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[theme music] >> Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
Every day, I'll be joined by guests from across TD, many of whom you'll only see here.
We're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today's show, we are going to discuss that latest US inflation report, what it might mean for the Fed and interest rates, TD Asset Management's Sam Chai joins us. MoneyTalk's Anthony Okolie will be looking at how the commodity spaces reacting to that inflation report today. And in today's WebBroker education segment, Hiren Amin is going to shows how you can research GICs using the platform.
So here's how you can get in touch with us.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Before we get to all that and our guest of the day, let's get you an update on the markets.
We will start here at home on Bay Street with the TSX Composite Index.
At 22,486, it is flirting with new highs.
Up 135 points, good for a little more than half a percent. Among the most notable movers today include MTY Food Group. We will tell you more later in the show but the market is clearly pleased by the latest results.
MTY is up 10%. Air Canada is an interesting one. We got news about the airline industry south of the border. It's Delta, they are under pressure. Some of the airlines perhaps down in sympathy because while they have record bookings, they also have pretty high costs. South of the border, an interesting day. Inflation, we are going to dig into the numbers, it pleased the market in terms of the direction it is moving and we are seeing bond yield pullback with the broader equity markets are to the downside. We will start with the S&P 500, we are down about 48 points are almost a full percent.
We are seeing money move out of some of the big tech winners, Nvidia, and some of the other tech plays like Microsoft. It's an interesting day in the market.
It's hitting the NASDAQ which is tech heavy, a little harder than the S&P 500.
It's down almost 2%. Quite a substantial turnaround from record highs south of the border. We will show you Delta Airlines.
I will tell you more later in the show but as investors take a look at the port transferred also, they have some concerns clearly. The stock is done a little more than 5%. And that is your market update.
US inflation showing more signs of cooling in June, but will it be enough to convince the US Federal Reserve that the conditions are getting right for a rate cut in the coming months? Joining us now to discuss his Sam Chai, VP for active fixed income port folio management, TD Asset Management.
Great to have you back.
>> Great to be here.
>> Inflation seems to be moving in the direction we been wanting it to move in.
>> Obviously, very encouraging reports that we have seen here, both the headline and the core CPI inflation trend that moves meaningfully lower versus prior month, printing at -0.06% and 0.06% respectively. The composition of the report is also very favourable. When we look at the core inflation metric, that is something the Fed focused on a bit more because it really shows the underlying inflation trend in the economy and that has driven the bulk of the slowdown in inflation.
When we look at also the super core component, which is something also the Fed's favourite, that is really the core services component less the shelter component. That printed the second negative print in a row now and when we compare that to the very sticky and high numbers in the first quarter, this really shows that the stickiness of inflation is coming down.
Thirdly, when we look at the owner rent component, which is the largest component in the core services component, that had a meaningful step down versus prior month, also very meaningful, because that accounted for over 25% of the entire CPI basket so in order for inflation to come down sustainably towards a 2% target, we really need to see that component come down which is very favourable. The current month over month rate is now roughly back to the pre-COVID year's run rate, so that's very encouraging. And finally, for the core goods component, that had printed the 11th negative print after 12 months now, continues to be disinflationary, also good.
And just take a step back, when we look at the broader CPI trend as well, just to put it into the context, the core CPI this month at 0.06% is the lowest since early 2021. It really tells you how much progress we made on the core inflation front. Also when you look at the three month annualized Q2 inflation, that is now at 2.1%. When you compare that to Q1, that's a meaningful slowdown and it's roughly already at the target. And I do want to put one caveat which is that the path through from CPI to PCE may not be as favourable this month.
>> PCE is really what the Fed is taking a look at, right?
>> Exactly. That is the preferred inflation metric.
But because of component differences, that may actually be a bit stronger this month.
Although it will likely still be encouraging. And finally, just on the market reaction as well, those prints are meaningful downside surprised to the market's expectation. We are seeing US interest rates going lower in general but also US curve sleeping as well.
>> The bond market seems to have cast its vote as to what kind of report this was because we are seeing yield pullback across the car. Jerome Powell was giving testimony in Washington this week and one of the things he said was they were pleased with them a report, so I think there's something out there well, if you were pleased with May, the Fed should really be pleased with June. How does that start setting them up? Is the door opening wider to a rate cut in the coming months?
>> I think this report definitely gives the Fed even more confidence that this disinflation narrative is in place. You mentioned the testimony that he gave two days prior and even before this inflation print, Powell was already mentioning about this more balanced risk between the dual mandates of the Fed. And when you compare, you look at the numbers, for Q2, the three month annualized core inflation is at 4.5%. In, sorry, and Q1. In Q2, it is 2.1%. Very meaningful progress and does give the Fed more confidence that inflation is indeed coming down.
So in terms of policy implications, will this lead to a cut in July? The labour market remains resilience and there is no rush to doing anything right now but I think what it does is that it allows the Fed to turn incrementally more dovish in July and potentially set out for a rate cut in September. It is September a done deal? Not absolutely, not 100%.
We still get two more sets of labour and CPI data from July to December but I would say that the bar for those data to beat to invalidate this disinflation trend is very high, given how much disinflation progress we have already seen through the Q2 times.
And so overall, the Fed is likely going to be very much more encouraged and likely that being a September rate cut being the base case. But from September onwards, assuming that there is a rate cut, was likely going to happen for our base case more gradual easing cycle.
The Fed is likely going to continue to be data dependent and continue to be very mindful of the two-sided risk, the dual mandate. Upside inflation risk versus downside growth risk.
>> When we talk about fixed income, investors in that space, I can like they have been waiting for a while. We are starting to see the signs. What does it mean for the fixed income investor, for the bond market?
>> This is definitely an encouraging sign that the Fed is finally ready to enter into potentially the easing phase of the monetary policy cycle and the Fed has been postponing the rate cuts, it was waiting since March, one is the cut coming?
And in Q1, we had seen the disinflation narrative be de-rooted but now it has been re-ingrained and just positioning from flows we have been seeing more fixed income investors being willing to come back to the space and being more focused on the duration front. This cements the fact that an easing cycle is likely coming closer.
>> Now of course, as we wait for the easing cycle that appears to be coming closer, people who have been fixed income investors are still getting that yelled, there getting a yield they have not seen in quite some time.
We don't have a crystal ball but we look back on 2024, six months from now, what kind of years are going to look like for a fixed income investor? Granted that these themes continue on.
>> So this year, the total returns for the fixed income in the US, on the government bond side, has been slightly positive but we are seeing more encouraging signs on the data front. Obviously, the disinflation trend.
We have been seeing some moderation in economic activity data as well. That is supportive for fixed income. For the remainder of this year, the expectation is that it will likely be getting income from the fixed income side but potentially we could also get some market to market capital returns on fixed income as well. I think the second half, needless to say, the second half of the year, I would be more encouraging than the first half of the year for fixed income.
>> Interesting stuff and a great start to the program. We are going to get your questions about fixed income for Sam Chai in just a moment's time.
