Transcript: Virtual Market Update

>> Joe Cox: And hello, everyone. Thanks for making time for us today. It’s great to be here with you. I’ll give a brief intro of myself because as Jill mentioned, I’m new to the firm and some of my CIBC colleagues haven’t met me either.

I am the head of U.S. Government Relations. I joined the bank in September. Prior to joining CIBC, I was with BNP Paribas, also in a government relations role based out of DC. While with BNP, I was the advocacy lead for capital markets and global banking. I was with BNP for about seven years. Prior to joining BNP Paribas, I was with the financial services trade association SIFMA. SIFMA is essentially a Wall Street lobbying firm. While with them, I had a focus on the securitization markets, so really looking at the agency MBS markets, housing financial reform, that sort of thing. Prior to joining SIFMA, I was with Fannie Mae briefly, and to bring this all full circle, prior to Fannie Mae, I received my MBA from Carnegie Mellon. So very happy to have this Pittsburgh connectivity and happy to be here with you today to share some thoughts on the political landscape in the U.S. right now.

So today, I’ll provide perspective on what’s happening in DC. We will discuss the general expectations for Trump’s second term, congressional focus, and also regulatory focus.

So before we look ahead, I think it is important to just reflect briefly on what got us to this moment in time. So as we all know, President Trump, he had a decisive victory, and winning the presidency, he also helped to carry the Senate and the House for Republicans. Shortly after the election, Republicans, they were really unified in their message that the American people gave us a mandate, and that mandate, it’s Trump’s campaign platform. And where that focus is, and we saw a lot of this on Monday with the executive actions, is a focus on immigration, a focus on energy, which is U.S. oil and gas production, a focus on trade, which is the geopolitical piece, and then this focus on government efficiency.

And I think as we look ahead into the first half of this year, Trump will, by and large, have near unanimous support from the Republican Congress to implement his vision. There are things the president can do and things the president cannot do, but the president can absolutely impact energy policy, can enact immigration reform, and can impose tariffs. Some of you might’ve seen Trump speaking just now, and he talked about tax reform. For tax reform, he does need Congress, and he also needs Congress to address the debt limit.

So now moving to the next slide, quickly looking at Congress and why this matters, and Republicans, they have a significant majority in the Senate, a three-seat lead. That’s a pretty big lead. And so because they have the three-seat majority, that makes the confirmation process much easier, so Trump can more easily have his people confirmed. He can lose three votes and you still have the vice president tiebreaker.

Looking at the House majority, the House majority is razor-thin. For a portion of Biden’s presidency, the Senate, it was 50/50. And during that time, Senator Joe Manchin, the Democrat from West Virginia, he was one of the most powerful people in Washington because as Joe Biden and Democrats sought to pass reconciliation packages, which they did, they had to get Manchin on board. He wasn’t able to lose any votes. And so as Trump looks ahead and wants to in enact his agenda, I think any potential tensions are going to arise out of the House. The House has more members, those members tend to have a wider distribution across the political spectrum.

And so as we look ahead on the spending initiatives, reconciliation, tax, there are some things that Freedom Caucus members want to do that moderate Republicans do not want to do, there are things moderate Republicans want to do that the Freedom Caucus does not want to do. And we got a brief glimpse into those spending tensions at the end of the year when Congress needed to pass the government funding. They had the government funding deadline, they essentially passed a continuing resolution into March, but we got a really early glimpse of those tensions, and I do think that’s going to be a prominent theme into this year.

And so now moving to the next slide, briefly reflecting on the Trump administration, what we can expect in the first 100 days. On Monday, President Trump, he had several executive actions. He really set a new high watermark for the number of actions in one day. And over the past few administrations, we’ve seen that number ticking up and I think that’s the new precedent going forward. But a lot of what Trump did, it was more or less in line with expectations and they were typical of new administrations, so a lot of executive actions related to his policy platform agenda. We know the Senate is going to be focused on confirmations, and one of the things Trump did was a regulatory freeze for 60 days. These are all very common, new administrations, these are all things that they do.

One question out of Monday, though, is how broad and/or immediate is the implementation scope of these actions? And I think it’s reasonable to expect over the next few days and weeks, there’ll be some clarification and refinement of the scope and mandate of those executive actions.

So just to give you two examples on this, one with the federal hiring freeze, Senator Murkowski from Alaska, she made the comment that it’s great that we want to, Trump wants to expand drilling permits, but you need people to approve those and expedite those things, meaning the federal hiring freeze, in some ways, works against that piece of his agenda. And then there was also an executive action related to spending, related to the Inflation Reduction Act and the Bipartisan Infrastructure Law. The OMB came out with guidance that essentially narrowed the focus of that executive action. And so a lot of these things that Trump is doing, there’s still a question of how broad is it? What will it look like? And we’ll get more clarity on that looking ahead.

And so the top line is things that we expected, and so then as we look to the unknowns, the big questions there relate to the reconciliation process, which we will discuss, how the debt ceiling will be resolved, and then also the tariff piece. What will tariffs look like? What route will Trump go with tariffs?

And so you see on the bottom right-hand side, Trump, prior to the inauguration, he discussed the potential use of the International Emergency Economics Power Act. He said he would use this to impose tariffs. No president has ever used this power for tariffs before. I think one common talking point with Trump is it hasn’t been done before, it hasn’t been tested in the courts, what will happen? He ended up not going that route, but if he did or if he chooses to go that route, he will essentially be able to immediately impose tariffs, opposed to the more traditional route, which, next slide, please, this shows the more traditional route as we think through what will tariffs look like?

So typically, presidents, they’ll use, there’s various U.S. trade laws. So they’ll use Section 201, Section 232 or Section 301 to impose tariffs, and the typical path for each of these is some type of report is initiated, there’s an amount of time to put that report together, and it can relate to potentially unfair trade practices. That report will then go to the president, and then the president, using that, will impose the tariffs.

