. We're talking US financials. Then we might talk Credit Suisse, and we're talking about the other side of the world. But back here at home, our financials did feel some downward pressure because of all this.
>> Absolutely. And again, the root cause of all these issues is a very rapid rate hike cycle, both in the Bank of Canada and the US Federal Reserve. That creates pressure on the system. But then when it comes to, OK, how do we differentiate? How do we separate the banks that are in real trouble versus the banks that are going to be more resilient?
I mean, I could go down a long list in terms of why the Canadian banks are different.
But I think the most basic and simple difference is if you look at the nature of our deposit base for the big five, the big six banks, very diverse, very sticky deposit bases.
Whereas Silicon Valley Bank, the root of the issue there was you had massive depositor flight, and basically the vast majority of Silicon Valley's deposit base was venture capital investors and tech startup companies that were burning cash rapidly and needed their money back.
If you look at, whether it's TD Bank, Royal Bank, Bank of Montreal, the sources and the diversity of the funding sources that we have to run our banks here in Canada, far more stable. And so everything that I've been hearing to date, you're not seeing the same type of disruptive drawdown of deposits in the Canadian banking system.
And at the end of the day, if you don't have that pressure on the deposit base, there's no reason to worry about some of these other problems that Silicon Valley Bank had with held to maturity, securities portfolios that were underwater. If you don't have the deposit pressure, you can hold those. It's not an issue.
So I think, at least what we've seen so far, "idiosyncratic" a dangerous word, but when you sort of flow it and compare it to the Canadian situation, I think the Canadian banks are in in far better shape in terms of that liquidity pressure.
>> That was Michael O'Brien, portfolio manager with TD Asset Management.
Now, let's get our educational segment of the day.
Index funds are one potential asset class and investor may consider; if you're interested in researching the space, WebBroker has tools which can help. Joining us now for more is Caitlin Cormier, client education instructor with TD Direct Investing.
Good to see you. Walk me through it all.
>> Great to see you too, Greg. One thing I'm going to cover today is talking about index funds. A lot of investors may choose index funds to add to their portfolio, add diversification, kind of in a quick and easy manner. Let's go ahead and hop into WebBroker and see how you can find these particular types of investments within the platform.
Today we are going to go to research. We are going to go under screeners and once we get to this page, we are going to choose specifically ETFs.
So once we get here, we are going to go ahead, there are some featured screens that you could look at if you want to but for today, let's go ahead and create our own custom screen.
So I have a couple of things that I'm going to choose today for categories. I'm going to go first to index and I'm going to choose to only add index funds, so show only index fund.
You can see 2700 matches for index funds so we will have to narrow it down more than that otherwise you will be here all day.
Let's go in underperformance, let's go ahead and choose tracking error, this is basically measuring how close this particular fund itis going to track the underlying benchmark. Left click to add and let's say in this case that we are looking for the lowest tracking error, meaning that it stays pretty true to the underlying index. Let's go into fund category as well.
So fund category, and for today, let's just choose, we are still at 416, let's choose Canadian US equities.
Let's scroll all the way down here, we are alphabetical, so we are going to go all the way to the bottom.
Canadian US equity. Alright. So we got 37 matches.
I'm going to actually unplug your mutual funds so we only see ETFs and we are down to 31.
That's not too too bad. Once we click to view results, this is showing us all of those results that match the specific criteria that we put in on the previous screen.
so they are all based in Canada, they are all index funds.
It shows their tracking error and the category which we have already chosen.
We can see there's a whole host of different ETFs here, including those S&P 500 type of ones as well as other diverse vacations, large-cap, ESG funds, total market funds. There are lots of different ETFs that fall under that criteria.
But we have at least somewhere to kind of go as far as doing a little bit more research. Within this page, we can see a ton of information about these funds. We can simply click through and see some of the additional information that's available.
And we can also go back and say, for example, if we want to see it like the lowest tracking error ETF, we simply click tracking error and it will rearrange our results based on lowest to highest tracking error, for example.
>> Okay, so we're digging down, as you said. He took a very big number and pared it down to a smaller group.
You're going through all of this, you see some funds, you want to do a little bit more research. How do you do that?
>> Yeah, so maybe you are looking specifically for an S&P 500 ETF, for example.
We saw a few of those in our results. Why don't we go back and take a peek at those?
I'm just going to scroll through our results here.
Here's one that's S&P 500.
Let's just see, we've got another one here. Another when here.
And this one.
Okay. So let's go ahead and choose those for ETFs and what I'm going to do is I'm going to click this compare button.
This will take me out of my screener and into a direct comparison of these four ETFs.
So always important to keep in mind, you want to be able to compare it like investments because if they are completely different, then the comparison isn't usually that relevant so it's better to have them be a little similar to one another so that you can really make a good comparison.
Here we've got information from net asset value, MorningStar rating, how much money they have in assets under management, the MER, pretty comparable for these funds for example.
If we go down again, we can see information about the managers, how long they've been there. We can also see performance, for example, and compare performance of these funds.
