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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, TD Asset Management's Hafiz Noordin will walk us through the surprising scenario that flood treasury yields close to that key 5% level. We will discuss the outlook for the commodity space and mid conflict in the Middle East with Jennifer Nowski from TD Asset Management. MoneyTalk's Anthony Okolie will have a look at a new TD Economics report on the state of the Canadian housing market. Plus in today's WebBroker education segment, killing Cormier will take us through how markedly GICs work and where you can find them on the WebBroker platform.
Before we get to all of that, let's get you an update on the markets. We will start with the TSX Composite Index.
We are down to the tune of 60 points or 1/3 of a percent. percent. percent.
percent. got Cenovus at 2680, down about 1%. Nothing too dramatic but taking some points out the top line. Even though the price of gold is pulling back in some money names are as well, IAMGOLD is standing out. At the box and $0.45, it is still in positive territory but it is off of its highs of the session. Now south of the border, we've got the US Federal Reserve on deck, a lot of central bank action and we are going to dig into it.
Next week we have their preferred gauge of inflation out. We have a lot of earnings as well, probably more of a driver of the market this week. Some of the big tech giants have flees the streets and others have not. Today seems to be a pleasing day, the S&P 500 is up 1/5 of a percent.
The tech heavy NASDAQ which has had a rough go in the last couple of sessions gaining back some lost territory, up 138 points about .4%.
We are hearing from some automakers out there in terms of demand for EVs in this environment.
And it has sort of been the stock up.
You've got 4 to 1031 per share, down a little more than 9%. And that's your market update.
Well, that inflation gauge favoured by the US Federal Reserve did move higher in September but even then it did not slow consumer spending.
MoneyTalk's Anthony Okolie joins us now with all these details. A pretty key reading here for the Fed on deck next week.
>> That's something the Fed will be looking closely. We will start the headline number. Personal consumption was up .4% month over month, the same pace that was out in August. On an annual basis, it's pretty steady, 3.4%. But the feds preferred price gauge, excluding food and energy, it takes into account the substitution behaviour. If you are substituting lower-priced goods for expensive goods, the CPI just measures cost without regard to substitution. So the PCE Index is a better reflection of the cost of living standards. It is so the PC price deflator actually accelerated on a month over month basis up .3% versus a soft reading in August of .1%. So that is kind of the bad news. On an annual basis, or PCI inflation it slowed year-over-year versus that the 3.8% we saw in August.
This represents a small decrease from 2021. If you are starting to see a bit of disinflation where prices are coming down.
They are still high but slowly coming down.
I think the pre-PC print shows inflation is heading in the right direction, that kind of supports the feds a wait-and-see status on the impacts that inflict tourist rates are having on inflation.
>> We will see next Wednesday when we get the US Fed making Inuit rate decision. On top of this preferred gauge, we have a GDP report out of the states. That economy is still moving along pretty strongly.
Right now, what is the expectation? As we have for this decision next Wednesday, what is the street thinking?
>> Right now the market is basically pricing and no change from the Fed. TD Economics believes that's going to be the case as well, we are likely to see no change from the Fed. The Fed left the door open to potential hike in the December meeting. Of course between November and December we will get a couple of rates on inflation to see if that disinflation trend is continuing. But in terms of next week, market expectation is for no change.
>> Okay. Big week this weekend big week next week. Thanks for that.
>> My pleasure.
>> MoneyTalk's Anthony Okolie. Anthony will be back later in the program to look at the help of the Canadian housing market.
Meantime, 10 year treasury yield south of the border has broken through 5% on a couple of occasions and then pulls back.
Of course we have investors today ingesting that PC report and other economic data. The question then becomes, where might the bond market go from here after this recent dramatic rise in rates?
Hafiz Noordin, VP, director and active fixed income portfolio manager TD Asset Management joined us earlier to discuss.
>> It's been a big move from about 4% to around the 5% level of the US 10-year.
Usually what causes bond yields to rise is you either have tight monetary policy, so rising interest rates from the central bank, or you'd have loose fiscal policy-- so large borrowing from the government, which would mean that rates have to go higher to fund that.
The surprise here is we've had both. And so I think what was probably more expected this year was the tight monetary policy.
We're getting the same story in terms of the data, like you said, of strong growth led by the US, inflation that is, although it's declining, it's still well above the 2% target.
And then you have tight labor markets. And that's causing wage growth to stay firm and fueling some concerns that it could feed into another round of inflation. But that's the part that was generally known.
It's persisting for longer than what might have been expected. But what was a bit of a surprise this year is that looser fiscal policy at a time when, generally, you would actually expect fiscal policy to get a little tighter.
The deficit in the US, in particular, should have been lower than 5% of GDP.
Instead, it surprised closer to 6% to 7% of GDP. So that's just a lot more money that needs to be borrowed in the market.
That's been fueling this latest move, in particular.
>> If we're talking about budget deficits, larger than expected spending, larger than expected out of Washington, is it time to start discussing bond vigilantes on these shores? I know they showed up in Britain last year. Are they showing up in the States?
>> Yeah, I think to a certain extent. The marginal buyer of bonds has changed from what was there before. In the past, we were used to the central bank with its QE programs being a consistent buyer of bonds. We were used to US banks being consistent buyers and foreign sovereign wealth funds and foreign reserve managers from other countries generally being pretty consistent in the US bond market.
They're all stepping back for different reasons. We know there's quantitative tightening, US banks don't have as much deposits as they used to. And so with that, we're seeing more the private sector being the one to step in as the marginal buyer. And they're definitely more price sensitive.
So I wouldn't necessarily say we're in a period where it's complete vigilante mode.
It's not like what we saw, say, in Greece or Italy, but definitely more price sensitivity. And therefore, more focus on this idea of what's a fair value of government bonds in the US given the fiscal outlook and given policy rates in the central banks have to stay higher for longer.
>> Now, I come from a journalism background, so we love numbers like 5% or 4% because it's easy in terms of storytelling. Is there a significance in the real world, in the fixed income world, to a 10-year yield at 5% or higher?
>> There is actually merit to it because psychological levels actually make sense.
Because at the end of the day, the market is just a bunch of humans, all of which have behavioral biases. And so the 5% level has stuck out. Again, it's a round number.
But the other piece to think about is that the market tends to look back at a historical periods of when the US 10-year traded at 5%. And what you can point to is the 2006 to 2007 period before the Global Financial Crisis. The peak in the US 10-year at that part of the cycle was around 5% to 5.2%. So the market has repriced yields higher and is now thinking, OK, are we similar in terms of this cycle compared to 2006 to 2007?
You can make the argument that growth was very strong then as it is now. But it probably had a bit of higher potential growth in the global economy sense. You had a much stronger China, a much stronger Europe.
And so you could see why rates were higher back then.
But on the flip side, you also had less government debt compared to what you have now. So it's kind of like you've got lower potential growth now but higher government debt and higher deficits. So I think those are sort of balancing themselves out to say that 5% might be fair for the near term.
But I think what we have to look forward then is, what happens when the labor market starts to crack a little bit? Where do rates go?
And we still think there's more room cyclically for US yields to come down.
>> The world continues to become a more dangerous place just in the past couple of weeks-- a massive geopolitical event in the conflict in the Middle East. You put that on top of what was already transpiring for quite a bit of time with Ukraine and Russia. There's a lot of risk out there. And then bonds, traditionally a haven play, could we see a haven play for bonds that might bring down yields in the next little while?
>> They should over the long run continue to provide that safe haven status in a portfolio.
That hasn't worked for the last few months, for sure. Correlations with bonds and equities have gotten more positive, so bonds and equities are moving up or moving down together.