And a reminder that you can get in touch with us any time.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
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.
Let's get back to Delta Airlines. Shares under pressure today as we showed you off the top of the show. Strong demand for summer travel saw Delta report record revenue for its most recent quarter, but the revenue guidance, this appears to be a concern for investors today with the shares down a little more than 5%.
Delta is forecasting sales growth of up to 4%, but that is lower than Wall Street's estimates.
They are also seeing the profit line under pressure for adults and the other airlines, the industry is facing higher costs.
Closer to home, shares of MTY Food Group are among the biggest Costco Wholesale, if you shop there, you might have heard, it is raising its membership fees in Canada and the US. It's the first time they've done so since 2017. The retailer says the increases are going to affect roughly 52 million members on both sides of the border. As of September 1, the cost of an annual membership is going up by five dollars to $65, and the higher tier plan is increasing by $10-$130 annually.
Earlier Costco is higher in the wake of the news but it has turned lower with the broader US market, down to the tune of about 3% right now.
We check in on the markets, we will start here on Bay Street. We have the TSX Composite Index 22,463, it is flirting round records here. It is coming off some of its highs from earlier in the session.
We will keep a close eye on that one, who knows where we will be at the close. South of the border, softer than expected US inflation report, bond yields pulled back.
We are seeing some money move out from some of the tech winners and it's weighing on the broader market, you're down about 44 points or three quarters of a percent.
We are back with Sam Chai, take your questions about fixed income. First one here, Sam. What duration and quality of the bond market does your guest see opportunities from the interest rate cuts, in the short and long term?
>> So conclusion first. On the duration front, I would say that there is a preference for longer duration bonds right now from the perspective of total returns.
Let me slay my logic here.
We talked about the base case scenario already which is that the Fed delivers a cut likely in September followed by perhaps one additional cut by the end of this year.
And that is based on some more just inflation progress and then we have been seeing the labour market remain solid but gradually moderating. But when thinking about total executive returns, we also need to consider the risk scenario as well and I want to talk about two.
One being that the inflation progress stalled, the disinflation progress stalled or even reverses. For instance, the shelter component is one of the most important components in the CPI basket and we've been tracking several leading indicators, including on the rent side, which tend to lead the shorter component.
They have been sending mixed signals. Some are very encouraging but others have basically plateaued after decelerating for, in the past quarters.
And it cast doubt as to, okay, will the shelter component continued to does inflate, and if so, how much more?
Without the shelter component coming down, it's difficult for inflation to come down sustainably to the 2% said target.
That is one risk.
The other risk is the labour market deteriorates faster than expected.
Why are we concerned about that?
For one thing, if you look at job openings to the unemployed workers ratio in the US, that has come down very meaningfully over the past quarters and now it's at a level which is comparable to precode levels.
So over the past years, we have obviously had a very tight labour market that has rebalanced but the bulk of that rebalancing came from less job openings.
But now that it is back to pre-COVID level of tightness, any further rebalancing can manifest in job losses and that would put a risk to the Fed's mandate so that is a downside risk we are seeing.
But when we also consider that when we look at other broad metrics in the economy, for instance, GDP is coming in a bit lower, it's now starting off slower than the trend growth, when we look at soft data on the PMI front that has been trending lower as well, that makes us think that the probability of the scenario is getting more likely relative to inflation stalling, especially if inflation stalling or inflation reversal comes from the demand side, that is less likely. So judging the risk reward, we do see that the balance tilted towards the downside risk to growth so that is why overall, despite our base case being that our rates could be range bound, we can see that expected returns of duration are favourable, and hence preference for long duration. That's the answer to that question. The second part is quality, so when we think about quality, we like to think about it from the credit standpoint.
So we still like investment grade bonds in the US. We see the income it provides. But we increasingly prefer up in quality bias right now. We look at the fundamental factors and other drivers of the spread returns, on the credit fundamental side, it had been improving consistently in the first half of this year but in recent months, that process has plateaued. It's no longer improving very meaningfully.
Technical side, investor demand remains relatively resilient but that is conditional on total yield of covered bonds likely to stay at elevated levels.
And when we look at valuation, IG spread is not at all time tight but is at the tighter range from an historical look back standpoint. So combining the specters, our view is that IG spread in the US is likely to be range bound in the near term but when we all also think about our macro scenario assessment and that the downside risk is more pronounced, it really encouraged us to pursue a more up in quality bias. By that, I mean we like to be more defensive sectors, for example, versus more cyclical sectors and that could be a preference for telecom and energies and more defensive names they are relative to the more cyclical sectors where its customer discretion a.
>> Fascinating stuff there on that front.
Another question now from the audience, this one with a political flavour. We are seeing inflation come down and we are not worried about certain things that we were before. As we get closer to the US election, how do you expect the bond market to react?
>> Still a lot of uncertainty with regards to the US election.
Will Biden be the nominee for the Democrat party?
Does Trump's pole advantage continue?
If there's any more clarity on fiscal policies or other policies front from the candidates. So I would like to think about this from a scenario analysis standpoint which is Biden versus Trump and a divided versus a sweep government. So I think there are a few more clear implications we can draw from this type of analysis which is that under a sweep government, there is higher chance of a further fiscal expansion, there is more scope for fiscal expansion as well, so that should be progrowth, pro-inflation and likely supportive of higher interest rates. Under a Trump administration, tariff is top of mind it. And we think about that, though a few options that Trump is put on the table right now, none of them are immaterial.
Even if that gets them implement it in some shape or form, that likely means that on net is going to be a positive interest rate scenario as well, positive factor supporting higher interest rates.
Under a Biden invitation and most likely a divided government, that is more status quo to me and possibly a neutral scenario for interest rates. So I think of the interest rate market will react to the US election risk will depend on how the odds shift among the scenario so, for example, it's quite intuitive that after the first presidential debate with trumps all its meaningfully increased, the market is really pricing and more likelihood of a Trump and potentially a trumpet sweep government and that is why, after the debate, we had a knee-jerk reaction higher in US interest rate.
>> Interesting stuff and a lot to watch in the coming weeks and months as we head towards November.
As always, make sure you do your own research before making any investment decisions.
we are going to get back to your questions for Sam Chai on fixed income in just a moment's time.
And a reminder that you can get in touch with us any time. Just email moneytalklive@td.com.
Now, let's get our educational segment of the day.
We are talking fixed income on the show today and one class that investors may consider our GICs.
Joining us now with more is Hiren Amin, senior client education instructor with TD Direct Investing. Herein, always great to see you.
Let's talk about finding information about GICs on the platform.
>> Absolutely. Great to be back again.
Timely conversation. GICs, let's start with what the name entails. It stands for guaranteed investment certificates.
As the name suggests, for those investors who do purchase GICs, their principal essentially gets guaranteed and they also do get some interest along the way paid upon the majority of that product there.