The guide, the timeline, it’s typically six to 12 months. It’s somewhat fluid, but using this process, it does serve as a reminder that, one, tariffs are not the goal in and of themselves. Tariffs are a lever that are used to achieve a goal. And when you use this process, it gives time to negotiate. And so as we know, Trump loves to negotiate. He loves to use tariffs for leverage to get things he wants. And so when you go this route, you have time to have those conversations, whereas if you use an emergency power, then it would really be immediately that he could impose them.

Another interesting point on the tariffs is during the U.S. Treasury secretary’s confirmation hearing, Scott Bessent, he provided some insight into what we can expect in regards to tariffs. He said that he thinks of tariffs in three categories: unfair trade practices, negotiation, and revenue raising. Another piece of this that he didn’t mention but is always there is national security concerns.

And so as we look at 232, 301 and 201, the regulatory personnel really matters here because they’re the ones who are driving the implementation, and we can expect the Treasury secretary to really follow the president’s direction, same for the Department of Commerce. And with Section 201, Congress has more of a role to play here. If they think the president has gone too far with their actions, then they can essentially initiate a study and try to have an investigation to pull those recommendations back. That’s not something that’s expected to happen.

And so tariffs, the threat is very real. We know Trump likes to use tariffs. He’ll do something here. One of his executive actions related to tasking the Commerce Department and the Treasury Department with providing him a report by April 1 related to unfair trade practices, and I believe in this, it mentioned Mexico and Canada.

And so that is the route he’s going right now. Trump, he is known to pivot. He’s known to change his mind. He could seek to get more aggressive if the timeline doesn’t suit him, but I think by and large right now, this is a fair example of what we can really expect on the tariff side going forward. And what’s interesting, the Treasury, the confirmation hearing is this point on revenue raising, using tariffs for revenue raising.

So now as we go to the next slide, we get to a topic that this is really going to be a huge point of discussion in DC for the first half of this year, and that’s the U.S. debt limit. Trump has a lot of things he wants to do, and those things, they cost money. And the U.S. debt limit, as we know, Treasury Secretary Yellen notified Congress that they began to use extraordinary measures. We don’t have an exact at-state for when the government will hit the ceiling, but we do know that it won’t be before tax season, so you’ll have tax revenue, so that will push that date further out.

But where the U.S. debt limit gets interesting is how you address this. So Congress really has two options. One, they can use the reconciliation process to increase the debt limit by a specific amount, or two, they can, through a bipartisan vote, 60 votes in the Senate, they can suspend the debt limit.

So looking at what they may or may not do, on the Republican side, Republicans really don’t like to increase spending. They don’t like to be on record for voting to increase spending. The Freedom Caucus came out with a proposal where the debt limit would be increased by a specific amount through the reconciliation process, but the increase, I think, was maybe $2 trillion, and then they also were offsetting that spending by a larger amount. And for Trump to do what he wants to do, it’s likely the deficit has to increase. And prior to year-end, Trump was very adamant that he wanted this addressed under Biden’s term, not under his term because this, for congressional Republicans, it’s a real fight and it’s going to be very messy and it’s going to impact a lot of what Trump wants to do.

At the end of the day, it will be increased or it will be suspended, but there’s going to be, I think, some pain and some tension really to get to that point. And I think the debt limit and spending, this is going to be part, a key item in all the discussions, our spending in general, as we talk about debt ceiling, reconciliation, tax reform, and tariffs.

And so for the government spending, that continuing resolution was used, so Congress kicked the can to March 14th. So March 14th, they have to again address government spending, which is different than the debt limit. With government spending, that’s where the government may or may not shut down. I think it’s very possible that debt limit gets tied to those discussions, but there will not be any kind of hard deadline to need the debt limit to be addressed then, but those discussions in March will give us a good sense for what the tensions in Congress might look like as we go forward in the year.

And so now as we go to the next slide, so reconciliation ambitions and tax reforms. So there’s been a lot of discussion about reconciliation and Congress planning to use reconciliation to pass legislation. So through budget reconciliation, when you have majorities in the White House or House and Senate, you’re able to use this process called reconciliation to pass legislation. And the benefit here is that you do not need the 60-vote threshold in the Senate. Instead, you only need simple majorities in both chambers of commerce. The limitation with reconciliation is there are some things you can do with reconciliation and there are some things you are not able to do with reconciliation.

So essentially, with reconciliation, you can fund existing programs with as much funding as you want, but you’re not able to create new programs and fund those. Tax increases and decreases do easily sit within the parameters of reconciliation, so that’s something that Republicans can absolutely do through this process. But I would say with reconciliation, there are firm boundaries on what you can do, what you cannot do. Presidents tried to push the envelope here, but there’s something called the Byrd Rule and the Senate parliamentarian, they make a ruling on is it in scope or out scope? And this is something that, from their perspective, has clear guidelines and you’re not really able to push the envelope.

But we know Republicans want to use reconciliation, and so the discussion is related to will there be one bill or two bills? And so the total package would include energy, immigration, and tax reform. There’d be other things in it, but those are really the three big pieces. Senate Majority Leader Thune prefers a two-bill approach, meaning in the first half of the year, you’d use reconciliation to pass legislation related to immigration and energy and let’s say defense, and then you would address tax later in the year. House leadership would prefer one reconciliation bill that addresses the debt limit and in includes tax as well.

The difficulty here is those tax discussions, they’re complicated, and they take a lot of time and it’s unclear if Congress really has enough time to find agreement on the tax piece to do it in the first reconciliation package. However, if Congress waits until the fall to try to address tax separately, then you’re asking some Republicans, who don’t like to vote on spending matters in general, to take two big votes on spending in the same calendar year. And given the thin majority in the House, the concern the House has is that if you do two bills, there’s a possibility that you won’t be able to pass the tax bill because they won’t be able to find agreement.