And largely, it goes back to the idea that there are concerns right now about funding these fiscal deficits and the large amount of issuance. So I think that's been skewing those correlations. So right now, we've seen the safe haven status be more evident in the US dollar and in gold.
I think those are two markets where we've seen that correlation be more negative relative to equities. But I think bigger picture, in a longer time frame, bond yields will continue to still be a major flight to quality asset, particularly US treasuries just because you generally still have a lot of foreign investors coming into the US market when they are trying to seek protection from their capital.
>> Of course, you mentioned earlier about central banks got this ball rolling about a year and a half ago. We heard from our central bank yesterday. We're getting the Fed next week. I think we got the European Central Bank. So there's a lot going on in that space.
What's intriguing to you? What's standing out for you?
>> Yeah. So I would glean from all of those that they're in the similar stage of, call it, a hawkish hold, right?
So they've done a lot of tightening.
They're seeing growth data staying strong but not necessarily running away. And they're seeing inflation coming down from the peaks and generally trending back to target but at a fairly slow pace.
So this idea that they want to pause, and be at these very restrictive rate levels, and see how it plays out, but also commit to keeping those rates higher for longer.
That's the balance they're playing of not sounding too dovish by pausing, showing that they have commitment to getting inflation down. And that may mean that there's no rate cuts anytime soon. For the Fed and Bank of Canada, in particular, really looking to the second half of next year for when we could see rate cuts, if inflation does meet the targets that they're seeing for next year.
>> That was Hafiz Noordin, active fixed income portfolio manager at TD Asset Management.
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.
Big week for tech earnings. We have shares of Amazon in the spotlight. The e-commerce giant easily beat earnings expectations in its latest quarter, thanks in part to cost-cutting that boosted operating margin.
Amazon also grew sales by 13%, revenue coming in net for those three months at $143 billion. The stock of 8%.
This rate seems please. Corus Entertainment suspending its dividend as it focuses on repayment of debt in a tough advertising environment. While the media company to be quarterly estimates, TV advertising was down 10% year-over-year.
Course as it affects ad revenue to remain pressured by several factors, including the Hollywood strikes and the overall economy. The stock down to almost 29%.
Shares of Intel or moving higher on an earnings before its most recent quarter.
The chip maker says it's also on track to cut some $3 billion in costs this year as part of its broader strategy. CEO Pat Gelsinger did acknowledge some customers are moving investment to Nvidia's artificial intelligence chips, which has been a concern for investors about Intel's product. The street is rewarding the name.
At 3564, he got Intel up almost 10%. Let's check in on the markets. We will start here at home on Bay Street with the TSX Composite Index. It's up a fifth of a percent. South of the border, the S&P 500… Since I said the words S&P TSX comps that I have it to the downside right now.
Several key commodities have seen volatile price action amid conflict in the Middle East. While markets have been shaken and they are term, with the longer-term outlook for oil and gold?
Earlier I was joined by Jennifer Nowski, VP, director and portfolio manager at TD Asset Management to discuss.
>> Yeah, so the oil price did increase as the market started to incorporate a higher geopolitical risk due to the conflict in the Middle East. The key, though, for the oil market balance over the next year really comes down to whether OPEC+ and, in particular, Saudi Arabia maintains its discipline in matching production with what they're seeing in demand.
Now, starting off on the demand side, this year has actually been a fairly strong year for oil demand growth. And that's because China's lockdown ended. And its oil demand rebounded fairly strongly. In 2024, you might see more modest demand growth. And that's where we'll probably see a resumption of the oil price being more correlated with global GDP growth.
Now, turning to the supply side, this year's supply growth in oil was really driven by the US production. But this was offset by OPEC+ restraining its production and, in particular, Saudi Arabia doing a series of voluntary production cuts.
Now, the challenge for the oil market is that there is some spare capacity now at OPEC+, much of it with Saudi Arabia. So to keep the oil market balanced, they're going to have to continue to be disciplined on how they manage that production capacity.
Now, in terms of geopolitical risk, the concern the oil market has is if the conflict were to impact either key oil infrastructure or transportation routes in the region, the other issue is that Iran has been exporting more oil. In response to the conflict, the market is looking to see if there's any changes in Iranian sanctions or reinforcement of them.
However, I'll talk briefly, though, on the energy companies. Now, the energy companies are in very strong financial condition. The high oil prices we've had for the past couple of years have allowed them to really significantly reduce their leverage. So debt is quite low right now.
And free cash flow is still very strong.
Now, there has been some more M&A activity in the sector. But I'd say for the group as a whole, the producers still maintain a disciplined focus on low production growth, keeping that strong balance sheet, and returning cash to shareholders.
Now, the oil stocks will continue to take their cues from the oil price. However, with about, call it, $80 WTI, that would generate a free cash flow yield on some of the larger cap names in the high single digits to low double digits. So that's still very healthy. And I would expect much of that would be returned to shareholders in the form of dividends and buybacks.
>> You briefly mentioned China there. How concerned should we be about the state of their economy? There's a lot of moving pieces there.
>> So China is about 16% of global oil demand and about 50% of demand for some metals. So it's very important to the commodity markets. Now, broadly in terms of how the Chinese economy has been doing, I'd say at the beginning of the year there was very high expectations for a big rebound as the COVID lockdowns were ended.
However, the recovery has been more tepid than that. And the particular challenge with China is its property sector, which is working through some debt issues.
Now, the Chinese government does want to generate economic growth. However, they don't want to create overbuilding or excesses. So in the past where they've pursued massive stimulus programs, this time it's been much more targeted stimulus measures and rate cuts.
And we're starting to see some stabilization, though, in the Chinese economy. The recent data released in September showed some retail sales growth.
Electricity consumption is up. Deflation is less of an issue, just to name a few.
Focusing more on the commodity demand side, I spoke already about how oil demand did rebound. Next year, it might be more tied to economic growth. On the metals side, though, that's perhaps outperformed expectations. So while property has been a headwind for metals demand, this has been more than offset by China's investments in renewables and electric vehicles.
>> All right. So we use the word "metals" there. Let's talk about the precious metal that everyone gets concerned about, gold.
Amid this heightened geopolitical risk in the past couple weeks, we have seen a haven play into there. What do we make of gold right now and perhaps where it might be headed?
>> Yes, taking a step back, if you look at the gold price over the past couple years, it's been rather range bound between about $1,800 and $2,000 an ounce. And that's because the main drivers of gold being the real yield US dollar and demand factors, they've painted a more mixed picture at time.
Now, there has been a rally in the gold price lately, as you said. And that's been driven on this flight to safety bid.
However, if we look underneath the pictures, it's still a bit more mixed, starting with demand. Demand has been more tepid. If you look at the physical gold ETF, that has been seeing outflows year to date. And I'd say we haven't seen a clear inflection or definitive stabilization in those flows yet. That's something we'll continue to watch.
The other factor is central bank buying.
Now, central banks have been net buyers of gold for the past decade-plus. Last year was a particularly strong year for central bank net buying. This year it's hard to predict how much they'll buy in any one year. But it likely might not repeat last year's highs.
Now, turning to the real yields, there's been a really big move in real yields. The US 10-year real yield has gone from, call it, 1 and 1/2% at the beginning of the year to about 2 and 1/2% today. So really big move. And that's a headwind for gold because gold pays no income. So that's your opportunity cost.
What the market is watching is rates and what the Fed does. Now, the Fed is very committed to bringing inflation down. And the risk there is that rates remain higher for longer. So this headwind for gold could continue. And the market will be watching closely for any change in tone from the Fed or direction in rates.
