2023 Economic Outlook – Light at the End of the Tunnel?
[Soft music plays]
[Benjamin Tal, Managing Director and Deputy Chief Economist
CIBC Capital Markets Inc.]
Everybody is talking about inflation. But the reality is that at the end of the day, this is not
about inflation.
[Sheets of currency being printed. The Bank of Canada, in Ottawa. The Federal Reserve in
Washington.]
This is about the cost of bringing inflation down to 2%, which is the target. The Bank of
Canada, the Fed in the U.S., have established their reputation as inflation fighters. They are
not going to toss it away. Given a choice between a recession and inflation they will take a
recession any day. That's the reality.
[Sources of inflation]
The trajectory of inflation is important here. This trajectory is changing.
[An aerial view of a shipping dock. A person online shops on their phone. An aerial view of a
warehouse and shipping center.]
At any point in time, there are two sources of inflation, supply driven inflation and demand
driven inflation.
[A full warehouse. Bustling shipping docks. The Bank of Canada building. A timelapse of
downtown Toronto.]
What we are seeing more and more, is that the contribution of the supply driven inflation is
diminishing, which means that the supply chain is improving, shipping cost is down. And
that's actually extremely good, because it means that the Bank of Canada is becoming more
powerful in its ability to deal with the situation because more and more inflation is not
coming from the outside, but rather from domestic sources which the Bank of Canada can do
something about.
[Interest rates]
So, what's the next move?
[The Bank of Canada building.]
The Bank of Canada is now at 4.25% overnight rate. We think it's done. We think that's the
end of it. Maybe another 25 basis points if they have to, but we are, basically, extremely
close, maybe at the end of the hiking cycle.
The next question, of course, is what's next? When are you cutting? Usually, the lag between
the last hike and the first easing move is relatively short. This time we believe it will be
relatively long, maybe a year, maybe early 2024.
[The Federal Reserve in Washington. Sheets of currency being printed.]
Why? Because the Bank of Canada and the Fed have to make sure that inflation is dead
before they ease monetary policy.
[An aerial image of the Brooklyn bridge in the 1970s. A CIBC branch in Toronto in the 1970s.]
The last thing they want to do is to repeat the mistakes of the 1970s when monetary policy
was eased prematurely and led to another wave of inflation, and therefore, the double dip
recession of the early 1980s. They would like to avoid that and, therefore, they will wait until
inflation is dead before they cut.
And then when they cut by how much? Now, we started this saga at 1.75% overnight rate.
We are going to 4.25%, 4.5%. We rest for a year. And then cut––to where? I say about 3%. A
full percentage point, maybe more, above the rate we have seen before the crisis.
Why? Because in the background there are three inflationary forces that are putting pressure
on overall inflation.
[A low angle view of a Canadian flag in Ottawa. A full warehouse. A woman carries a box of
office supplies.]
We are talking about deglobalization. We are talking about Just-in-case inventories that are
replacing Just-in-time inventory. And clearly the labour market is much tighter now with
vacancy rates in the sky. And the target is the same target, still 2%. So, in order to achieve
the same target with more inflationary forces, by definition, interest rates have to be higher
and the new neutral rate, about 3%, clearly higher than what it was before the crisis.
[The risk of central bank overshooting]
What's the risk? Overshooting. To the extent that supply chain does not behave. To the
extent that we don't see a significant decline in the external source of inflation, that will lead
to a situation, in which the Bank of Canada will overshoot, will raise interest rates to 5%,
5.5%.
[The Bank of Canada crest. A person fills out a job application. People sit in a waiting room.]
That will take you to a real recession, with the unemployment rate rising significantly. Every
economic recession was helped, if not caused by a monetary policy error, in which central
bankers raised interest rates too much.
[The Bank of Canada building.]
At this point of the game, it seems that the Bank of Canada is getting it. They would like to
avoid this risk. Basically, stop at 4.25%. That's the main case scenario.
[The Housing Market]
