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[music] >>Hello I'm Greg Bonnell and 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 will only see here. We we'll take you through it's moving the markets and answer your questions but investing.
Coming up on today show, we will discuss whether the Fed will likely be on pause as we get more signs that inflation is cooling south of the border.
TVs Thomas Feltmate joins us.
MoneyTalk's Anthony Okolie will have a look at a new study on whether it's getting harder to borrow money in the United States.
And in today's WebBroker education segment, Jason Hnatyk will show us how you can stay on top of market events using the platform.
You can get in touch with us by emailing moneytalklive@td.com or follow that viewer response box right under the video player here and WebBroker.
Before we get to our guest of the day let's get you an update on the markets.
The TSX Composite Index, there was an early indication that markets want to make some gains today.
Sort of drifting through the morning session heading into lunchtime. A triple digit loss of 105 points of the TSX down about 1/2 a percent.
We are in the thick of earnings season. Let's take a look at Kinross even though we are seeing some of its mining brethren under pressure, Kinross came in with its latest results. Talking about restarting their share in the second half of this year. A bit of money moving in that direction.
Seven bucks and $0.27 a share. Good for a 2% pop.
Let's take a look at the oil today, south of the border, you did get that read on inflation, coming in slightly cooler than expected. The modest level sort of choppy in the morning. Right now modestly pausing at the S&P 500 with seven points, a little shy the fifth of a percent.
The tech stocks off the back of that did seem to get of a stronger bid. We have the NASDAQ up 107 points, almost a full percent.
Including some of the chipmakers. Let's check in on Advanced Micro Devices.
Up almost a full percent.
An extra market update.
The latest read on American consumer prices it shows that inflation continues to cool.
But does that mean that the Federal Reserve is at the end of the rate hiking cycle? Join us now to discuss this Thomas Feltmate, Senior Economist at TD. Great to have you on the show.
>> Thanks for having me.
>> This is the kind of reports of the Fed markets want to see. A continuation of the cooling of inflation. As you look beyond and beneath that headline number what you see?
>> We definitely saw a bit of cooling year-over-year on the headline measures.
Some of that was due to a pullback in energy prices.
We saw food prices line over the month. Encouraging signs. But will he strip out those effects a look at the core measure we still saw a point for month on month gain.
A few encouraging signs a big point to when we saw the shelter gains, they definitely continue to slow.
In April. So that's encouraging. In March and April now have showed some pullback relative to the stronger prints that we were seeing earlier last year.
And it kind of aligns to the narrative that we have been telling: shelter costs, we look at market-based measures of rent have Artie Pete last year and there will be some kind of lag in terms of when we actually see that show up. That's what we've seen over the last couple of months. So certainly encouraging.
But then on the good side of things, late last year we saw a lot of signs of deflation there.
But now, over the last two months, core goods have again contributed positively to inflation.
A lot of that had to do with just a one off a sharp increase in used vehicle prices. We strip that out. For flat.
It's either that and we look at non-housing services again, some moderation there but it's only start over the last month or so.
So it's still too early to say definitively whether or not we are seeing a cooling on the core measure or if these are just, kind of, one off effects.
>> Does it suggest that the last mile, as they often say, will be the hardest mild?
Bringing down from seven or eight handles to get slightly below five here, to get back to two… Is this a much tougher battle?
>> I think getting back to four by the end of this year is very conceivable. To your point, that last move down to the 3 1/2, down to two, is certainly going to be where we see a lot more stickiness coming through.
Particularly on the surface side of things.
>> What will the Fed make of this?
After the rate hike last week, chair Powell is careful to say we are not on pause but they laid the groundwork, depending on the data at the end of the rate hiking cycle, what does a print like this sort of tell us about what the Fed might be thinking?
>> I think it kind of confirms what they were hinting at.
They are basically reaching a point where they are comfortable with a great degree of restriction in the economy today.
But they also left the door open to future rate hikes if, you know, we continue to see the economic data surprise to the upside. On the inflation numbers this morning, very early signs that we are seeing some cooling.
So I think that kind of works in their favour.
But if we look back at last week's reading unemployment where we saw the US economy had over 250000 Jobs in April, things are still running well above trend and pace right now and it suggest that we could see a bit stronger push come through on the price side of things.
So I think they are comfortable right now. But if we continue to see upside surprises in the economic data, they definitely left the door open for another hike in June.
>> Pauses one thing, possibility if the data pushes in that direction but then you have certain pockets of the market, thinking of fixed income, that are actually starting to price and cuts as early as… As the Summer, it may have been pushed back to the fall, but in the remainder of this year.
Is that a little too optimistic?
>> I think so at this point. Certainly we know there is a lot of stickiness on the inflation side of things.
Just given the strength we are still seeing in the labour market, I think it will be optimistic to say that, come fall this year, the Fed would feel comfortable to start kind of easing back on the policy rate, particularly given the trajectory we are still seeing on the inflation data.
Very, very early signs of cooling.
A lot of strengths still in the labour market.
But I think, you know, in our opinion it is a little premature at this point.
>> In this country we have been on pause with our central-bank for a little while now. But the same thing, if the data tells us that we have to move again, we will move again. What is the most likely scenario in Canada going forward?
> I think it's a similar story.
We got the April jobs numbers last year's well well above consensus just like the US. We are still seeing a lot of underlying momentum coming through the hiring side of things. Those higher frequency reads that we are seeing on consumer spending data can sit continue to point to some near acceleration in consumer activity. This works against were policymakers are trying to get the economy.
So ultimately that means rates need to stay elevated for longer. So certainly through this year, we have both that Canada and the Federal Reserve containing policy where it is today.
>> I've had some discussions where it is suggested, conversations we are seeing out there, market pundits… If they can get it down to around three they will be happy enough. I mean, the target is to.
There is a range on either side.
To keep the confidence of I guess, the consumer, to anchor inflation expectations, do they really have to wrestle it down to that sweet spot?
>> This is certainly a question that policymakers have been asked. We heard from chair Powell the 2% as their mandate and that's what they are targeting.
At all costs that's what they are trying to get inflation back to which, again, probably argues that rates need to stay higher for longer relative to what markets are currently burl building in.
>> The whole point of this is obviously to cool inflation.
I guess the thing is you can't cool inflation without calling the economy. Strengthen the labour market now, consumers are holding up. What do the cracks need to be for central banks to think "this is working".
Headlines are one thing but revoke robust demands for labour, it all seems to be working against each other.
>> I would agree with that. I think we are still seeing a lot of strength in the labour market. That said, in the US, there is definitely some cracks starting to emerge, I would say. We look at job openings, for example, they have come in over the last year or so.
They have fallen from 10 million, 11 million, down to closer to 9.6. That's meaningful but they are still elevated by historical standpoint.
When we look at continue to jobless claims, they have started to edge higher.
Again, this is another sign that things are starting to ease a bit.
Right now if you look at where they are sitting, they are above the 2019 average.
So another encouraging sign that things are starting to cool.
But it's on the margin right now.
The labour market still remains historically tight and we are seeing that come through on the wage side of things.
Wage growth is still well above what would be consistent with 2%.
>> Interesting times to be a central-bank watcher and investor.
We will get your questions about the economy and interest rates with Thomas Feltmate and just moments time. A reminder that you can get in touch with us in just moments time by filling out the viewer response box on WebBroker or emailing us MoneyTalk Live a TD.com.
Now let's take a look at some of the top stories and how the markets are trading.
Brookfield Asset Management says it has $19 billion in new funds to invest with an eye to real estate infrastructure and private equity plays.
The asset manager says investors from the Middle East and Asia are making up a larger percentage of fundraising sources.