>> That was Jennifer Nowski, portfolio manager at TD Asset Management.
Now let's get to today's education segment.
Joining us now with more, Caitlin Cormier, client education instructor at TD Direct Investing.
Great to see you. Let's talk about market linked GICs. What are they all about?
>> Yeah, absolutely. They are an interesting little product like a traditional GIC in a lot of ways, meaning they are covered by CDIC, Canada Deposit Insurance Corporation, which is one of those key things that GIC investors typically are looking for, a little bit of that comfort as far as if anything would happening to the issuing institution.
There is some kind of guaranteed interest but there are some things that are different because there is a bit of exposure to the market.
So let's pop into a broker and take a closer look at these investments.
What I'm going to do is, I'm going to click into our research and go under the GIC Rate Sheet. Research, GIC Rate Sheet.
Once I get here, I'm in a go ahead here and click on the market linked GICs.
You will see here that there are both three and five year terms for market linked GICs on the far left hand side.
We can see also when we look at the returns there's both a minimum and maximum return. So this is different from your standard GIC. They are also quoted in total returns as opposed to annual returns. Typically you would see an interest rate just for one year. These interest rates are actually for the entire length of the GIC. So what we will see here is a range. The first number is your guaranteed minimum, this is what you will get as far as a return on the GIC for the term. For example, for the three year term, you will get a 10% total return guaranteed for that investment. There is also a potential to have your maximum return which can be viewed like a bonus interest. What that bonus interest is tied to is an underlying index.
You can see the different indices here in the middle that her legs to the different GICs. For example, the second one down is linked to the S&P 500, so the 500 biggest companies in the US. For this particular GIC, the US top 500, it's a three-year term. Your guaranteed minimum interest is going to be 7.5% and you have the potential to earn up to 25% depending on how the S&P 500 does.
Basically what this means is if you buy this GIC and that underlying index increases by 25% or more, you will receive the total maximum return at maturity.
If the GIC increases by less than 25 but over 7.5, you'll get whatever percentage increase that the index has achieved, so let's just say it achieves 17% returns, and increases 17% from the time that you purchased it to the time it came do, then you get a 17% return.
If it is 7.5 or less or even negative, you are so went to get that guaranteed minimum of 7.5%. It's a hybrid thing where it has some features of a GIC but also has the potential to have some bonus interest depending on how that underlying GIC actually performs.
Or index, sorry, how the index performs.
>> People might be wondering if they buy a product like this, over the course of holding it over those years, how are they doing? They might be curious about that and what kind of return they might get by the time the term is up.
>> Right, yeah, it's definitely something to consider for sure. The one thing I will always caution is that the return that you get is based on the date the purchaser, whatever the level of the index is, and the data comes due. It doesn't matter if it goes up by 300% and goes down to -5, it's beginning versus and and that's it.
In order to keep an eye out, we happened to WebBroker and we are going to click on research. On the left-hand side we are going to go under markets and click on indices and then we can actually select whatever the underlying indexes for that particular GIC. So with the S&P 500, we can click on that when we find it here in the list and then towards the bottom of this little box we are going to click on charts so we can actually chart the performance of an index. I'm just going to remove a couple of extra things I had on there.
This is showing me a one year term but let's just say I bought a GIC a couple of years ago so I could go back for example 3 years, I could find the date that I actually purchased. You can see my date is showing here, my open and close numbers are showing for the index. I see for example maybe you purchased it on April 9, 2021, I see the close that day was 4128 versus whatever day it might come due, I find out or currently what the level is so I find the difference between those two numbers and see if it has gone up or down and of itself, what percentage it's gone up to get an idea of whether I'm currently in a position where it could pay out my maximum or if it has some room to grow before I get to that return.
>> Alright, great stuff as always, Caitlin.
Thanks for that.
>> Thanks, Greg.
>> Caitlin Cormier, client education instructor at TD Direct Investing. And a reminder that October is investor education month at TD Direct Investing.
[music] The Bank of Canada did hold its trendsetting rate steady at 5% this week, but they also said that they are prepared to hike rates again amid the slow progress in the fight against inflation. Andrew Kelvin, head of Canadian and global rates strategy at TD Securities it joined us earlier for a reaction.
>> The needle the Bank of Canada had to the thread was the trade-off between growth that had been quite a bit weaker than anticipated and inflation that had been quite a bit more persistent than anticipated, if you go back to their forecast from July.
So I think to the extent that there were questions about what would happen, it wasn't around what would happen with the overnight rate. I think looking for rate hikes always sort of felt like a long shot. But it was about what they would put more emphasis on. And it does look like, while they tried to address both sides of the argument, they did put a little bit more emphasis on the slowing demand environment.
I think the Bank of Canada would very much like to be done with rate hikes here.
They talked about giving rate hikes time to work their way through the economy. At the same time, it's important for the Bank of Canada to let Canadians know that they remain vigilant in order to keep financial conditions relatively tight, because if they tell us they're done or that they think they're done or that they'd like to be done, without forcing us to read between the lines, markets react. And it becomes counterproductive for them.
So while the Bank of Canada did warn that inflation has been coming down more slowly than they'd hoped, perhaps, that inflation, the inflationary backdrop, is still high and they need to see more progress on the inflationary trends, it did strike a fairly comfortable note in the context of seeing that large upside revision to their near-term inflation forecasts.
>> When I take a look through the statement and talking about a new source of geopolitical uncertainty-- of course, this is what's happening in the Middle East-- what it could mean for the price of oil, are they sort of in a situation now where they see things progressing in a certain way, although slower than they first saw it, but there are always wild cards?
>> Yeah, and I think one of the messages they wanted to get across is that the uncertainty is higher than it normally would be, because there's always wild cards. There's always uncertainty in the economy. I think the message they're trying to put out is, one, that there's more uncertainty than normal.
And two, that because inflation has been high for a number of years now, they need to be a bit more vigilant against inflation.
I think that was part of their message.
And that's part of the reason why they continue to talk to the idea about inflationary risks having risen simply because inflation hasn't come down to the extent they would have hoped or expected so far.
>> Now, with this fight taking longer than expected, taking longer to get back to 2%, a weaker economy next year, one of the headlines I saw moving across the wires was Tiff Macklem saying there's a narrow path now for a soft landing. Everyone's been talking, well, how does the economy resolve itself out of this? Maybe we just keep going on, or maybe we have a nice soft landing. Is it because this fight is taking longer than expected that that path is quite narrow now?
>> I think the fact that the Bank of Canada was a little bit slow off the mark last year always implied a very narrow path for a soft landing. So it meant that they now had to start tightening in leaps and bounds, instead of just very gradually tightening.
The fact that there is a sort of narrow path, it also says that Canadians are very highly indebted. And because inflation has been very persistent, we're having to keep sort of a high for longer sort of a scenario. It won't be a quick move to 5% and then a quick return to a somewhat easier policy rate.
And Governor Macklem did actually address that in the press conference, stating that it's far too early to be talking about rate cuts. The longer we are at 5%, the narrower the path for a soft landing becomes. And a soft landing, it becomes a little bit of an argument about semantics, on some level. I mean, the Bank of Canada is looking for growth to be 0.8% annualized this quarter, 0.8% annualized next quarter, which is, in real terms, unannualized terms, just slightly above zero, in the context of very robust population growth.
So Bank of Canada is talking about quite negative per-capita GDP growth, but I guess we've all sort of agreed on this idea that a soft landing is one where the aggregate economy doesn't shrink. So that's still, I think, in play. But when you start talking about two consecutive quarters of growth below 1 coming off of a quarter which was very marginally, modestly negative, yeah, it's a pretty narrow dividing line between what you would call a soft landing and what you might call a harder one.
