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The Omicron Variant – A Medical & Markets Perspective

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COVID-19 Insights Research & Strategy December 06, 2021
COVID-19 Insights Research & Strategy December 06, 2021
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The discovery of the Omicron variant in Southern Africa, and its subsequent appearance in countries around the globe, has shaken confidence in the recovery from the global pandemic.

BMO hosted a panel to discuss the emergence of the Omicron variant as we enter the holiday season and as cold weather drives more people indoors. Our internal and external experts will look at what Omicron means from a health, markets, and economic perspective and how it may impact the ongoing recovery.

Participants include:

Listen to full discussion.

BMO COVID-19 Insights podcast is live on all major channels including Apple, Google and Spotify.

Balancing Omicron and Inflation Woes

The emergence of a new COVID-19 variant has shaken market confidence in a global economic recovery from the pandemic even as central banks weigh a response to rising inflation concerns in the United States, Canada and further afield. As the Omicron variant appears in more states and provinces, BMO hosted a conference call to evaluate the potential impacts from the economic, markets and health perspective.

Moderated by BMO Capital Markets Chief Investment strategist Brian Belski, the call featured special guest Dr. John Whyte, Chief Medical Officer, WebMD, as well as BMO Capital Markets’ Deputy Chief Economist and Head of U.S. Economics Michael Gregory and Margaret Kerins, Head of FICC Macro Strategy, and saw panelists discuss what Omicron will mean for the recovery as the pandemic approaches its third year.

In terms of raw data, the U.S. is currently seeing a seven-day average of 100,000 cases per day and 1,000 deaths per day, with much of those coming from a handful of states that have either higher population or lower vaccination rates, or a combination of the two. Looking at immunization, 71 percent of the American population has had one dose, and 60 percent are fully vaccinated, although 86 percent of the over-65 population are fully vaccinated.

By comparison, Canada is averaging 3,500 cases per day and 20 deaths per day, and while the majority of new cases are coming out of Ontario and Quebec, Alberta has the highest number of cases per 100,000 people. In terms of immunization, 89 percent of Canadians over the age of 12 have had their first dose and 86 percent are fully vaccinated.

What We Know and Don’t Know

It may take some time for scientists to understand the true impact of the Omicron variant.

“There is more that we don’t know than we know,” said Dr. Whyte, noting that Omicron shows 30 mutations against the original virus, compared to four mutations for the prevailing Delta variant that emerged in the summer. “There is the feeling that it is likely more transmissible, but that doesn’t mean that it will cause more death because there are two separate issues here, transmissibility versus virulence.”

Noting that in the developing world, vaccination rates are in some cases as low as 8 percent of the population, Dr. Whyte said the key to ending the pandemic is vaccine equity. Until that imbalance is fixed, he said, the likelihood of new variants emerging will remain, and with it, the potential for the global recovery from the pandemic to be stymied.

The Economy: Consumer Confidence is Everything

From an economic perspective, BMO Deputy Chief Economist Michael Gregory says consumer confidence will be key to weathering this latest challenge from the COVID-19 pandemic.

Gregory said that, notwithstanding spikes in hospitalization and mortality rates that might lead to new shutdowns, the big question is how consumers will react to Omicron, and whether it will lead to new sheltering at home behaviour and more conservative spending, as was the case with the emergence of the Delta variant.

“Households chose not to eat out as much during the last wave. They chose not to fly as much,” said Gregory. “So, confidence is key here, regardless of what governments do in terms of bringing in more restrictions.”

Economic Momentum and Inflation

For Gregory, the Canadian and U.S. economies have become remarkably resilient as the pandemic wears on, with considerable economic momentum on both sides of the border.

“In fact, we’ve just recently upgraded our forecasts for both economies for the fourth quarter by a percentage point, looking for 4 ½ percent growth in the current quarter in Canada and 5 ½ percent in the U.S.,” he said.

The larger concern for the economy currently, he said, is inflation that is reaching multi-decade-high rates in both countries and driving central banks to reassess how they approach monetary policy. Gregory expects we’ll see peak rates of inflation during the winter months before they cool in the spring.

“So inflation rates will come down, but it’s how quickly do they come down, and what level do they end up at … that’s the big question that central banks are struggling with now,” he said.

With that, rate hikes could come sooner than later in both countries, potentially as soon as in the spring, rather than the summer of 2022, Gregory says.

A Faster Taper?

For Margaret Kerins, BMO Capital Markets Head of FICC Macro Strategy, the Fed has clearly indicated a shift in its focus from employment concerns to inflation.

“The Fed really shifted their focus to fighting the inflation risk, and of course, anchoring inflation,” she said. “Most recently, the Fed has acknowledged that the upside risks to inflation are likely to outweigh the risks to employment, and they are now willing to taper faster.”

The key for the Fed is to stop inflation from seeping into the decisions made by the consumer, said Kerins, echoing Gregory’s comments and noting that once that happens, it can become self-fulfilling. At the same time, it must weigh concerns around the new variant and the potential risks it might pose to the economic recovery and people returning to work in offices, and to spending again in urban centres.

“So the Fed is in this position of really trying to thread a very, very fine needle. They need to slow demand to contain inflation, but really just slow it long enough for some of the supply and employment frictions to work their way through,” she said.

Kerins said the Fed is willing to raise short-term rates in order to ward off inflation risks. She said the pace of tightening will depend on the economic outlook, but that the Fed will likely begin with caution.