And they add that there US clients representing a smaller share of the new funds generation.
Brookfield's latest earnings were largely in line with street estimates. The stock down about 2%.
Shares of Air B&B are in the spotlight today.
A sizable pullback to the tune of about 10% right now.
The short-term accommodation service headed and stronger-than-expected quarterly results.
But it's the months ahead that seem to have the attention of investors.
Air B&B is warning it's going to be pretty tough comparisons for the coming quarters when you think about last spring and last Summer when all that pent up demand resulted in a travel boom. Travelling to space is clearly a costly proposition.
Virgin Galactic says it's quarterly loss widened compared to the same period last year.
Wanting to hire research and development expenses.
Of course, the space tourism company is aiming to launch its first commercial flight near the end of next month.
Right now, that stock up a little more than 2%. Let's take a look at the main benchmark indices of both Bay Street and Wall Street. The TSX Composite Index right now, about 106 points, about half a percent.
South of the border, that broader read of the American market on the heels of inflation, a little cooler than expected.
Just modestly in positive territory.
Up about three points or seven tics. All right. We are back with Thomas Feltmate taking your questions about the economy and interest rates.
Here's the big one. How concerned should we be about the debt ceiling?
>> Certainly that's a growing risk that has been on our radar for the last several months.
We just heard from Janet Yellen last week where we have seen the treasury pull forward, that exit date of when the debt ceiling is actually going to be reached.
That could be as early as the beginning of June now.
And, you know, from a negotiation standpoint, it seems like Congress is no closer to a deal today than what they were in January.
So, two weeks ago we heard the house had passed a bill to raise the debt ceiling by $1.5 trillion.
Of course with that came a bunch of spending cuts and a repeal of some of the key initiatives, I would say that the Biden administration has passed over the last year or so, mainly related to climate a written initiatives in the IRA. Also the student loan forgiveness plan.
Obviously this bill stands no chance as it is today of getting through the democratically controlled Senate.
We heard that Biden and Speaker McCarthy met last night to talk on the debt ceiling.
No closer to a deal today.
So with that debt ceiling looming, three weeks out, really not making any progress towards a deal, I think as we kind of edge closer to that we should definitely expect more volatility to come through in the financial markets.
>> I heard people say it is a low probability event that they would default but if they did it would be very high-impact.
And then some people trying to figure out… Or what actually happened? Some people say they shipped some of their spending priorities, social services in the states… That seems like it would have a pretty profound economic impact.
>> For sure. Markets are still operating on the assumption that a deal will ultimately get done.
But some of that uncertainty, I would say, is already starting to seep in the financial markets. We saw just a few weeks ago the spread between the three month and one month treasury bill widened by about 200 basis points. So obviously investors were pouring into that one month treasury security.
Just trying to get ahead of any potential default that could occur.
So you know, we are already starting to see some implications there are in financial markets and things will get a lot worse.
The knock on effects to the real economy could be significant. To your point, if we start seeing delays in payments of Social Security, even repayments of interest on debt that is already outstanding, that's going to have a very, very dire impacts for not only the economy but also financial markets which will reverberate globally.
>> More to watch in the days and weeks ahead.
Here is another story dominated the headlines in recent weeks.
Regional Bank issues south of the border. Could these lead into a recession?
>> Certainly puts downside risk to the forecast now.
What we've seen over the last couple months in the wake of the onset of the banking crisis, we saw some tightening in financial market conditions.
We saw some widening and selloff in equities. The more recently, measures of financial stress are shown that conditions of eased back to kind of precrisis levels.
Another concern is just more of the tightening and Bank lending standards.
On that front, we did receive some data this week from the Federal Reserve on the second quarter. That showed across the board we are seeing a tightening in Bank lending standards.
Particularly of the small and medium-sized banks which are been hit the hardest so far.
You know, I think the one area focus definitely is on this ENI, the CRE side. That is certainly where the small and medium-sized banks seem to have a lot more exposure. And, you know, just looking at the CRA fundamentals in general, I think things are kind of deteriorated over the last year, given the high… Environment. There was Artie some uncertainty there and then we layer on top of it this additional stress.
>> When you talk about that commercial real estate, the greater banks seem to have a sensitivity. Diversifying some of the bigger names.
>> Exactly right.
When you look at some of the commercial mortgages in the CRE space about 80% of them are happening from small, medium-sized banks. So the impact there is significant.
Of those mortgages, about 10% are set to renew this year. And in an environment where, I think standards are tighter, disproportionate amounts of lending are happening from the smaller institutions.
You could certainly envision an area were refinancing kind of dries up to some degree.
Equity owners have a harder time trying to refinance and mattress leads to more properties going on the market in a time where evaluations are the following.
So it certainly puts more downside risk I would say on CRA prices over the next year or so.
We also have to remember to that a lot of these loans in the CRE space are floating rate. Originated in a much lower interest rate environment. So, you know, as rates remain elevated for longer, that risk of default starts to grow to the extent that we see defaults just from higher interest rates.
The potential knock on effects they are to smaller banks, who are already getting squeezed, on the liquidity side could be significant and have more dire impacts for our economy.
>> I think the Fed itself is made the argument, what we are seeing in the US regional banks could actually do some of the job for them and tighten credits, cooling things down.
But also seem to have a very good handle on how much.
>> I think it's true among most economists right now.
It's hard to say what degree that's going to have knock on effects are measurable knock on effects to the real economy.
I think from our perspective, that growth at risk right now is certainly on that business investment side of things, just given the closer ties to see and I and CRE lending. So we already assumed our forecast in the latter half of this year, we will see contractions and business investments in both Q3 and Q4 at a very slow recovery through 2024.
>> Our Anthony Okolie is going to join us a little later in the show to talk about some of the signs in terms of the tightening of credit and lending standards there. Let's get to another question now.
A question for the guest.
Thomas is the expert.
(Greg reads the question.) >> If they would've paused a few weeks ago?
>> I guess last week.
I guess some people thought of the Bank is suddenly saying we are done, not hiking, with that of unsettled things?
>> I think that's probably fair.
By all accounts we heard leading up to that that they were going to be going ahead with another 25 basis point rate increase.
If all of a sudden we had that shock where they didn't do that, I think that would certainly… >> You would ask why not.
>> We don't know the counterfactual here but it depends on how the Fed had communicated that and what do they know that we don't know.
So it really kind of hinges on not only how they would have communicated that decision but also, the path forward on interest rates and what that might mean at future meetings as well.
>> Is at a very important part of the central-bank strategy right now?
To communicate pretty well to the markets what you are up to and what you're thinking? I mean, in the past we've seen central banks like the Bank of Canada after oil prices rolled off in 2014, surprising the market, with their moves.
It's pretty critical now for central banks to lay the groundwork.
>> Certainly leading up to the lead last few announcements, they've been very clear on how they will tighten the policy rate. I think where we are now, given the uncertainties of just not really knowing the measurable effects from tightening lending standards, it's harder to continue to articulate exactly where they could be headed.
So now, the onus really is on the economic data right?
And the interpretation of that and what that means from a growth standpoint and how the economy is handling the higher interest rates.
So from that perspective, you know, as we continue to get more data out, I fully expect to hear from more Fed speakers and kind of communicate with their thinking and where they see rates going.
>> As always at home, make sure to do your own research before making any investment decisions.
We will get back to your questions with Thomas Feltmate on the economy and interest rate than just moments time.
A reminder of course that you can get attention as any time by emailing MoneyTalk Live IT.com.
And now let's get to our educational segment of the day.
Staying on top of the market and news is an important part of any investment strategy. WebBroker has tools which can help. Joining us now with Maurice Jason Hnatyk, Senior Client Education Instructor with TD Direct Investing.