Let's talk about the housing market now. The housing market is extremely sensitive to higher
interest rates than in any other time in history.
[An aerial view of houses in Toronto.]
It is slowing down. Is it a correction? Is it a crash? Is it a meltdown? In order to answer those
questions, we have to understand what happened to the housing market during COVID. We
know that prices went up by 46% in two years. The question is why? The answer is the
asymmetrical nature of the crisis. All the jobs that were lost were low paying jobs.
[An empty warehouse. A person reads a layoff notice. Apartment buildings in Toronto.
Homebuyers look at listings in the window of a real estate office.]
Young people, renters. That's why rent actually went down during the pandemic.
[A young couple looks at the front door of a house.]
At the same time, homebuyers and even potential homebuyers, their jobs were there. They
were assuming their income was there and interest rates were in the basement. So basically,
we have a situation in which, if you think about it for a second, homebuyers during COVID
got the benefit of a recession, vis-a-vis extremely low interest rates, without the cost of a
recession, vis-a-vis a broadly-based increase in the unemployment rate.
[A street view of a residential neighbourhood.]
There was a sense of urgency to get into the market. So, if you have a sense of urgency to get
into the market, you frontload activity. You borrow activity from the future. We are in the
future. This is not a freefall. This is not a crash. This is a reallocation of activity over time. We
frontloaded activity, now we are resting due to higher interest rates. That's a very positive
development. It's not over.
[A “For Sale” sign on a lawn.]
Now, this is the first correction ever, in which the supply resale activity is actually down.
Usually, you see supply listings going up when the market is correcting. This is not the case
now. Supply is down because people simply are worried about the overall situation, they are
not willing to list, and therefore, supply is down by 10% on a year-over-year basis. That's
protecting prices from falling further. I believe that will change in 2023 and 2024. We will
see supply rising because the fog will clear.
[An aerial view of houses in Toronto.]
But also, some people will be forced to sell given the huge increase in interest rates and the
shock that they will experience moving from variable rates to fixed rates or renewing their
variable rates. And therefore, I see further downward pressure in the housing market in
2023. However, it's not a crash, it's not a meltdown. It's a very healthy correction.
[An aerial view of houses. A plane lands at an airport. A woman waits for a ride at an airport.
A man holds up the Canadian flag. The Ukrainian flag flying over Kyiv. An agent shows a
couple a condo]
So, expect to see further declining sales and clearly declining prices, especially in the low-rise
segment of the market. At the same time, remember, the fundamentals of this market are
still very strong. This year alone, we got 700,000 new immigrants, plus non-permanent
residents, foreign students, and people from Ukraine. 700,000. None of them carries his or
her house on their back. The demand is there and what's happening to supply? We are not
building.
[An aerial view of houses in Toronto. The interior of a semiconstructed apartment.]]
One third of activity is being canceled or delayed because of the fact the cost is rising too
fast.
So, you don't have the supply coming. The demand is definitely there. You don't need to be
an economist to see what will happen two or three years from now. So, the fundamentals of
the market, the lack of supply, a lot of demand still there. But at the same time, the market is
now adjusting, basically reflecting the asymmetrical nature of this recession.
[This video is provided for general informational purposes only and does not constitute
financial, investment, tax, legal or accounting advice nor does it constitute an offer or
solicitation to buy or sell any securities referred to. Individual circumstances and current
events are critical to sound investment planning; anyone wishing to act on this document
should consult with his or her advisor. All opinions and estimates expressed in this video are
as of the date of publication unless otherwise indicated, and are subject to change.
The CIBC logo is a trademark CIBC, used under licence.
The material and/or its contents may not be reproduced without the express written consent
of CIBC.]
[CIBC Logo]
[The CIBC logo is a trademark of CIBC, used under licence.]