And to put this another way, on the debt ceiling in general, there’s some Republican members who’ve never voted on the debt limit, and there’s some members who are freshman members and they’ve never voted on anything at all. And so there’s a fair amount of people who don’t want to vote on a debt limit increase and they don’t want their first vote to be related to that because they just campaign to get elected, likely on promises they would cut spending.

And so this is really, I think, the tension we’re going to see early into the year. There’s going to be a lot of discussion about the debt limit, a lot of discussion about the reconciliation process, and how do you pay for these things? And that’s where tariffs can come into play.

And so now I’ll briefly touch on a few other things. So moving to the next slide, another big piece in all this is deregulation. We’ve heard a lot about deregulation. So the regulatory agencies, they’re all going to have turnover. The one maybe understated topic in how much turnover there will be is one of Trump’s executive actions required the federal workforce to return to the office. I believe it’s maybe the Fed, for people, they go in twice a week every two weeks. And so I think there’s a fair amount of government employees that potentially don’t live in the area. They don’t want to go in every day. They’re maybe not even able to go in every day. And so from that, there could be some attrition. The leadership at all these agencies will be vastly different.

The one benefit of this regulatory rulemaking freeze for 60 days is it gives more time for those appointments to get in their seats, but by and large, regulatory agencies will look much different. I think they’ll be more industry-friendly from a financial services perspective, they’ll be more willing to engage with the industry.

And so on a whole, DC, it’s going to look very, very different. And looking at Trump’s agenda, he’s going to absolutely enact aspects of it, but whether or not he’ll be able to enact the full spectrum of what he wants to do, I think it is going to be a challenge, just given the tensions around spending. And I will stop there and hand it over to Charlie.

>> Charlie Cashman: Great, thank you, Joe. Yeah, so I will shift the conversation here to interest rates, which certainly have been impacted by the expectations for Trump’s policies and some of the things that Joe was talking about. But first, I’ll get us started on the bread and butter for interest rates, which is jobs and inflation, and then we’ll talk a little bit about the recent move in interest rates and expectations on where we’re going to go from here.

So first, starting off with the labor market, and as we all remember, the labor market got extremely tight after the pandemic. Unemployment fell to 50-year lows and it was a source of inflation, among other things, that led to higher interest rates and the Fed hiking rates. Over the summer, we did see unemployment tick higher and that was seen as a normalization. It wasn’t necessarily a bad thing, and it gave the Fed comfort to start cutting rates this fall. The Fed did end up cutting rates by 100 basis points between September and December, and part of that was a reaction to inflation coming down, but also part of that was an reaction to the unemployment rate ticking higher, and they didn’t want... Unemployment sometimes will snowball when it starts going up. It might start slow and then shoot higher. So I think they were trying to protect from a situation where we saw widespread job losses that might hurt the economy as a whole.

So like I said, the Fed started cutting in September, and if you look at that red line there, that’s the unemployment rate. Luckily, the unemployment rate really started evening out into the fall months and even into the most recent reports. So that’s caused the Fed to shift gear a bit and instead of continuing to cut, they now feel comfortable that the labor market is stabilized so they can pause and focus more on inflation. And onto the next slide here.

So just wrapping up on the labor market, so I like this graph because it shows how tight the labor market is. So if you look at the gray line, that is the number of job openings per unemployed person. And if you look all the way to the left, there were not many jobs available after the Great Recession. And eventually, this stabilized, we got to a more sustainable level, maybe around one-to-one, which I would say is a healthy labor market but not a cause for concern. And obviously, you can see the hockey stick with after the pandemic, when the labor market got extremely tight, there were basically two job openings for every one person looking. And with that, if you look at the red line above, you can see that caused wage growth to really spike and you get up in that 6% level. That was definitely part of the inflation story and part of the reason why the Fed cut, or sorry, hiked rates so aggressively over the past few years.

But thinking about where we’re at now, you can see both of those lines have trend lower. So wage growth, while it’s still elevated, has definitely been trending lower to a more sustainable level. And also, the tightness of the labor market with the jobs-to-unemployment people, that’s around one, which I would say has given the Fed comfort that while the labor market has weakened a bit, it’s at a more sustainable level now where the labor market isn’t a source for inflation. And you can flip on to the next slide, please.

So here, you can see basically the inflation rates over the last five years, and everybody remembers that the summer of 2022, that was really where we saw inflation peak. CPI hit about 9%. Some of that was driven by energy, a lot of it was driven by the labor market, the pandemic, there were a ton of factors that created this inflation. And in response, the Fed hiked rates the fastest and the most in modern history. And you can see, it did work. Inflation has come down quite a bit over the last few years, and we all remember the Fed’s target is 2%, so we’ve made a lot of progress. You can see the different inflation measures were close to 3%. So while they’ve made a lot of progress, unfortunately their target is 2 and not 3.

We’re at a point now where the Fed’s not so worried about inflation that they feel like they need to hike, though they definitely want to see that trend lower and get into the low twos before they cause or celebrate a victory over inflation. And so like I was talking about previously with the labor market, now that that isn’t so much a concern, the Fed is back to laser-focused on inflation, and with that, they’re probably going to hold rates for a while.

And just a couple more things about inflation, just tying in things that Joe was talking about. So we talked about immigration and that could definitely impact wage gains. A lot of the or some of things that deportation would cause would be inflation in things like construction or farming. So thinking about from a political lens, and that’s part of the reason why rate expectations have gone up is because people are worried that some of these Trump policies could push up rates, so immigration’s definitely one. Tariffs are another where, if prices are higher, that could feed through into the inflation data, it could raise inflation expectations, it could create this snowball effect and another wave of inflation.

So in general, part of the reason why swap markets have repriced is because of expectations for these Trump policies. And as we know, he’s gotten off to a hot start in the first few days of his presidency, but we haven’t seen any solid action on immigration or tariffs yet. So in general, interest rates are going to be really sensitive, not only to the labor market like I was talking about or the inflation data, but more forward-thinking or how are these Trump policies going to impact rates?