Jason great to see you again. Let's talk about these resource on the platform.
>> Great to be back Greg. Staying ahead of the news as a challenge and WebBroker has some very useful tools to help with that.
So let's jump to the platform and show them off. Right from the homepage, we can see we are on now, a couple of really invaluable resources that I want to point out first of all. The first thing here is the market update appearing on the right-hand side near the top of the page.
This is an ongoing look at the market both in the Canadian and US side of the border.
Looking in giving us updates as the market moves on, as the world turns. These updates are gonna keep changing and making sure were well informed what's moving the markets. Then down below here, let's take a look at these featured reports.
If you're trying to get prep for some trading for the day, these are reports from both Canadian and US sides of the border that will give you highlights to what to expect for the day. If there's any major news that is going to be moving markets, such as the debt ceiling that has been discussed, recessionary concerns or even major stock earnings reports or anything else that's really going to be a key to note, these reports will be something that's going to be very helpful for the investor here and WebBroker.
There is one of the resource I want to show off. Look under the "research" tab at the top of the page. If you go down to the reports section, this is another supplementary before the market.
It's located appear in the top left-hand corner.
It's called before the bell. One more arrow that you can use.
The more data to collect information for you to make an informed decision.
The last thing, we are keeping up to date with news in the market. Let's identify where we can find out where and when those events are to be happening. At the top of the page from our research section, you will notice this second tab from the right is our events tab.
On this tab, we get the opportunity to see both on the Canadian side as well as the US side.
We are informed of what companies are reporting earnings for the day and what companies have dividends.
If there are any major corporate actions happening or updated on analyst changes. So there is a wealth of veneration. But beyond that we are also getting a sense of the epic economic reports calendar. Here's where we can go and find out your consumer price index.
Fed, Inc. of Canada rates, jobs, housing reports.
If you're to be kept informed and when these major events are happening. When it's time to make a decision, you know it's helping to move the market.
>> Now we can better stay on top of news. The news flow can get particularly intense particularly during earnings season. Where do we go to find more in depth analysis on the market?
>> WebBroker has tools for that too. What's the saying?
Peeling back the layers of the onion to see what's on the inside… Let's jump back to the platform and take a quick look.
I will bring us back to the reports tab. On this particular page, there is so much information that's here. We have third-party independent research in addition to our TD Securities update. We have information from Argus, MorningStar,… Reuters… You can also jump in and look at sector specific information.
If you looking for materials, energy, technological indicators, lots of great stuff here.
I want to highlight for everyone now, reports from TD Economics, this gives you the ability to use their trusted research and analysis to identifySo lots of information.
We also can look, if you click on the economy button at the top of the page, look at very specific sectors in the economy.
Getting lots of information.
But the report I want to highlight for everybody here today is our weekly bottom-line report.
This report is very useful to keep you informed. We are talking Fed and debt ceiling, this is a great insight from our friends over at TD Economics and then you also are able to get some more in-depth analysis to help combine with what you have and WebBroker. Once again, lots of information here and it's just about finding and identifying it in the right place.
>> That weekly roundup is definitely part of my Friday afternoon reading. Thanks for that Jason, always a pleasure having you on!
>> My pleasure Greg.
>> Jason Hnatyk, Senior Client Education Instructor a TD Direct Investing. And make sure to check out the learning centre and WebBroker for more educational videos, live interactive master classes and upcoming webinars.
Before we get back to Thomas Feltmate, a reminder of how you can get in touch with us.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live!
And we are back with Thomas Feltmate taking your questions about the economy and interest rates. Lots to talk about inflation.
(Greg reads the question) I've talked about this with people in the past two. We hear about this basket of goods that represents how much prices are up or down.
What's going on here?
> Right.
So it is a representative basket of what households are spending their money on. You hinted at that. Things like energy and food were seeing more price pressures over the past year. Those are much higher.
If you're just looking at that in and of itself, you might get the impression that inflation is running much higher.
But the reality is there is a lot of other goods and their and services that are included in this measure that have much higher waiting in the inflation measure.
Presumably because that's where households are spending increasingly more of their money. We think about vehicles, for example, that carries a pretty significant weight on the goods side of things.
Apparel, furniture, other household items you might buy.
These are all kind of lumped into that "goods" category which accounts to about 25% of the core measure.
Then the rest of the basket on the core side will be on the services.
A significant portion of that, about 40%, will be shelter, housing -related costs and this could be calculated through either a measure that captures what you would be paying to own a house or also to rent that house.
And then, the rest would be on kind of core discretionary services. Things like cleaning services, haircuts, childcare and that sort of thing. That carries the rest of the weight in a core basket.
>> Of course if somebody sees a headline like this morning about inflation coming in cooler than expected, the headline continues to come down. It doesn't mean that prices are down compared to last year.
It just means they are not rising at as much of a torrid pace as they were before.
>> Exactly. And what we're hearing from central bankers now is a lot of price pressures of the last year, year and 1/2 on the goods side of things. But we've seen a lot of encouraging developments were prices of really started to cool or at least level off to some degree.
We had up until this morning seen that in the East vehicle market. Prices appreciated about 60% to the pandemic and then we saw about an 18% giveback until more recently when things have started to turn higher.
Now, the real sticking point has been on the services measure X shelter. These will be the services that will be more labour-intensive and also more closely tied to discretionary.
That's the area that central bankers have really been focusing on the inflation front because were still seeing a lot of strength in the labour market and what that means is discretionary sent spending is still running at a pace well above trend and its fuelling price growth in a lot of these other kind of service categories.
>> Let's get to another question now. This one about central banks again.
Rate cuts still probable this year? We touched a little on the top of this the big question for investors right?
If you look at the markets, perhaps there is a chance because the markets are… >> I think at this point we are only just now really starting to see the effects of the cumulative round of tightening over the last year really start to hit the economy.
That being said, first-quarter consumer spending growth, 3.7%, quarter annualized, we did see some moderation in business investment but things were still growing. We are just seeing some slowing.
We are looking at leading indicators. Things like core durable orders on the manufacturing side.
It is pointing to more softness on the investment spending side over the next quarter, at least, and then with the tightening of Bank lending standards as well… That's going to have a more dire impact on the real economy as the year progresses. So, I think we are starting to see some early signs of things hitting the economy but you know, it's way too early to still say decisively that inflation is moving back towards 2%.
So from that perspective, I would argue that rates need to remain at this level for quite some time before we really start to see the economy slow in a way that is going to give policymakers that convincing or conviction that inflation is in fact moving back to 2%.
>> One thing about our central-bank governor, when you hear from Jerome Powell South of the border, they really push back against that notion when they think of a chance of being able to cut before the end of the year. At the same time, I guess, there have also been warnings. Warnings from the Fed saying when we look at history, we've seen perhaps the errors of going through a hiking cycle and then turning around and cutting too quickly before we really had a chance for her to take hold.
>> And then Powell has been quite explicit on that as well right?
There is a real risk of cutting prematurely and then, you know, cutting some of that restriction of the economy and not necessarily getting inflation to stay on that steady downward trajectory.
We look at some more recent readings on inflation excitations from March and April in the US, one year ahead of inflation expectations, those of actually turn higher.
So that's really giving policymakers any conviction that at least, a year from now, consumers are expecting inflation the fall which, to some sense, that means that this could become somewhat self-fulfilling. Again, one data point doesn't make a trend but it's certainly something that has to be catching the eyes of the policymakers. Particularly in this environment where we have not seen any moderation and wage growth yet.
>> Let's take another question now. What is the state of US real estate? Is this a repeat of the 2008 crisis on the way?