I always like in GICs to being the Black sheep of the fixed income family. For many years, it just didn't get love at the dinner table but that has shifted and largely and thanks to the BOC and the Fed for their aggressive rate hike cycle that they went through because this directly reflected on the GIC rates that we kind of see and potentially enjoy. It's obviously garnered a lot more attention from investors over the last few years with interest rates teetering on the peak. The BOC has kind of pivoted now to change and start easing a bit and the Fed, of course, is still in that contemplation mood so the rates are sitting in these high points that we have enjoyed and that we haven't seen in a while in the market. Just to put some context for our viewers, let's jump into a broker and we will show you how you can locate some of these GICs.
Once we are in web broker, we are going to click on to our research tab over here.
Underinvestment, at the very bottom, we are going to click on the GIC Rate Sheet.
What you're going to see is these different categories. This is a comprehensive look but if you wanted to partake in it based on different maturities, you could look at short-term which are going to be anything less than a year, long term will start from a year going up to the maximum usually goes up to five years here. One of the benefits of being a self-directed investor and having a direct investment account here with TD is that the investors are going to be spoiled for choice because they're going to be a lot of variety of different issuers that you can choose from and you can do this all virtually by looking at the screen. Now, the rates to get published every day or I should say they get refreshed every day based on how the yields are moving and what the forward-looking expectations are so if you or anyone is interested in searching, with one year, we know there is a yield in version happening now. For the shorter term, you can see the one year sitting at 5% but as you go further out in maturity, you're gonna see those yields shrink a little bit compared to the shorter-term ones. But for those who are wanting to look more into it, let's say we identified one of these GICs, we can click on the rate if we want to get paid out on an annual basis and it brings you over to the ticket, order entry ticket, and all you simply going to do is plug in the amount that you want to get invested in there.
This is just a quick look at GICs perusing through the rates and how you can set up the trades there.
>> That list you are showing us, we could think of it as a shopping list. Besides rate shopping through this process, any other benefit to having a variety of GICs available?
>> Absolutely.
One of the big things that we wanted to point out is in the last little while, we know that most of these issuers of GICs are financial institutions and not so long ago, I'm just going to re-collect everyone's memory that out in the US, some of the financial institutions were on a bit of shaky ground. There are question marks around it.
Naturally, investors have concerns about their viability and for that, to ease your concerns, these products are going to be insured.
Here domestically in Canada, we have the CDIC which is the Canada Deposit Insurance Corporation. It is a Crown corporation that backs these financial institutions in the event of failure and when it comes to GICs, we know that we are protected if you have a run-of-the-mill checking or savings account but it also applies the same way to GICs. You get coverage of 200,000 per issuer per account and so one of the things we wanted to highlight was if you have let's say an amount that is going to be greater than 100,000 to invest and allocate towards your GIC, in a portfolio, then you may want to split it up to get up to that hundred thousand insurance.
Rather than putting it all into one issuer, investors may consider just divvying up between different issuers, capping it up 200,000 so that you know that in the event of a worst case scenario, you will be fully covered. The other thing I wanted to mention, I wanted to click on one of these, is just to be aware of the minimum values that the GICs have. Let's bring up one and I will click on the selection here and what it will do is show me all the GICs and tell me what are the minimum and maximum values that you can invest and you do have the ability to shorted out based on how much you need to allocate.
If you're on a more economical budget when it comes to this, you can identify ones that are going to be a little less damaging on your wallet when it comes to the threshold there. The main two considerations. Keep in mind the last thing I will mention is these are going to, although once you invest in a GIC, your rates are fixed, the rates do get refreshed every day and it's always based on looking at the forward-looking yields and the yields start coming back, you see them start to accordingly shrink or grow to paying on how that's going. Those are considerations to think about when looking at GICs.
>> Great primer there. Thanks a lot for that.
>> My pleasure.
>> Hiren Amin, Senior client education instructor with TD Direct Investing. For more educational resources, you can check out the learning centre on web broker or you can use this QR code, it will navigate to TD Direct Investing's YouTube page and there you are going to find more informative videos.
We are back with Sam Chai, taking your questions about fixed income. Next one here for you.
Let's dig in. Has the bank of Canada been playing the yield curve, buying deeply discounted long bonds and replacing with near-term T-bills, increasing carry cost but with the thinking that when near-term rates declined, so does the value of the long term go increase, pay more for a while but reduce overall debt outstanding?
Break this one down for us.
>> Quite a long question. The short answer is no. Since early 2022, the Bank of Canada had incremented the quantitative tightening policy by which that means the Bank of Canada would, one, and not be purchasing any Government of Canada bonds from either primary or secondary markets.
Two, not reinvest in any maturing Government of Canada bonds and allowing any matured bond to roll off its balance sheet but also not actively selling any Government of Canada bonds from the balance sheet as well. The short answer is the government of Canada is not purchasing long-term bonds, regardless of whether they are discounted or not.
I would like to raise one point here though to add to this discussion which is the federal government's debt management strategy. In terms of how they have managed their reasoned Government of Canada bond issuance, there had been, it is notable that increasingly, there is a relatively lower amount of issuance of 30 year Government of Canada bonds relative to say five year or 10 year bonds. So it is arguable and debatable perhaps that one of the factors for that strategy is consideration that not to lock in this relatively higher funding cost for a 30 year period and prefers to use shorter bonds for funding purposes.
>> Interesting stuff in an intriguing question there. Next question. Someone wants to say, do you see the discount spread between Canada and the USA widening this year on the long end? It has narrowed recently.
>> So my general thought on that is that we are likely going to see probably a range bound, range bound environment for the cross market spread. I take this question to me and basically the difference between US rates versus the Canadian rates in the long term bonds.
So to think about this, to think about this, we need to look at both the Federal Reserve and the Bank of Canada. The Federal Reserve, we already laid out the base case, cut likely in September followed by one market this year.
For Bank of Canada though, I think it is unlikely the Fed will be able to out doff the Bank of Canada and ease more aggressively.
I think there is a better than all chance that the Bank of Canada goes for another cut in July.
I fully acknowledge that the latest may CPI data is quite strong in Canada.
However, to put it into a broader context, we have seen four good months of disinflation data in Canada and I think there is a relatively high bar that the June CPI, which you will get next week, need to meet for the May and June CPI together to invalidate the disinflationary trend we have seen year to date.
Especially when one considers that the labour market in Canada had lost quite a bit more versus the US. The unpleasant rate for our country, there many reasons for that, but in general, the unemployment rate has risen meaningfully and sustainably from its trough and so when you consider that labour induced inflation pressure is also relatively much lower in Canada, I think that it is not likely that the June CPI will be able to meet that bar to basically necessitate the bank of Canada to make way for one more month to deliver a cut later in August, September.
However, with that relative expectation of the two central banks, I see that in the near term we each get more of a range bound cross market rate, especially as the question pointed out that cross market spread has already narrowed meaningfully of late.