“The market will revert to the most recent experience, likely pricing a Fed hike every quarter or three hikes a year,” she said.

Markets Outlook

BMO Capital Markets Chief Investment Strategist Brian Belski, who recently published his 2022 markets outlook, said stock indexes will continue to rise next year, adding another year to the 20- to 25-year bull market run that started in 2010.

“I think the theme overall for 2022 is what we like to call in the business second derivative, meaning less positive but positive nonetheless,” said Belski, who has an S&P 500 price target of 5,300 and a TSX price target of 24,000. “We simply believe that equity assets in the United States are the best equity assets in the world, and that investors should tilt toward quality while also focusing on growth at a reasonable price and dividend growth investing … And the same thing holds true for Canada.”

He said sector overweights for both countries include financials, discretionary, industrials and materials.

Fire, Aim, Ready

Belski said recent market volatility can be attributed to skittish investors making subjective, opinion-based decisions in the face of recent news around inflation and the Omicron variant, and that those fears should ease going forward.

“It’s a simple case of Fire, Aim, Ready with respect to what’s happening in the markets today,” he said. “I think we’re starting to see calmer heads prevail.”

He predicted that markets could have a historic month of December in terms of the upside as the year comes to a close, buoyed as investors in the U.S. and abroad return to the quality offered by North American stocks, and companies that are positioned for growth at a reasonable price and promise dividend growth now and over the next three to five years.

“I believe that investors around the world will seek non-volatile assets which are indeed U.S. stocks,” said Belski. “Our favourite sectors are clearly technology, communication services, discretionary and financials.”

Additional Resources

  • What is Omicron, the new COVID variant? Doctor breaks down what we know

Read more

Brian Belski: Hello, everyone. This is Brian Belski, Chief Investment Strategist at BMO Capital Markets. On behalf of BMO Financial Group and us here at BMO Capital Markets, welcome to the call today, which is the Omicron variant, a medical and markets perspective. We're blessed and honored to have our Chief Medical Expert here at BMO, Dr. John Whyte from WebMD, along with subject matter experts, our Deputy Chief Economist, Michael Gregory, and Margaret Kerins, Head of Fixed Income, Currency and Commodity Research and myself with respect to markets.

The flow of the call will work as follows. I will introduce Dr. John Whyte. He will provide some commentary with respect to the update in terms of the omicron variant. I will ask him a few questions, and then he'll hand the ball off to our subject matter experts here at BMO. Then we'll follow up with Q&A. You have functionality as a participant on this call with respect to Q&A. So please, we want to hear from you. And again, this is your resource with respect to the omicron variant.

As an introduction to Dr. John Whyte, he's the Chief Medical Officer at WebMD, as I said. In this role, Dr. Whyte leads efforts to develop and expand strategic partnerships that create meaningful change around important and timely public health issues. Prior to WebMD, Dr. Whyte served as the Director of Professional Affairs and Stakeholder Engagement at the Center for Drug Eval Research at the US Food and Drug Administration. Dr. John Whyte is an active participant in the medical field. He's still a doctor in the Washington, DC area. And oh, by the way, he is also an accomplished author. He recently published a book entitled, Take Control of Your Cancer Risk, which was published in October of 2021. It's a great resource for us here at BMO Financial Group. I personally have learned a lot from Dr. Whyte, and I want to thank him personally for everything that he's done for us and our clients.

I will remind you that as we get started, I point you to the BMO disclosure page via the web link enclosed at the bottom of the invitation that you would have received. Given that we're talking about sensitive medical information, just a reminder that if you seek medical advice, please do so accordingly and directly consult your physician and/or healthcare professional.

And with that, I'm going to hand the ball off to Dr. John Whyte. He's going to give us an update. I'll ask him a couple of questions after that, and then we'll hand it off to our subject matter experts. Dr. Whyte, the floor is yours.

John Whyte: Thank you, Brian, and thank you for that kind invitation. Good morning, everyone. Just want to say I'm going to review kind of what's the latest data about COVID and omicron. And if you have questions, put them in the chat box. Nothing is off limits.

So let's put it in perspective as to where we are today. The 7-day average here in the United States is about 100,000 cases. 100,000 new cases every day. The 7-day average of deaths is around 1,000. Now, that's not where we want to be nearly a year since vaccines became available. So the concern is that the trend line is flattening out, meaning it's really ending around that 100,000 new cases a day. And that's the challenge that we have in getting the virus under control. Now, there is encouraging news that the proportionality in terms of the number of deaths per new cases is not what it was earlier this year, yet again, it's still too many.

And something, if you've listened to these other ones that I talked a lot about, is all almost locality. And that's what important for you to know. We talk about the broad numbers in the aggregate, but what really matters for you is what's happening in your state, your city, your county, your province. And when we look at the number of cases, there are a few states that are accounting for the majority of cases. Part of it is population, part of it is low vaccination rates. But it's Arizona, California, Illinois, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, Pennsylvania, Wisconsin. Those are all states where we're still seeing a high number of cases.

In Canada, it's about 3,500 new cases a day and 20 deaths. As you know, it's a tenth of the population. Quebec and Ontario, the greatest number of cases over the past 7 days. And that makes sense if you're looking at population. But what I thought would be interesting to point out that if you look at cases per 100,000 people and look from the beginning, it's actually Alberta that has the highest number of cases per population. So that's important to keep in mind what's happening in local areas. And I mention it because when we talk about travel, it's always important to know what's happening locally in terms of community spread.

