CIBC Capital Market’s Roman Dubczak hosts a mid-year economic and market outlook discussion with colleagues Benjamin Tal, Ian de Verteuil and Ian Pollick. The discussion offers valuable perspectives for investors and business leaders navigating today’s complex economic landscape and explores the resilience of global markets amid tariffs, evolving rate cycles, and ongoing geopolitical and economic volatility.
CIBC Perspectives - Economics and Strategy Update
00:00:05:772 - Roman Dubczak:
Hello, everyone. I'm Roman Dubczak, Deputy Chair of CIBC Capital Markets. Welcome to another episode of CIBC Perspectives. Today we're bringing you our mid-year update on the economic and market outlook. And it has been a bit busy. I may sound like a broken record, but it's been very, very busy in a unique period of time in markets globally.
As we move into the second half of 2025, we'll explore the key forces shaping these markets and how all this activity in the markets is panning out in terms of currency markets, housing markets and equity markets.
Joining me here today are my colleagues, Benjamin Tal, CIBC's Deputy Chief Economist, Ian de Verteuil, Head of Portfolio Strategy, and Ian Pollick, Head of Fixed Income, Currencies and Commodities at CIBC.
Together, we'll break down the latest trends, examine sources of volatility, and highlight where opportunities may lie as we move forward. This is going to be a very interesting conversation, to say the least.
Gentlemen, Benny, why don't we start with you, after giving, why don't you give us a bit of an overview of, all this activity, that we've seen politically, geopolitically, economically, the T word tariffs, etc., and, what sort of assumptions are we using now about, where the economy is currently?
00:01:14:774 - Benjamin Tal:
Yeah, it's easy. Question. As a question. Yes. It's a tough listen, if you look at the last two weeks, the last two weeks really tell the tale. Yeah. What I mean by that is that we have seen some escalation in the tariff language. We have seen this brutal attack on the independence of the central bank from Trump. And look at the market.
Nothing happens. The bond market, the long end of the curve, behaving like nothing happened. And the stock market is actually improving. So the question is why? Why the market is not so sensitive anymore to Trump and what's happening. And I think that there are two answers here. One is that there is Trump fatigue. Basically enough is enough. Enough with all those tweets, you know, wake me up when it's relevant.
So the market is not taking it seriously. That's one thing that I think is happening. The other is the island mentality of the market. Basically the US is an island. It's actually a closed economy, not relying on trade the way Canada-China or the EU, and therefore the tariff story does not impact you. The economy is fine.
And exhibit number one is actually the economy is doing fine if you look at the headline statistics. So given that, the market is not panicking now, if we continue on August 1st, then the things are going crazy. The market will react, no question about it. So the economy is going to slow down. Our working assumption is that in the second half of the year, the U.S. economy would slow down under the weight of the tariff story.
The labour market is already showing signs of weakness. So I think that's one thing. The other is tariffs are here to stay. They are here to stay. The only question is the magnitude. It's becoming really a revenue story. Basically a can you find a rate that will finance my beautiful build and turn it into also an affordable bill.
And that's something that is happening in our working assumption, something between 10 to 15%. Now it's about 16%. So we are there already generating $320 billion of money a year just to subsidize the budget deficit. So this is interesting. So tariffs is a way to stay. And it's not just Trump. It's also after Trump. Because show me the administration that will give up 300, you know, billion dollars a year.
So that's our assumption.
00:03:24:637 - Roman Dubczak:
Thanks, Benny. Ian, I’ll turn to you. And, now that Benny's addressed, the why are we so happy? Question, so to speak, how are the equity markets looking? And, you know, why do we find ourselves in the mid 6000 with the S&P.
00:03:36:916 - Ian de Verteuil:
Yeah. Every day a new high right. So a couple things I'd say certainly against the backdrop, Ben has, has laid out the numbers continue to come in from corporate America, continue to be extremely strong. And that is reflective, as Ben rightly said, of, of the tariffs creating some uncertainty. But at the end of the day, the US is principally a closed economy.
America makes what it consumes, and consumes what it makes. So as a result, the tariffs are creating uncertainty. But I still think we have, we have pretty good, demand from the consumer. I think the spending, the government continues to exist. Ben talked about the one beautiful bill. It's not net new spending, but it's keeping the, the government spending the way it is.
So I think as long as the earnings continue to hold together and the long end of the curve behaves, I would say we're open. Of all the surprises I've had, I'm not surprised by the tariffs. I'm not surprised by the rhetoric and the action on on immigration. I am surprised at how well behaved inflation expectations have been or certainly how it's been priced in on that.