And moving on to what we’re looking at in this slide, and you can go back to the last one, Todd. In general, this is a summary of the market move we’ve seen over the past six months, let’s say, and it’s been confusing for our clients because the Fed has cut rates by 100 basis points, yet long-term rates have gone up by 100 basis points. And you can see in the bottom right, this is pretty atypical. Normally, when the Fed is cutting rates, long-term rates go along with the short-term rates, but in this case, like I said, they cut rates by 100 basis points, but if you look at the 10-year yield, it went up by 100 basis points. A lot of that was driven by people pricing in a Trump victory, and some of the more inflationary policies that he could have, but there were also a string of strong data throughout the fall that also pushed up expectations for rates. And you can go to the next slide, please.

So looking ahead, this is the outlook as priced by the market and the Fed. So if you look at the graph on the right, that shows where SOFR and Fed Funds have been the last few years. So you can see the aggressive rise up to the 5% range, the Fed held rates there for about a year, year and a half, and then you can see the 100 basis points of cuts that we got at the end of last year.

Looking ahead at that red dotted line, that is what the market’s implying right now. So the yield curve is extremely flat. There’s maybe one, one-and-a-half cuts priced into the market, which is a lot different than what we saw before. So that gray line at the bottom, that’s where we were in February before the Fed started cutting. I think they were expecting about 10 cumulative cuts by the end of next year. In December, you could see there were still expectations for more cuts, but given the strong data and Trump winning, at this point, the yield curve is pretty much dead-flat.

So that’s something we’ve been trying to educate our clients on. More casual observers might think like, “Oh, the Fed’s cutting rates, rates are just going to keep going down,” but that is not really what’s priced in or what’s expected at the moment.

Shifting more towards the Fed, so that’s the dot plot on the left-hand side, that black graph there, the Fed is still, I would say, optimistic in terms of their projections. So those projections are from the December Fed meeting, and it basically shows two cuts in 2025 followed by two more cuts in 2026. And so that’s definitely a lot more than the one, one and a half that’s priced into the curve. You can obviously see there, so each dot is a different Fed official. There’s a really wide range of views among the FOMC members and they try and put a disclaimer on these anyway, these are definitely forecast with what we know now. But in general, I think the thing to take away is the Fed is still optimistic that they can continue to cut, but the market does not have that priced in anymore.

We’ll see how this progresses. So the Fed updates their projections quarterly. The next one will be in March. They talked about trying to not think too much ahead in terms of what Trump might do in their projections, but maybe by March we’ll have some more clarity on what’s actually going to be policy and we expect them to adjust their forecast closer to the market. But a lot of things can happen between now and then in terms of labor market, inflation, and then obviously policies that are going to come through.

So shifting ahead to the next slide, so here are just a few ideas of interest rate hedging solutions. These are things that we put in place with our clients when they’re thinking about getting some certainty in place related to their interest expense, and I’ll just touch on these briefly just to give you a flavor.

So the first and, I would say, the more traditional solution would be an interest rate swap, and that’s basically where you can lock in the SOFR portion of your pricing for a fixed rate. And you can see there, a current fixed rate today is around 4.25, and that compares to SOFR, which is about 4.30, so pretty much the same. So you can lock in where rates are today and gain that certainty for the future at the current rate. It’s not like the environment we saw before where there are more cuts priced into the curve, but I would say in a traditional environment, typically you have to pay up to get that interest rate certainty where now, you’d be fixing exactly where rates are today.

Shifting to the next one, which is the interest rate collar, this is, I would say, a more flexible solution where you can still get that worst-case protection. In this example, it’s 5.50, so it gives you protection, say, if these new policies ignite a new wave of inflation and the Fed has to ship more into a hiking stance, you’d get protection from that. But on the low side, it gives you the ability to float down to 3.85. So just more participation if the Fed is able to come through with more cuts. So it’s more of a flexible solution where you get that worst-case scenario, but also get to participate if things go well and the Fed can continue to cut.

Then lastly, this is a more structured solution, and we’ve literally got dozens of these types of products and usually we like to look at what makes sense for the specific business in terms of cyclicality or views on rates and things like that. But this is an example that has done well in the current environment where effectively you’re buying a cap on your interest rate and you’re entering into a swap, but the benefit of this is with an interest rate cap, you can float if the Fed cuts rates. So it’s giving some flexibility where maybe you think that things are going to go well or inflation is going to go away and the Fed can cut rates to a more normal level, say somewhere in the 3% range, you’re still maintaining some flexibility where you can participate in that downside, but at the same time, being prudent and putting a cap and a fixed nature to your rate.

And so I’ll wrap up there. I’ll just finish with a couple of thoughts on interest rates. So in general, these are all hedging solutions. We do this to gain certainty. It’s not necessarily like a bet. We don’t want our clients to think they’re trying to win the market or outsmart anyone. It’s all about getting certainty in an uncertain environment. When we think about hedging for our clients, 50% fixed and 50% floating is typically a good starting point. Sometimes we see people get closer to 100%, but for some people, a 50/50 mix is good for them, and it puts you in this position where you’re not necessarily betting that rates are going to go up or rates are going to go down. All of these tools, they basically give you some certainty on the interest expense part of your business so you can really focus on what you do best instead of staying up late at night wondering what Trump’s going to tweet or what the next jobless claims number is going to be.

But in general, if you have questions on any of these things or anything that I talked about, feel free to reach out to Jim, Annie, or Colleen, and I’m happy to talk about things specific to your business. And with that, I will wrap it up and pass it on to Todd.

>> Todd Liska: Great, thanks, Charlie. I appreciate that. I think maybe I’ll just take a moment to see, does anyone have any questions for Charlie or Joe at this point? Just quickly before I get into talking about FX and commodity markets, I just wanted to make sure that, if there was any questions that you guys wanted to bring up, that we could answer them here before we get too far down the presentation.