So let's talk about immunizations. In the United States, about 234 million people, or 71% of the population, have received at least one dose. Overall, about 197 million, or 60% of the population, has been fully vaccinated. Now let's be realistic. There's no magic number about what that percentage needs to be. But most experts agree that 71%, certainly 60% for one dose is too low. And that's what's allowing the virus to live, to infect other people and mutate. Remember, viruses have to find a host to mutate, and when they mutate, they become stronger. It's kind of like survival of the fittest. So that's why vaccination is so important. And many states in the South, Arkansas, Tennessee, Louisiana have less than half of the population vaccinated. So that's the concern about spread.

Now, I always like to give the good news as well that 99% of people over the age of 65, 99% have received at least one vaccine. 86% are fully vaccinated. So that's really good because those are the people that are most at risk. And that's probably why we don't see that proportionate increase in the number of deaths.

Now, Canada is doing much better. It started slower in terms of vaccine supply, but now it outpaces the United States in all age categories for vaccination. When you look at total population, 79% of Canadians have received at least one dose. 89% of people 12 years of age and older. And when you look at fully vaccinated, 75% of people have been fully vaccinated in Canada, 86% of people over the age of 12. So that's real progress in Canada.

In the United States, we're still averaging about a million immunizations a day. That's probably a bit on the low side given where we are right now. And in terms of boosters, about 5% have received it in Canada of those that were eligible. About 23% in the United States. And that's partly a result of that we started earlier than Canada in giving vaccinations.

I do want to point out to everyone in case they had not heard, the CDC now recommends boosters for everyone over the age of 18. Before, they said consider if you didn't have underlying health conditions, but now the recommendation with omicron is that everyone over the age of 18 should get a booster. And I think when we talk about boosters in the future, after we get through the omicron variant, I think we're going to start thinking about the need, if we need boosters again, to reformulate the boosters to more adequately address some of these variants.

The other thing to keep in mind that I think we're going to start hearing much more discussion around is this issue of vaccine inequity. And we've talked about this before, that we're not safe until we're all safe. If you look at low income countries, roughly 8% of that population is vaccinated. 8%. So if we really want to quash this pandemic, recognizing it's a global economy, global travel, we need to also focus on vaccinating the rest of world.

Now let's talk about omicron, what today's webinar is mostly about. Its scientific name is B.11529. It's a variant of concern. That's the highest level designated by the World Health Organization. I just thought I'd throw this in for all you lovers of the Greek alphabet. You may say, well, omicron is the 15th letter. Have we had 15 variants? And you might have seen, WHO actually skipped nu and xi, because nu could be confusing. It's the nu variant. Xi, X-I, is a common last name. So they decided to skip those, just in case you were wondering that.

I want to point out with omicron, there's more that we don't know than we know right now. And I want to point out, delta is still the dominant strain, and that's important to remember. We're spending a lot of time talking about omicron, but delta right now is the strand that's causing a lot of misery. And omicron's becoming more widespread. It's in at least 15 states, but I want to be realistic. It's probably much more widespread than that in the United States and Canada. The reason why I say that is we don't do enough genomic sequencing. On average in the United States, we do about 3% of all positive samples. 3%. It's been a little better in the last few weeks. Canada's on average about 9%. But most places are doing less than 10%. So if you're not testing for it, you really don't know. So then it becomes simply a matter of time. But the reality is, it's probably in most states, in most provinces.

What was the initial concern is that when you look at omicron, it has 30 mutations to the spike protein. By reference, delta had 4 mutations. Remember, the spike protein, that's that crown of coronavirus, that's where the word comes from, is what latches onto our cells, latches on into our lungs and cause the damage. If we allow mutations to this spike protein, does that mean we're going to be able to fight it with the vaccine? Is it going to be more transmissible? And there is good feeling that it is likely more transmissible, but that doesn't mean that it'll cause more death. Because there's two separate issues here. There's transmissibility versus virulence. And the outcomes could turn out to be pretty similar to previous variants such as alpha or delta. So we don't know that yet in terms of what we're seeing.

And you might have heard, well, we're waiting a couple weeks to find out more. Part of that is they really were searching for patients in South Africa and other areas of the world to test their serum and to test their blood against the vaccines and determine how effective they are. That's why we're going to learn more in probably another week or so. But what this tells you overall is that you don't want to let your guard down. You continue to do what you're doing for delta, which is get vaccinated, get a booster, wear a mask in some indoor settings, based on what the community transmission is.

And the other point is to test, test and test. There's been supply issues for the rapid antigen test. It's been spotty in certain areas of the country in Canada to get. But they're going to play a significant role. We need to encourage using them much more often, especially if you're symptomatic, before you go somewhere, when you might be seeing people that are immunocompromised, perhaps when you come back from a trip. And rapid tests, I want point out, have become much more accurate. They're not the gold standard of PCR, but they do help guide decision making and they give you more data, and I really encourage that. In the United States, the president has announced that private insurers are going to have to cover rapid tests. That's not until next month. They still have to work out some details. It's not clear how many you'd be eligible for, do you have to be symptomatic. But the point is, this is a useful tool and I want to encourage doing that.

I will point out real quickly that the rapid tests don't tell you whether or not you have omicron. Neither does the PCR test. You can't go somewhere and say, hey, what variant did I have? Remember, genomic sequencing is done not that often.