In the medium to long term, however, I think there is room for that cross market spread it to perform, because the US rate is starting from a high policy rate standpoint. The assumed average long-term rate, the market is priced in for the US, it's also relatively elevated and from an historical standpoint, that cross market spread on absolute valuation is also relatively wide and given the correlation between the two economies, we do expect that over the cycle, there would be monetary policy convergence but that's more often medium to long term opportunities and I would think we could be patient, to wait that one out.
>> Interesting stuff, July 24, the next BOC rate decision. I meeting you want to keep your eyes on.
We will get back to your questions for Sam Chai on fixed income in just a moment's time.
As always, make sure you do your own research before making any investment decisions.
And a reminder that you get in touch with us at any time.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
Gold is obviously been in the headlines for quite a while now, tracking some renewed interest today following that softer than expected US inflation data bolstering expectations of that September rate cut from the Fed, not a done deal with the doors open wider.
Anthony Okolie joining us now.
>> As you mentioned, gold is trading around $2417, up nearly 2%. The softer than expected US inflation data is boosting hopes for a September rate cut.
That is good news for gold, since lower interest rates reduces the opportunity cost of holding gold which does not, of course, pay any interest. Another key driver for gold prices today, of course, is central bank buying. Central bank buying, banks around the world continue to hoard gold and continue to add to the foreign exchange reserves.
Despite the fact that the consumer People's Bank of China has paused its buying of gold for the second straight month, we continue to see central banks around the world buying gold and according to TD Securities, we see that from the Bank of India, they bought about nine tons of gold in June. The National Bank of Poland, four tons, check National Bank, two tons and this buying continues to show that the official sector is much broader than just the People's Bank of China. As the chart shows here, the central bank gold holdings have had the highest level since… And higher levels could be on the way. Despite the pause and purchasing gold by the People's Bank of China and TD Securities attributes that to the price of gold being a little higher right now for China, they believe that China will continue to purchase gold in the future and that's because currently they only have about 5% of the foreign exchange in gold reserves. That compares to between 15 to 25% for global peers. They have a long way to go in order to catch up to their global peers which means they will have to do significant purchases over the coming years, coming decade according to TD Securities, to get there so that really bodes well for the price of gold and gold demand going forward. Greg.
>> Really fascinating dynamics.
[video skipped] MoneyTalk's Anthony Okolie.
Now, for an update on the markets.
We are having a look at TD's Advanced Dashboard, a platform designed for active traders available through TD Direct Investing.
We are at the heat map function here, nice view of the market movers. Let's start with the TSX 60 by Price and volume. As you look at the broader TSX compensate, we are flirting with new highs.
What are we getting out of the actual sector? Advanced Dashboard actually is not cooperating with us at the moment but we do have some widespread green on the screen I can tell you that much, including the financials getting a bit of a bid today as well.
Sorry I couldn't bring that to you but we will get back now to Sam Chai, talking about fixed income. Another question for you here.
What impact could the elections in Europe have on the bond market?
>> We can talk a little bit about the background of the, particularly the France election event.
In early June, President Macron had to call a snap Parliament election which surprised the market and as a knee-jerk reaction, the European rates fell meaningfully and that spilled over to the global rates market and will boys got dragged lower. Why is that?
To basically understand that, we also have to know that at the time, the far right party, Le Pen's party, was pulling very well and there is fear that the far right party could form a majority government in France and that could persuade more reckless policies, including fiscal expansions, particularly consider that France is already struggling with fiscal deficit concerns right now and the fear is that the far right party could clash with the European Union's and also exacerbate other concerns.
Also a knee-jerk reaction, the France government bond spread over that of the Germany bond yield, which is basically like a measure of… Has risen meaningfully and that led to concerns that the European Central Bank may need to ease more aggressively to address this new risk and to address this risk of fragmentation's of the monetary policy transmission issues.
That is why the European interest rate went lower.
But, lo and behold, the actual result from the election is actually quite surprising, again. Surprising initially and surprising in the ends that the far right party actually got much less seats than expected and the end result is a hung Parliament right now, so no major party is able to form a majority government.
Is there a lot of political uncertainty still? Yes, but it did give assurance to the market that more reckless policies from the far left and the far right will not be pursued at this point. And so as a result, the France a government bond spread has basically retreated meaningfully and the European rates, the price for this risk, has also came back and so now the event risk is now on the back burner. This became more of a secondary driver for interest rate market in general and I think right now it's more neutral but obviously there could be tail risk but I think that would not be a lot of headline risk at this point.
>> Interesting stuff on that front.
It is squeeze in one more question. Our friend Hiren Amin earlier was talking about GICs on the platform.
The viewer wants to know, how are GICs looking compared to bonds?
>> So the preference would be to overweight bond versus GICs in monetary policy easing cycle. We talk about the base case expectation for the Bank of Canada policy past which is that better a cut in July followed by potentially one or two markets this year. And that expectation is slightly more than what the market is currently pricing and so in a base case scenario, I think that rates could be relatively range bound in Canada and that could deliver similar returns to that of GICs but when we also consider the downside risk to growth, I think that the expected returns for bonds would be skewed to the upside, hence why my preference would be to, at the current time, hold bonds, longer duration bonds, over GICs.
>> Perhaps for someone not familiar with the DIC and bond market might not realize that the bond, the value can change if we see rates come down, you get that capital gain you were talking about earlier, the GIC, this is the rate you're going to get, the principal is the principal, it will not change.
>> For sure.
>> Interesting stuff indeed.
Before we let you go, any final thoughts about how we should think about the second half of the year? We seem to be in a position where the Fed might deliver in September and the Bank of Canada might deliver again later this month.
What should the fixed income investor be thinking about?
>> I think the market generally had been assured on the fixed income side that we are seeing more disinflation in general in the US and to the extent that the US rate still drive the global rates market, this is quite important because directionally, that means that we likely have the upside of rates capped.
Again, in a base case scenario where the Fed only delivers gradual easing starting in September, we could see say 10 year US rates being range bound from somewhere around 4 to 5% and in that range but we have been seeing more slowdown in general economic data. Again, labour market data is, should be keenly watched, as you mentioned earlier, chair Powell himself had been mentioning that the balance of risk should be shifting now much more in balance for upside inflation versus downside labour risk, and the latest data on, survey data or when you look at other general indicators, though should be watched for downside risk for rates and we are position for effective returns to be positive in fixed income, watching the risk scenario, how they play out. The central bank will continue to be data dependent, of course, but the macroeconomic trend is suggesting that a re-acceleration of the data trend is not very likely at this point.
>> Fascinating set. Always a pleasure to have you.
>> Thank you very much.
>> Our thanks to Sam Chai, VP for active fixed income for fully management at TD Asset Management.
As always, make sure you do your own research before making any investment decisions.
if we didn't have time to get your question today, we are going to aim to get it into future shows.
Stay tuned. We'll be back tomorrow with an update on the markets and how is from some of our best interviews of the week and then on Monday show, John Eade, president of Argus Research, is going to be our guest taking your questions about market strategy. And a reminder that you can get a head start. Just email MoneyTalkLive@TD.com. That's all the time we have for today, thanks for watching.
We will see you tomorrow.