>> Jim Nickel: Hey, Todd, it’s Jim. I do see a question in the chat from Ralph Fisher. “How do we see federal state money spending in 2025 as it relates to highway projects or construction?” Maybe that’s more of a Joe Cox question.

>> Todd Liska: Yeah, Joe, do you want to take that one?

>> Joe Cox: Yeah. No, first, I’ll give a disclaimer. That, that’s not something I follow super closely, but I think in general, those source of infrastructure projects, I wouldn’t see much divergence from how things are today, really. Thinking about money for those things, members of Congress, they want to do things that benefit their districts and benefit the areas they’re from. And so I think infrastructure in general is something that has bipartisan support and typically doesn’t have a ton of resistance. So I can also look into this further and I’m happy to get to connect with Todd or Jim and get you a more precise answer.

>> Jim Nickel: Sounds good. Thanks, Joe.

>> Todd Liska: Jim, were there any more questions in the chat?

>> Jim Nickel: Not at this time.

>> Todd Liska: All right, great. So why don’t we jump then into FX markets, and like what Charlie did, I’m going to just try to connect the dots between the stuff that Joe went over and what we see, how we see that playing into FX and commodity markets now, but also, what are we talking specifically to clients about? What are the key things that, as a risk manager, you could be doing to try to optimize your approach to risk management in this environment?

So first, we’ll start out with, okay, well, what’s going on in FX markets? And I’m going to start by showing this is a chart of the U.S. Dollar Index. So it’s a basket of currencies against the dollar, so it’s the general value of the dollar, and there’s a lot of different currencies we can talk about. So this makes it a little bit easier just to present to you, the audience, what’s happening.

And so one of the big themes for the dollar, and it’s been this way for about two years, is that the currency is overvalued. And so when you look at it from almost every metric, from a purchasing power parity or a real exchange rate perspective, it’s definitely overvalued. Now, currencies can certainly be overvalued for a long period of time.

So interestingly enough, what we started seeing happening in the third quarter of this past year, you could see that the dollar actually started to weaken and people were really getting concerned. There was a little bit more anxiousness about, okay, well, what if the dollar continues to weaken? And what if this valuation starts to unwind? Well, what happens interestingly at the end of September, at the end of the third quarter, is the probability of President Trump winning election started to show up in betting markets and things like that, and people became a little bit more confident that he was probably going to win the election.

And so we started, as Charlie has nicely laid out, we started to see the dollar move higher, and that was for two reasons. One was this concept of the labor market started to stabilize, inflation started to seem a little bit sticky, so that pushed interest rates up, and higher interest rates in the U.S. supports this theme of positive carry, so you pick up more return by owning dollars relative to other currencies. So that was part of it. But the other part was really this concern about inflation and tariff risk premiums and the fact that the president could, if he wins the election, could initiate tariffs and we’d see more volatility in exchange rates. And what we saw, there’s not a lot of examples of this, but what we saw happen in his first administration with the tariffs on China is that basically the Chinese renminbi moved and the currency movement pretty much totally offset the tariff impact, as we had a 12% movement in the exchange rate relative to, on average, around a 10% tariff overall.

So what we saw happen is the dollar start to move higher on that, and then obviously, Trump won the election, and we’ve seen the dollar continue to move higher. So it’s moved about 8.6% higher since the September low. And if we say, “Okay, some of that’s due to this higher U.S. interest rates, this tariff or inflation risk, and some of it is due to this tariff risk premium,” we could say, “maybe there’s five to 7% already priced in from a tariff risk premium perspective.” And obviously, President Trump has thrown out 10% tariffs. Just the other day, he threw out 25% tariffs against Canada and Mexico. So those give you some idea as far as the frame to which the exchange rate can move. We’ve had an 8.6% move and some of that is already the tariff premium. You can get an idea for how much is already priced in from a risk perspective.

What I do want to highlight is this black dotted line here. This is the market expectations for the dollar exchange rate over the next year. As you can see, it still favors a weaker dollar, and that’s because of that valuation factor. But when you actually look at the range, this is the high range of market forecasts and the low range, it really shows markets are quite uncertain about direction, and that really holds from the standpoint of that this tariff risk premium is real. If we were to get a 25% tariff on Canada, which I don’t think anyone really thinks is going to happen, but if we were, the dollar would definitely strengthen, specifically against the Canadian dollar. So if tariffs do get implemented, we probably will see the dollar continue to move higher, and that reflects this.

If we do not, if the bark is worse than the actual bite on tariffs and trade, we may see us move more in line with general forecasts. And that’s really what we’re looking at from a directional perspective.

Now, let’s talk about another-

>> Jim Nickel:

Hey, Todd, could I jump —

>> Todd Liska: Yep.

>> Jim Nickel: — in for just a second? I had a question. Somebody sent me a text because they’re driving. It’s Rich Beaty, and it’s really about tariffs, “Is there something specific,” and this, again, may be a question back to Joe, “that might govern Trump’s move on tariffs? Is it really nothing’s going to govern him, he’s all in, or are there some factors to consider?” And then again, of course, and you’ve already said it from a FX standpoint, but also, “What impact might that have on interest rates?”

>> Todd Liska: Yeah, so I’ll jump in just to talk about markets and then I’ll let Joe talk more a little bit about constraints.

I think if they were to enact tariffs and the tariffs would be on the more aggressive end of expectations, I think we would see a stronger dollar, and I think we would see higher U.S. interest rates as the initial response to that. Now, the question really boils down to, well, what happens? What’s the response to that? How do other countries respond to that? And I think initially, we’ll have that higher dollar, higher interest rate response, but depending on what different countries do and in response to those could shape what happens to the interest rates in the currency market after that point.

And so I think that’s the thought on the tariffs and I think, like I said, I’ll leave it to Joe to give you thoughts on constraints around what he can and can’t do straight out of the gate.