But real quickly, I just also want to point out that the future is in terms of treatments, therapeutics and antivirals. Both Merck and Pfizer have antivirals currently that they've been studying. You may know that Merck recently submitted theirs, molnupiravir. A vote of 13 to 10, advisory committee approved it. This is a pill. Pfizer's is a pill as well. You take twice a day for 5 days. The data did not turn out as well as Merck initially reported. It probably reduces hospitalizations about 30%. There's a risk-benefit analysis that has to be considered. But we're going to continue to make progress, and we're going to continue to see iterations in terms of therapeutics. There's interferon beta that's being studied as inhalers. So we're seeing a lot more progress in terms of therapeutics. And we have to be realistic that that's one of the ways, given vaccine hesitancy around the world, that is going to help get this virus under control and ultimately get it to a point where it's at an endemic level.

With that, I'll turn it back over to Brian. I talked fast, but I wanted to cover a lot of data and help put it in perspective for folks.

Brian Belski: No, that was great, John. And with much humility, we have some great questions from the crowd here. I was going to come up with my own question, but the clients always have the best question. So, it sounds like someone's going to be traveling here soon and wants to know the situation in Mexico. We don't hear a lot about Mexico. The holidays are coming up, and we're hopefully all going to be able to jump on airplanes and go somewhere warm. And so can you give us a little more color with respect to how COVID looks in Mexico and some of the preventative measures going back and forth either to Canada and/or the United States?

John Whyte: Yes. And I just want to put it out there so everyone, just as practical advice. We have to recognize that travel rules are changing rapidly. We had some new rules apply today for international travel. And something that you have to keep in mind is even if you're fully vaccinated and you travel outside of the country and you get a breakthrough infection, because remember, the vaccines, they're not sterilizing. They don't remove any type of infection. But if you test positive prior to coming back in internationally, that's going to be a challenge. You're not going to get back in. So I just want to remind people. You have to keep that in mind. Even if you're citizen, if you test positive, and you will have to get a test prior to returning into the United States, that could be a concern.

I think the issue is whether it's Mexico or anywhere else, you really want to look at what's happening. The CDC does put a list where they discourage travel to, and if that's the case, that implies that it's high community spread. What I would do whether I was traveling to Mexico or Canada or wherever, I would do my own test, a rapid test just prior to going. I'd make sure I don't have any strict time constraint when I get back because just in case you test positive, how's that going to impact if you have to stay in another country for about 2 weeks extra or 10 days? And then just check again right before you go because this is a rapidly changing situation.

Canada, as I pointed out, is doing much better than the United States in terms of percent immunizations, in terms of number of cases. That's very good. And they have a robust testing system. Mexico, not as well, and there's different pockets within Mexico. Some are doing much better, primarily the urban areas than the rural areas. I assume if you're going, you're going to resort. There's going to be a lot more safeguards there. So that's encouraging news.

Brian Belski: One quick follow-up question on that, Dr. Whyte, and then an additional question that I'll paraphrase from the crowd, and then we'll hand it off to Michael. Why is Canada doing so much better? Do you have any kind of empirical data or belief on that, or is it a subjective opinion? Why do you think Canada's doing so much better than the United States?

John Whyte: And remember, I pointed out that Canada started later in terms of vaccination because of vaccine supply. This is just my subjective assessment of it. I think Canadians are much more focused on community. They're much more focused on helping their friends, their family members, their neighbors. I think the United States is very much focused on individual rights. And I haven't seen the fights at school boards happening in Canada, the other fights about the rejection of science. So I think in many ways, Canada has much more been receptive to following mitigation strategies, which we know work -- mask wearing, social distancing -- and they based it on science.

And I might point out, Canada has done really well with the schools, and they had a 3 meter distance -- or they had 1 meter distance instead of 6 feet. So they actually had tighter in the schools and still did better. And I think there's many reasons because of their sense of community.

Brian Belski: And as kind of a follow-up, just to wrap this all up before we hand it off to Michael, we talked about boosters, we talked about therapeutics. Where is this thing going, John? Is it going to become like a flu type of thing every year in the season? Is that how -- where you see this going? Or is it a combination? Or kind of what is -- where is this thing going?

John Whyte: I think it's going to become endemic like flu at this low level of activity throughout the year. The reason why I think that is is because of the vaccine hesitancy. There's still going to be a large percentage of people that choose not to get vaccinated in the United States, which is going to allow the virus to survive, and I think that's also going to happen around the world. So it's going to be baseline level. It just won't be as deadly. It won't be resulting in as many hospitalizations. But the key is, we don't want to have to wait another year or two to get to that point of it becoming endemic. That's why we still have to have our foot on the gas now to power through this.

Brian Belski: Thanks, Dr. Whyte. We've got a ton of questions coming through the portal, so thank you so much, everyone. Keep them coming. We're going to hand the portion of the broadcast now off to our subject matter experts. First off, Dr. Michael Gregory, who happens to be Deputy Chief Economist here at BMO Financial Group. Mr. Gregory, the floor is yours.

Michael Gregory: Thank you, Brian. All right. Well, as Dr. Whyte just said with respect to omicron, we tend to know less than we actually know about it. And that's a problem because you're thinking about what are the economic implications of this variant, it's difficult to assess. Obviously, we know that the global travel industry has been the first casualty as countries around the world have brought in travel bans to certain African countries, and of course, most countries have brought in more onerous travel restrictions, some effective even today in the US, testing 24 hours before you enter. So that's a damper. But we really don't know what more is going to happen until we have a sense of what kind of virus it's going to be.