Remember, the ten year is how effectively the basis for a discount rate for discounting earnings in the future. So if earnings are relatively strong and the evaluation metrics look okay, I think we continue to move forward. If, Ben's right and I think he is right, we are going to see some effect of it towards the back end of the year.
We're going to see that, I think some of the strength peter out, but I don't see any reason for a massive correction other than some immediate idiosyncratic risk developing and interesting.
00:05:08:341 - Roman Dubczak:
Thanks, Ian. Ian, money flows, there was a big story as it related to money flows. But apropos of the comments, recently things seem to have, you know, found a bit of a resting spot. So, not to sort of, relook at history over the last six months, but there might be some relevant comments as to why we find ourselves where we are and probably what we should be looking for, given all the variables, that we all know are in front of us.
00:05:33:466 - Ian Pollick:
Yeah. So I think both Ben and Ian said exactly correct. And I take a step back and I say, well, what was the big bond market theme in the first half? And it was really this uncertainty related to the trade war, but in real time we had to recalibrate our growth expectations. Inflation expectations and really importantly, our fiscal expectations.
The bond market has focus on fiscal and inflation. It's kind of largely ignored the growth story. And so Ben's right over the second half of the year, what we expect to see is just an overall slower pace of growth, more visibility on tariffs means we can have focus on lower activity. And so when I think about what that means for the level of rates, there's there's really two things here.
More visibility allows us to have a better understanding what forecasts look like today. And so therefore we think that in general there's higher inflation in the US, lower inflation globally. What works against that is this idea of de-dollarizaton. I think the world's coming to this idea that when you have more visibility on tariffs, people aren't selling their dollar assets right away.
And while there's no alternative to U.S. equities, there is a very big alternative in the fixed income space. And that being said, when we think about some of the overarching correlations in the market, we tend to think that long term rates, which are higher year to date, will start to come down a little bit. But but I do stress a little bit.
00:06:46:806 - Roman Dubczak:
Okay. So, to your point on the US dollar, there is, you know, one can argue a dramatic chart of the, you know, the ten year US dollar. And they've completely diverged first time in like forever. You know, what's, what's the rationale behind that. And does it ever kind of come back. Does the correlation come back into play?
00:07:06:793 - Ian Pollick:
I think so, and I would say that the reason it's happening is because for the first time ever, we've taken a 0% probable outcome and changed the scales to 3% or 4%, and that 4% as well. Not necessarily the Mar-A-Lago Accords, which was all the discussion early on in the year. It's more about can you trust the administration to do business and not change its mind?
I think that's a byproduct of visibility. And so if you do get that visibility, people are generally long dollar assets because it's a bigger market. And there's preferences that you need those deeper liquid markets. Now that being said, we think it's a very real story that over time you get more diversification. And so countries like Canada, Australia, the UK will all benefit from it.
But like this is very slow moving stuff. And so I would argue that if you do get that idiosyncratic shock and you do get a wobble in risk assets, that correlation probably reasserts itself.
00:08:00:913 - Roman Dubczak:
Interesting. Okay. And so, it also in a Canadian context was probably touch on that. Where are we, you know, are we following the US now or, you know, it looks kind of feels as though we're the end of days in terms of a easing cycle in Canada. Like, how close are we to that? The opinions across the street very, you know, one, two, three, whatever. Like you know everyone's got different opinions. What's your view on where we are in the rate cycle.
00:08:25:004 - Ian Pollick:
So I would argue, respectfully, of course, that I think the bank is probably closer to being done than it is in the middle of its cycle. And whether it's no more cuts or whether it's 1 to 2 cuts, we have to respect the fact that we need to start looking at the other side. And so I look at what's priced into markets right now, and it's a bit skinny.
You know, you have 15 basis points of price this year and 15 basis points of hikes in 2026. And so the question now for markets is well are we realistically going to get interest rate hikes in the early part of next year? I personally don't think we are. But what it means is that a lot of the very specific homegrown Canada factors are abating.
And I think you said earlier, people are fatigued around Trump and fatigued around tariffs. And that's for sure impacting the bond market. And so as Canada re tethers the rest of the world as our fiscal policy continues to be very big, it does put upward pressure on longer term rates. And I would expect that over the foreseeable future.
00:09:19:823 - Roman Dubczak:
Okay. Well that's a perfect tie in to a question I have for Ben here is on the housing market. So up until now bit of a tale of two markets, single family and condo etc. it's commercial. You know, we're assuming Ian and the street are generally correct that rates are kind of foreseeable. You know, where are we in terms of housing and what happens now?
