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Anthony Okolie speaks with James Orlando, Senior Economist, TD Bank, about the latest record job losses in Canada and the US, and if there is a silver lining to a path to recovery.
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[MUSIC PLAYING]
- Hello and welcome to the MoneyTalk COVID-19 Daily Bulletin for Tuesday, March 24. I'm Anthony Okolie.
And in a few minutes we'll talk with James Orlando. He's a Senior Economist with TD Bank Group, about the financial stress in markets, as well as his views on Canada and the loonie.
But before we get there, let's just round up what's happening in the news today. Markets opened sharply on optimism a US coronavirus rescue bill is very close. And top US airlines are reportedly drafting plans for a possible voluntary shutdown of all US passenger flights, according to The Wall Street Journal.
The European Union economic activity collapsed in March as the coronavirus outbreak intensified. The purchasing managers' index in the eurozone tumbled from 51.6 in February to 31.4 in March. A reading below 50 indicates a contraction in the economy.
And Italy reported a decline in deaths for the coronavirus for a second straight day. And in China, the two-month lockdown of most Hubei province was lifted. Finally, Bombardier will halt aircraft and rail production in Ontario and Quebec until April 26 to limit the financial impact from the coronavirus outbreak.
Bombardier also joins GM and Twitter and a growing list of companies that have pulled a 2020 revenue and profit guidance. And for more on what some of these views could mean for markets and investors, I'm joined by James Orlando, senior economist with TD Bank Group.
James, welcome.
- Thank you.
- James, we're seeing financial stress everywhere. Markets are up today so far on the huge stimulus bill that we're expecting from the US. But talk about where else the stress is showing up.
- Yeah, so that's exactly right in the sense that equity markets have been in everyone's focus right now. We've had huge losses since the peak in mid-February. But we've seen stress in different markets, specifically areas that the Federal Reserve has targeted.
Now this comes in the form of a liquidity help. So we've seen a tightening in spreads and money markets. And so the Fed has jumped in, providing liquidity to those markets.
We've seen it also in the mortgage-backed securities market. So remember in 2008 the epicenter of the financial crisis was the mortgage market. And we saw mortgage spreads rise close to levels we saw in the global financial crisis just recently. So the act of the Federal Reserve stepping in for relaunching quantitative easing that will focus on mortgage-backed securities is a big deal.
And the other big problem we have right now is in corporate credit. We've seen corporate credit spreads widen out significantly, specifically in the lowest rated credit. And the act of the Federal Reserve moving to start purchasing assets such as corporate bonds or corporate bond ETFs is a big deal to stem the financial stress in all of these markets.
- And as we wait for the big stimulus bill coming out of Washington, is it going to work? And what will the stimulus bill do?
- Well, we certainly hope it's going to work. A lot of it depends on the size of the stimulus and how quickly they can get the money and the help to people and businesses.
The way we view stimulus is that we're in a situation right now where people have lost incomes. So incomes are reduced, and that limits people's ability to spend. They need to be able to have money to be able to buy just everyday goods.
And so the idea of a government stimulus is to be able to help people and businesses bridge the time from now where we have these lost revenues, lost incomes, to when things are sort of back to normal and when you get revenues coming in and you can start working again. So the idea is we have government stepping in to really help people out and handle this extraordinarily difficult time period.
- And otherwise, the outlook for Q2 in the US is really grim. We've never seen anything like this before. Correct?
- So the time period right now, the hit to economic growth in the month of March and for what looks like a lot of the second quarter of the year is going to be big. You have restaurants closing. You have nobody flying anywhere, no travel. Businesses, production facilities are closing.
This is going to be big. And that's why we need fiscal stimulus to step in to be able to help out.
- And certainly we've seen the impact in the US. What about Canada? What do you see there?
- So Canada, we have similar measures to what's happening in the United States. We probably have more social isolation happening right now than a lot of states in the United States right now. But the other problem for Canada is that we are very much exposed to commodity prices. And we've seen it with the price of oil. The price of oil has come down. So this is a layering on of risk and difficulties in Canada, specifically in Western provinces and in Eastern provinces, as well.
- The Canadian dollar has been the lowest we've seen in recent times. James, what's your view on the loonie?
- Well, so the loonie has been disadvantaged based on the fact that, one, we've had a huge risk-off move. And this usually, just like it is right now, causing a high demand for US dollars. And so that's not favorable for the Canadian dollar.
Plus, as a Canadian economy we are very much still hedged to commodity prices. And when we're in a situation where economic growth is low, there's less production happening, people aren't driving as much. There's less demand for commodity prices. And that causes the price of oil to come down.
And as the price of oil comes down, generally what happens is the Canadian dollar follows. So we're at about $0.68 on the lows. So far in the current risk-off move, this compares to what happened in 2015.
It's not as low as what we saw in the early 2000s where we got to about $0.62 on the loonie versus the US dollar. But our outlook is that the Canadian dollar is most likely going to be trading lower for as long as the risk-off time period continues.
So when you have risk-off, that usually means lower oil prices layered on the fact that we have a huge amount of supply coming on due to the price war between Saudi Arabia and Russia.
That said, there is a time period in the future that we think we're going to move past this pandemic time period. And that means more economic growth, returning to hopefully normal. And that should mean that oil prices will rebound with the overall rebound in the global economy.
And so as the prices of oil go up, there should be more demand for Canadian assets. So that should help out the Canadian dollar in the future.