That was a big one.
What's the perspective?
>> You can certainly see why some people would draw the parallels if they were only looking at home sales.
Over the last year or so we have seen sales fall by about 35% and recently they've kicked up by 10%. A lot of low levels and a lot of that is driven by the fact that October and January of this year, between then, we've seen mortgage rates come down about 75 basis points.
That brought some buyers back in the market. But since January, we've seen mortgage rates take back higher.
Basically back to levels relatively consistent with where they were in October.
So the expectation that sales are likely to pull back in the second quarter with rates to remain elevated through much of this year, it's hard to imagine that you will see any kind of strong rebound on the sales perspective.
Through this year and probably a very slow recovery through 2024.
You know, when we look at measures of affordability, they are still low by historic standards. Even lower than kind of where they were and that peak era before the global financial crisis when the housing boom was really in its prime.
So affordability is still very, very weak.
That in and of itself is keeping buyers out of the market and especially preventing the kind of move up buyers that would otherwise potentially come in to really enter the market and that's kept inventory really, really tight. So despite sales having fallen by 35%, prices in the US have only followed by about 0.
5%.
Now, when we look at the supply pipeline, it looks to be quite rich over the next year.
We should see more supply coming to market in a time when demand will still remain quite weak. I do envision some further correction in home prices.
Maybe as much is 8 to 10% by mid next year. But, you know, you put that into perspective of the global financial crisis or prices have fallen by over 30%, it's small in comparison. Particularly given the fact that we saw such a meaningful run-up in prices through the pandemic where, in the US crisis were about 35%.
>> We will get back to your questions with Thomas Feltmate on the economy in just a moment's time.
As always make sure to do your own research before making any investment decisions and a reminder that you can get in touch with us any time.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live!
In the wake of the US regional Bank crisis, a recent Fed survey suggests that commercial banks have tightened lending standards to reduce the risk. Anthony Okolie joins us to discuss a new TD Economics report that looks at the direct impact this trend may have on the US economy.
>> US commercial banks tightening credits for all major products in the second quarter of this year. Following the US banking crisis. Now, even with lending standards rising for some products, the reports suggest that banks continue to cut lending further and I brought along a chart that shows that it got harder to borrow from US commercial banks in the second quarter.
Across a variety of products. Lending tightening, mostly for commercial and industrial loans along with commercial real estate loans. Within the commercial real estate loan category, construction and development loans were hit the hardest.
TD Economics suggests that the business sector of the economy, the US economy will be most exposed to the consequences of the cycle. TD Economics also estimates that tightening will come between 2 to 2.5 percentage points off commercial and industrial lending growth in 2023.
Now, the largest increase in tightening standards of course, was in the auto and other loans category. These loans typically carry much higher risks than other categories. US banks have been warning of the trouble ahead in the auto loans sector amid dropping used car prices. Following used car prices risk leaving buyers owing more than their cars are worth which which may encourage some consumers stop making payments and let their vehicles go to be repossessed.
Now, in contrast, household credit stays more accessible for Americans. Reflecting stronger household fundamentals in the US. However, lending tightened for riskier products within the residential section particularly for mortgages, nonqualifying Jumbo mortgages.
Overall TD Economics concludes that the tightening access to credit will continue to affect the macroeconomic conditions going forward even if the worst of a mini crisis is behind us.
Greg?
>> There is an indication the credit is tightening, for the banks themselves. What are they pointing to?
What key factors are they say are leading this dynamic?
>> Both large and small banks who leading… Most important factor for the tightening of conditions across all products. For loan officers at small banks, they noted that the deterioration and expected liquidity positions and reduce tolerance for risk at a much higher weighting compared to larger banks.
Greg.
>> Thanks Anthony.
MoneyTalk Live's Anthony Okolie.
Let's check in on the markets.
Element fleet management coming out with an earnings boosting its guidance going forward. The streets him to like the sound of what they heard today.
20 bucks and $0.25 a share.
Up about 13%. First Quantum appears to be under pressure today.
Indeed, 3313 with some of the mining stocks facing some downward pressure to the tune of 6 1/2%. S&P 500, a tick cooler than expected on a year-to-year headline number.
An indication earlier in the session that perhaps it will be a bit of a stronger day. Right now a very modest one of the quarter-point, just three ticks on the broader meat of the market, broader read of the market.
We should do AMD off the top of the show. Amazon was making some gains earlier along with the new tech stocks and hundred nine bucks a share, up almost 3%.
We are back now with Thomas Feltmate, Senior Economist with TD Bank talking about economy and rates. What's the outlook for the American dollar? It had quite a run last year.
>> Exactly. Over the last couple of months, we kind of sensed the onset of this banking crisis. We have seen the dollar depreciated by about 2 1/2 or 3%. You know, a lot of that which is due to the fact that we did see a bit of a collapsing rate hike expectations.
Prior to this crisis we had seen markets kind of pricing in the terminal rate of the Fed funds rate going to 5 3/4, 6%, by all accounts that's what we're hearing from the feds as well even in chair Powell's testimony to Congress. So that kind of drop in expectations, obviously led to some narrowing and interest rate differentials.
Kind of pressure the dollar lower.
As we've already talked about, I think it's probably fair to say that rate hikes are not going to happen this year.
As we start to see market expectations reprice that in, it could be somewhat positive for the dollar, at least over the near term.
But that being said, I think the Fed is certainly standing to be one of the first central banks to start cutting rates when we get into next year.
And that is going to lead to a further narrowing and interest rate differentials. So from that perspective, it seems like it could put further downward pressure on the dollar over the course of the next year. But, again, there's a lot of risks out there to the could be somewhat dollar positive. So, of course, assuming that none of these actually come to the forefront.
>> I think some of the headlines involving the US dollar in recent days, this idea of de-dollarization… Bricks wanting to have their own trading currencies : how seriously should we be taking some of these arguments?
>> I think are the near term it's unlikely. If we think of how deep the US treasury market is, from a liquidity standpoint, it just doesn't necessarily seem feasible that there will be another currency that is, you know, standing ready to be the new global currency. Could it happen over the next decade? Maybe. But certainly not in the near term.
>> Let's talk about the job market. We have of you are saying (Greg reads the question) >>We have definitely seen the breath of hiring really narrow over the last couple of months. So again, this is kind of one of those early signs that maybe we are starting to see some cooling around the edges and the labour market. To give you some context, in the April data, we saw just three industries, healthcare, leisure hospitality and professional business services account for two thirds of the private sector job gains.
That is definitely considerably less spread across the other industries. Relative to what we were seeing earlier in the recovery.
So definitely a sign that we are starting to see some cooling there. But, the unemployment rate remains historically low.
It's at a 53 year low right now.
It's going to take a lot more than what we have seen so far to really cool the job market.
We look at job openings and I think a lot of people are kind of cheered that over the last year.
Openings of command by over 2 1/2 million but they are still historically elevated by several million above where they were prior to the pandemic.
So from that perspective, labour demand still remains quite elevated in the US. In an environment where it doesn't necessarily see supply and purchase and rates rather participation rates looking the same like they did in the last couple of months. There is still this mismatch in the labour market and certainly argues that we are going to see continued upward pressure on wages, at least over the near term.
>> Thomas always a pleasure to have you. I enjoy the conversation and looking forward to the next one.
>> Thanks.
>> Our thanks to Thomas Feltmate, Senior Economist at TD. Stay tuned on Thursday, Michael O'Brien, Portfolio Manager at TD Asset Management will be our guest taking your questions but Canadian stocks. A reminder that you get a head start by emailing us at moneytalklive@td.com.
That's all for show. Take care.