And in the meantime, as Dr. Whyte mentioned, is that delta rules. And that's what we're seeing around the world. Well, it's the delta variant that's the predominate one that's impacting economies. And we're seeing that even now with some of the surges we've seen in Europe and Asia, which is causing some countries even to go back into lockdown or limited lockdowns, more onerous restrictions. And of course, that is just further contributing to not only the headwind for global growth, but a further exacerbating of global supply bottlenecks and sort of the primary driver of inflation these days. So it's the delta we really, we really have to be worried about. But we can think about it for North America, as we sort of head into the winter season when we know respiratory infections tend to rise anyway, this idea of a possible surge in delta or a delta-omicron combo, and what's that going to matter or what's it going to mean for the economy?

And I think a couple things that are worth noting here is that unless we see very noticeable increases in hospitalization rates and mortality rates, we are unlikely to see the kind of onerous restrictions that have been very dampening on the economy. And yes, we may get sort of capacity limits on indoor dining and things like that should cases rise, but to me, the bigger issue, and we saw this during the last delta wave in the United States, that even though consumers were able to go freely throughout the economy, households chose not to eat out as much during the latest wave. They chose not to fly as much. So confidence is key here, regardless of what governments do in terms of bringing in more restrictions.

The other thing I think you have to sort of keep in mind here is that currently in the economy, we have a tremendous amount of momentum on both sides of the border. In fact, we have just recently upgraded our forecast for both economies for the fourth quarter by a percentage point, looking for 4.5% growth in the current quarter in Canada, 5.5% in the US. You can think of, though, this is momentum that we're providing presumably as we hit some kind of a headwind, whether it's delta, whether it's omicron, whether it's a combination of both. So I think that's sort of a positive development from that perspective.

The other thing I think to keep in mind here is we do have this momentum in the economy. And inflation on the ground, as everyone knows, it remains quite high on both sides of the border. We're looking at decade-high rates of inflation. We do know that we have yet to see the peak in inflation that will likely come during the winter months before presumably things will cool off this spring as -- next spring, as this spring sort of reopening surge in prices is not repeated in early 2022.

So inflation rates will come down, but it's how quickly do they come down, to what level do they end up at, that's the big question mark that central banks are struggling with now. And the one thing about concerns about a new variant or concerns about the old variant that's actually had already proven to have an impact on the economy is it's negative for growth. At the same time, it has probably contributed a little bit more to inflation pressure to the extent it exacerbates bottlenecks. And this is the struggle at central banks, not only the Fed and the Bank of Canada, but central banks around the world are facing right now. How do you deal with clearly our mounting risk for the economic outlook and also mounting risk to the inflation outlook?

And I think we're starting to see a sentiment change among the global central banking community where, yes, we recognize the risk, but now we've got to pay perhaps a little bit more attention to the inflation risks than we would have, say, a year ago or 6 months ago. Because inflation is simply too high, and we're just not certain how far it's going to fall and to what level we settle down at. And we're concerned about seeing inflation expectations become unanchored.

So what we are beginning to see is more hawkish talks coming out of central banks, whether it was Chair Powell last week and the decision to potentially consider tapering at a quicker pace, to literally create more opportunity to raise rates as early as next spring instead of next summer. And we'll be hearing from the Bank of Canada in the next few days. And they too have already signaled that they only expect to be keeping rates at their current levels until the middle quarters of next year, meaning they could be raising rates as early as the spring at the same time.

So I do think despite the fact we have these concerns coming from omicron and from delta and the impact on the economy, it's the inflation consequences that are getting a little bit more weight in central banks' reaction functions. The good news is that unless we see more onerous restrictions being applied, and given the very high vaccination rates we have on both sides of the border, I don't think that's necessarily going to be the case, again, unless we start to see hospitalization and mortality rates go up. Again, we just don't know. But from where we stand right now we do think, just like Chair Powell thinks, that the economy has been able to weather these repeated waves with -- in better shape. And I think that will be the case come what will probably be the next wave. That'll be the case come -- well, I'll leave it at that for now, Brian.

Brian Belski: Thank you so much, Michael. Now it's on to our Head of Fixed Income, Currency and Commodity Strategy, Margaret Kerins. Go ahead, Margaret.

Margaret Kerins: Thank you, Brian. So as Michael mentioned, the Fed has really shifted their focus to fighting the inflation risk, and of course, anchoring inflation in the first place was a very painful experience. So what I would say is that the Fed is shifting to a more traditional reaction function to inflation. Most recently, as Michael mentioned, the Fed has acknowledged that the upside risks to inflation are likely to outweigh the risks to employment. And they are now willing to taper faster so that they can be prepared to lift off earlier if they need to in order to maintain price stability and to ward off any inflation risks. So that's a key in the reaction function, and the market has clearly also reacted to that. So basically the Fed can't allow inflation to seep into the decisions made by the consumers because once that happens, it could become self-fulfilling, especially in the backdrop of increasing wages and diminishing labor market slack, and as Mike also mentioned, these issues with regard to the supply chain.

So the emergence of this variant really adds another element to the risk. On the inflation front, the risk is that the supply chain disruptions intensify, that they last longer than we had initially expected. And so this is very tricky. It's tricky for the Fed because the variant poses downside risks to the economic recovery and employment just with concern over delayed return to office and what that means for some of these urban centers.