>> Joe Cox: Yeah. So with tariffs, at the highest level, I would say the U.S. government has more of an appetite for tariffs generally, right? Globalism’s not really a thing anymore. Looking back at Trump’s first term when he used tariffs against China, that did get a fair amount of resistance. Now we look at Biden’s recent term, he increased or renewed most of the China tariffs.

I think if Trump goes the typical route, meaning he has an executive action and he tasks the Commerce Department or the Treasury Department to do a study and they come back with that report, I think by and large, the congressional Republicans will be okay with that approach. I think the really only constraint he could potentially have is if he used an emergency power to immediately enact tariffs or he tries to do something that no president has done before. I think he will get some resistance to that. And if he does things that upset some members of Congress, then it really puts in jeopardy things he wants to do through reconciliation, the tax package.

And so while he’s very much his own person and he does and says what he wants to say, when it comes to implementation, he does have to do a bit of a dance to keep Republicans happy or to at least not upset them. The thing that, again, that really stood out to me during the Treasury secretary confirmation hearing was this idea that tariffs are used as a way to raise revenue. I cannot really remember hearing someone say that before. And so I think as Trump wants to implement aspects of his agenda, and they’re absolutely going to cost money, if you extend the Tax Cuts and Jobs Act, if you lower the corporate rate, that’s less revenue and you need to offset that somehow, then tariffs could potentially be used there.

But I think at least initially, he’s going to try to go the more traditional route. So at least these things will be telegraphed because if they’re not telegraphed, then the market can get upset, and we know that’s not what Trump likes to do is upset the U.S. equity market.

>> Jim Nickel: So aside from the U.S. equity market, and I’m having fun being Rich’s relay here, he’s driving, his suggestion is it’s really about the 10-year Treasury, which is, by my last watch, is it like 4.60, 4.65, that if it reaches up over, say, 6%, that might be the market constraint.

I don’t know, Charlie, if you have a thought on that or anybody, Joe, Charlie, Todd?

>> Todd Liska: Yeah. I think if, Jim, if his question is, is will equity markets start to feel the pain of higher interest rates if we get the long end of the curve up to 6%, I think that’s probably... There’s truth to that, right? It’s a simple mathematical equation. Forecasted or discounted cash flows at higher interest rates are going to be worth less.

So I think that’s probably fair. There’s probably some fairness from the standpoint of saying that asset allocation, reallocation might make more sense in that environment when you have Treasury yields north of 6%, which would support maybe some reduction in what have been long-term overweights in U.S. equities. So I think there’s probably some truth to that and definitely we’ve seen the U.S. equity market trade softly when we have moves up in the 10-year over the last month and a half or so.

>> Rich Beaty:

That was my —

>> Charlie Cashman: Yeah, I’ll just add a couple of thoughts.

>> Rich Beaty: That was my calculus. Thank you.

>> Charlie Cashman: Yep. Just two more —

>> Jim Nickel: Rich speaks. Thank you, Rich. Yeah.

>> Charlie Cashman: Just two more thoughts on the... Thank you, thank you for the question, Rich. I’ll just add two more things on the tariff and rates point because I would say out of all or some of the policies, it’s not as cut-and-dry how tariffs are going to impact inflation and eventually interest rates. And I will say during the last time Trump was in office, he started doing these tariffs and it created all this uncertainty and global trade slowed down and the Fed ended up cutting rates partially because of that. So not saying that’s going to happen again, but that it happened not too long ago and that’s something I think people forget about.

And another, we were talking about Trump’s sensitivity to the equity market, I would say they’ve also been focused on the Treasury market a lot more now than we’ve seen presidents in the past, like a couple weeks ago, JD Vance was on Fox and he was quoting the 10-year yield. So I think they know rates are really high and they don’t have a ton of appetite for them to go higher. So I don’t know if the pain point’s 5%, 6%, but I would just add that I think they’re also focused on where interest rates go and maybe that will impact some of their actions in the future.

>> Todd Liska: Rich, did that help answer all your questions on that?

>> Rich Beaty: Yeah, that was awesome. The calculus and the math was spot-on and just that more theoretical answer there on the back end, 100%. Thank you.

>> Todd Liska: Great. All right, so unless there’s any question, we’ll jump back on the FX here. And as I mentioned, there’s a few things driving the potential direction of the market, but the real thing here is I want to again highlight that this is quite a range of outlooks and what we are really talking to clients about now is expect higher levels of volatility in FX markets.

This chart here I’m going to show you, this is the one-year FX chart of expected FX volatility. So it’s market’s expectations for how volatile exchange rates are going to be over the next 12 months. It’s weighted by the activity of our CIBC clients. And so obviously, back in 2022 when we had the dollar really selling off, and I’m sorry, really rallying and the British pound was really selling off and some of those things, we saw the expectations for inflation jumped quite a bit. And then since then, it’s come back down. And what we’ve seen since September, again, if you recall, that’s when I said the dollar turned and U.S. interest rates turned and that’s when the probability of Trump winning the election turned, you can see that markets are pricing in higher and higher rates of expected volatility.

We think that’s probably going to hold, given the fact that you have quite a bit of uncertainty on the trade and tariff front, you’re going to be moving, as Joe said, you’re going to be moving in probably over the next 100 days, moving into some discussion about the fiscal policy in the U.S., the debt ceiling, we know that always tends to get FX markets a little bit nervous. And the other thing I want to highlight is speculators right now are holding the largest long dollar position they’ve had in the last five years. And so if we were to get some sort of movement in the opposite direction, that could accelerate how things move.

So we’re anticipating that volatility is going to be higher in the near term and that clients need to think about that from the perspective of not necessarily is the dollar going to strengthen or weaken, but it’s going to be a more volatile environment, and am I comfortable with the exposures that I have in my business?

And so what I want to do is I’m going to highlight just a case study. Obviously, there’s lots of different exchange rates out there, there’s lots of different currencies that our clients have exposure to. I’ve just picked one example. It’s more about how this works from the standpoint of our thoughts around it, and it can be applied to lots of different exchange rates. It can be applied to a lot of different strategies for managing risk. But just want to give you guys some thoughts about how we’re looking at it and how we’re talking to clients about it with using just one example.