[music]
Every day I'll be joined by guests from across TD, many of whom you will only see here. We we'll take you through it's moving the markets and answer your questions but investing.
Coming up on today show, we will discuss whether the Fed will likely be on pause as we get more signs that inflation is cooling south of the border.
TVs Thomas Feltmate joins us.
MoneyTalk's Anthony Okolie will have a look at a new study on whether it's getting harder to borrow money in the United States.
And in today's WebBroker education segment, Jason Hnatyk will show us how you can stay on top of market events using the platform.
You can get in touch with us by emailing moneytalklive@td.com or follow that viewer response box right under the video player here and WebBroker.
Before we get to our guest of the day let's get you an update on the markets.
The TSX Composite Index, there was an early indication that markets want to make some gains today.
Sort of drifting through the morning session heading into lunchtime. A triple digit loss of 105 points of the TSX down about 1/2 a percent.
We are in the thick of earnings season. Let's take a look at Kinross even though we are seeing some of its mining brethren under pressure, Kinross came in with its latest results. Talking about restarting their share in the second half of this year. A bit of money moving in that direction.
Seven bucks and $0.27 a share. Good for a 2% pop.
Let's take a look at the oil today, south of the border, you did get that read on inflation, coming in slightly cooler than expected. The modest level sort of choppy in the morning. Right now modestly pausing at the S&P 500 with seven points, a little shy the fifth of a percent.
The tech stocks off the back of that did seem to get of a stronger bid. We have the NASDAQ up 107 points, almost a full percent.
Including some of the chipmakers. Let's check in on Advanced Micro Devices.
Up almost a full percent.
An extra market update.
The latest read on American consumer prices it shows that inflation continues to cool.
But does that mean that the Federal Reserve is at the end of the rate hiking cycle? Join us now to discuss this Thomas Feltmate, Senior Economist at TD. Great to have you on the show.
>> Thanks for having me.
>> This is the kind of reports of the Fed markets want to see. A continuation of the cooling of inflation. As you look beyond and beneath that headline number what you see?
>> We definitely saw a bit of cooling year-over-year on the headline measures.
Some of that was due to a pullback in energy prices.
We saw food prices line over the month. Encouraging signs. But will he strip out those effects a look at the core measure we still saw a point for month on month gain.
A few encouraging signs a big point to when we saw the shelter gains, they definitely continue to slow.
In April. So that's encouraging. In March and April now have showed some pullback relative to the stronger prints that we were seeing earlier last year.
And it kind of aligns to the narrative that we have been telling: shelter costs, we look at market-based measures of rent have Artie Pete last year and there will be some kind of lag in terms of when we actually see that show up. That's what we've seen over the last couple of months. So certainly encouraging.
But then on the good side of things, late last year we saw a lot of signs of deflation there.
But now, over the last two months, core goods have again contributed positively to inflation.
A lot of that had to do with just a one off a sharp increase in used vehicle prices. We strip that out. For flat.
It's either that and we look at non-housing services again, some moderation there but it's only start over the last month or so.
So it's still too early to say definitively whether or not we are seeing a cooling on the core measure or if these are just, kind of, one off effects.
>> Does it suggest that the last mile, as they often say, will be the hardest mild?
Bringing down from seven or eight handles to get slightly below five here, to get back to two… Is this a much tougher battle?
>> I think getting back to four by the end of this year is very conceivable. To your point, that last move down to the 3 1/2, down to two, is certainly going to be where we see a lot more stickiness coming through.
Particularly on the surface side of things.
>> What will the Fed make of this?
After the rate hike last week, chair Powell is careful to say we are not on pause but they laid the groundwork, depending on the data at the end of the rate hiking cycle, what does a print like this sort of tell us about what the Fed might be thinking?
>> I think it kind of confirms what they were hinting at.
They are basically reaching a point where they are comfortable with a great degree of restriction in the economy today.
But they also left the door open to future rate hikes if, you know, we continue to see the economic data surprise to the upside. On the inflation numbers this morning, very early signs that we are seeing some cooling.
So I think that kind of works in their favour.
But if we look back at last week's reading unemployment where we saw the US economy had over 250000 Jobs in April, things are still running well above trend and pace right now and it suggest that we could see a bit stronger push come through on the price side of things.
So I think they are comfortable right now. But if we continue to see upside surprises in the economic data, they definitely left the door open for another hike in June.
>> Pauses one thing, possibility if the data pushes in that direction but then you have certain pockets of the market, thinking of fixed income, that are actually starting to price and cuts as early as… As the Summer, it may have been pushed back to the fall, but in the remainder of this year.
Is that a little too optimistic?
>> I think so at this point. Certainly we know there is a lot of stickiness on the inflation side of things.
Just given the strength we are still seeing in the labour market, I think it will be optimistic to say that, come fall this year, the Fed would feel comfortable to start kind of easing back on the policy rate, particularly given the trajectory we are still seeing on the inflation data.
Very, very early signs of cooling.
A lot of strengths still in the labour market.
But I think, you know, in our opinion it is a little premature at this point.
>> In this country we have been on pause with our central-bank for a little while now. But the same thing, if the data tells us that we have to move again, we will move again. What is the most likely scenario in Canada going forward?
> I think it's a similar story.
We got the April jobs numbers last year's well well above consensus just like the US. We are still seeing a lot of underlying momentum coming through the hiring side of things. Those higher frequency reads that we are seeing on consumer spending data can sit continue to point to some near acceleration in consumer activity. This works against were policymakers are trying to get the economy.
So ultimately that means rates need to stay elevated for longer. So certainly through this year, we have both that Canada and the Federal Reserve containing policy where it is today.
>> I've had some discussions where it is suggested, conversations we are seeing out there, market pundits… If they can get it down to around three they will be happy enough. I mean, the target is to.
There is a range on either side.
To keep the confidence of I guess, the consumer, to anchor inflation expectations, do they really have to wrestle it down to that sweet spot?
>> This is certainly a question that policymakers have been asked. We heard from chair Powell the 2% as their mandate and that's what they are targeting.
At all costs that's what they are trying to get inflation back to which, again, probably argues that rates need to stay higher for longer relative to what markets are currently burl building in.
>> The whole point of this is obviously to cool inflation.
I guess the thing is you can't cool inflation without calling the economy. Strengthen the labour market now, consumers are holding up. What do the cracks need to be for central banks to think "this is working".
Headlines are one thing but revoke robust demands for labour, it all seems to be working against each other.
>> I would agree with that. I think we are still seeing a lot of strength in the labour market. That said, in the US, there is definitely some cracks starting to emerge, I would say. We look at job openings, for example, they have come in over the last year or so.
They have fallen from 10 million, 11 million, down to closer to 9.6. That's meaningful but they are still elevated by historical standpoint.
When we look at continue to jobless claims, they have started to edge higher.
Again, this is another sign that things are starting to ease a bit.
Right now if you look at where they are sitting, they are above the 2019 average.
So another encouraging sign that things are starting to cool.
But it's on the margin right now.
The labour market still remains historically tight and we are seeing that come through on the wage side of things.
Wage growth is still well above what would be consistent with 2%.
>> Interesting times to be a central-bank watcher and investor.
We will get your questions about the economy and interest rates with Thomas Feltmate and just moments time. A reminder that you can get in touch with us in just moments time by filling out the viewer response box on WebBroker or emailing us MoneyTalk Live a TD.com.
Now let's take a look at some of the top stories and how the markets are trading.
Brookfield Asset Management says it has $19 billion in new funds to invest with an eye to real estate infrastructure and private equity plays.
The asset manager says investors from the Middle East and Asia are making up a larger percentage of fundraising sources.