Will Market Volatility Continue?

[Soft music]

[Michael Sager, Executive Director, Multi-Asset and Currency Management

CIBC Asset Management]

I think market volatility is being driven by a number of factors.

[A Russian government building. The Ukrainian flag flying over Kiev.]

The first one, obviously, is the geopolitical situation in Europe with Russia's invasion of Ukraine.

[The EU Central Bank building. The U.S. Federal Reserve building.]

In a more underlying sense, though, we can think back to the pivot by developed market central

banks that has occurred over the last few months, in terms of their policy priorities and how

they're thinking about inflation.

[People wearing masks in public.]

In addition, the third thing that's been around for a little bit longer, of course, is the pandemic,

which has really impacted behaviour and markets.

[Sources of volatility

• Geopolitics

• Policy

• Pandemic]

So, geopolitics, policy, pandemic would be the three sources of relatively heightened volatility at

the moment.

[Volatility - historical context]

[Soft music]

In the grand sweep of history, if you go back and you include some of the big volatility events:

[The Wall Street sign. Market Data.]

2008 with the global financial crisis, or March 2020 with the onset of the pandemic in North

America, volatility in financial markets was much, much higher, at least for a time than we're

currently witnessing. So, I would characterize volatility in the markets at the moment as

elevated, but certainly not exceptional on the high side.

[Volatility outlook]

[Soft music]

I think the most likely case is that volatility stays a little bit elevated, relative to what we're used

to, on average over the last several years. So, there's a number of reasons.

[1. Geopolitics]

[A military checkpoint. Skyscrapers. Market Data]

One, if you look at the history of geopolitical events from the perspective of their impact on

financial markets, it tends to be relatively short lived. That source of volatility might be around

for several weeks yet, even perhaps a couple of months, but after that, that source of volatility

wanes.

[2. Policy]

[A politician’s hands surrounded by microphones.]

More relevant is the policy source of risk and volatility. So, two aspects there. One; clearly, the

pivot to trying to bring inflation back down to more tolerable rates is generating volatility.

[The U.S. Federal Reserve building. The Bank of Canada building.]

And I think that that battle between inflation and central banks is going to last for a little bit

longer yet. So that means that that source of inflation will last for a little bit longer.

[3. Pandemic]

[A woman wearing a mask. The EU Central Bank building.]

Since the onset of the pandemic in North America in March 2020, central banks bought a huge

volume of assets and that buying really dampened down market volatility. As part of their efforts

to get inflation firmly under control, they will be, first of all, reducing the extent of their asset

purchases.

[Market Data on monitors.]

And then actually selling off the assets on their balance sheets. And so that will almost be a

reverse impact. So, whereas the purchases dampened market volatility, that dampening impact

won't be as strong. That in itself will lead to a little bit higher volatility on average.

[Conclusion]

When thinking about periods of volatility, our best counsel is to as best one can, look through

them, continue to focus on long-term fundamentals, ensure that your portfolio is set up to be

consistent with your long-term goals and objectives because it's very easy to get swept up in the

current spike in volatility, the current event risk that is driving that spike. But often times those

spikes are relatively short lived. And then afterwards, what we're left with is a re-engagement

with long-term fundamentals. So, I think best counsel is to wherever possible, look through the

short-term focus on those long-term fundamentals.

[Soft music]

[The views expressed in this video are the personal views of Michael Sager and should not be

taken as the views of CIBC Asset Management Inc. This video is provided for general

informational purposes only and does not constitute financial, investment, tax, legal or

accounting advice nor does it constitute an offer or solicitation to buy or sell any securities

referred to. Individual circumstances and current events are critical to sound investment

planning; anyone wishing to act on this video should consult with his or her advisor. All opinions

and estimates expressed in this video are as of the date of publication unless otherwise

indicated, and are subject to change.™The CIBC Asset Management and the CIBC logo are

trademarks of Canadian Imperial Bank of Commerce (CIBC), used under license. The material

and/or its contents may not be reproduced without the express written consent of CIBC Asset

Management Inc.Certain information that we have provided to you may constitute “forwardlooking”

statements. These statements involve known and unknown risks, uncertainties and

other factors that may cause the actual results or achievements to be materially different than

the results, performance or achievements expressed or implied in the forward-looking

statements.]

[CIBC Logo]

[The CIBC logo is a trademark of CIBC, used under license.]

How to Stay Balanced in Volatile Markets

[Soft music plays]

[Onscreen Text: Craig Jerusalim, Portfolio Manager, Canadian Equities, CIBC Asset Management]

Craig: Markets are really experiencing some unprecedented moves right now. The drop in oil, 20 to 30 percent in one day. The drawdown in the broad indices is really unprecedented in the scale and the speed of which it's dropped. And the problem right now is no one can give definitive answers, definitive answers of when the Coronavirus is going to be cured or when the imminent recession is going to come or not come. And it's really that fear of the unknown that is causing some market participants to panic. And there's no answer that I can give to fully allay fears of an imminent V-shaped bounce back, because no one knows for certain that that's what's going to happen.