00:09:41:948 - Benjamin Tal:
Well, not in a good place, quite frankly. As you said, the housing market is a tale of two markets. The low rise segment of the market is still okay. Nothing to write home about, but okay, the condo market is in a deep recession. Actually, I would suggest that it's actually weaker than it was during the 91 recession.
This is a major slowdown. We are seeing sales going down dramatically. Inventories are rising. There is no tomorrow over the next, 18 months in the GTA alone, we are going to see more than 50,000 units entering the market being completed. That's a lot of supply that the market has to deal with. At the same time, pre-sell activity, namely pre construction activity is dead zip.
We are building nothing, which means that over the next two years this will be a buyer's market. If you are in the market for a condo, go and buy now or in a year from now the market will slow. Prices will continue to go down. This is your market. But in two years from now, the market will still be there.
Supply is zero. Guess what will happen? It will be like that and like that. It will be 90 degrees. And that's something that we have to take into account. So this market is not dead by any stretch of the imagination, but it will change the future of the market. The condo market of the future will be different. There will be less investors, more focus on end users, less speculations.
And then we are going to get the MURB. MURB is a multiple unit residential, which means that the government is going to introduce a system that was there in the 70s to create purpose built rental. This is going to be huge. I'm now talking to the Prime Minister office about the design of this program. It's going to happen.
It will be significant and will move the needle when it comes to affordability.
00:11:32:692 - Roman Dubczak:
Interest. Very, very interesting. So just to follow on on that. So the condo buyers and condo owners, condo investors are getting crushed. My question is have they been crushed or are they going like have we seen the pain in that market yet.
00:11:46:172 - Benjamin Tal:
We are in the middle of it. Clearly. You know, prices are down by about 10% in my opinion. They will go down by another 10%. 91% of investors, are in negative cash flow. They are getting out of the market. People are not closing. So supply is going to go up significantly over the next year. You enough. Eventually we will clear the market at much lower prices and that's when we will hit the wall.
There will not be supply, new supply coming and that's where we see pressure. And that's why when we talk to the government and we talk to the government very often, unfortunately, we said, you know, this is a time, the time actually to encourage building now because two years from now it will be too late. Yeah.
00:12:23:542 - Roman Dubczak:
Well, look, I'm glad the government is talking to you. Let's get that out of the way. Okay. Ian, you're a former bank analyst. The financials analyst on this topic has the the impact on housing been reflected in the financial sector?
00:12:39:592 - Ian de Verteuil:
The answer is not really. The reality is the, the way the bank act is structured, Canadian banks are really restricted from doing high high ratio lending. So we had a little bit of a wobble on, on home equity lines of credit and whatever it is. But broadly speaking, the Bank act requires banks to, to, to, ensure they either have good coverage so loan to values that, that are acceptable or they require the, the consumer to actually purchase insurance.
And the insurance was purchased from a government entity. So I think the, the, the direct linear impact of a weakness in the housing market isn't, isn't really showing up. So the mortgage books, Ben talked about the economy being as bad as was in the 90s. You know, we did not see a meaningful spike in the loan losses on the residential mortgage book.
Even back in the, in the 90s. What we are seeing is that it is sort of it is broadening out, I think, with respect to, some of the consumer books that's a little bit that's a we're starting to see some of that weakness, I think, as we move forward. But just as that, as that's occurring, the parts of the bank, the diversified parts of the bank, the capital markets business, the trading businesses are all doing particularly well.
The, you know, we always think about some of the capital markets, the wholesale parts of the bank being, lower multiple businesses. But at the end of the day, whenever the economy gets stressed, those parts of the business actually kick. So it's just a lovely balance that actually exists. And we're seeing that right across the board.
We've had the money centres over the last while. And generally speaking good trading numbers. And we see that we also expect to see, activity on, on, on M&A start to pick up. I've, I've only been saying that for a year now. It's so, so let's I'm just going to keep saying it.
00:14:30:936 - Roman Dubczak:
From your lips. Yes. Yeah, exactly. But I do think that that will, kick in a variety of things. I think some of the uncertainty, is beginning to whether its Benny's thing on, we’re just too tired to listen to the, the machinations out of, out of the White House. I think businesses are starting to say we have to start. We have to get moving. And I think we're going to see that activity pick up.
You know, on the M&A point you raised. Look we're all guilty of thinking this was going to be a boomer year in M&A and in a way that hasn't been terrible. But it's wasn't the here to for not the September year. Do you think at some point, maybe the fatigue of all the reasons why not to do a deal, goes away and we start to see that pick up?