>> So you mentioned Mr. Macklem saying that it's too early to talk about rate cuts. Of course, investors do ask that question. He was asked the question. At this point, is it a bit of a tough game to try to figure out when a cut might finally arrive if it's taking this long to get inflation under control?
>> And that's exactly it. It's how long does it take to get inflation under control. For the BoC to cut rates, four things need to be true, two of which can be achieved pretty easily, two of which could be a little bit more difficult.
So the first two things we need to see happen for the BoC to cut rates credibly, we need to be in excess supply. So we need to have some slack in the economy. The Bank of Canada thinks we might be there now.
We need to see growth below trend. Bank of Canada believes growth to be below trend in the current quarter, in the previous quarter, and the quarter before that. So those two things have already been sort of checked off.
And in a cycle where we hadn't had two-plus years of well-above-target inflation, we might be talking about cuts now. But in an environment where three-month annualized core inflation, which is sort of a nice measure of your underlying trend, where that's running at about 3.7%, and where headline inflation is still well above the 2% target, as well-- it's currently about 3.8%, as of the last reading-- that's a world where it's very difficult to credibly cut rates when you're an inflation target who has been missing your target.
So for the BoC to talk about cutting rates, they need to be on a very firm and clear path to the 2% inflation target. We don't need to be there in terms of year-over-year inflation, but the sort of higher frequency, three-month inflationary trends need to be pointing at 2%.
And that's where it looks like there's still quite a bit of ground to cover.
So we have rate cuts in our forecast in the third quarter of next year.
And it really is just a question of the speed with which inflation normalizes.
>> Now, with the Bank of Canada having giving us its decision this morning, its commentary about the economy, clock is ticking toward the Fed on November 1. What should we expect from that central bank, arguably the most influential one in the world?
>> Absolutely the most influential one in the world. As much as I would like to put the Bank of Canada on the same level, it is not.
So the Fed's sort of an interesting one because they're looking at sort of a very different set of shocks. Whereas Canada has been characterized by very soft growth, unexpectedly soft growth in the third quarter of this year, the US economy looked like it was quite strong in the third quarter. So the Fed is sort of confronting this fairly robust growth outlook while seeing improvement on the inflation front.
The Fed did leave the door open in its last meeting to one more rate hike this cycle, with the majority of participants suggesting it could be this year. I don't think this is a story for this upcoming meeting. They are going to leave the door open to certainly future tightening.
And ultimately, it's going to be a very data-dependent thing. thing. the latter part of this year, which we do think will help keep the Fed at its current policy rate. But it is something where the Fed does need to see that deterioration in the growth figures, ultimately, if it is going to justifiably be able, or comfortably be able, to hold at current levels.
>> That was Andrew Kelvin, head of Canadian and global rates strategy at TD Securities.
Now for an update on the markets.
We are having a look at TD's Advanced Dashboard, platform designed for active traders available through TD Direct Investing.
This is the heat map function, gives you a view of the market movers. Let's start with the TSX 60, screening by price and volume. The headline number for the TSX Composite Index, we are down a little more than half a percent.
What's going on? Weakness in the energy space today, the big names including Canadian Natural Resources, Enbridge, Cenovus all down a little more than 1%.
Cameco, a uranium play, a little bit of a move to the upside but not all that much.
You can see financial stocks are under pressure as well. Bit of a mixed bag in the material space. And Shopify, after a couple of hard sessions to the downside, is up modestly. South of the border, we have the US Federal Reserve on deck next week to deliver a rate decision. We had GDP out of the states this week, stronger-than-expected. Their preferred gauge of inflation which we discussed off the top of the show, was happening on the markets, it's more earnings driven. If we take a look at Amazon right now, up more than a percent, the street happy with what they saw in the quarterly report.
Intel is well up more than 10%. Ford really standing up. Some reports now, not sure if they were confirmed by the company, but unconfirmed reports that they could be pulling back to the tune of billions due to EV while they figure out the demand picture for EVs. You can get more information on TD Advanced Dashboard by visiting TD.com/Advanced Dashboard.
While we do have signs of weakening economy, this would be an important downside risk that could affect Canada's housing market.
So what do we think about it all? TD Economics has a new report out. Anthony Okolie has been a throat pouring through it.
>> They are pointing to Bank of Canada rate hikes that put downward pressure on Canada's retail activity since the summer.
We looked at the national sales numbers.
They have pulled back about 5% in sales remained about 12% below pre-pandemic levels.
Sales have coincided with a significant jump in new listings. The Canadian sales to new listings ratio fell from around 7% back in April to about 51% in September.
The sales to new listings ratio, there is a huge divergence provincially. The weakest being in BC and Ontario. That's of course because affordability in these two markets recently hit what TD Economics describes as historically worst levels. TD Economics notes that Canadian new listings have risen for the sixth straight month through September. In the report, TD Economics also takes a look at the outlook for the housing market for 2024. We will start with new listings.
After a spike in the third quarter of 2023, TD Economics's newest forecast will likely trend higher through to the end of 2024.
They also note that the rise and supply will be somewhat tempered by a resilient job market. Relative to third-quarter levels, they expect sales and prices to be roughly 10% and 5% lower respectively by the end of Q1 and 2024. Thereafter, they expect sales prices to pick up starting in the second quarter of 2024. That's assuming that the Bank of Canada cuts rates in the spring.
Originally, TD Economics expects the steepest near-term drops to be in Ontario and BC. They do see lesser drops across much of the Atlantic region as well is in Québec. Québec. market. If it deteriorates by more than they expect, that could push housing supply higher and weaken demand as well.
TD Economics looks at how homebuilding is holding up across Canada. This is very important from the standpoint of what we have seen in our surging population which recently surpassed 40 million. So far, TD Economics believes that homebuilding is going pretty well despite high borrowing costs and persistent labour shortages.
Builders are had 20% above pre-pandemic levels in our near multi-decade highs. We are also seeing a resurgence in purpose-built rental starts and's. This chart shows that's being supported by robust rent growth and government programs.
Purpose built starts are by far the highest they've been since at least 1990, both in absolute and per capita terms according to TD Economics.
Now despite these positives, a big number of these units are still under construction. The number of these units under construction is actually a record high which suggests it's taking much longer to actually deliver supplies to the market and TD Economics worries that homebuilding is lagging behind our surging population and that could leave a gap or shortage of 300,000 units.
>> A lot of challenges in the market right now.
What does the report say about how government is responding to these challenges?
>> For their part, governments at all levels have taken steps in the right direction according to TD Economics. They point to a couple of examples and I will highlight a few, including at the municipality level, like in Edmonton, Vancouver and Toronto, they have been changing zone regulations to allow for more gentle density. From the federal level, the government has made headlines by removing GST on purpose-built rental starts and to level the playing field between those types of units and condos for builders and some provinces including Ontario have followed suit as well.
TD Economics suggests other measures that the government can take. For example, eliminating or reducing cumbersome restriction construction requirements, a financing initiative which offers low-cost loans for developers. That interesting stuff. Thanks for breaking it down.
>> My pleasure.
>> MoneyTalk's Anthony Okolie. As always, do your own research before making any financial decisions. We will be back on Monday with Nicole Ewing, director of tax and estate planning at TD Wealth. She will be our guest take your questions about tax and estate planning. It you can get a head start with this question. Email moneytalklive@td.com. That's all the time we have the show today. On behalf of Anthony and me behind the desk said everyone behind the scenes who brings you the show every day, thanks for watching and will see you next week.