Advice for clients really has to be in line with what you feel comfortable, what risk you feel comfortable taking on. However, don't try and time the market. All the evidence we've seen over history is that investors are really poor at getting out as the market is dropping and then getting back in when the market's rebounding. There's really only one mistake an investor can make throughout the history of investing, and that's selling at the bottom. If you miss just the 20 best days over the past 20 years, you would've wiped out 100 percent of your returns over that time period for the TSX. So instead, be comfortable with your asset allocation and be able to perhaps either dollar cost average in or dollar cost average out to help alleviate some of those fears.

[Onscreen Title: The importance of long-term investing]

Craig: Today's market price is probably not the low, tomorrow's low probably won't be the cycle low either, but we don't know when that rebound is going to happen. And there are a number of differences between the situation today and the situation in 2009, for example, during the financial crisis.

Today, there's a factor, the Coronavirus, that is causing people to just tighten up and cause people to not go out and spend, not travel. And that's causing a short-term demand impact. However, unlike in 2008 and 2009, there's not massive fraud in the system. There's not excesses in valuations or any bubbles forming. The U.S. consumer, for example, is much healthier today than they were in 2008. Saving rates are high. Debt service ratios are low. Unemployment is extremely low. So, there's reasons to believe that there's going to be some sort of built up demand that will come back to the market when those fears alleviate. We also know that interest rates are extremely low at all-time record lows and that the federal government is there for monetary and fiscal stimulus, as well as many other countries around the world that are going to be throwing everything they can at this economy to get it moving again. We don't know when that's going to happen, but we know we want to be positioned for it. So, we're not throwing out the babies with the bathwater or using the opportunity to high-grade portfolios to move to the highest quality companies, to be best positioned for that rebound when it happens.

[Onscreen Title: Portfolio positioning]

Craig: There's two sets of assets that we need to think about. The asset where the allocation is a little bit more flexible, where you could raise cash and you can move more defensive. And there's another set of assets that are going to stay fully invested. And that's the money that we're managing for clients, for the money that's staying fully invested in mutual funds, for example, we're not sitting on our hands and doing nothing.

[Onscreen Text: Five indicators we are watching in our portfolios]

Craig: There's five things that we're doing within those funds.

[Onscreen Text: 1. Look at company balance sheets]

Craig: The first is looking at balance sheets. Any company that is at risk in the short term, due to their leverage, is something that needs to be taken out of the portfolios. We have to be invested in the companies that can use this market disruption to their advantage as opposed to it causing risks from an ongoing basis.

[Onscreen Text: 2. Identify potential switch trades]

Craig: The second thing is we're looking for switch trades, which companies with similar exposures are down more than others because right now everything is moving lower. But at different paces. So, we're looking for the switch trades in the portfolio.

[Onscreen Text: 3. Look for overreaction in company shares]

Craig: The third thing is we're looking for companies that have just overreacted: which companies have are discounting a worst case scenario, recession, even though the cash flows are still recurring and ongoing.

Craig: The fourth is we're looking for the opportunities in the companies that have recurring earnings, that have domestic focused earnings, because we think that Canada is going to be less impacted than some other emerging markets around the world. We're looking for the companies that we know where their next dollar is going to come from. Think about all the companies whose bills you receive every month that you're going to continue to pay. Those are the telcos and the utility companies.

Craig: We're starting to sharpen our pencil on those cyclical companies. The companies that are down the most now but are likely to snap back at the time when the stimulus and the recovery begins. We're too early at this stage, but sharpening the pencil and getting ready for that rebound is important.

[Onscreen Text: The views expressed in this video are the personal views of Craig Jerusalim and should not be taken as the views of CIBC Asset Management Inc. This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change. ®The CIBC logo is a registered trademark of the Canadian Imperial Bank of Commerce (CIBC), used under license. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements.]