[theme music]
Every day, I'll be joined by guests from across TD, many of whom you'll only see here.
We're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today's show, we are going to discuss that latest US inflation report, what it might mean for the Fed and interest rates, TD Asset Management's Sam Chai joins us. MoneyTalk's Anthony Okolie will be looking at how the commodity spaces reacting to that inflation report today. And in today's WebBroker education segment, Hiren Amin is going to shows how you can research GICs using the platform.
So here's how you can get in touch with us.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Before we get to all that and our guest of the day, let's get you an update on the markets.
We will start here at home on Bay Street with the TSX Composite Index.
At 22,486, it is flirting with new highs.
Up 135 points, good for a little more than half a percent. Among the most notable movers today include MTY Food Group. We will tell you more later in the show but the market is clearly pleased by the latest results.
MTY is up 10%. Air Canada is an interesting one. We got news about the airline industry south of the border. It's Delta, they are under pressure. Some of the airlines perhaps down in sympathy because while they have record bookings, they also have pretty high costs. South of the border, an interesting day. Inflation, we are going to dig into the numbers, it pleased the market in terms of the direction it is moving and we are seeing bond yield pullback with the broader equity markets are to the downside. We will start with the S&P 500, we are down about 48 points are almost a full percent.
We are seeing money move out of some of the big tech winners, Nvidia, and some of the other tech plays like Microsoft. It's an interesting day in the market.
It's hitting the NASDAQ which is tech heavy, a little harder than the S&P 500.
It's down almost 2%. Quite a substantial turnaround from record highs south of the border. We will show you Delta Airlines.
I will tell you more later in the show but as investors take a look at the port transferred also, they have some concerns clearly. The stock is done a little more than 5%. And that is your market update.
US inflation showing more signs of cooling in June, but will it be enough to convince the US Federal Reserve that the conditions are getting right for a rate cut in the coming months? Joining us now to discuss his Sam Chai, VP for active fixed income port folio management, TD Asset Management.
Great to have you back.
>> Great to be here.
>> Inflation seems to be moving in the direction we been wanting it to move in.
>> Obviously, very encouraging reports that we have seen here, both the headline and the core CPI inflation trend that moves meaningfully lower versus prior month, printing at -0.06% and 0.06% respectively. The composition of the report is also very favourable. When we look at the core inflation metric, that is something the Fed focused on a bit more because it really shows the underlying inflation trend in the economy and that has driven the bulk of the slowdown in inflation.
When we look at also the super core component, which is something also the Fed's favourite, that is really the core services component less the shelter component. That printed the second negative print in a row now and when we compare that to the very sticky and high numbers in the first quarter, this really shows that the stickiness of inflation is coming down.
Thirdly, when we look at the owner rent component, which is the largest component in the core services component, that had a meaningful step down versus prior month, also very meaningful, because that accounted for over 25% of the entire CPI basket so in order for inflation to come down sustainably towards a 2% target, we really need to see that component come down which is very favourable. The current month over month rate is now roughly back to the pre-COVID year's run rate, so that's very encouraging. And finally, for the core goods component, that had printed the 11th negative print after 12 months now, continues to be disinflationary, also good.
And just take a step back, when we look at the broader CPI trend as well, just to put it into the context, the core CPI this month at 0.06% is the lowest since early 2021. It really tells you how much progress we made on the core inflation front. Also when you look at the three month annualized Q2 inflation, that is now at 2.1%. When you compare that to Q1, that's a meaningful slowdown and it's roughly already at the target. And I do want to put one caveat which is that the path through from CPI to PCE may not be as favourable this month.
>> PCE is really what the Fed is taking a look at, right?
>> Exactly. That is the preferred inflation metric.
But because of component differences, that may actually be a bit stronger this month.
Although it will likely still be encouraging. And finally, just on the market reaction as well, those prints are meaningful downside surprised to the market's expectation. We are seeing US interest rates going lower in general but also US curve sleeping as well.
>> The bond market seems to have cast its vote as to what kind of report this was because we are seeing yield pullback across the car. Jerome Powell was giving testimony in Washington this week and one of the things he said was they were pleased with them a report, so I think there's something out there well, if you were pleased with May, the Fed should really be pleased with June. How does that start setting them up? Is the door opening wider to a rate cut in the coming months?
>> I think this report definitely gives the Fed even more confidence that this disinflation narrative is in place. You mentioned the testimony that he gave two days prior and even before this inflation print, Powell was already mentioning about this more balanced risk between the dual mandates of the Fed. And when you compare, you look at the numbers, for Q2, the three month annualized core inflation is at 4.5%. In, sorry, and Q1. In Q2, it is 2.1%. Very meaningful progress and does give the Fed more confidence that inflation is indeed coming down.
So in terms of policy implications, will this lead to a cut in July? The labour market remains resilience and there is no rush to doing anything right now but I think what it does is that it allows the Fed to turn incrementally more dovish in July and potentially set out for a rate cut in September. It is September a done deal? Not absolutely, not 100%.
We still get two more sets of labour and CPI data from July to December but I would say that the bar for those data to beat to invalidate this disinflation trend is very high, given how much disinflation progress we have already seen through the Q2 times.
And so overall, the Fed is likely going to be very much more encouraged and likely that being a September rate cut being the base case. But from September onwards, assuming that there is a rate cut, was likely going to happen for our base case more gradual easing cycle.
The Fed is likely going to continue to be data dependent and continue to be very mindful of the two-sided risk, the dual mandate. Upside inflation risk versus downside growth risk.
>> When we talk about fixed income, investors in that space, I can like they have been waiting for a while. We are starting to see the signs. What does it mean for the fixed income investor, for the bond market?
>> This is definitely an encouraging sign that the Fed is finally ready to enter into potentially the easing phase of the monetary policy cycle and the Fed has been postponing the rate cuts, it was waiting since March, one is the cut coming?
And in Q1, we had seen the disinflation narrative be de-rooted but now it has been re-ingrained and just positioning from flows we have been seeing more fixed income investors being willing to come back to the space and being more focused on the duration front. This cements the fact that an easing cycle is likely coming closer.
>> Now of course, as we wait for the easing cycle that appears to be coming closer, people who have been fixed income investors are still getting that yelled, there getting a yield they have not seen in quite some time.
We don't have a crystal ball but we look back on 2024, six months from now, what kind of years are going to look like for a fixed income investor? Granted that these themes continue on.
>> So this year, the total returns for the fixed income in the US, on the government bond side, has been slightly positive but we are seeing more encouraging signs on the data front. Obviously, the disinflation trend.
We have been seeing some moderation in economic activity data as well. That is supportive for fixed income. For the remainder of this year, the expectation is that it will likely be getting income from the fixed income side but potentially we could also get some market to market capital returns on fixed income as well. I think the second half, needless to say, the second half of the year, I would be more encouraging than the first half of the year for fixed income.
>> Interesting stuff and a great start to the program. We are going to get your questions about fixed income for Sam Chai in just a moment's time.