[music]
coming up on today show, TD Asset Management's Hafiz Noordin will walk us through the surprising scenario that flood treasury yields close to that key 5% level. We will discuss the outlook for the commodity space and mid conflict in the Middle East with Jennifer Nowski from TD Asset Management. MoneyTalk's Anthony Okolie will have a look at a new TD Economics report on the state of the Canadian housing market. Plus in today's WebBroker education segment, killing Cormier will take us through how markedly GICs work and where you can find them on the WebBroker platform.
Before we get to all of that, let's get you an update on the markets. We will start with the TSX Composite Index.
We are down to the tune of 60 points or 1/3 of a percent. percent. percent.
percent. got Cenovus at 2680, down about 1%. Nothing too dramatic but taking some points out the top line. Even though the price of gold is pulling back in some money names are as well, IAMGOLD is standing out. At the box and $0.45, it is still in positive territory but it is off of its highs of the session. Now south of the border, we've got the US Federal Reserve on deck, a lot of central bank action and we are going to dig into it.
Next week we have their preferred gauge of inflation out. We have a lot of earnings as well, probably more of a driver of the market this week. Some of the big tech giants have flees the streets and others have not. Today seems to be a pleasing day, the S&P 500 is up 1/5 of a percent.
The tech heavy NASDAQ which has had a rough go in the last couple of sessions gaining back some lost territory, up 138 points about .4%.
We are hearing from some automakers out there in terms of demand for EVs in this environment.
And it has sort of been the stock up.
You've got 4 to 1031 per share, down a little more than 9%. And that's your market update.
Well, that inflation gauge favoured by the US Federal Reserve did move higher in September but even then it did not slow consumer spending.
MoneyTalk's Anthony Okolie joins us now with all these details. A pretty key reading here for the Fed on deck next week.
>> That's something the Fed will be looking closely. We will start the headline number. Personal consumption was up .4% month over month, the same pace that was out in August. On an annual basis, it's pretty steady, 3.4%. But the feds preferred price gauge, excluding food and energy, it takes into account the substitution behaviour. If you are substituting lower-priced goods for expensive goods, the CPI just measures cost without regard to substitution. So the PCE Index is a better reflection of the cost of living standards. It is so the PC price deflator actually accelerated on a month over month basis up .3% versus a soft reading in August of .1%. So that is kind of the bad news. On an annual basis, or PCI inflation it slowed year-over-year versus that the 3.8% we saw in August.
This represents a small decrease from 2021. If you are starting to see a bit of disinflation where prices are coming down.
They are still high but slowly coming down.
I think the pre-PC print shows inflation is heading in the right direction, that kind of supports the feds a wait-and-see status on the impacts that inflict tourist rates are having on inflation.
>> We will see next Wednesday when we get the US Fed making Inuit rate decision. On top of this preferred gauge, we have a GDP report out of the states. That economy is still moving along pretty strongly.
Right now, what is the expectation? As we have for this decision next Wednesday, what is the street thinking?
>> Right now the market is basically pricing and no change from the Fed. TD Economics believes that's going to be the case as well, we are likely to see no change from the Fed. The Fed left the door open to potential hike in the December meeting. Of course between November and December we will get a couple of rates on inflation to see if that disinflation trend is continuing. But in terms of next week, market expectation is for no change.
>> Okay. Big week this weekend big week next week. Thanks for that.
>> My pleasure.
>> MoneyTalk's Anthony Okolie. Anthony will be back later in the program to look at the help of the Canadian housing market.
Meantime, 10 year treasury yield south of the border has broken through 5% on a couple of occasions and then pulls back.
Of course we have investors today ingesting that PC report and other economic data. The question then becomes, where might the bond market go from here after this recent dramatic rise in rates?
Hafiz Noordin, VP, director and active fixed income portfolio manager TD Asset Management joined us earlier to discuss.
>> It's been a big move from about 4% to around the 5% level of the US 10-year.
Usually what causes bond yields to rise is you either have tight monetary policy, so rising interest rates from the central bank, or you'd have loose fiscal policy-- so large borrowing from the government, which would mean that rates have to go higher to fund that.
The surprise here is we've had both. And so I think what was probably more expected this year was the tight monetary policy.
We're getting the same story in terms of the data, like you said, of strong growth led by the US, inflation that is, although it's declining, it's still well above the 2% target.
And then you have tight labor markets. And that's causing wage growth to stay firm and fueling some concerns that it could feed into another round of inflation. But that's the part that was generally known.
It's persisting for longer than what might have been expected. But what was a bit of a surprise this year is that looser fiscal policy at a time when, generally, you would actually expect fiscal policy to get a little tighter.
The deficit in the US, in particular, should have been lower than 5% of GDP.
Instead, it surprised closer to 6% to 7% of GDP. So that's just a lot more money that needs to be borrowed in the market.
That's been fueling this latest move, in particular.
>> If we're talking about budget deficits, larger than expected spending, larger than expected out of Washington, is it time to start discussing bond vigilantes on these shores? I know they showed up in Britain last year. Are they showing up in the States?
>> Yeah, I think to a certain extent. The marginal buyer of bonds has changed from what was there before. In the past, we were used to the central bank with its QE programs being a consistent buyer of bonds. We were used to US banks being consistent buyers and foreign sovereign wealth funds and foreign reserve managers from other countries generally being pretty consistent in the US bond market.
They're all stepping back for different reasons. We know there's quantitative tightening, US banks don't have as much deposits as they used to. And so with that, we're seeing more the private sector being the one to step in as the marginal buyer. And they're definitely more price sensitive.
So I wouldn't necessarily say we're in a period where it's complete vigilante mode.
It's not like what we saw, say, in Greece or Italy, but definitely more price sensitivity. And therefore, more focus on this idea of what's a fair value of government bonds in the US given the fiscal outlook and given policy rates in the central banks have to stay higher for longer.
>> Now, I come from a journalism background, so we love numbers like 5% or 4% because it's easy in terms of storytelling. Is there a significance in the real world, in the fixed income world, to a 10-year yield at 5% or higher?
>> There is actually merit to it because psychological levels actually make sense.
Because at the end of the day, the market is just a bunch of humans, all of which have behavioral biases. And so the 5% level has stuck out. Again, it's a round number.
But the other piece to think about is that the market tends to look back at a historical periods of when the US 10-year traded at 5%. And what you can point to is the 2006 to 2007 period before the Global Financial Crisis. The peak in the US 10-year at that part of the cycle was around 5% to 5.2%. So the market has repriced yields higher and is now thinking, OK, are we similar in terms of this cycle compared to 2006 to 2007?
You can make the argument that growth was very strong then as it is now. But it probably had a bit of higher potential growth in the global economy sense. You had a much stronger China, a much stronger Europe.
And so you could see why rates were higher back then.
But on the flip side, you also had less government debt compared to what you have now. So it's kind of like you've got lower potential growth now but higher government debt and higher deficits. So I think those are sort of balancing themselves out to say that 5% might be fair for the near term.
But I think what we have to look forward then is, what happens when the labor market starts to crack a little bit? Where do rates go?
And we still think there's more room cyclically for US yields to come down.
>> The world continues to become a more dangerous place just in the past couple of weeks-- a massive geopolitical event in the conflict in the Middle East. You put that on top of what was already transpiring for quite a bit of time with Ukraine and Russia. There's a lot of risk out there. And then bonds, traditionally a haven play, could we see a haven play for bonds that might bring down yields in the next little while?
>> They should over the long run continue to provide that safe haven status in a portfolio.
That hasn't worked for the last few months, for sure. Correlations with bonds and equities have gotten more positive, so bonds and equities are moving up or moving down together.