And they add that there US clients representing a smaller share of the new funds generation.
Brookfield's latest earnings were largely in line with street estimates. The stock down about 2%.
Shares of Air B&B are in the spotlight today.
A sizable pullback to the tune of about 10% right now.
The short-term accommodation service headed and stronger-than-expected quarterly results.
But it's the months ahead that seem to have the attention of investors.
Air B&B is warning it's going to be pretty tough comparisons for the coming quarters when you think about last spring and last Summer when all that pent up demand resulted in a travel boom. Travelling to space is clearly a costly proposition.
Virgin Galactic says it's quarterly loss widened compared to the same period last year.
Wanting to hire research and development expenses.
Of course, the space tourism company is aiming to launch its first commercial flight near the end of next month.
Right now, that stock up a little more than 2%. Let's take a look at the main benchmark indices of both Bay Street and Wall Street. The TSX Composite Index right now, about 106 points, about half a percent.
South of the border, that broader read of the American market on the heels of inflation, a little cooler than expected.
Just modestly in positive territory.
Up about three points or seven tics. All right. We are back with Thomas Feltmate taking your questions about the economy and interest rates.
Here's the big one. How concerned should we be about the debt ceiling?
>> Certainly that's a growing risk that has been on our radar for the last several months.
We just heard from Janet Yellen last week where we have seen the treasury pull forward, that exit date of when the debt ceiling is actually going to be reached.
That could be as early as the beginning of June now.
And, you know, from a negotiation standpoint, it seems like Congress is no closer to a deal today than what they were in January.
So, two weeks ago we heard the house had passed a bill to raise the debt ceiling by $1.5 trillion.
Of course with that came a bunch of spending cuts and a repeal of some of the key initiatives, I would say that the Biden administration has passed over the last year or so, mainly related to climate a written initiatives in the IRA. Also the student loan forgiveness plan.
Obviously this bill stands no chance as it is today of getting through the democratically controlled Senate.
We heard that Biden and Speaker McCarthy met last night to talk on the debt ceiling.
No closer to a deal today.
So with that debt ceiling looming, three weeks out, really not making any progress towards a deal, I think as we kind of edge closer to that we should definitely expect more volatility to come through in the financial markets.
>> I heard people say it is a low probability event that they would default but if they did it would be very high-impact.
And then some people trying to figure out… Or what actually happened? Some people say they shipped some of their spending priorities, social services in the states… That seems like it would have a pretty profound economic impact.
>> For sure. Markets are still operating on the assumption that a deal will ultimately get done.
But some of that uncertainty, I would say, is already starting to seep in the financial markets. We saw just a few weeks ago the spread between the three month and one month treasury bill widened by about 200 basis points. So obviously investors were pouring into that one month treasury security.
Just trying to get ahead of any potential default that could occur.
So you know, we are already starting to see some implications there are in financial markets and things will get a lot worse.
The knock on effects to the real economy could be significant. To your point, if we start seeing delays in payments of Social Security, even repayments of interest on debt that is already outstanding, that's going to have a very, very dire impacts for not only the economy but also financial markets which will reverberate globally.
>> More to watch in the days and weeks ahead.
Here is another story dominated the headlines in recent weeks.
Regional Bank issues south of the border. Could these lead into a recession?
>> Certainly puts downside risk to the forecast now.
What we've seen over the last couple months in the wake of the onset of the banking crisis, we saw some tightening in financial market conditions.
We saw some widening and selloff in equities. The more recently, measures of financial stress are shown that conditions of eased back to kind of precrisis levels.
Another concern is just more of the tightening and Bank lending standards.
On that front, we did receive some data this week from the Federal Reserve on the second quarter. That showed across the board we are seeing a tightening in Bank lending standards.
Particularly of the small and medium-sized banks which are been hit the hardest so far.
You know, I think the one area focus definitely is on this ENI, the CRE side. That is certainly where the small and medium-sized banks seem to have a lot more exposure. And, you know, just looking at the CRA fundamentals in general, I think things are kind of deteriorated over the last year, given the high… Environment. There was Artie some uncertainty there and then we layer on top of it this additional stress.
>> When you talk about that commercial real estate, the greater banks seem to have a sensitivity. Diversifying some of the bigger names.
>> Exactly right.
When you look at some of the commercial mortgages in the CRE space about 80% of them are happening from small, medium-sized banks. So the impact there is significant.
Of those mortgages, about 10% are set to renew this year. And in an environment where, I think standards are tighter, disproportionate amounts of lending are happening from the smaller institutions.
You could certainly envision an area were refinancing kind of dries up to some degree.
Equity owners have a harder time trying to refinance and mattress leads to more properties going on the market in a time where evaluations are the following.
So it certainly puts more downside risk I would say on CRA prices over the next year or so.
We also have to remember to that a lot of these loans in the CRE space are floating rate. Originated in a much lower interest rate environment. So, you know, as rates remain elevated for longer, that risk of default starts to grow to the extent that we see defaults just from higher interest rates.
The potential knock on effects they are to smaller banks, who are already getting squeezed, on the liquidity side could be significant and have more dire impacts for our economy.
>> I think the Fed itself is made the argument, what we are seeing in the US regional banks could actually do some of the job for them and tighten credits, cooling things down.
But also seem to have a very good handle on how much.
>> I think it's true among most economists right now.
It's hard to say what degree that's going to have knock on effects are measurable knock on effects to the real economy.
I think from our perspective, that growth at risk right now is certainly on that business investment side of things, just given the closer ties to see and I and CRE lending. So we already assumed our forecast in the latter half of this year, we will see contractions and business investments in both Q3 and Q4 at a very slow recovery through 2024.
>> Our Anthony Okolie is going to join us a little later in the show to talk about some of the signs in terms of the tightening of credit and lending standards there. Let's get to another question now.
A question for the guest.
Thomas is the expert.
(Greg reads the question.) >> If they would've paused a few weeks ago?
>> I guess last week.
I guess some people thought of the Bank is suddenly saying we are done, not hiking, with that of unsettled things?
>> I think that's probably fair.
By all accounts we heard leading up to that that they were going to be going ahead with another 25 basis point rate increase.
If all of a sudden we had that shock where they didn't do that, I think that would certainly… >> You would ask why not.
>> We don't know the counterfactual here but it depends on how the Fed had communicated that and what do they know that we don't know.
So it really kind of hinges on not only how they would have communicated that decision but also, the path forward on interest rates and what that might mean at future meetings as well.
>> Is at a very important part of the central-bank strategy right now?
To communicate pretty well to the markets what you are up to and what you're thinking? I mean, in the past we've seen central banks like the Bank of Canada after oil prices rolled off in 2014, surprising the market, with their moves.
It's pretty critical now for central banks to lay the groundwork.
>> Certainly leading up to the lead last few announcements, they've been very clear on how they will tighten the policy rate. I think where we are now, given the uncertainties of just not really knowing the measurable effects from tightening lending standards, it's harder to continue to articulate exactly where they could be headed.
So now, the onus really is on the economic data right?
And the interpretation of that and what that means from a growth standpoint and how the economy is handling the higher interest rates.
So from that perspective, you know, as we continue to get more data out, I fully expect to hear from more Fed speakers and kind of communicate with their thinking and where they see rates going.
>> As always at home, make sure to do your own research before making any investment decisions.
We will get back to your questions with Thomas Feltmate on the economy and interest rate than just moments time.
A reminder of course that you can get attention as any time by emailing MoneyTalk Live IT.com.
And now let's get to our educational segment of the day.
Staying on top of the market and news is an important part of any investment strategy. WebBroker has tools which can help. Joining us now with Maurice Jason Hnatyk, Senior Client Education Instructor with TD Direct Investing.