And a reminder that you can get in touch with us any time.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
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.
Let's get back to Delta Airlines. Shares under pressure today as we showed you off the top of the show. Strong demand for summer travel saw Delta report record revenue for its most recent quarter, but the revenue guidance, this appears to be a concern for investors today with the shares down a little more than 5%.
Delta is forecasting sales growth of up to 4%, but that is lower than Wall Street's estimates.
They are also seeing the profit line under pressure for adults and the other airlines, the industry is facing higher costs.
Closer to home, shares of MTY Food Group are among the biggest Costco Wholesale, if you shop there, you might have heard, it is raising its membership fees in Canada and the US. It's the first time they've done so since 2017. The retailer says the increases are going to affect roughly 52 million members on both sides of the border. As of September 1, the cost of an annual membership is going up by five dollars to $65, and the higher tier plan is increasing by $10-$130 annually.
Earlier Costco is higher in the wake of the news but it has turned lower with the broader US market, down to the tune of about 3% right now.
We check in on the markets, we will start here on Bay Street. We have the TSX Composite Index 22,463, it is flirting round records here. It is coming off some of its highs from earlier in the session.
We will keep a close eye on that one, who knows where we will be at the close. South of the border, softer than expected US inflation report, bond yields pulled back.
We are seeing some money move out from some of the tech winners and it's weighing on the broader market, you're down about 44 points or three quarters of a percent.
We are back with Sam Chai, take your questions about fixed income. First one here, Sam. What duration and quality of the bond market does your guest see opportunities from the interest rate cuts, in the short and long term?
>> So conclusion first. On the duration front, I would say that there is a preference for longer duration bonds right now from the perspective of total returns.
Let me slay my logic here.
We talked about the base case scenario already which is that the Fed delivers a cut likely in September followed by perhaps one additional cut by the end of this year.
And that is based on some more just inflation progress and then we have been seeing the labour market remain solid but gradually moderating. But when thinking about total executive returns, we also need to consider the risk scenario as well and I want to talk about two.
One being that the inflation progress stalled, the disinflation progress stalled or even reverses. For instance, the shelter component is one of the most important components in the CPI basket and we've been tracking several leading indicators, including on the rent side, which tend to lead the shorter component.
They have been sending mixed signals. Some are very encouraging but others have basically plateaued after decelerating for, in the past quarters.
And it cast doubt as to, okay, will the shelter component continued to does inflate, and if so, how much more?
Without the shelter component coming down, it's difficult for inflation to come down sustainably to the 2% said target.
That is one risk.
The other risk is the labour market deteriorates faster than expected.
Why are we concerned about that?
For one thing, if you look at job openings to the unemployed workers ratio in the US, that has come down very meaningfully over the past quarters and now it's at a level which is comparable to precode levels.
So over the past years, we have obviously had a very tight labour market that has rebalanced but the bulk of that rebalancing came from less job openings.
But now that it is back to pre-COVID level of tightness, any further rebalancing can manifest in job losses and that would put a risk to the Fed's mandate so that is a downside risk we are seeing.
But when we also consider that when we look at other broad metrics in the economy, for instance, GDP is coming in a bit lower, it's now starting off slower than the trend growth, when we look at soft data on the PMI front that has been trending lower as well, that makes us think that the probability of the scenario is getting more likely relative to inflation stalling, especially if inflation stalling or inflation reversal comes from the demand side, that is less likely. So judging the risk reward, we do see that the balance tilted towards the downside risk to growth so that is why overall, despite our base case being that our rates could be range bound, we can see that expected returns of duration are favourable, and hence preference for long duration. That's the answer to that question. The second part is quality, so when we think about quality, we like to think about it from the credit standpoint.
So we still like investment grade bonds in the US. We see the income it provides. But we increasingly prefer up in quality bias right now. We look at the fundamental factors and other drivers of the spread returns, on the credit fundamental side, it had been improving consistently in the first half of this year but in recent months, that process has plateaued. It's no longer improving very meaningfully.
Technical side, investor demand remains relatively resilient but that is conditional on total yield of covered bonds likely to stay at elevated levels.
And when we look at valuation, IG spread is not at all time tight but is at the tighter range from an historical look back standpoint. So combining the specters, our view is that IG spread in the US is likely to be range bound in the near term but when we all also think about our macro scenario assessment and that the downside risk is more pronounced, it really encouraged us to pursue a more up in quality bias. By that, I mean we like to be more defensive sectors, for example, versus more cyclical sectors and that could be a preference for telecom and energies and more defensive names they are relative to the more cyclical sectors where its customer discretion a.
>> Fascinating stuff there on that front.
Another question now from the audience, this one with a political flavour. We are seeing inflation come down and we are not worried about certain things that we were before. As we get closer to the US election, how do you expect the bond market to react?
>> Still a lot of uncertainty with regards to the US election.
Will Biden be the nominee for the Democrat party?
Does Trump's pole advantage continue?
If there's any more clarity on fiscal policies or other policies front from the candidates. So I would like to think about this from a scenario analysis standpoint which is Biden versus Trump and a divided versus a sweep government. So I think there are a few more clear implications we can draw from this type of analysis which is that under a sweep government, there is higher chance of a further fiscal expansion, there is more scope for fiscal expansion as well, so that should be progrowth, pro-inflation and likely supportive of higher interest rates. Under a Trump administration, tariff is top of mind it. And we think about that, though a few options that Trump is put on the table right now, none of them are immaterial.
Even if that gets them implement it in some shape or form, that likely means that on net is going to be a positive interest rate scenario as well, positive factor supporting higher interest rates.
Under a Biden invitation and most likely a divided government, that is more status quo to me and possibly a neutral scenario for interest rates. So I think of the interest rate market will react to the US election risk will depend on how the odds shift among the scenario so, for example, it's quite intuitive that after the first presidential debate with trumps all its meaningfully increased, the market is really pricing and more likelihood of a Trump and potentially a trumpet sweep government and that is why, after the debate, we had a knee-jerk reaction higher in US interest rate.
>> Interesting stuff and a lot to watch in the coming weeks and months as we head towards November.
As always, make sure you do your own research before making any investment decisions.
we are going to get back to your questions for Sam Chai on fixed income in just a moment's time.
And a reminder that you can get in touch with us any time. Just email moneytalklive@td.com.
Now, let's get our educational segment of the day.
We are talking fixed income on the show today and one class that investors may consider our GICs.
Joining us now with more is Hiren Amin, senior client education instructor with TD Direct Investing. Herein, always great to see you.
Let's talk about finding information about GICs on the platform.
>> Absolutely. Great to be back again.
Timely conversation. GICs, let's start with what the name entails. It stands for guaranteed investment certificates.
As the name suggests, for those investors who do purchase GICs, their principal essentially gets guaranteed and they also do get some interest along the way paid upon the majority of that product there.