- James, Thank you very much for your time.
- Thank you.
[MUSIC PLAYING]
- Hello and welcome to the MoneyTalk COVID-19 Daily Bulletin for Tuesday, March 24. I'm Anthony Okolie.
And in a few minutes we'll talk with James Orlando. He's a Senior Economist with TD Bank Group, about the financial stress in markets, as well as his views on Canada and the loonie.
But before we get there, let's just round up what's happening in the news today. Markets opened sharply on optimism a US coronavirus rescue bill is very close. And top US airlines are reportedly drafting plans for a possible voluntary shutdown of all US passenger flights, according to The Wall Street Journal.
The European Union economic activity collapsed in March as the coronavirus outbreak intensified. The purchasing managers' index in the eurozone tumbled from 51.6 in February to 31.4 in March. A reading below 50 indicates a contraction in the economy.
And Italy reported a decline in deaths for the coronavirus for a second straight day. And in China, the two-month lockdown of most Hubei province was lifted. Finally, Bombardier will halt aircraft and rail production in Ontario and Quebec until April 26 to limit the financial impact from the coronavirus outbreak.
Bombardier also joins GM and Twitter and a growing list of companies that have pulled a 2020 revenue and profit guidance. And for more on what some of these views could mean for markets and investors, I'm joined by James Orlando, senior economist with TD Bank Group.
James, welcome.
- Thank you.
- James, we're seeing financial stress everywhere. Markets are up today so far on the huge stimulus bill that we're expecting from the US. But talk about where else the stress is showing up.
- Yeah, so that's exactly right in the sense that equity markets have been in everyone's focus right now. We've had huge losses since the peak in mid-February. But we've seen stress in different markets, specifically areas that the Federal Reserve has targeted.
Now this comes in the form of a liquidity help. So we've seen a tightening in spreads and money markets. And so the Fed has jumped in, providing liquidity to those markets.
We've seen it also in the mortgage-backed securities market. So remember in 2008 the epicenter of the financial crisis was the mortgage market. And we saw mortgage spreads rise close to levels we saw in the global financial crisis just recently. So the act of the Federal Reserve stepping in for relaunching quantitative easing that will focus on mortgage-backed securities is a big deal.
And the other big problem we have right now is in corporate credit. We've seen corporate credit spreads widen out significantly, specifically in the lowest rated credit. And the act of the Federal Reserve moving to start purchasing assets such as corporate bonds or corporate bond ETFs is a big deal to stem the financial stress in all of these markets.
- And as we wait for the big stimulus bill coming out of Washington, is it going to work? And what will the stimulus bill do?
- Well, we certainly hope it's going to work. A lot of it depends on the size of the stimulus and how quickly they can get the money and the help to people and businesses.
The way we view stimulus is that we're in a situation right now where people have lost incomes. So incomes are reduced, and that limits people's ability to spend. They need to be able to have money to be able to buy just everyday goods.
And so the idea of a government stimulus is to be able to help people and businesses bridge the time from now where we have these lost revenues, lost incomes, to when things are sort of back to normal and when you get revenues coming in and you can start working again. So the idea is we have government stepping in to really help people out and handle this extraordinarily difficult time period.
- And otherwise, the outlook for Q2 in the US is really grim. We've never seen anything like this before. Correct?
- So the time period right now, the hit to economic growth in the month of March and for what looks like a lot of the second quarter of the year is going to be big. You have restaurants closing. You have nobody flying anywhere, no travel. Businesses, production facilities are closing.
This is going to be big. And that's why we need fiscal stimulus to step in to be able to help out.
- And certainly we've seen the impact in the US. What about Canada? What do you see there?
- So Canada, we have similar measures to what's happening in the United States. We probably have more social isolation happening right now than a lot of states in the United States right now. But the other problem for Canada is that we are very much exposed to commodity prices. And we've seen it with the price of oil. The price of oil has come down. So this is a layering on of risk and difficulties in Canada, specifically in Western provinces and in Eastern provinces, as well.
- The Canadian dollar has been the lowest we've seen in recent times. James, what's your view on the loonie?
- Well, so the loonie has been disadvantaged based on the fact that, one, we've had a huge risk-off move. And this usually, just like it is right now, causing a high demand for US dollars. And so that's not favorable for the Canadian dollar.
Plus, as a Canadian economy we are very much still hedged to commodity prices. And when we're in a situation where economic growth is low, there's less production happening, people aren't driving as much. There's less demand for commodity prices. And that causes the price of oil to come down.
And as the price of oil comes down, generally what happens is the Canadian dollar follows. So we're at about $0.68 on the lows. So far in the current risk-off move, this compares to what happened in 2015.
It's not as low as what we saw in the early 2000s where we got to about $0.62 on the loonie versus the US dollar. But our outlook is that the Canadian dollar is most likely going to be trading lower for as long as the risk-off time period continues.
So when you have risk-off, that usually means lower oil prices layered on the fact that we have a huge amount of supply coming on due to the price war between Saudi Arabia and Russia.
That said, there is a time period in the future that we think we're going to move past this pandemic time period. And that means more economic growth, returning to hopefully normal. And that should mean that oil prices will rebound with the overall rebound in the global economy.
And so as the prices of oil go up, there should be more demand for Canadian assets. So that should help out the Canadian dollar in the future.
- James, Thank you very much for your time.
- Thank you.
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