And largely, it goes back to the idea that there are concerns right now about funding these fiscal deficits and the large amount of issuance. So I think that's been skewing those correlations. So right now, we've seen the safe haven status be more evident in the US dollar and in gold.
I think those are two markets where we've seen that correlation be more negative relative to equities. But I think bigger picture, in a longer time frame, bond yields will continue to still be a major flight to quality asset, particularly US treasuries just because you generally still have a lot of foreign investors coming into the US market when they are trying to seek protection from their capital.
>> Of course, you mentioned earlier about central banks got this ball rolling about a year and a half ago. We heard from our central bank yesterday. We're getting the Fed next week. I think we got the European Central Bank. So there's a lot going on in that space.
What's intriguing to you? What's standing out for you?
>> Yeah. So I would glean from all of those that they're in the similar stage of, call it, a hawkish hold, right?
So they've done a lot of tightening.
They're seeing growth data staying strong but not necessarily running away. And they're seeing inflation coming down from the peaks and generally trending back to target but at a fairly slow pace.
So this idea that they want to pause, and be at these very restrictive rate levels, and see how it plays out, but also commit to keeping those rates higher for longer.
That's the balance they're playing of not sounding too dovish by pausing, showing that they have commitment to getting inflation down. And that may mean that there's no rate cuts anytime soon. For the Fed and Bank of Canada, in particular, really looking to the second half of next year for when we could see rate cuts, if inflation does meet the targets that they're seeing for next year.
>> That was Hafiz Noordin, active fixed income portfolio manager at TD Asset Management.
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.
Big week for tech earnings. We have shares of Amazon in the spotlight. The e-commerce giant easily beat earnings expectations in its latest quarter, thanks in part to cost-cutting that boosted operating margin.
Amazon also grew sales by 13%, revenue coming in net for those three months at $143 billion. The stock of 8%.
This rate seems please. Corus Entertainment suspending its dividend as it focuses on repayment of debt in a tough advertising environment. While the media company to be quarterly estimates, TV advertising was down 10% year-over-year.
Course as it affects ad revenue to remain pressured by several factors, including the Hollywood strikes and the overall economy. The stock down to almost 29%.
Shares of Intel or moving higher on an earnings before its most recent quarter.
The chip maker says it's also on track to cut some $3 billion in costs this year as part of its broader strategy. CEO Pat Gelsinger did acknowledge some customers are moving investment to Nvidia's artificial intelligence chips, which has been a concern for investors about Intel's product. The street is rewarding the name.
At 3564, he got Intel up almost 10%. Let's check in on the markets. We will start here at home on Bay Street with the TSX Composite Index. It's up a fifth of a percent. South of the border, the S&P 500… Since I said the words S&P TSX comps that I have it to the downside right now.
Several key commodities have seen volatile price action amid conflict in the Middle East. While markets have been shaken and they are term, with the longer-term outlook for oil and gold?
Earlier I was joined by Jennifer Nowski, VP, director and portfolio manager at TD Asset Management to discuss.
>> Yeah, so the oil price did increase as the market started to incorporate a higher geopolitical risk due to the conflict in the Middle East. The key, though, for the oil market balance over the next year really comes down to whether OPEC+ and, in particular, Saudi Arabia maintains its discipline in matching production with what they're seeing in demand.
Now, starting off on the demand side, this year has actually been a fairly strong year for oil demand growth. And that's because China's lockdown ended. And its oil demand rebounded fairly strongly. In 2024, you might see more modest demand growth. And that's where we'll probably see a resumption of the oil price being more correlated with global GDP growth.
Now, turning to the supply side, this year's supply growth in oil was really driven by the US production. But this was offset by OPEC+ restraining its production and, in particular, Saudi Arabia doing a series of voluntary production cuts.
Now, the challenge for the oil market is that there is some spare capacity now at OPEC+, much of it with Saudi Arabia. So to keep the oil market balanced, they're going to have to continue to be disciplined on how they manage that production capacity.
Now, in terms of geopolitical risk, the concern the oil market has is if the conflict were to impact either key oil infrastructure or transportation routes in the region, the other issue is that Iran has been exporting more oil. In response to the conflict, the market is looking to see if there's any changes in Iranian sanctions or reinforcement of them.
However, I'll talk briefly, though, on the energy companies. Now, the energy companies are in very strong financial condition. The high oil prices we've had for the past couple of years have allowed them to really significantly reduce their leverage. So debt is quite low right now.
And free cash flow is still very strong.
Now, there has been some more M&A activity in the sector. But I'd say for the group as a whole, the producers still maintain a disciplined focus on low production growth, keeping that strong balance sheet, and returning cash to shareholders.
Now, the oil stocks will continue to take their cues from the oil price. However, with about, call it, $80 WTI, that would generate a free cash flow yield on some of the larger cap names in the high single digits to low double digits. So that's still very healthy. And I would expect much of that would be returned to shareholders in the form of dividends and buybacks.
>> You briefly mentioned China there. How concerned should we be about the state of their economy? There's a lot of moving pieces there.
>> So China is about 16% of global oil demand and about 50% of demand for some metals. So it's very important to the commodity markets. Now, broadly in terms of how the Chinese economy has been doing, I'd say at the beginning of the year there was very high expectations for a big rebound as the COVID lockdowns were ended.
However, the recovery has been more tepid than that. And the particular challenge with China is its property sector, which is working through some debt issues.
Now, the Chinese government does want to generate economic growth. However, they don't want to create overbuilding or excesses. So in the past where they've pursued massive stimulus programs, this time it's been much more targeted stimulus measures and rate cuts.
And we're starting to see some stabilization, though, in the Chinese economy. The recent data released in September showed some retail sales growth.
Electricity consumption is up. Deflation is less of an issue, just to name a few.
Focusing more on the commodity demand side, I spoke already about how oil demand did rebound. Next year, it might be more tied to economic growth. On the metals side, though, that's perhaps outperformed expectations. So while property has been a headwind for metals demand, this has been more than offset by China's investments in renewables and electric vehicles.
>> All right. So we use the word "metals" there. Let's talk about the precious metal that everyone gets concerned about, gold.
Amid this heightened geopolitical risk in the past couple weeks, we have seen a haven play into there. What do we make of gold right now and perhaps where it might be headed?
>> Yes, taking a step back, if you look at the gold price over the past couple years, it's been rather range bound between about $1,800 and $2,000 an ounce. And that's because the main drivers of gold being the real yield US dollar and demand factors, they've painted a more mixed picture at time.
Now, there has been a rally in the gold price lately, as you said. And that's been driven on this flight to safety bid.
However, if we look underneath the pictures, it's still a bit more mixed, starting with demand. Demand has been more tepid. If you look at the physical gold ETF, that has been seeing outflows year to date. And I'd say we haven't seen a clear inflection or definitive stabilization in those flows yet. That's something we'll continue to watch.
The other factor is central bank buying.
Now, central banks have been net buyers of gold for the past decade-plus. Last year was a particularly strong year for central bank net buying. This year it's hard to predict how much they'll buy in any one year. But it likely might not repeat last year's highs.
Now, turning to the real yields, there's been a really big move in real yields. The US 10-year real yield has gone from, call it, 1 and 1/2% at the beginning of the year to about 2 and 1/2% today. So really big move. And that's a headwind for gold because gold pays no income. So that's your opportunity cost.
What the market is watching is rates and what the Fed does. Now, the Fed is very committed to bringing inflation down. And the risk there is that rates remain higher for longer. So this headwind for gold could continue. And the market will be watching closely for any change in tone from the Fed or direction in rates.