The Fed is in this position of really trying to thread a very, very fine needle. They need to slow demand to contain inflation, but really just slow it long enough for some of the supply and employment frictions to work their way through and to ease. As Dr. Whyte has mentioned, we should get a better understanding of the health risk imposed by the variant in coming weeks.

So what does this mean for interest rates? Obviously, we've seen quite a bit of volatility over the past couple of weeks. We know now that the Fed is clearly willing to raise short term rates to ward off any inflation risk. And this has given the Fed credibility. We've seen long term rates actually fall. The front end is continuing to rise in terms of rates as the market prices in an increasing probability that the Fed does in fact tighten next year. And really what we've seen in the past pricing, the market will revert to the most recent experience and likely price in a Fed hike every quarter or three hikes a year, something that's more of what we've seen in the most recent past.

The other -- the backdrop, really the question that we get often, what's going on with 10s? We're down at 1.40%. We hit the 1.30s last week. And really the bottom line for that is that we do have uneven vaccine rates, as Dr. Whyte mentioned. We've got different reaction functions to the outbreaks by country and different implications for the global economy. And of course, 10-year yields are the flight-to-quality asset for the globe, and so regardless of what is happening in the US economy, we're still going to get this backdrop of a bid for 10s due to the international demand.

In terms of expectations for 10s into next year, we do think -- so we're more bearish than we were this year. This year we did start off with a call that 10s would end the year at 1.35% to 1.40% and held that call despite the backup, especially in the first quarter. Now we do think that we will have a bit more of a bearish impulse next year that 10s will push up into the 2% range. But again, in the global backdrop, if we get into a 2.25% type of range, we expect better buying to emerge. We do think Q2, maybe into Q1, we could see this 2% level. And again, we're only at 1.40% now, so it's quite a ways to go.

In terms of the expectations for Fed tightening, we're holding our most likely case is September to December. The risk, of course, is to an earlier liftoff. Given the Fed's concern over the inflation risks and the desire to wind down purchases quite a bit earlier does give them the cover if they need to raise rates to ward off any inflation risks, and any inflation expectations, increase in expectations is undesirable. Again, it's not our base call, but something to be watching for. And we're going to see bouts of market pricing where we increase the Fed timing and possibly even the pace at which the market expects the Fed to increase, but again, holding our call at this time.

In terms of terminal rate, we look to the last cycle and the Fed was only able to achieve that 2.25% to 2.50% range. They held it there for about 7 months, and of course had to do some tweaking back lower down to the 1.75% level. Of course, one key difference now is the inflation backdrop. And the very concept of allowing inflation to run slightly above their mandate was really because they wanted to be able to get that terminal rate higher than the past. Of course, the Fed dot plot is still expecting a 2.50% terminal rate, which is higher than the 1.75% that they actually ended up achieving in the last cycle. We will get another dot plot next Wednesday. All eyes will be on that. But changes to the long run terminal rate don't really occur very often. And so it's unlikely that we're going to see that because the Fed is going to message that they're going to have appropriate monetary policy in order to achieve both their employment and inflation goals in the terminal rate.

So the timing of a liftoff and the pace will depend on the economic outlook at the time. We do think that the Fed is likely to begin with caution. We've seen in the past these fits and starts, and it's really because of the uneven economic global recovery and the implications of this current variant and the likelihood that we're going to be living with this virus for some time. But that doesn't mean that we're not going to see volatile pricing. The market has been extremely volatile I think over the past several weeks especially.

So with that, I can turn it back to Brian. Thank you very much.

Brian Belski: Thank you so much, Margaret. And we will have some follow-up questions for both you and Michael during the more formal Q&A session. I thought we'd talk a little bit about investment strategy. And these questions keep coming in for everybody, so thank you so much for doing that. We're going to cover as much as we possibly can.

With respect to our outlooks on the market, we published our Year Ahead piece for 2022 on November 18th. It is our 24th official forecast on the S&P 500 as the senior strategist and our 10th consecutive forecast on the S&P 500 and the S&P/TSX here at BMO. And it will come to no surprise to people out there that follow our work that we're positive. But I think the theme overall for 2022 is what we like to call in the business "second derivative," meaning less positive. Positive nonetheless, but still positive.

And so we equate returns, if our targets are met for this year -- and I'll go over that in a second -- to high-single digits, low-double digits for the S&P 500 and similar for the TSX, at 5,300 to $245, respectively, in terms of the S&P 500, and 24,000 and 1,500 with respect to earnings on the TSX.

Now we think the US remains in a 20 to 25-year secular bull market. That was a call that we originated in 2010. We remain steadfast with that. In fact, on March 23rd of 2020, we published a piece announcing that the second half of the bull market was starting at the lows, and we continue to think that. We simply believe that equity assets in the United States are the best equity assets in the world, and that investors should tilt toward quality while also focusing on growth at a reasonable price and dividend growth investing. Same thing holds true for Canada. We are eerily similar with respect to our sector positioning and our size and style. But really this tilt toward quality, but especially dividend growth investing in Canada to get us to that 24,000 target, which is another new high with respect to the Canadian index.

So as America goes, so goes Canada. Those sectors that are economically sensitive to the fantastic cross-border allegiance that we have from an economic perspective we think will continue to benefit. So our sector overweights in both countries are as follows: financials, discretionary, industrials and materials. In Canada, we've had a tremendous run in energy, obviously. We think next year we're probably going to see a little bit stronger fundamental performance from the material sector. And we do think that energy prices are most likely going to be a bit lower, especially WTI and Western Canadian Select. That will be a positive for the Canadian consumer. And we think that the Canadian economy, thanks to Mr. Gregory's work, will continue to do its job in terms of growth, but not -- actually at a higher rate than the US. A lot of people don't know that. So we think that Canada's coming along for the ride. We think North American assets are the place to be. And we remain positive.