So I’m just going to highlight a case study here where we have a client, and this is a common thing in our portfolio, obviously we’re a Canadian bank, so in the U.S., we’re dealing with a lot of companies that do business in Canada, and so let’s say it’s a company that’s looking to protect their Canadian revenues. And so in an environment of higher volatility, and I’ll just highlight this chart here, this is the Dollar/Canada spot exchange rate. So you can see this goes back to September, you can see that the dollar strengthened, the Canadian dollar’s weakened. And so now is, okay, well, what’s going to happen going forward? We know that volatility is potentially going to be higher, and so we’re protecting, we want to protect, if we’re a client that has a Canadian revenue stream, we want to protect against further weakness in the Canadian dollar and that this exchange rate continues along this trend. We don’t want that... That’s a negative outcome for us.

However, we are talking about more volatility and not necessarily direction of the... It could go down. If tariffs don’t come in play, that risk premium will get priced out. And so what we want to do is leave some participation capability, allow the risk manager to cap their risk, but allow for some participation that, if the exchange rate does move in their favor, that they can take advantage of some of that. All right? And so I’m just going to show you a couple ideas on how we can look at that through some actual solutions that we work with clients.

I’m not going to get too into what all these ones are, but I’m going to start with the basics, and just for example purposes, let’s just assume the spot exchange rate is at this level, 1.4442. So we’re looking to protect against a move up to 1.50 or something like that.

Now, the client could do the very basic hedge and that’s something called a forward contract where they can just lock into exchange rate today for the purchase of currency into the future. And I’m using an example, I’m just assuming the client’s going to sell a million Canadian dollars every month for the next 12 months, and the rate that they could lock into for that would be the rate of 1.4332. So that’s their benchmark. I can lock in that rate and whether the exchange rate goes up or goes down from here, I know what my conversion is.

Now, in an environment like this where we have the risk of upside or downside movements due to higher volatility, as I mentioned, we want to try to keep some participation. So this is a strategy that we could show a client. It’s something called an at maturity variable rate collar, and it would allow them to lock in a worst-case rate of 1.46. So no matter where they are, where the exchange rate is over the next 12 months, they’re selling their million CAD at 1.46, and it is a little bit worse than the current spot rate, and it is a little bit worse, obviously, than the forward rate that they could lock in. However, this solution allows them to participate in exchange rate movement in their favor all the way down to 1.3885.

So this is just an example for a client who says, “You know what? Look, I need to protect my Canadian revenue stream, but I’m really worried that if I do it up here, these aren’t the best rates over the last 12 months to two years to be doing that. If the exchange rate moves back in my favor, can I still be able to participate?” And so this is a solution that would take the risk off the table, but allow for some of that participation. All right?

Another strategy that we’re talking about with clients is, “Okay, well, 2025, I hedged some, but I wasn’t fully hedged and now the exchange rate’s moved against me and the exchange rate’s not that great. I don’t really want to lock in up here. Is there anything I can do to try to put a hedge in place, but maybe improve the rate at which I’m able to lock the hedge in at?” So this is a product called a capped forward. And again, I’m just showing you these. There’s of different products and solutions that we can just use to meet a client’s need around managing risk, and this is just one example. So just trying to give you guys the theme of what we can do and what we’re talking about.

So again, in this scenario, the client’s seen Dollar/Canada move up against them. They know they need to hedge a little bit more, but they don’t really want to do it at current rates, so what can they do? So a capped forward is a nice tool because it can allow you to put some protection in place, but again, lock that protection in in a rate better than the current market rates.

And so here’s an example. Same thing. Client’s looking to sell a million Canadian dollars. I’m doing this just for the next six months because lots of times, clients are looking to rebalance hedges and stuff more on a shorter-term timeframe than 12 months, so we’re looking at a six-month term structure. Again, the current exchange rates that same 1.4442, and the forward reference for this six-month period is 1.4383. So anything you can do better than 1.4383 is better than you could from a standpoint of just locking in the current rate.

So how does a capped forward work? So a capped forward will give you protection at a known strike rate, and that strike rate is going to be better than the current forward rate. So you’re going to lock in your conversions of CAD at 1.4297. That’s much better than 1.4383. So that helps you with, “Okay, yeah, I’m a little underwater on this rate relative to where I want to be. I’m going to get a nice pickup.” Now you have protection between 1.4297 and up to 1.4650. So it caps how much protection you have. And given 1.4650 would cover a decent portion of any tariff bump we might see, this will give you some protection. So if at the end of your hedges timeframe, if we were trading at 1.48, you still have the protection from 1.4297 to 1.4650, but it caps off at that level.

And so this is a nice tool to help clients who are a little bit underwater on a hedge rate, if they’re looking to sell Canadian dollars, realize a rate better than the current market rate by capping how much protection they have in place. So these are just two examples, from a risk management perspective, on how you can look at, “Okay, I need to get some protection in place because we expect markets to be a little bit more volatile, but because of that volatility being two ways, we want to keep some participation capability.” So those are just two examples.

The other thing I want to highlight is that when volatility goes up and expectations for volatility goes up, it actually provides some opportunities for some folks as well. And so this here is the chart. This is the implied one-month volatility of Dollar/Canada. So this is how volatile do people think Dollar/Canada will be over the next month? And you can see, since September, again, you can see markets are expecting a lot more volatility.

Now, for a client that doesn’t normally hedge or maybe hedges, but hedges with a very low hedge ratio, there’s a chance for you to take advantage of this volatility by using some of the solutions we offer to enhance your returns on your cash deposit holdings. So let’s say you’re sitting with 5 million in cash earning a deposit rate and you’re a regular buyer of Canadian dollars or a seller of Canadian dollars, you could actually boost up your return by taking advantage of this. I’ll walk you through how that works.

