Show Transcript
The recently released federal budget is looking to boost revenue through new taxes. But it also includes more than $50B in new spending over the next five years. Hafiz Noordin, VP & Director, Active Fixed Income Portfolio Management at TD Asset Management, looks at the implications for the Bank of Canada’s efforts to tackle inflation.
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[AUDIO LOGO]
The federal budget laying out more than $50 billion in new spending over the next five years. So what could that mean for the Bank of Canada as it tries to get inflation back down to that 2% target? Joining us now to discuss, Hafiz Noordin, VP and Director of Active Fixed Income Portfolio Manager at TD Asset Management. Hafiz, great to have you on the show.
It's great to be back.
All right. So we've had a little bit of time now to live with the budget we know. As we said, more than $50 billion in new spending announced in this document over the next five years. They said they were going to have a budget that wouldn't be inflationary. The Bank of Canada don't undo their work. As you read through it, what's your take on it?
Well, there's definitely some deterioration in the deficit outlook over the next few years. And so that alone is not a great outcome. But when we think about it, there was some raising in tax revenue but offset by spending. And so I think net-net, it didn't really rock the boat too much in terms of financial markets. We didn't see bond yields move very meaningfully.
On the revenue side, we saw that surprise announcement on the capital gains inclusion rate for corporations and for large capital gains at the individual level. But on the flip side, we also got more spending, particularly around housing, but also in other areas like defense and health care.
And so yeah, net new stimulus, there's different ways of looking at the numbers. But I kind of saw $35 billion as the net new stimulus relative to what was expected or what was baked in from the fall update in November. And that $35 billion is over the next five years. So when you think about spreading that out as a percent of our GDP, it's not a huge increase.
But I think the main takeaway is that persistent deficits to come and not really seeing a path to balancing the budget anytime soon. And I think that's where there has to be some caution.
Yeah. Let's talk about that then because the deficit's, as you said, persistent. And throughout the timeline, where you don't have a path back to balance, that is going to add to the national debt. And of course, the government is a big issuer of debt. How do we read through on that?
So yeah. So part of the budget is this debt management strategy. So we have to see then, how are they going to fund all of this? And so the big, high-level numbers that we saw in terms of the amount of debt that will need to be issued this year is about $500 billion. So it sounds massive, but we always have to adjust for how much of that is just debt rolling over. So how much debt is maturing in this coming fiscal year?
So when you subtract the amount of debt that's maturing, it's about $85 billion of net new issuance. And then the next thing in markets that we look at is how much of the issuance is going to be in treasury bills, so that's less than 1-year bills, versus bonds that are issued at 2-year, 5-year, 10-year, and 30-year tenors.
And if you start to get too much issuance on bonds, that can start to pressure bond yields higher because the market will demand a concession for that. But we actually got an opposite outcome. The amount of bonds that will be issued this year is about $230 billion. Analysts, in general, were expecting around $240 to $250 billion. So it was a little bit lower than expected.
And so from that perspective, the issuance strategy is still relatively benign. It's not, again, rocking the boat too much in terms of what bond yields investors were expecting.
Now, the last time we heard from Tiff Macklem-- I make it sound like it was a million years ago. But it was pre-budget in the sense that he said, well, we're still holding where we are right now. Is June a possibility for a cut? It's not impossible. The market's thinking July. But in a conversation I had-- I think it might have been a conversation I had with you that day-- it's like, they're going to see a federal budget before they get to decide.
So now we're on the other side of that federal budget, anything-- as you go through here, you think Tiff Macklem will say, this changes our idea of the world or, no, we can keep doing the work we're doing?
Yeah. So I think they'll obviously have some longer-term projections that might get impacted when it comes to the amount of government spending. There will be an impact on GDP, perhaps a bit of inflationary impact. But the other thing that we got yesterday, though, was the CPI print for March in Canada, which missed a bit to the downside. And so to start the day, yesterday-- or, actually, the full day yesterday, we had a meaningful bond rally in Canada, while US bonds were selling off.
And so I think when we look very near term, which is probably what the Bank of Canada is going to focus on more now because the budget wasn't, again, meaningfully different from November, they're really going to look at how to extrapolate the inflation data and monitor that.
