Richard Drury
Transcript
Greg Bonnell: Following another red-hot US jobs report, Fed Chair Jerome Powell is once again saying he’s in no rush to cut interest rates. Joining us now to discuss, Chris Whelan, the Senior Canada Rate strategist and Head of Portfolio and ESG strategy at TD Securities. Chris, great to see you again.
Chris Whelan: Great to see you. Thanks for having me on.
Greg Bonnell: All right. So we have a few things to weigh here, along with the broader markets, trying to weigh out exactly where the Fed is in terms of their thinking of rate cuts. We’ve had hot US jobs. We’ve got Jerome Powell, again, driving the point home. They’re in no rush. What do we make of it all?
Chris Whelan: I think what you just said is what we make of it all, that they’re no rush. No, they’re not in no rush, but they would like to see more of the same and not see any indications that the economy is taking off again and inflation is going to go higher. So they’d like — they’d like some more room for safety.
And I think that Jerome Powell’s interview over the weekend that was on TV, I think, indicated exactly that. I think they’d like to see more of the same. And if they see more of the same, then that sets up the ability to cut as we head into the summer. At TD Securities, we have that set up for May right now. Of course, there’s risk that goes a bit later.
But it’s not an if. It’s a when. And we just need some stability. And we’d like to — and I think they’d like to see that inflation remains around these levels and remains contained, and then that will give them the confidence to cut. So I think as long as we don’t head higher in inflation in a meaningfully or scary way, then the cuts are set up for the back half of the year, if not as soon as May. So, to be determined.
Greg Bonnell: There does seem to be a logic — well, one of the key passages I saw from the 60 Minutes interview is where Jerome Powell was late, driving the point home yesterday about waiting — is that the economy is strong. I mean, we’ve got the strong jobs report. We should dig into that. Inflation is cooling. There doesn’t seem to be an indication right now for them that they have to rush, that they’re like, oh, no, things are going off a cliff. We’ve got to cut rates. We’ve got to stimulate the economy. At these levels, things are holding in. Is it a bit surprising, particularly the jobs report?
Chris Whelan: I think in the end of the day, economies can take longer than we think to turn to the downside, and I think that that’s what we’re going through. I think that the Fed and just the Bank of Canada and other central banks globally, they don’t want to impose any more interest rate pain on the economy than they need to and then pay the price for that in 2025 with an overly weak economy that wasn’t necessary.
So I think — we’ve discussed this on the show before. And I think that it’s a little bit — this cycle is a little bit more confusing than past cycles that we’re used to because right now, central banks globally are in restrictive territory. They’re in highly restrictive territory because inflation was high — was much higher than we’ve been used to for the past decade-plus.
So returning from restrictive to neutral can be achieved during a good economy. You can’t have an overly strong economy that’s accelerating at a rapid pace. But you can have a healthy economy and still cut rates because you’re moving towards neutral. And I think that’s exactly how you can have this sort of Goldilocks scenario this year, where it’s good for risk assets and central — so you can have stocks doing well, and you can have them cutting rates, and that be OK.
So I think what they want to do is just make extra sure and be extra careful before they do that so as to not regret it and have interest rates end up having to go higher next year, and also not regret cutting them sooner and imposing more pain for the economy on a go-forward basis. So I think that’s exactly what they’re trying to tread the line on. And so far, I think it makes a lot of sense. And I think the central banks have a pretty good game plan at the moment.
Greg Bonnell: Does the scenario — and you said it’s not a matter of if but when — but if the rate cuts come a little later than the market was thinking heading into this year, does that mean we’ll get fewer cuts in 2024? This idea of getting back to a neutral place. Do you think the bank knows where neutral is and what it’s going to take to get there?
Chris Whelan: I don’t think anyone knows where neutral is.
So I think we’d like to think we have a good idea. But we were at a 0% interest rate economy for a long time, and now we have 5%-ish overnight rates in North America. There’s a lot of distance between 0 and 5. There’s 500 basis points of being insured. And we’ve said this before — maybe they could even — what if they had to go to 7%?
We don’t think that. That’s not our base case at all. And that’s a far-out scenario. But there’s a lot of variability here on where neutral is. But I think — yeah, to be quite frank, I don’t think anyone knows where neutral is.
Greg Bonnell: All right. So obviously, that’s going to take some thinking through for the central banks as we push through the year. We’ve been talking about the US economy, how resilient it has been despite these higher rates. You say it can take time for an economy to turn. It seems like a different story here in Canada, that we have felt the turn. It’s been pretty tepid. How do the two economies stack up to each other?
Chris Whelan: Between Canada and the US, I think it’s tricky to stack the two against each other. They seem both in tandem at different times, and they seem — and then they seem to be — Canada seems to be weaker at certain times, the US seems to be stronger, and vice versa.
I think in the end of the day, at TD Securities, we expect more cuts in the next 12 months by the Fed than we do at the Bank of Canada. But that’s our house view. And so we think that there’s more room for the Fed to cut.
In terms of how the economies stack up, I think time will tell. We think there’s some near-term risks to the economy for the Bank of Canada. We feel good about our call for a July cut at the Bank of Canada right now. There’s nothing that concerns us on that call, and we’re happy with that call.
And so I think we’re really in this — we’re really in this holding pattern for the markets where we need to see how the data evolves over the coming months. And a few months from now will tell us where both economies are on a relative basis. But so far, relatively speaking, there’s no reason to expect that this cut cycle shouldn’t be nearly in tandem. It’s just the magnitudes. So we expect a bit more magnitude in the US than Canada over the coming 12 months on the cutting side.
Greg Bonnell: I find that a really intriguing idea that there is more magnitude for rate cuts south of the border, despite them having a stronger economy than ours. Do we have a sticky inflation problem in this country? Because ultimately, in the end, what the Bank of Canada is trying to do is bring inflation back down to 2%.
Chris Whelan: I think in the end of the day — our call could be a bit out of consensus — but we see the Fed being aggressive in their move back towards neutral, which we see at least 200 bps lower than here. So our views of neutral are around 3%-ish, give or take. And so we see the Fed moving aggressive on their way back there, and we just think the Bank of Canada will take a bit more time to move back there.
Yes, the US economy is stronger. That’s a risk to our call for now. But taking a step back, in 12 months from now, are overnight rates at the Bank of Canada and the Federal Reserve going to be lower? We would say with extremely high conviction that that’s the case.