This is a simple solution. It’s something called a dual currency transaction, and it really is for a hedger who or a user profile where you have probably north of 5 million in cash deposits, you regularly buy or sell a foreign currency, and in this example, I’m going to use Canadian dollars just because that’s the currency we’ve been talking about, and that you’re looking for an increased return on your cash.

So here’s how it works. You would agree to place some percentage of your deposit in what we call this DCT. You’ll select a maturity date. Usually, those maturity dates are one month and less. We tend to see that being the sweet spot. There’s the most value in that range. And then you’re going to select exchange rate. And in this case, I’m going to use an example where this person, this hedger or this company is a regular buyer of Canadian dollars. So you’re going to select an exchange rate that says, “Okay, if the exchange rate gets to this level, I’m fine with buying it. It’s just for the next month, and I’m just going to use that balance to pay my expenses or whatever I’m using the Canadian dollars I buy for.”

So you’re going to select a maturity. In this example, I selected one month. You’re going to select an exchange rate at which you’re comfortable buying Canadian dollars, and that will be 1.45 on the exchange rate, which is better than the current spot exchange rate at the time I did this. And then you’re going to get to earn a higher interest rate on this deposit. And this is the reason why. You’re going to deposit, let’s say, a million U.S. dollars for a month. And at the end of this deposit, if the exchange rate is above 1.45, you’re going to get Canadian dollars back in the amount of 1.45 million. If it’s below 1.45, you’re going to get your original U.S. dollar deposit back.

Now, for taking on this variability in your principal being returned, you’re going to earn an interest rate of 7% on that. So the cash deposit on a million is going to earn an interest rate of 7% for the next month, which is an enhanced yield relative to the current deposit rates.

Now, this works only if you actually need those Canadian dollars. So if we’re above 1.45 at the end of the maturity in a month, you’ll just take those Canadian dollars and instead of buying them in the spot market, you’ll take them and you’ll have them sent to, if you’re sending it up to your Canadian operations to use for operating expenses or something like that, you’ll just use them for that. If you get the dollars back, you’ll just still have your dollars back, you’ll have an enhanced yield, and then you’ll go into the spot market at that time and buy the Canadian dollars that you would need just like you would normally do. So this is an example of how clients can actually take advantage of some of this expectation for higher volatility as it relates to markets.

So I know we’re running a little bit close on time and do want to leave some time for questions, so I’m just going to hustle through our discussion on commodities. And the one we want to focus on today was natural gas.

One of the things probably many of us have heard from the Trump administration and President Trump is the “drill, baby, drill” comments. And so there’s a lot of discussion about increasing U.S. oil production, increasing U.S. natural gas production. And so looking at the natural gas market makes a lot of sense, we think, for clients, and a lot of our clients that we work with do have natural gas exposure in manufacturing processes and things like that.

So what I want to highlight is natural gas prices over the last three months, this grayed line here, this is where natural gas prices were if you looked on a forward basis three months ago, and you can see, over the past three months, they’ve jumped higher. Why have they jumped higher? Well, the first reason they’ve jumped higher is because we’ve had a big swing of cold weather in the U.S., a little bit colder than what original forecast had shown, and so we’ve seen a pretty strong demand for natural gas from a heating perspective, and we’ve seen pretty solid drawdowns on the supply storage side over the last couple of weeks. And so that’s pushed prices up.

The other thing that’s pushed prices up is probably some of you have heard about Ukraine shutting down a key pipeline. There was a contract between Russia and Europe that expired and the pipeline has been shut down and so natural gas has not been delivered in the same capacity as it was before to Europe, and so the demand for liquid natural gas has picked up. And we’ve seen, in fact, U.S. exports pick up quite a bit.

So the combination of LNG demand risk and colder weather has really been the reason for this jump higher in the curve, but we think that there’s some things risk managers should be thinking about as they’re managing natural gas risk.

So the first thing is, we’ll just look at this from a standpoint of supply. This chart here is week two natural gas storage supply. So you can see that this black dotted line is the historical average of week two and what natural gas supplies would look like. And you can see for right now, we’re still above the normal levels of supply. We actually just had the new supply numbers come out this morning and it actually was less than expected, and so we’re still sitting above, with even new data for week three, we’re still sitting well above the average supply levels.

So what the heck does that mean? That means that we still have ample supplies of natural gas, and obviously, more supply equals lower prices. So what we think as we look back at this price chart here is maybe we’re towards fairer value. Unless we were to get a really big cold streak in the next couple of weeks, we’re really probably towards fair value in this pricing, and that’s just below $4 in maybe the February-March area where we see really strong demand, weather-related demand for natural gas. All right?

The other —

>> Jim Nickel: Hey, Todd, to prod into your pause there, yeah, I mean, we’re getting just close to the end of our time. I think your last couple of slides talk a little bit about a case study, a way we can put a collar on natural gas. Maybe we can just make sure that everybody has this deck of slides as we wrap. Maybe just a few comments in conclusion and we’ll just see if there’s any last second questions before we break.

>> Todd Liska: Yeah, sure. And so from the standpoint of this sort of example, we do think from a natural gas perspective that you want to have some upside protection in place, but you want to do that with allowing for some participation. So maybe some alternative to fixed-rate contracts makes sense, especially as you look out into the back half of 2025, 2026. We do think there’s some value in this area of curve for some participation-type strategies as it relates to natural gas. So again, from a hedging perspective, it’s more about let’s put some fixed-rate protection in place, but have some ability to participate if natural gas prices come back down, especially in the back end of 2025, early 2026.

So I think that’s it, Jim, on FX and commodities and so we can turn it back to you if anyone else has got any questions.

>> Jim Nickel: Thank you for the time. Annie, Colleen, and myself are available at any point in time. If you need anything, just reach out to us. We’re a phone call away. And with that, I’ll cut us loose and thank everybody again and try and stay warm wherever you happen to be. Take care.