The headline and core inflation both came in at about 2.9% year-over-year as of March. So we're just now dipping below 3%. And I think, from that perspective, it's consistent with their narrative around gradually declining inflation. And I think, importantly, the momentum in inflation has definitely declined to the extent that June is very much still on the table.
I think Tiff Macklem was part of a panel discussion with-- Jay Powell was there. I think I saw Bill Morneau, too. I was just watching out of the corner of my eye. It was on the TV. We were focusing on other things. And he was able to react. I mean, it's not often we get a reaction from the governor of the Bank of Canada to an inflation report on the same day. But it was part of that Q&A session and discussion. He seemed pleased with the trajectory.
For sure. And I think he still balanced it, knowing that there's still some data to come. We're talking about June, so there's still all the data releases for the rest of April and in May. They will be looking for consistency in this trend that, by June, if we're seeing this disinflation continue, it will be more in the 2 and 1/2% area in terms of inflation. I think that would definitely be more consistent with the idea that cutting to at least get off of the maximum restrictive policy level is reasonable.
And that's in stark contrast to what Jay Powell is definitely facing. But yeah, I think, so far, the data is supporting. They just want to see consistency.
The wild card here, in the end, just energy prices? Because that was the one thing, if you wanted to quibble with that report, you said you stripped it down to the core measures, and things are moving the way the Bank of Canada wants. You look at the headline, and the headline is, of course, shelter costs and gasoline.
Yeah. And I think there's always some amount of volatility, and that's why we get this core measure. But I think at the end of the day, even at a headline level, including energy, including food and all of the volatile components, still just dipping below 3%.
So I think there's been a more recent increase in gas prices for sure. That could start to filter in. But I think knowing that there's still a lot of volatility around what's driving oil prices, we know that there's obviously concerns in the Middle East that are impacting near-term supply expectations. At the same time, we're seeing strong US growth. So the demand for energy has been also increasing.
So I don't think-- we've seen that bounce in commodities. It hasn't been so strong that it's really impacting inflation expectations, so how much are consumers expecting inflation to increase. That's the one that the Bank of Canada really has to watch to know that there's a concern and that they have to actually cool demand down a little bit more. I think for now, they can kind of look through that noise. [AUDIO LOGO]
[MUSIC PLAYING]
The federal budget laying out more than $50 billion in new spending over the next five years. So what could that mean for the Bank of Canada as it tries to get inflation back down to that 2% target? Joining us now to discuss, Hafiz Noordin, VP and Director of Active Fixed Income Portfolio Manager at TD Asset Management. Hafiz, great to have you on the show.
It's great to be back.
All right. So we've had a little bit of time now to live with the budget we know. As we said, more than $50 billion in new spending announced in this document over the next five years. They said they were going to have a budget that wouldn't be inflationary. The Bank of Canada don't undo their work. As you read through it, what's your take on it?
Well, there's definitely some deterioration in the deficit outlook over the next few years. And so that alone is not a great outcome. But when we think about it, there was some raising in tax revenue but offset by spending. And so I think net-net, it didn't really rock the boat too much in terms of financial markets. We didn't see bond yields move very meaningfully.
On the revenue side, we saw that surprise announcement on the capital gains inclusion rate for corporations and for large capital gains at the individual level. But on the flip side, we also got more spending, particularly around housing, but also in other areas like defense and health care.
And so yeah, net new stimulus, there's different ways of looking at the numbers. But I kind of saw $35 billion as the net new stimulus relative to what was expected or what was baked in from the fall update in November. And that $35 billion is over the next five years. So when you think about spreading that out as a percent of our GDP, it's not a huge increase.
But I think the main takeaway is that persistent deficits to come and not really seeing a path to balancing the budget anytime soon. And I think that's where there has to be some caution.
Yeah. Let's talk about that then because the deficit's, as you said, persistent. And throughout the timeline, where you don't have a path back to balance, that is going to add to the national debt. And of course, the government is a big issuer of debt. How do we read through on that?
So yeah. So part of the budget is this debt management strategy. So we have to see then, how are they going to fund all of this? And so the big, high-level numbers that we saw in terms of the amount of debt that will need to be issued this year is about $500 billion. So it sounds massive, but we always have to adjust for how much of that is just debt rolling over. So how much debt is maturing in this coming fiscal year?