Jason great to see you again. Let's talk about these resource on the platform.
>> Great to be back Greg. Staying ahead of the news as a challenge and WebBroker has some very useful tools to help with that.
So let's jump to the platform and show them off. Right from the homepage, we can see we are on now, a couple of really invaluable resources that I want to point out first of all. The first thing here is the market update appearing on the right-hand side near the top of the page.
This is an ongoing look at the market both in the Canadian and US side of the border.
Looking in giving us updates as the market moves on, as the world turns. These updates are gonna keep changing and making sure were well informed what's moving the markets. Then down below here, let's take a look at these featured reports.
If you're trying to get prep for some trading for the day, these are reports from both Canadian and US sides of the border that will give you highlights to what to expect for the day. If there's any major news that is going to be moving markets, such as the debt ceiling that has been discussed, recessionary concerns or even major stock earnings reports or anything else that's really going to be a key to note, these reports will be something that's going to be very helpful for the investor here and WebBroker.
There is one of the resource I want to show off. Look under the "research" tab at the top of the page. If you go down to the reports section, this is another supplementary before the market.
It's located appear in the top left-hand corner.
It's called before the bell. One more arrow that you can use.
The more data to collect information for you to make an informed decision.
The last thing, we are keeping up to date with news in the market. Let's identify where we can find out where and when those events are to be happening. At the top of the page from our research section, you will notice this second tab from the right is our events tab.
On this tab, we get the opportunity to see both on the Canadian side as well as the US side.
We are informed of what companies are reporting earnings for the day and what companies have dividends.
If there are any major corporate actions happening or updated on analyst changes. So there is a wealth of veneration. But beyond that we are also getting a sense of the epic economic reports calendar. Here's where we can go and find out your consumer price index.
Fed, Inc. of Canada rates, jobs, housing reports.
If you're to be kept informed and when these major events are happening. When it's time to make a decision, you know it's helping to move the market.
>> Now we can better stay on top of news. The news flow can get particularly intense particularly during earnings season. Where do we go to find more in depth analysis on the market?
>> WebBroker has tools for that too. What's the saying?
Peeling back the layers of the onion to see what's on the inside… Let's jump back to the platform and take a quick look.
I will bring us back to the reports tab. On this particular page, there is so much information that's here. We have third-party independent research in addition to our TD Securities update. We have information from Argus, MorningStar,… Reuters… You can also jump in and look at sector specific information.
If you looking for materials, energy, technological indicators, lots of great stuff here.
I want to highlight for everyone now, reports from TD Economics, this gives you the ability to use their trusted research and analysis to identifySo lots of information.
We also can look, if you click on the economy button at the top of the page, look at very specific sectors in the economy.
Getting lots of information.
But the report I want to highlight for everybody here today is our weekly bottom-line report.
This report is very useful to keep you informed. We are talking Fed and debt ceiling, this is a great insight from our friends over at TD Economics and then you also are able to get some more in-depth analysis to help combine with what you have and WebBroker. Once again, lots of information here and it's just about finding and identifying it in the right place.
>> That weekly roundup is definitely part of my Friday afternoon reading. Thanks for that Jason, always a pleasure having you on!
>> My pleasure Greg.
>> Jason Hnatyk, Senior Client Education Instructor a TD Direct Investing. And make sure to check out the learning centre and WebBroker for more educational videos, live interactive master classes and upcoming webinars.
Before we get back to Thomas Feltmate, a reminder of how you can get in touch with us.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live!
And we are back with Thomas Feltmate taking your questions about the economy and interest rates. Lots to talk about inflation.
(Greg reads the question) I've talked about this with people in the past two. We hear about this basket of goods that represents how much prices are up or down.
What's going on here?
> Right.
So it is a representative basket of what households are spending their money on. You hinted at that. Things like energy and food were seeing more price pressures over the past year. Those are much higher.
If you're just looking at that in and of itself, you might get the impression that inflation is running much higher.
But the reality is there is a lot of other goods and their and services that are included in this measure that have much higher waiting in the inflation measure.
Presumably because that's where households are spending increasingly more of their money. We think about vehicles, for example, that carries a pretty significant weight on the goods side of things.
Apparel, furniture, other household items you might buy.
These are all kind of lumped into that "goods" category which accounts to about 25% of the core measure.
Then the rest of the basket on the core side will be on the services.
A significant portion of that, about 40%, will be shelter, housing -related costs and this could be calculated through either a measure that captures what you would be paying to own a house or also to rent that house.
And then, the rest would be on kind of core discretionary services. Things like cleaning services, haircuts, childcare and that sort of thing. That carries the rest of the weight in a core basket.
>> Of course if somebody sees a headline like this morning about inflation coming in cooler than expected, the headline continues to come down. It doesn't mean that prices are down compared to last year.
It just means they are not rising at as much of a torrid pace as they were before.
>> Exactly. And what we're hearing from central bankers now is a lot of price pressures of the last year, year and 1/2 on the goods side of things. But we've seen a lot of encouraging developments were prices of really started to cool or at least level off to some degree.
We had up until this morning seen that in the East vehicle market. Prices appreciated about 60% to the pandemic and then we saw about an 18% giveback until more recently when things have started to turn higher.
Now, the real sticking point has been on the services measure X shelter. These will be the services that will be more labour-intensive and also more closely tied to discretionary.
That's the area that central bankers have really been focusing on the inflation front because were still seeing a lot of strength in the labour market and what that means is discretionary sent spending is still running at a pace well above trend and its fuelling price growth in a lot of these other kind of service categories.
>> Let's get to another question now. This one about central banks again.
Rate cuts still probable this year? We touched a little on the top of this the big question for investors right?
If you look at the markets, perhaps there is a chance because the markets are… >> I think at this point we are only just now really starting to see the effects of the cumulative round of tightening over the last year really start to hit the economy.
That being said, first-quarter consumer spending growth, 3.7%, quarter annualized, we did see some moderation in business investment but things were still growing. We are just seeing some slowing.
We are looking at leading indicators. Things like core durable orders on the manufacturing side.
It is pointing to more softness on the investment spending side over the next quarter, at least, and then with the tightening of Bank lending standards as well… That's going to have a more dire impact on the real economy as the year progresses. So, I think we are starting to see some early signs of things hitting the economy but you know, it's way too early to still say decisively that inflation is moving back towards 2%.
So from that perspective, I would argue that rates need to remain at this level for quite some time before we really start to see the economy slow in a way that is going to give policymakers that convincing or conviction that inflation is in fact moving back to 2%.
>> One thing about our central-bank governor, when you hear from Jerome Powell South of the border, they really push back against that notion when they think of a chance of being able to cut before the end of the year. At the same time, I guess, there have also been warnings. Warnings from the Fed saying when we look at history, we've seen perhaps the errors of going through a hiking cycle and then turning around and cutting too quickly before we really had a chance for her to take hold.
>> And then Powell has been quite explicit on that as well right?
There is a real risk of cutting prematurely and then, you know, cutting some of that restriction of the economy and not necessarily getting inflation to stay on that steady downward trajectory.
We look at some more recent readings on inflation excitations from March and April in the US, one year ahead of inflation expectations, those of actually turn higher.
So that's really giving policymakers any conviction that at least, a year from now, consumers are expecting inflation the fall which, to some sense, that means that this could become somewhat self-fulfilling. Again, one data point doesn't make a trend but it's certainly something that has to be catching the eyes of the policymakers. Particularly in this environment where we have not seen any moderation and wage growth yet.
>> Let's take another question now. What is the state of US real estate? Is this a repeat of the 2008 crisis on the way?