>> That was Jennifer Nowski, portfolio manager at TD Asset Management.
Now let's get to today's education segment.
Joining us now with more, Caitlin Cormier, client education instructor at TD Direct Investing.
Great to see you. Let's talk about market linked GICs. What are they all about?
>> Yeah, absolutely. They are an interesting little product like a traditional GIC in a lot of ways, meaning they are covered by CDIC, Canada Deposit Insurance Corporation, which is one of those key things that GIC investors typically are looking for, a little bit of that comfort as far as if anything would happening to the issuing institution.
There is some kind of guaranteed interest but there are some things that are different because there is a bit of exposure to the market.
So let's pop into a broker and take a closer look at these investments.
What I'm going to do is, I'm going to click into our research and go under the GIC Rate Sheet. Research, GIC Rate Sheet.
Once I get here, I'm in a go ahead here and click on the market linked GICs.
You will see here that there are both three and five year terms for market linked GICs on the far left hand side.
We can see also when we look at the returns there's both a minimum and maximum return. So this is different from your standard GIC. They are also quoted in total returns as opposed to annual returns. Typically you would see an interest rate just for one year. These interest rates are actually for the entire length of the GIC. So what we will see here is a range. The first number is your guaranteed minimum, this is what you will get as far as a return on the GIC for the term. For example, for the three year term, you will get a 10% total return guaranteed for that investment. There is also a potential to have your maximum return which can be viewed like a bonus interest. What that bonus interest is tied to is an underlying index.
You can see the different indices here in the middle that her legs to the different GICs. For example, the second one down is linked to the S&P 500, so the 500 biggest companies in the US. For this particular GIC, the US top 500, it's a three-year term. Your guaranteed minimum interest is going to be 7.5% and you have the potential to earn up to 25% depending on how the S&P 500 does.
Basically what this means is if you buy this GIC and that underlying index increases by 25% or more, you will receive the total maximum return at maturity.
If the GIC increases by less than 25 but over 7.5, you'll get whatever percentage increase that the index has achieved, so let's just say it achieves 17% returns, and increases 17% from the time that you purchased it to the time it came do, then you get a 17% return.
If it is 7.5 or less or even negative, you are so went to get that guaranteed minimum of 7.5%. It's a hybrid thing where it has some features of a GIC but also has the potential to have some bonus interest depending on how that underlying GIC actually performs.
Or index, sorry, how the index performs.
>> People might be wondering if they buy a product like this, over the course of holding it over those years, how are they doing? They might be curious about that and what kind of return they might get by the time the term is up.
>> Right, yeah, it's definitely something to consider for sure. The one thing I will always caution is that the return that you get is based on the date the purchaser, whatever the level of the index is, and the data comes due. It doesn't matter if it goes up by 300% and goes down to -5, it's beginning versus and and that's it.
In order to keep an eye out, we happened to WebBroker and we are going to click on research. On the left-hand side we are going to go under markets and click on indices and then we can actually select whatever the underlying indexes for that particular GIC. So with the S&P 500, we can click on that when we find it here in the list and then towards the bottom of this little box we are going to click on charts so we can actually chart the performance of an index. I'm just going to remove a couple of extra things I had on there.
This is showing me a one year term but let's just say I bought a GIC a couple of years ago so I could go back for example 3 years, I could find the date that I actually purchased. You can see my date is showing here, my open and close numbers are showing for the index. I see for example maybe you purchased it on April 9, 2021, I see the close that day was 4128 versus whatever day it might come due, I find out or currently what the level is so I find the difference between those two numbers and see if it has gone up or down and of itself, what percentage it's gone up to get an idea of whether I'm currently in a position where it could pay out my maximum or if it has some room to grow before I get to that return.
>> Alright, great stuff as always, Caitlin.
Thanks for that.
>> Thanks, Greg.
>> Caitlin Cormier, client education instructor at TD Direct Investing. And a reminder that October is investor education month at TD Direct Investing.
[music] The Bank of Canada did hold its trendsetting rate steady at 5% this week, but they also said that they are prepared to hike rates again amid the slow progress in the fight against inflation. Andrew Kelvin, head of Canadian and global rates strategy at TD Securities it joined us earlier for a reaction.
>> The needle the Bank of Canada had to the thread was the trade-off between growth that had been quite a bit weaker than anticipated and inflation that had been quite a bit more persistent than anticipated, if you go back to their forecast from July.
So I think to the extent that there were questions about what would happen, it wasn't around what would happen with the overnight rate. I think looking for rate hikes always sort of felt like a long shot. But it was about what they would put more emphasis on. And it does look like, while they tried to address both sides of the argument, they did put a little bit more emphasis on the slowing demand environment.
I think the Bank of Canada would very much like to be done with rate hikes here.
They talked about giving rate hikes time to work their way through the economy. At the same time, it's important for the Bank of Canada to let Canadians know that they remain vigilant in order to keep financial conditions relatively tight, because if they tell us they're done or that they think they're done or that they'd like to be done, without forcing us to read between the lines, markets react. And it becomes counterproductive for them.
So while the Bank of Canada did warn that inflation has been coming down more slowly than they'd hoped, perhaps, that inflation, the inflationary backdrop, is still high and they need to see more progress on the inflationary trends, it did strike a fairly comfortable note in the context of seeing that large upside revision to their near-term inflation forecasts.
>> When I take a look through the statement and talking about a new source of geopolitical uncertainty-- of course, this is what's happening in the Middle East-- what it could mean for the price of oil, are they sort of in a situation now where they see things progressing in a certain way, although slower than they first saw it, but there are always wild cards?
>> Yeah, and I think one of the messages they wanted to get across is that the uncertainty is higher than it normally would be, because there's always wild cards. There's always uncertainty in the economy. I think the message they're trying to put out is, one, that there's more uncertainty than normal.
And two, that because inflation has been high for a number of years now, they need to be a bit more vigilant against inflation.
I think that was part of their message.
And that's part of the reason why they continue to talk to the idea about inflationary risks having risen simply because inflation hasn't come down to the extent they would have hoped or expected so far.
>> Now, with this fight taking longer than expected, taking longer to get back to 2%, a weaker economy next year, one of the headlines I saw moving across the wires was Tiff Macklem saying there's a narrow path now for a soft landing. Everyone's been talking, well, how does the economy resolve itself out of this? Maybe we just keep going on, or maybe we have a nice soft landing. Is it because this fight is taking longer than expected that that path is quite narrow now?
>> I think the fact that the Bank of Canada was a little bit slow off the mark last year always implied a very narrow path for a soft landing. So it meant that they now had to start tightening in leaps and bounds, instead of just very gradually tightening.
The fact that there is a sort of narrow path, it also says that Canadians are very highly indebted. And because inflation has been very persistent, we're having to keep sort of a high for longer sort of a scenario. It won't be a quick move to 5% and then a quick return to a somewhat easier policy rate.
And Governor Macklem did actually address that in the press conference, stating that it's far too early to be talking about rate cuts. The longer we are at 5%, the narrower the path for a soft landing becomes. And a soft landing, it becomes a little bit of an argument about semantics, on some level. I mean, the Bank of Canada is looking for growth to be 0.8% annualized this quarter, 0.8% annualized next quarter, which is, in real terms, unannualized terms, just slightly above zero, in the context of very robust population growth.
So Bank of Canada is talking about quite negative per-capita GDP growth, but I guess we've all sort of agreed on this idea that a soft landing is one where the aggregate economy doesn't shrink. So that's still, I think, in play. But when you start talking about two consecutive quarters of growth below 1 coming off of a quarter which was very marginally, modestly negative, yeah, it's a pretty narrow dividing line between what you would call a soft landing and what you might call a harder one.