Again, there may be more to the story than what we see directly so you always want to do a little bit further research than this but at least it gives you a kind of starting off point to see some of the information about these funds and kind of made to a further determination as to which one you might want to look into a little further, do that further research and then potentially at your portfolio.
>> Great stuff as always, Caitlin. Thanks that.
>> No problem.
>> Caitlin Cormier, client education instructor at TD Direct Investing.
And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Amid the recent market volatility, their three themes that investors may want to keep in mind.
That's according to James Dixon, director of family office solutions at TD Securities.
He joined me earlier to discuss those themes and teach us a little bit more about what his team does.
>> So what we try to do is deliver the full suite of Capital Market solutions to family offices and ultrahigh net worth individuals.
We do that by connecting with our partners, private banking, PIA, PIC, our TD Family Office, and of course, just directly through external family office.
So we really aim to just bring an institutional quality of coverage to the space, something that we feel the space has been lacking for a while.
>> OK, so that obviously puts you in a very interesting position in terms of watching sort of everything in the world that's happening and trying to distill it down to an essence. So you've got three big themes here.
. I want to start with what central banks have been doing and trying to tamp down inflation by hiking rates. And I just found such an interesting wrinkle over the weekend that, as we talk about inflationary pressures, they get OPEC in as partners with a surprise production cut. I mean, how does this all play out?
>> Yeah, you know, it's been a very, very interesting story. We've seen so much tightening over the last year, far more than we thought initially. And we saw all banks continuously revise their targets higher as central banks across the globe ramped up to fight inflation.
Now we're in this position where economies are breaking, and because rates have just been too high.
The question is really, does inflation continue to trend lower like we've seen, or is it sticky? On my desk, we have held the narrative of a sticky inflation theme persisting. In the short term, we do think the trend is lower, even with this OPEC cut.
I mean, it's a big cut, over a million barrels.
We think, overall, the inflation levels out around 3%, 4%.
And there's a few narratives driving that.
I mean, the oil supply is clearly a big issue, and OPEC Plus has made that worse.
We also think that we continue to see reshoring of supply chains on the back of COVID. We also think that this remilitarization efforts around the globe on the back of the war in Ukraine is a really big deal.
And this should keep demand for commodities high, and on the back of that inflation.
And I think, overall, central banks might actually even be OK with that because if you have a ballooned balance sheet, the easiest way to get rid of your debt is just to inflate it away.
>> OK, so an interesting point there, and obviously interesting developments to keep a track on.
Now that we've-- for the longest time, all we could talk about was inflation, the central bank action.
And then in the recent weeks, something stole the spotlight, the banking crisis, the failure of some US banks, or the whole Credit Suisse situation. Now, what should we be thinking about in terms of that?
>> Well, it's interesting. Initially, I thought about rehashing what actually caused this banking crisis. But I think what's more pertinent is, what's next? There was some chatter about a run on A1 bonds after the big write down with Credit Suisse.
But I think the bigger issue right now is a theme that's gaining momentum, and that is commercial real estate. These regional banks have circa 70% of commercial real estate loans. Now, this is a big deal.
Commercial real estate has been struggling because of work-from-home policies, a change in the way consumers spend.
A lot of it's online now, so revenues are down.
Financing costs are up.
And at the same time, we have a lot of loans maturing.
To put things into perspective, just this year, there's $450 billion of loans maturing.
And the pain doesn't end there. In the years to come, it's around $550 a year.
By 2027, that's around $2 and 1/2 trillion in debt that's maturing.
And this is a big deal because commercial real estate works a little bit different to residential real estate.
These loans are not amortized, so there's usually a balloon payment at the end, whether it's in 5 or 10 years.
And when it comes to refinancing these loans, I don't know how you do it because the bid-offer spread on these buildings is huge.
The banks say they're worth one amount because revenues are down, and the owners say they're worth something completely different.
So I think this is the underlying issue now that we are all trying to chop through.
Are we facing a balance sheet crisis, or is loose policy going to alleviate the problem we have and we drive on?
Certainly, markets seem to be thinking loose policy will be OK.
>> OK, so two interesting things. We promised three themes, and the big one, of course, as we plow ourselves through all of this, try to bring inflation down. Live with higher borrowing costs.
Worry about some of those US regional banks.
People are trying to figure out, are you getting a recession? If you do, what kind of recession is it going to be?
What are the signs that they're telling us?
>> Well, it's interesting. Everybody's been pointing to 2s/10s that have been inverted for a while and 5/30s.
5/30s have actually started to steepen again, which suggests inflation is around-- sorry, recession is about six weeks away.
I think we're in a very difficult position. You've got tighter lending standards, which slows growth.
You've got weaker consumer balance sheets. So I think the signs are there.
I think it's going to be a recession. The question is how hard it's going to be. Is it soft, or is it a hard landing?
My gut says it's probably a softer landing, and just because we believe that China reopening is a big story.
And we've seen some strong growth there, and we think that they keep commodities bid, and they could fuel a bit of growth.
Is it enough to keep the world out of recession? We don't think so. But certainly a soft landing is on the cards.