00:15:11:176 - Ian de Verteuil:
Yeah, I absolutely do. I mean, the reason our logic was good and we turned out to be wrong was at the end of the day, there is massive deregulation going on in the US system. Yeah. So if you deregulate heavily, we're going to encourage businesses to actually, you know, removing some of the shackles, and allowing CEOs to truly drive equityholder / shareholder value.
And I think there's a lot of opportunity, that that going forward as well, a number of the regulatory issues with respect to capital ratios on banks, what they can and can't do, those are being rolled back as well. So I think we are going in an environment where, if true, and I absolutely agree with Ben that the Trump fatigue is there, which businesses are saying, let's just let's just put that aside and get back to doing what we need to do to actually drive our businesses forward and add value.
So I think the deregulation piece is there, and hopefully, C-suite executives are going to say, we’ll just live with some uncertainty and drive forward here.
00:16:07:566 - Roman Dubczak:
On M&A and global. This is more of a global capital flow question. Clearly there's been, you know, tale of there's a tale of two markets like in every single market, maybe more. So what are we finding in terms of the global response to in capital flows, say away from the US? Are there any beneficiaries here.
00:16:27:620 - Ian Pollick:
Oh for sure. Yeah. So you kind of do all the math and say, well who has the capacity and its Europe? You know, Europe has a huge amount of capacity. It traditionally been quite a fractured market, but they're coming together and a lot of very, very important ways. They're a very heavily, heavily regulated market that is starting to move in the opposite direction.
And so the capacity, particularly in the fixed income market, to absorb M&A, LBO type of debt is very big. And so we generally have a quite positive view on the currency, but also on the level of rates there as well.
00:16:56:448 - Roman Dubczak:
Okay, great. Okay. Well, look, Benny, maybe I'll just have one last question for you. And that's kind of, from a Canadian perspective. You know, the activities with the Canadian government since the election of Prime Minister Carney has been to really have a a, cold, sober look at the Canadian economy and perhaps look at diversifying away from the revenue streams in the business streams we've had in the past. You know, what do you see in that regard? For the next couple months or a couple of years? Really?
00:17:26:845 - Benjamin Tal:
Well, you know, it makes sense, but it's not easy, quite frankly. You know, I was in Halifax meeting with the finance minister there. They are talking about Halifax becoming the gateway to Europe, the way Vancouver is the gateway to Asia. Easy to say, not very easy to implement. We have been talking about diversifying our economic engine since the 1970s.
Trudeau, the father, started Harper Trudeau, the son. We have 15 free trade agreements with 51 countries and now our reliance on the US went up, not down. So something is up in the air. And if you look at the overall situation, as, Paul Krugman said, we are closer to the US than we are to ourself, and that's something that we have to take into account.
It's not easy to do. And now we are in a trade war, global trade war, and in the global trade war, like in the Cold War, you are a third party, and we are a third party, you have to choose a side. So are you going to choose China or are you going to choose the US? We know exactly where we are.
If you have Australia, all your security, coming from the US, all your economic coming, coming from China. Good luck with that. Yeah. So what I'm saying you it's not going to be very easy quite frankly, as we can see with Japan already with the deal with Japan is requiring them to, to buy more from the US.
That might be our case as well. So I would not be surprised if five years from now, when the fog clears, our reliance on the US would be the same or even higher, despite all the talk.
00:18:50:229 - Roman Dubczak:
Very interesting. Okay, thanks, Benny. That's an interesting way to end today's conversation, but we'll see how these things pan out over the course of the next few months.
So Benny, Ian, Ian, thank you once again for joining me.
And I would just like to end today by thanking Ian, Ian's ending his career voluntarily, in the next couple of weeks, with, CIBC.
00:19:12:384 - Ian de Verteuil:
You're making me blush. Yeah.
00:19:13:652 - Roman Dubczak:
The make up can help, 37 year illustrious career on Bay Street. Through many firms. And, I remember distinctly our first conversation at a little place on Wellington Street. And, you know, you had already semi-retired and were looking to get back. And I gotta say, it's been the, you know, the highlights of all of our careers to be working with you Ian over the last decade or so.
So thank you very much. And, happy trails, as they say.
And I just want to thank all of you for joining us here on today's, webcast. We look forward to speaking with you again soon. Please feel free to reach out and lean on any of your CIBC partners, and we'd be happy to help you walk through the issues of the day, of which there, as you can see, very many thanks.
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