Now, what's gone on in the last couple of weeks is just a simple case of fire, aim, ready with respect to what's happening in the markets. Today we obviously had a very strong day in equity markets. And I think we're starting to see calmer heads prevail thanks to, in part, very common sense and analytical comments from people like Dr. John Whyte, which are kind of easing some of the fears out there. And a lot of people are making subjective opinions, so I will stress to people out there: don't be a closet epidemiologist, virologist. Let the experts do that, and let's keep on keeping on with respect to society and the workplace.


We have to kind of cut ourselves some slack. We as a society and workplace did a wonderful job in terms of pivoting in February/March of 2020. We are prepared for this. We are prepared for this, and the market is seeing that. And that's why we think the market in terms of equities in the month of December could have a historic month in terms of the upside. Given the fact of volatility everywhere else in the world, but given the fact on how I started my original comments that equity assets in the United States are the best assets in the world because we have the highest quality companies, because we have companies that are positioned for growth at a reasonable price and dividend growth.

Now over the next 3 to 5 years, our favorite sectors are clearly technology, communication services, discretionary and financials. Now technology and communication services are 40% of the market, a very important part of your portfolio. Longer term should be a little bit more overweight because these technology companies are obviously helping lead the majority of the other sectors, number one. But number two, they're exhibiting fundamental trades of cash flow, balance sheet, and most importantly from our lens, earnings discernibility with respect to a low standard deviation of earnings, meaning not variable, not volatile. The markets have obviously been volatile. Margaret talked about market volatility. I believe that investors around the world will seek non-volatile assets, which are indeed US stocks.

We're going to hand -- I'm going to as a quick question to Margaret, then Michael. And then I'll go to the prompter here in terms of a ton of questions for Dr. John Whyte. So my first question, actually my question for Margaret would be this. We talk a lot about the Fed doing what it's going to do. It's going to raise rates. It's going to taper. But can you give us some perspective of the liquidity that still stands in the marketplace and what kind of is we'd be looking for the next let's say couple of years in terms of Fed liquidity overall?

Margaret Kerins: Sure. So I think that's one of the big questions in the marketplace today. The Fed has been the largest purchaser of US Treasuries over the past couple of years. They will continue mostly likely to hold their balance sheet constant, reinvesting any maturities. Some of the concerns surrounding liquidity are the Fed does own 60% to 70% of some of these maturities, especially in the 20/30s, where way back when we didn't have a 30-year. And some of the -- the amount really available to other investors, in some cases it's only $8 billion in a certain maturity year and only up to $50 billion. Just to put that in perspective, if we're looking at the 2-year sector, we've got over $2 trillion in oustandings available to the marketplace after the Fed.

So just some concerns about liquidity in the market, given that the Fed really was the backdrop buyer across the curve and really without regard to price over the past couple of years. And I have to mention that at the same time, we do have Treasury cutting on-the-run coupons. So on-the-runs are very, very liquid, but as coupon size is cut, that will reduce the amount available to the public as well. However, I don't see on-the-run liquidity really suffering, especially in the front end of the curve In 10s and 30s. We will continue to most likely have the same amount of I would say relative liquidity. 20s obviously have been trading a little bit with the bump there. Not really the same part of the curve as 10s and 30s for the marketplace. But overall, I think it's something to watch as the Fed extracts itself from being the largest purchaser, coupled with Treasury reducing coupon sizes in the on-the-runs.

Brian Belski: Thanks, Margaret. Onto Michael Gregory. Quick question with respect to inflation. We are a binary state of world. It's either on/off, up/down, green/red. What's the difference between rising and high inflation? I think we've all seen the little girl in Germany post the World War I with the wheelbarrow full of German marks trying to buy a loaf of bread. We seem to be in the marketplace, and the press is doing a great job scaring everybody, that we're heading into a high inflation environment like the 70s. Can you explain the difference and what your view is, the difference between rising inflation and high inflation, please?

Michael Gregory: Well, it's a fair point. You look at all the forecasts that are out there for inflation over the next few years, and you get a lot of 3%, maybe get the odd 4% outlier, mostly with sort of a two-handle. What we're talking about potentially here is a onetime run-up in prices, largely because of supply bottlenecks. But also, it's not just the supply side. It's also the demand side. And that's the part that's been a little harder to try and figure out. We've had tremendous stimulus by governments, by central banks on both sides of the Canada-US border and around the world, and so demand remains fundamentally very well supported.

Normally, and you would not worry so much about inflation taking off unless you had, say, compensating wage gains. And then workers demanding higher wages, businesses paying those higher wages, passing them on to their customers. And you perpetuate this wage price spiral, which is something the Fed even says that despite very rapid rates of wage inflation currently, that's not the scenario that's likely to unfold or is unfolding in the US. And so right now, businesses do have some ability to pass on their higher costs, but that's just because of shortages. At some point, bottlenecks do get remedied and those pressures begin to dissipate.