I always like in GICs to being the Black sheep of the fixed income family. For many years, it just didn't get love at the dinner table but that has shifted and largely and thanks to the BOC and the Fed for their aggressive rate hike cycle that they went through because this directly reflected on the GIC rates that we kind of see and potentially enjoy. It's obviously garnered a lot more attention from investors over the last few years with interest rates teetering on the peak. The BOC has kind of pivoted now to change and start easing a bit and the Fed, of course, is still in that contemplation mood so the rates are sitting in these high points that we have enjoyed and that we haven't seen in a while in the market. Just to put some context for our viewers, let's jump into a broker and we will show you how you can locate some of these GICs.
Once we are in web broker, we are going to click on to our research tab over here.
Underinvestment, at the very bottom, we are going to click on the GIC Rate Sheet.
What you're going to see is these different categories. This is a comprehensive look but if you wanted to partake in it based on different maturities, you could look at short-term which are going to be anything less than a year, long term will start from a year going up to the maximum usually goes up to five years here. One of the benefits of being a self-directed investor and having a direct investment account here with TD is that the investors are going to be spoiled for choice because they're going to be a lot of variety of different issuers that you can choose from and you can do this all virtually by looking at the screen. Now, the rates to get published every day or I should say they get refreshed every day based on how the yields are moving and what the forward-looking expectations are so if you or anyone is interested in searching, with one year, we know there is a yield in version happening now. For the shorter term, you can see the one year sitting at 5% but as you go further out in maturity, you're gonna see those yields shrink a little bit compared to the shorter-term ones. But for those who are wanting to look more into it, let's say we identified one of these GICs, we can click on the rate if we want to get paid out on an annual basis and it brings you over to the ticket, order entry ticket, and all you simply going to do is plug in the amount that you want to get invested in there.
This is just a quick look at GICs perusing through the rates and how you can set up the trades there.
>> That list you are showing us, we could think of it as a shopping list. Besides rate shopping through this process, any other benefit to having a variety of GICs available?
>> Absolutely.
One of the big things that we wanted to point out is in the last little while, we know that most of these issuers of GICs are financial institutions and not so long ago, I'm just going to re-collect everyone's memory that out in the US, some of the financial institutions were on a bit of shaky ground. There are question marks around it.
Naturally, investors have concerns about their viability and for that, to ease your concerns, these products are going to be insured.
Here domestically in Canada, we have the CDIC which is the Canada Deposit Insurance Corporation. It is a Crown corporation that backs these financial institutions in the event of failure and when it comes to GICs, we know that we are protected if you have a run-of-the-mill checking or savings account but it also applies the same way to GICs. You get coverage of 200,000 per issuer per account and so one of the things we wanted to highlight was if you have let's say an amount that is going to be greater than 100,000 to invest and allocate towards your GIC, in a portfolio, then you may want to split it up to get up to that hundred thousand insurance.
Rather than putting it all into one issuer, investors may consider just divvying up between different issuers, capping it up 200,000 so that you know that in the event of a worst case scenario, you will be fully covered. The other thing I wanted to mention, I wanted to click on one of these, is just to be aware of the minimum values that the GICs have. Let's bring up one and I will click on the selection here and what it will do is show me all the GICs and tell me what are the minimum and maximum values that you can invest and you do have the ability to shorted out based on how much you need to allocate.
If you're on a more economical budget when it comes to this, you can identify ones that are going to be a little less damaging on your wallet when it comes to the threshold there. The main two considerations. Keep in mind the last thing I will mention is these are going to, although once you invest in a GIC, your rates are fixed, the rates do get refreshed every day and it's always based on looking at the forward-looking yields and the yields start coming back, you see them start to accordingly shrink or grow to paying on how that's going. Those are considerations to think about when looking at GICs.
>> Great primer there. Thanks a lot for that.
>> My pleasure.
>> Hiren Amin, Senior client education instructor with TD Direct Investing. For more educational resources, you can check out the learning centre on web broker or you can use this QR code, it will navigate to TD Direct Investing's YouTube page and there you are going to find more informative videos.
We are back with Sam Chai, taking your questions about fixed income. Next one here for you.
Let's dig in. Has the bank of Canada been playing the yield curve, buying deeply discounted long bonds and replacing with near-term T-bills, increasing carry cost but with the thinking that when near-term rates declined, so does the value of the long term go increase, pay more for a while but reduce overall debt outstanding?
Break this one down for us.
>> Quite a long question. The short answer is no. Since early 2022, the Bank of Canada had incremented the quantitative tightening policy by which that means the Bank of Canada would, one, and not be purchasing any Government of Canada bonds from either primary or secondary markets.
Two, not reinvest in any maturing Government of Canada bonds and allowing any matured bond to roll off its balance sheet but also not actively selling any Government of Canada bonds from the balance sheet as well. The short answer is the government of Canada is not purchasing long-term bonds, regardless of whether they are discounted or not.
I would like to raise one point here though to add to this discussion which is the federal government's debt management strategy. In terms of how they have managed their reasoned Government of Canada bond issuance, there had been, it is notable that increasingly, there is a relatively lower amount of issuance of 30 year Government of Canada bonds relative to say five year or 10 year bonds. So it is arguable and debatable perhaps that one of the factors for that strategy is consideration that not to lock in this relatively higher funding cost for a 30 year period and prefers to use shorter bonds for funding purposes.
>> Interesting stuff in an intriguing question there. Next question. Someone wants to say, do you see the discount spread between Canada and the USA widening this year on the long end? It has narrowed recently.
>> So my general thought on that is that we are likely going to see probably a range bound, range bound environment for the cross market spread. I take this question to me and basically the difference between US rates versus the Canadian rates in the long term bonds.
So to think about this, to think about this, we need to look at both the Federal Reserve and the Bank of Canada. The Federal Reserve, we already laid out the base case, cut likely in September followed by one market this year.
For Bank of Canada though, I think it is unlikely the Fed will be able to out doff the Bank of Canada and ease more aggressively.
I think there is a better than all chance that the Bank of Canada goes for another cut in July.
I fully acknowledge that the latest may CPI data is quite strong in Canada.
However, to put it into a broader context, we have seen four good months of disinflation data in Canada and I think there is a relatively high bar that the June CPI, which you will get next week, need to meet for the May and June CPI together to invalidate the disinflationary trend we have seen year to date.
Especially when one considers that the labour market in Canada had lost quite a bit more versus the US. The unpleasant rate for our country, there many reasons for that, but in general, the unemployment rate has risen meaningfully and sustainably from its trough and so when you consider that labour induced inflation pressure is also relatively much lower in Canada, I think that it is not likely that the June CPI will be able to meet that bar to basically necessitate the bank of Canada to make way for one more month to deliver a cut later in August, September.
However, with that relative expectation of the two central banks, I see that in the near term we each get more of a range bound cross market rate, especially as the question pointed out that cross market spread has already narrowed meaningfully of late.