So when you subtract the amount of debt that's maturing, it's about $85 billion of net new issuance. And then the next thing in markets that we look at is how much of the issuance is going to be in treasury bills, so that's less than 1-year bills, versus bonds that are issued at 2-year, 5-year, 10-year, and 30-year tenors.
And if you start to get too much issuance on bonds, that can start to pressure bond yields higher because the market will demand a concession for that. But we actually got an opposite outcome. The amount of bonds that will be issued this year is about $230 billion. Analysts, in general, were expecting around $240 to $250 billion. So it was a little bit lower than expected.
And so from that perspective, the issuance strategy is still relatively benign. It's not, again, rocking the boat too much in terms of what bond yields investors were expecting.
Now, the last time we heard from Tiff Macklem-- I make it sound like it was a million years ago. But it was pre-budget in the sense that he said, well, we're still holding where we are right now. Is June a possibility for a cut? It's not impossible. The market's thinking July. But in a conversation I had-- I think it might have been a conversation I had with you that day-- it's like, they're going to see a federal budget before they get to decide.
So now we're on the other side of that federal budget, anything-- as you go through here, you think Tiff Macklem will say, this changes our idea of the world or, no, we can keep doing the work we're doing?
Yeah. So I think they'll obviously have some longer-term projections that might get impacted when it comes to the amount of government spending. There will be an impact on GDP, perhaps a bit of inflationary impact. But the other thing that we got yesterday, though, was the CPI print for March in Canada, which missed a bit to the downside. And so to start the day, yesterday-- or, actually, the full day yesterday, we had a meaningful bond rally in Canada, while US bonds were selling off.
And so I think when we look very near term, which is probably what the Bank of Canada is going to focus on more now because the budget wasn't, again, meaningfully different from November, they're really going to look at how to extrapolate the inflation data and monitor that.
The headline and core inflation both came in at about 2.9% year-over-year as of March. So we're just now dipping below 3%. And I think, from that perspective, it's consistent with their narrative around gradually declining inflation. And I think, importantly, the momentum in inflation has definitely declined to the extent that June is very much still on the table.
I think Tiff Macklem was part of a panel discussion with-- Jay Powell was there. I think I saw Bill Morneau, too. I was just watching out of the corner of my eye. It was on the TV. We were focusing on other things. And he was able to react. I mean, it's not often we get a reaction from the governor of the Bank of Canada to an inflation report on the same day. But it was part of that Q&A session and discussion. He seemed pleased with the trajectory.
For sure. And I think he still balanced it, knowing that there's still some data to come. We're talking about June, so there's still all the data releases for the rest of April and in May. They will be looking for consistency in this trend that, by June, if we're seeing this disinflation continue, it will be more in the 2 and 1/2% area in terms of inflation. I think that would definitely be more consistent with the idea that cutting to at least get off of the maximum restrictive policy level is reasonable.
And that's in stark contrast to what Jay Powell is definitely facing. But yeah, I think, so far, the data is supporting. They just want to see consistency.
The wild card here, in the end, just energy prices? Because that was the one thing, if you wanted to quibble with that report, you said you stripped it down to the core measures, and things are moving the way the Bank of Canada wants. You look at the headline, and the headline is, of course, shelter costs and gasoline.
Yeah. And I think there's always some amount of volatility, and that's why we get this core measure. But I think at the end of the day, even at a headline level, including energy, including food and all of the volatile components, still just dipping below 3%.
So I think there's been a more recent increase in gas prices for sure. That could start to filter in. But I think knowing that there's still a lot of volatility around what's driving oil prices, we know that there's obviously concerns in the Middle East that are impacting near-term supply expectations. At the same time, we're seeing strong US growth. So the demand for energy has been also increasing.
So I don't think-- we've seen that bounce in commodities. It hasn't been so strong that it's really impacting inflation expectations, so how much are consumers expecting inflation to increase. That's the one that the Bank of Canada really has to watch to know that there's a concern and that they have to actually cool demand down a little bit more. I think for now, they can kind of look through that noise. [AUDIO LOGO]
[MUSIC PLAYING]