>> How keen would the central banks be to race back to the rescue? This is sort of the job, but there's been some argument made that as they try to wrestle down inflation, they're going to tolerate, perhaps, a little bit more pain in the economy than they would during other cycles.
>> Correct. So we believe that there's not enough priced in terms of cuts. We saw huge hikes over the last year.
It started at 25. Then it went to 50. Then it was 75.
And we've just continued to see pain in the economy.
And all those hikes haven't even fed through into the data yet. So we believe that when the Fed starts to pivot, it's going to be aggressive. They'll have to unwind as quickly as they hiked.
>> So with all of this in mind-- and that is a lot-- a nice breakdown with what the state of the world is right now, what it means for investors, what should investors do about positioning themselves in an environment like this?
>> I've got to be careful of how I answer this one, Greg. What we have seen is we had a look at all the data since the 1930s. And what we have seen is when bonds and stocks sell off in lockstep, typically in the year that follows, bonds outperform stocks.
Will that happen again? We're not sure. If there is a recession, bonds tend to outperform stocks, just on a flight to safety. And if there is a recession, things like consumer staples, health care, utilities, those are the stocks that outperform. For commodities, well, I think you've got to ask yourself if you believe in the militarization theme that we do. Do you believe in the rebuilding of critical infrastructure? Because if you do, then commodities should outperform.
>> That was James Dixon, director of family office solutions at TD Securities.
Let's check in on the markets right now.
We seem to be building to the upside again. Nothing too dramatic but you got 30 points on the shortened trading week for the last day of the trading week. Of course, tomorrow is a holiday. We are up a little more than 1/10 of a percent. I noticed Nutrien was under pressure earlier. I want to check in on the name.
It still hasn't turned with the broader market, 9284, you're down about 3 1/2%. First Quantum was weak earlier in the session. It is coming off the lows but at 3162, it is down about $0.16 per share. So the border, we got the S&P 500 moving higher to the tune of 10 points, about 1/4 of a percent of the tech stocks seem to be getting a bit of a bid today.
You are up on the NASDAQ to a tune the tune of almost half a percent were 51 points.
Alphabet, Google, it's one of the winners in the tax base. Hundred and seven bucks per share today, it's up to have bucks or about 2 1/2%.
The US vehicle sales began 2023 on a strong footing, easing supply constraints and continues to drive some improvements in production. Our Anthony Okolie has been digging in on the latest figures for March and what TD Economics makes of it all. Anthony.
>> Thanks very much, Greg. It March vehicle sales fell 1.2% to just under 15 million annualized units.
That came in slightly below consensus forecasts. Now when we break it down by the type of vehicle, light trucks edged higher by 9.7% year-over-year.
And light trucks again accounted for the bulk of March sales at about 79%, that's equal to March 2022.
with dealership inventories continuing to bounce back from last summer's lows, we also saw an improvement in the average daily selling rate which rose to about 50,000 cars sold across 27 days, that's up from 46000 Daily Rate in March of last year. Now TD Economics does note that while inventory levels have improved, they are are still about 55% below the March 2019 levels.
When we look at the best-selling models in March, the light trucks gained the top three spots with the Tesla model Y sat in fourth position.
Of course the Ford F-series was number one again, followed by Chevrolet Silverado and ram pickup trucks.
Running up the top 10 were Nissan, Honda, Toyota, Ford and GMC. Tesla's model fell out of the top 10 last month.
Sales continue to trend upwards compared to one year ago because we are seeing supply improvement and that's helping to offseta lot of the pent-up demand for vehicles that we've seen since the beginning of COVID.
Now, as on production increases this year on improving supply chain pressures, TD Economics is that inventory levels are also expected to continue to improve gradually over time. Greg it?
>> Okay.
Let's to take on what happened and what about the rest of the year and perhaps some risks to the outlook for the year?
>>'s over 2023, TD Economics expect sales to rise 12% year-over-year to just over 15 million units. Now while this is an improvement over 2022, it still lags the pre-pandemic levels of about 17 million units.
On the production side, they are expecting production to increase 5.2% year-over-year to just over 10 million new units. Supply constraints continue to ease.
They expect full normalization to pre-pandemic levels, that is expected to happen in 2024.
Now in terms of risks, one of the risks is of course inflation.
If inflation remains higher for longer, that could prompt the Federal Reserve to raise rates further. Of course, that could lead to higher levels of demand destruction and therefore lower sales for vehicles.
They also point to an additional stress, if they do see additional stress, in the banking sector. At that could cause lending conditions to tighten more quickly and of course that would weigh on demand going forward.
>> Thanks, Anthony.
>> My pleasure.
>> MoneyTalk Anthony Okolie paid stay tuned. We'll be having a show tomorrow because of the holiday but on the other side of the long weekend, on Monday, Jim Kelleher, director of research at Argus Research will be our guest.
He wants to take your questions about technology stocks. A reminder that you can get a head start with that. A three day headstart, really. Just email moneytalklive@td.com. That's all the time we have for the show today. On behalf of me and Anthony here on the desk and everyone behind the scenes that brings you the show every day, thanks for watching, and we'll see you on Monday.
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