Opportunities amid turmoil

[CIBC logo]

[Upbeat music]

[Opportunities amid turmoil]

[Michael Sager

Vice-President, Multi-Asset & Currency

CIBC Asset Management]

So it's clear that the US dollar has been broadly strong against pretty much every currency this year, including the Canadian dollar. But the source of that strength has been the US Fed and its willingness and commitment to continue to increase policy interest rates until it sees a meaningful decline in the rate of inflation. That's not likely to happen any time soon because some of the slower moving elements of inflation, things like rents and housing costs broadly and wage costs are just too high and showing no evidence of a downturn.

[Aerial shot of a residential housing. Condo buildings and skyscrapers. Aerial shot of a residential housing.]

So until the Fed sees that evidence of weaker inflation, it's going to keep tightening policy. And as long as it keeps tightening policy, the dollar is going to remain strong.

[Upbeat music]

[Signs inflation has peaked?]

The Fed has become increasingly determined in its efforts to regain control of inflation. The measure of inflation that it focuses on strips out volatile components like oil or food, which have shown some evidence of weakening in recent months.

[Combine harvester in a cornfield. Corn cobs being sorted onto a conveyor belt. Farm workers sorting a larger bin of corn cobs.]

Instead, the Fed focuses on a measure of inflation called "core". The main components of core inflation - the main drivers - are housing and rent and wage costs.

And thus far, there's no evidence that any of those more sticky components are showing any signs of weakening. This means that the Fed has quite a bit more tightening to do. But it also is obvious from "Fed speak" that it's very committed to following through with the necessary rate increases. So this is a very different episode from 2018.

Back then the Fed., under current Chairman Powell, started to tighten policy rates, but stopped too soon as it saw a decline in equity markets. That's not going to be the case this time. It's all eyes on control of inflation to a large extent regardless of the damage it causes to financial markets.

[Upbeat music]

[Investment opportunities]

With central banks committed to delivering low inflation via tighter monetary policy it means that the outlook for economic growth is increasingly difficult, which in turn means the outlook for corporate earnings is also difficult. That hasn't necessarily been fully reflected in market expectations for equity returns, which suggests that in the near term at least, there is more downside side for broad equity markets. But even within that relatively pessimistic outlook, there are opportunities.

The Canadian equity market looks relatively attractive, both given its valuation compared to other markets, but also its focus on dividends in a number of sectors.

[The Toronto skyline. The Toronto Stock Exchange building.]

Both of those are positive attributes in difficult periods, challenging periods for markets. Fixed income opportunities are getting more attractive. That includes both at the short end of the curve, but also if you think about developed markets, sovereign bonds. Yields have increased quite significantly over the last couple of years as market participants have priced in higher policy rates.

But now yields have moved a lot higher. It means that sovereign bonds can get back to playing their traditional role as a counterweight to equities during challenging periods for equity markets. So bonds become relatively more attractive.

[Upbeat music]

[C$ outlook]

The US Dollar is likely to continue to strengthen against the Canadian dollar for as long as the Fed continues to tighten policy. There are a number of reasons. First, it looks like the Fed will increase interest rates more than the Bank of Canada. Interest rates are a key driver of exchange rates, so more tightening from the Fed suggests that the US Dollar will continue to appreciate against the Canadian dollar. The Canadian dollar is also a very pro-cyclical currency. It does well when the economy does well, when commodity prices do well.

[A rural oil refinery station. Rural oil derrick pumps.]

At the moment, the outlook for economies and commodities like oil has soured. And so that suggests, again, that in the short term, at least, the Canadian dollar is likely to experience a little bit more weakening against the US Dollar. Once we get to the point that the US Fed signals an end to its tightening phase. I think that weakening of the Canadian dollar can start to reverse and will probably regain a lot, if not all, that we've lost over the last few weeks in terms of the level of the Canadian dollar against the U.S.

[Upbeat music]

[The views expressed in this document are the views of CIBC Asset Management Inc. and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This document is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change.

Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements.

CIBC Asset Management and the CIBC logo are trademarks of Canadian Imperial Bank of Commerce (CIBC), used under license.

The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc.]

[The CIBC logo is a trademark of CIBC, used under license.]