>> So you mentioned Mr. Macklem saying that it's too early to talk about rate cuts. Of course, investors do ask that question. He was asked the question. At this point, is it a bit of a tough game to try to figure out when a cut might finally arrive if it's taking this long to get inflation under control?
>> And that's exactly it. It's how long does it take to get inflation under control. For the BoC to cut rates, four things need to be true, two of which can be achieved pretty easily, two of which could be a little bit more difficult.
So the first two things we need to see happen for the BoC to cut rates credibly, we need to be in excess supply. So we need to have some slack in the economy. The Bank of Canada thinks we might be there now.
We need to see growth below trend. Bank of Canada believes growth to be below trend in the current quarter, in the previous quarter, and the quarter before that. So those two things have already been sort of checked off.
And in a cycle where we hadn't had two-plus years of well-above-target inflation, we might be talking about cuts now. But in an environment where three-month annualized core inflation, which is sort of a nice measure of your underlying trend, where that's running at about 3.7%, and where headline inflation is still well above the 2% target, as well-- it's currently about 3.8%, as of the last reading-- that's a world where it's very difficult to credibly cut rates when you're an inflation target who has been missing your target.
So for the BoC to talk about cutting rates, they need to be on a very firm and clear path to the 2% inflation target. We don't need to be there in terms of year-over-year inflation, but the sort of higher frequency, three-month inflationary trends need to be pointing at 2%.
And that's where it looks like there's still quite a bit of ground to cover.
So we have rate cuts in our forecast in the third quarter of next year.
And it really is just a question of the speed with which inflation normalizes.
>> Now, with the Bank of Canada having giving us its decision this morning, its commentary about the economy, clock is ticking toward the Fed on November 1. What should we expect from that central bank, arguably the most influential one in the world?
>> Absolutely the most influential one in the world. As much as I would like to put the Bank of Canada on the same level, it is not.
So the Fed's sort of an interesting one because they're looking at sort of a very different set of shocks. Whereas Canada has been characterized by very soft growth, unexpectedly soft growth in the third quarter of this year, the US economy looked like it was quite strong in the third quarter. So the Fed is sort of confronting this fairly robust growth outlook while seeing improvement on the inflation front.
The Fed did leave the door open in its last meeting to one more rate hike this cycle, with the majority of participants suggesting it could be this year. I don't think this is a story for this upcoming meeting. They are going to leave the door open to certainly future tightening.
And ultimately, it's going to be a very data-dependent thing. thing. the latter part of this year, which we do think will help keep the Fed at its current policy rate. But it is something where the Fed does need to see that deterioration in the growth figures, ultimately, if it is going to justifiably be able, or comfortably be able, to hold at current levels.
>> That was Andrew Kelvin, head of Canadian and global rates strategy at TD Securities.
Now for an update on the markets.
We are having a look at TD's Advanced Dashboard, platform designed for active traders available through TD Direct Investing.
This is the heat map function, gives you a view of the market movers. Let's start with the TSX 60, screening by price and volume. The headline number for the TSX Composite Index, we are down a little more than half a percent.
What's going on? Weakness in the energy space today, the big names including Canadian Natural Resources, Enbridge, Cenovus all down a little more than 1%.
Cameco, a uranium play, a little bit of a move to the upside but not all that much.
You can see financial stocks are under pressure as well. Bit of a mixed bag in the material space. And Shopify, after a couple of hard sessions to the downside, is up modestly. South of the border, we have the US Federal Reserve on deck next week to deliver a rate decision. We had GDP out of the states this week, stronger-than-expected. Their preferred gauge of inflation which we discussed off the top of the show, was happening on the markets, it's more earnings driven. If we take a look at Amazon right now, up more than a percent, the street happy with what they saw in the quarterly report.
Intel is well up more than 10%. Ford really standing up. Some reports now, not sure if they were confirmed by the company, but unconfirmed reports that they could be pulling back to the tune of billions due to EV while they figure out the demand picture for EVs. You can get more information on TD Advanced Dashboard by visiting TD.com/Advanced Dashboard.
While we do have signs of weakening economy, this would be an important downside risk that could affect Canada's housing market.
So what do we think about it all? TD Economics has a new report out. Anthony Okolie has been a throat pouring through it.
>> They are pointing to Bank of Canada rate hikes that put downward pressure on Canada's retail activity since the summer.
We looked at the national sales numbers.
They have pulled back about 5% in sales remained about 12% below pre-pandemic levels.
Sales have coincided with a significant jump in new listings. The Canadian sales to new listings ratio fell from around 7% back in April to about 51% in September.
The sales to new listings ratio, there is a huge divergence provincially. The weakest being in BC and Ontario. That's of course because affordability in these two markets recently hit what TD Economics describes as historically worst levels. TD Economics notes that Canadian new listings have risen for the sixth straight month through September. In the report, TD Economics also takes a look at the outlook for the housing market for 2024. We will start with new listings.
After a spike in the third quarter of 2023, TD Economics's newest forecast will likely trend higher through to the end of 2024.
They also note that the rise and supply will be somewhat tempered by a resilient job market. Relative to third-quarter levels, they expect sales and prices to be roughly 10% and 5% lower respectively by the end of Q1 and 2024. Thereafter, they expect sales prices to pick up starting in the second quarter of 2024. That's assuming that the Bank of Canada cuts rates in the spring.
Originally, TD Economics expects the steepest near-term drops to be in Ontario and BC. They do see lesser drops across much of the Atlantic region as well is in Québec. Québec. market. If it deteriorates by more than they expect, that could push housing supply higher and weaken demand as well.
TD Economics looks at how homebuilding is holding up across Canada. This is very important from the standpoint of what we have seen in our surging population which recently surpassed 40 million. So far, TD Economics believes that homebuilding is going pretty well despite high borrowing costs and persistent labour shortages.
Builders are had 20% above pre-pandemic levels in our near multi-decade highs. We are also seeing a resurgence in purpose-built rental starts and's. This chart shows that's being supported by robust rent growth and government programs.
Purpose built starts are by far the highest they've been since at least 1990, both in absolute and per capita terms according to TD Economics.
Now despite these positives, a big number of these units are still under construction. The number of these units under construction is actually a record high which suggests it's taking much longer to actually deliver supplies to the market and TD Economics worries that homebuilding is lagging behind our surging population and that could leave a gap or shortage of 300,000 units.
>> A lot of challenges in the market right now.
What does the report say about how government is responding to these challenges?
>> For their part, governments at all levels have taken steps in the right direction according to TD Economics. They point to a couple of examples and I will highlight a few, including at the municipality level, like in Edmonton, Vancouver and Toronto, they have been changing zone regulations to allow for more gentle density. From the federal level, the government has made headlines by removing GST on purpose-built rental starts and to level the playing field between those types of units and condos for builders and some provinces including Ontario have followed suit as well.
TD Economics suggests other measures that the government can take. For example, eliminating or reducing cumbersome restriction construction requirements, a financing initiative which offers low-cost loans for developers. That interesting stuff. Thanks for breaking it down.
>> My pleasure.
>> MoneyTalk's Anthony Okolie. As always, do your own research before making any financial decisions. We will be back on Monday with Nicole Ewing, director of tax and estate planning at TD Wealth. She will be our guest take your questions about tax and estate planning. It you can get a head start with this question. Email moneytalklive@td.com. That's all the time we have the show today. On behalf of Anthony and me behind the desk said everyone behind the scenes who brings you the show every day, thanks for watching and will see you next week.
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