In the medium to long term, however, I think there is room for that cross market spread it to perform, because the US rate is starting from a high policy rate standpoint. The assumed average long-term rate, the market is priced in for the US, it's also relatively elevated and from an historical standpoint, that cross market spread on absolute valuation is also relatively wide and given the correlation between the two economies, we do expect that over the cycle, there would be monetary policy convergence but that's more often medium to long term opportunities and I would think we could be patient, to wait that one out.
>> Interesting stuff, July 24, the next BOC rate decision. I meeting you want to keep your eyes on.
We will get back to your questions for Sam Chai on fixed income in just a moment's time.
As always, make sure you do your own research before making any investment decisions.
And a reminder that you get in touch with us at any time.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
Gold is obviously been in the headlines for quite a while now, tracking some renewed interest today following that softer than expected US inflation data bolstering expectations of that September rate cut from the Fed, not a done deal with the doors open wider.
Anthony Okolie joining us now.
>> As you mentioned, gold is trading around $2417, up nearly 2%. The softer than expected US inflation data is boosting hopes for a September rate cut.
That is good news for gold, since lower interest rates reduces the opportunity cost of holding gold which does not, of course, pay any interest. Another key driver for gold prices today, of course, is central bank buying. Central bank buying, banks around the world continue to hoard gold and continue to add to the foreign exchange reserves.
Despite the fact that the consumer People's Bank of China has paused its buying of gold for the second straight month, we continue to see central banks around the world buying gold and according to TD Securities, we see that from the Bank of India, they bought about nine tons of gold in June. The National Bank of Poland, four tons, check National Bank, two tons and this buying continues to show that the official sector is much broader than just the People's Bank of China. As the chart shows here, the central bank gold holdings have had the highest level since… And higher levels could be on the way. Despite the pause and purchasing gold by the People's Bank of China and TD Securities attributes that to the price of gold being a little higher right now for China, they believe that China will continue to purchase gold in the future and that's because currently they only have about 5% of the foreign exchange in gold reserves. That compares to between 15 to 25% for global peers. They have a long way to go in order to catch up to their global peers which means they will have to do significant purchases over the coming years, coming decade according to TD Securities, to get there so that really bodes well for the price of gold and gold demand going forward. Greg.
>> Really fascinating dynamics.
[video skipped] MoneyTalk's Anthony Okolie.
Now, for an update on the markets.
We are having a look at TD's Advanced Dashboard, a platform designed for active traders available through TD Direct Investing.
We are at the heat map function here, nice view of the market movers. Let's start with the TSX 60 by Price and volume. As you look at the broader TSX compensate, we are flirting with new highs.
What are we getting out of the actual sector? Advanced Dashboard actually is not cooperating with us at the moment but we do have some widespread green on the screen I can tell you that much, including the financials getting a bit of a bid today as well.
Sorry I couldn't bring that to you but we will get back now to Sam Chai, talking about fixed income. Another question for you here.
What impact could the elections in Europe have on the bond market?
>> We can talk a little bit about the background of the, particularly the France election event.
In early June, President Macron had to call a snap Parliament election which surprised the market and as a knee-jerk reaction, the European rates fell meaningfully and that spilled over to the global rates market and will boys got dragged lower. Why is that?
To basically understand that, we also have to know that at the time, the far right party, Le Pen's party, was pulling very well and there is fear that the far right party could form a majority government in France and that could persuade more reckless policies, including fiscal expansions, particularly consider that France is already struggling with fiscal deficit concerns right now and the fear is that the far right party could clash with the European Union's and also exacerbate other concerns.
Also a knee-jerk reaction, the France government bond spread over that of the Germany bond yield, which is basically like a measure of… Has risen meaningfully and that led to concerns that the European Central Bank may need to ease more aggressively to address this new risk and to address this risk of fragmentation's of the monetary policy transmission issues.
That is why the European interest rate went lower.
But, lo and behold, the actual result from the election is actually quite surprising, again. Surprising initially and surprising in the ends that the far right party actually got much less seats than expected and the end result is a hung Parliament right now, so no major party is able to form a majority government.
Is there a lot of political uncertainty still? Yes, but it did give assurance to the market that more reckless policies from the far left and the far right will not be pursued at this point. And so as a result, the France a government bond spread has basically retreated meaningfully and the European rates, the price for this risk, has also came back and so now the event risk is now on the back burner. This became more of a secondary driver for interest rate market in general and I think right now it's more neutral but obviously there could be tail risk but I think that would not be a lot of headline risk at this point.
>> Interesting stuff on that front.
It is squeeze in one more question. Our friend Hiren Amin earlier was talking about GICs on the platform.
The viewer wants to know, how are GICs looking compared to bonds?
>> So the preference would be to overweight bond versus GICs in monetary policy easing cycle. We talk about the base case expectation for the Bank of Canada policy past which is that better a cut in July followed by potentially one or two markets this year. And that expectation is slightly more than what the market is currently pricing and so in a base case scenario, I think that rates could be relatively range bound in Canada and that could deliver similar returns to that of GICs but when we also consider the downside risk to growth, I think that the expected returns for bonds would be skewed to the upside, hence why my preference would be to, at the current time, hold bonds, longer duration bonds, over GICs.
>> Perhaps for someone not familiar with the DIC and bond market might not realize that the bond, the value can change if we see rates come down, you get that capital gain you were talking about earlier, the GIC, this is the rate you're going to get, the principal is the principal, it will not change.
>> For sure.
>> Interesting stuff indeed.
Before we let you go, any final thoughts about how we should think about the second half of the year? We seem to be in a position where the Fed might deliver in September and the Bank of Canada might deliver again later this month.
What should the fixed income investor be thinking about?
>> I think the market generally had been assured on the fixed income side that we are seeing more disinflation in general in the US and to the extent that the US rate still drive the global rates market, this is quite important because directionally, that means that we likely have the upside of rates capped.
Again, in a base case scenario where the Fed only delivers gradual easing starting in September, we could see say 10 year US rates being range bound from somewhere around 4 to 5% and in that range but we have been seeing more slowdown in general economic data. Again, labour market data is, should be keenly watched, as you mentioned earlier, chair Powell himself had been mentioning that the balance of risk should be shifting now much more in balance for upside inflation versus downside labour risk, and the latest data on, survey data or when you look at other general indicators, though should be watched for downside risk for rates and we are position for effective returns to be positive in fixed income, watching the risk scenario, how they play out. The central bank will continue to be data dependent, of course, but the macroeconomic trend is suggesting that a re-acceleration of the data trend is not very likely at this point.
>> Fascinating set. Always a pleasure to have you.
>> Thank you very much.
>> Our thanks to Sam Chai, VP for active fixed income for fully management at TD Asset Management.
As always, make sure you do your own research before making any investment decisions.
if we didn't have time to get your question today, we are going to aim to get it into future shows.
Stay tuned. We'll be back tomorrow with an update on the markets and how is from some of our best interviews of the week and then on Monday show, John Eade, president of Argus Research, is going to be our guest taking your questions about market strategy. And a reminder that you can get a head start. Just email MoneyTalkLive@TD.com. That's all the time we have for today, thanks for watching.
We will see you tomorrow.
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