That was a big one.
What's the perspective?
>> You can certainly see why some people would draw the parallels if they were only looking at home sales.
Over the last year or so we have seen sales fall by about 35% and recently they've kicked up by 10%. A lot of low levels and a lot of that is driven by the fact that October and January of this year, between then, we've seen mortgage rates come down about 75 basis points.
That brought some buyers back in the market. But since January, we've seen mortgage rates take back higher.
Basically back to levels relatively consistent with where they were in October.
So the expectation that sales are likely to pull back in the second quarter with rates to remain elevated through much of this year, it's hard to imagine that you will see any kind of strong rebound on the sales perspective.
Through this year and probably a very slow recovery through 2024.
You know, when we look at measures of affordability, they are still low by historic standards. Even lower than kind of where they were and that peak era before the global financial crisis when the housing boom was really in its prime.
So affordability is still very, very weak.
That in and of itself is keeping buyers out of the market and especially preventing the kind of move up buyers that would otherwise potentially come in to really enter the market and that's kept inventory really, really tight. So despite sales having fallen by 35%, prices in the US have only followed by about 0.
5%.
Now, when we look at the supply pipeline, it looks to be quite rich over the next year.
We should see more supply coming to market in a time when demand will still remain quite weak. I do envision some further correction in home prices.
Maybe as much is 8 to 10% by mid next year. But, you know, you put that into perspective of the global financial crisis or prices have fallen by over 30%, it's small in comparison. Particularly given the fact that we saw such a meaningful run-up in prices through the pandemic where, in the US crisis were about 35%.
>> We will get back to your questions with Thomas Feltmate on the economy in just a moment's time.
As always make sure to do your own research before making any investment decisions and a reminder that you can get in touch with us any time.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live!
In the wake of the US regional Bank crisis, a recent Fed survey suggests that commercial banks have tightened lending standards to reduce the risk. Anthony Okolie joins us to discuss a new TD Economics report that looks at the direct impact this trend may have on the US economy.
>> US commercial banks tightening credits for all major products in the second quarter of this year. Following the US banking crisis. Now, even with lending standards rising for some products, the reports suggest that banks continue to cut lending further and I brought along a chart that shows that it got harder to borrow from US commercial banks in the second quarter.
Across a variety of products. Lending tightening, mostly for commercial and industrial loans along with commercial real estate loans. Within the commercial real estate loan category, construction and development loans were hit the hardest.
TD Economics suggests that the business sector of the economy, the US economy will be most exposed to the consequences of the cycle. TD Economics also estimates that tightening will come between 2 to 2.5 percentage points off commercial and industrial lending growth in 2023.
Now, the largest increase in tightening standards of course, was in the auto and other loans category. These loans typically carry much higher risks than other categories. US banks have been warning of the trouble ahead in the auto loans sector amid dropping used car prices. Following used car prices risk leaving buyers owing more than their cars are worth which which may encourage some consumers stop making payments and let their vehicles go to be repossessed.
Now, in contrast, household credit stays more accessible for Americans. Reflecting stronger household fundamentals in the US. However, lending tightened for riskier products within the residential section particularly for mortgages, nonqualifying Jumbo mortgages.
Overall TD Economics concludes that the tightening access to credit will continue to affect the macroeconomic conditions going forward even if the worst of a mini crisis is behind us.
Greg?
>> There is an indication the credit is tightening, for the banks themselves. What are they pointing to?
What key factors are they say are leading this dynamic?
>> Both large and small banks who leading… Most important factor for the tightening of conditions across all products. For loan officers at small banks, they noted that the deterioration and expected liquidity positions and reduce tolerance for risk at a much higher weighting compared to larger banks.
Greg.
>> Thanks Anthony.
MoneyTalk Live's Anthony Okolie.
Let's check in on the markets.
Element fleet management coming out with an earnings boosting its guidance going forward. The streets him to like the sound of what they heard today.
20 bucks and $0.25 a share.
Up about 13%. First Quantum appears to be under pressure today.
Indeed, 3313 with some of the mining stocks facing some downward pressure to the tune of 6 1/2%. S&P 500, a tick cooler than expected on a year-to-year headline number.
An indication earlier in the session that perhaps it will be a bit of a stronger day. Right now a very modest one of the quarter-point, just three ticks on the broader meat of the market, broader read of the market.
We should do AMD off the top of the show. Amazon was making some gains earlier along with the new tech stocks and hundred nine bucks a share, up almost 3%.
We are back now with Thomas Feltmate, Senior Economist with TD Bank talking about economy and rates. What's the outlook for the American dollar? It had quite a run last year.
>> Exactly. Over the last couple of months, we kind of sensed the onset of this banking crisis. We have seen the dollar depreciated by about 2 1/2 or 3%. You know, a lot of that which is due to the fact that we did see a bit of a collapsing rate hike expectations.
Prior to this crisis we had seen markets kind of pricing in the terminal rate of the Fed funds rate going to 5 3/4, 6%, by all accounts that's what we're hearing from the feds as well even in chair Powell's testimony to Congress. So that kind of drop in expectations, obviously led to some narrowing and interest rate differentials.
Kind of pressure the dollar lower.
As we've already talked about, I think it's probably fair to say that rate hikes are not going to happen this year.
As we start to see market expectations reprice that in, it could be somewhat positive for the dollar, at least over the near term.
But that being said, I think the Fed is certainly standing to be one of the first central banks to start cutting rates when we get into next year.
And that is going to lead to a further narrowing and interest rate differentials. So from that perspective, it seems like it could put further downward pressure on the dollar over the course of the next year. But, again, there's a lot of risks out there to the could be somewhat dollar positive. So, of course, assuming that none of these actually come to the forefront.
>> I think some of the headlines involving the US dollar in recent days, this idea of de-dollarization… Bricks wanting to have their own trading currencies : how seriously should we be taking some of these arguments?
>> I think are the near term it's unlikely. If we think of how deep the US treasury market is, from a liquidity standpoint, it just doesn't necessarily seem feasible that there will be another currency that is, you know, standing ready to be the new global currency. Could it happen over the next decade? Maybe. But certainly not in the near term.
>> Let's talk about the job market. We have of you are saying (Greg reads the question) >>We have definitely seen the breath of hiring really narrow over the last couple of months. So again, this is kind of one of those early signs that maybe we are starting to see some cooling around the edges and the labour market. To give you some context, in the April data, we saw just three industries, healthcare, leisure hospitality and professional business services account for two thirds of the private sector job gains.
That is definitely considerably less spread across the other industries. Relative to what we were seeing earlier in the recovery.
So definitely a sign that we are starting to see some cooling there. But, the unemployment rate remains historically low.
It's at a 53 year low right now.
It's going to take a lot more than what we have seen so far to really cool the job market.
We look at job openings and I think a lot of people are kind of cheered that over the last year.
Openings of command by over 2 1/2 million but they are still historically elevated by several million above where they were prior to the pandemic.
So from that perspective, labour demand still remains quite elevated in the US. In an environment where it doesn't necessarily see supply and purchase and rates rather participation rates looking the same like they did in the last couple of months. There is still this mismatch in the labour market and certainly argues that we are going to see continued upward pressure on wages, at least over the near term.
>> Thomas always a pleasure to have you. I enjoy the conversation and looking forward to the next one.
>> Thanks.
>> Our thanks to Thomas Feltmate, Senior Economist at TD. Stay tuned on Thursday, Michael O'Brien, Portfolio Manager at TD Asset Management will be our guest taking your questions but Canadian stocks. A reminder that you get a head start by emailing us at moneytalklive@td.com.
That's all for show. Take care.
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