I guess where there's a really big risk here in terms of do we settle back down to 2%, do we settle around 3%. Most people when they're doing their financial plans have always assumed 2% inflation. Well, maybe we have to assume a little bit more. Concerns with this other issue that's supporting demand, it's all the excess savings that's been accumulated due to the inability to spend because of shortages, because of tremendous support for incomes on both sides of the border. And so you have this sort of mass of excess savings that can be used to keep demand strong, but also keep paying higher prices for a little bit longer than otherwise be the case. In other words, they kind of mimic a little bit the role of compensating wage gains, and that's where a lot of the uncertainty kind of fits.

And quite frankly, that's why central banks are -- even they still believe in transitory, meaning not permanent. But transitory, they've sort of abandoned that -- at least the Fed has and I think the Bank of Canada as well -- is because they think those pressures will last a little bit longer because of the demand side of the economy. But I do think at the end of the day, this is not the 1970s. Central banks know how to remedy this quite quickly. And they will tighten interest rates to try and cool off demand, as Margaret mentioned, and that should help bring back a little better equilibrium to price setting. And I think that will settle in with inflation perhaps in the higher end of the 2s, but definitely sub-3%.

Brian Belski: Amazing clarity. Thank you so much, Michael. Okay, Dr. Whyte. Since we started this malaise, let's call it, when COVID became a reality, there's been a big argument out there or question. So I want you to answer this question as a doctor and as a father. What is the most important thing: cases, hospitalizations, deaths? Where do you stand on that subject matter? And then part 2 question with respect to that, you mentioned something very interesting that we're getting these tests, but we don't really know if it is -- if someone's positive, is it with the omicron or is it with delta. Do we have any kind of preliminary data with respect to hospitalizations on omicron or anything like that? So answer the first question. It's kind of a big picture thing. And then how does that filter into the current situation? Because to us as observers and answering questions with clients, we're right back to where we were in February in terms of people's fears and what they should be following.


John Whyte: Brian, I really focus on hospitalizations and deaths. And at one point people are saying, well, we're having a casedemic. Well, 1,000 deaths a day is still way too many deaths. And this is why COVID is different than the flu in terms of the number of deaths, the number of hospitalizations that we're having. And the impact of those hospitalizations, we've seen this and it's still happening in some sections of the country, is that people are not able to get other services. They're delayed in terms of their care for a heart attack or for a stroke. So that's the real concern that I have.

If we have 50,000 mild cases a day, that's not horrible from a public health perspective. It's inconvenience. It's tough on your life for a period of days. But that's not what we're still seeing. We're still seeing a fair number of hospitalizations and a fair number of deaths. So when we look at the metrics, that's what we should be focused on: the number of hospitalizations, the number of deaths. I'd love to say, Brian, it should be the percent positivity of cases, but we're still not doing a comprehensive testing strategy. That's part of the problem.

And then for the other question, big academic centers will do the genomic sequencing at the hospital when you're in the intensive care unit. At that point, I wish we could avoid getting to that point. But it really speaks to the underfunding of our surveillance systems that we just don't have the labs to do it, we don't have the people to do it. We have the scientific capability to do it. We just don't have the people and the labs to be doing it. Places like Finland do do like 90% of testing and Denmark, but that's not realistic for a country the size of the United States, given the number of cases, or even in Canada. That's an area where Canada could do a little better as well in terms of the testing of each positive case.

Brian Belski: Now, it's to our initial knowledge that this new variant came from South Africa. And you touched a little bit about how the US and Canada's doing. You touched a little bit about the rest of the world. What is your view on vaccines for the rest of the world, and how do we get this out and how do we kind of defend against this going forward?

John Whyte: We have improvement in vaccine supply in many areas of the world. But it's the same issues of vaccine hesitancy that we have in North America, that people are resistant, they feel it's too fast, they don't understand it. I do want to reiterate the point in low income countries, we're talking about 8% of the population vaccinated. So they don't even have the vaccine to a large degree. And that's going to be a challenge given that then we have another mutation be created and thrive in sub-Saharan Africa or another area of the world. It's not a surprise that we're seeing it come from where we are seeing it: India and Africa, et cetera. So it's a real concern if we don't focus more on vaccinating the rest of the world. We can't have some areas of the world 10% vaccinated. That's going to be a problem for us.

Brian Belski: So medically and scientifically, it's already coming out that this strain is a little bit more mild, relative to some of the other variants. Do you believe that's a trend, Dr. Whyte, that this is potentially going to set the stage for less severe mutations going forward?

John Whyte: You know, I'm hopeful. But let's keep in mind, this is like the 13th variant of concern. Each time we get a little more concerned because when they mutate, I mentioned before, they become stronger. They don't become weaker. The fittest ones survive. What we don't want to be is at a point where they evade the vaccine. So that's when they survive and thrive, they're going to develop strategies to make the vaccine less effective.

And that speaks to the fact that even if we get mild cases, to your point, Brian, can we live with that, the society? It's unrealistic to think that we're going to get to zero. But right now, the vaccines are holding their own. But if we continue to get variants every month for another year, I'm not sure that'll be the case. That's why it's so important to get this under control now. And a lot of people do kind of have this laissez-faire attitude now like, oh, I'll wait it out. It doesn't seem so bad. I don't need to do anything. And that's just the wrong strategy, either as an individual or as a country.

Brian Belski: One quick question for Margaret and another quick question for Mr. Gregory. Margaret, what is your team's call on the Canadian dollar? What are you seeing the next 12 to 18 months?

Margaret Kerins: Sure. Actually, that might be a better question for Michael. I think they hold the call for FX. It really depends on I think when the Fed tightens relative to Canada. And as Michael mentioned, they possibly could be tightening at the same time. So I'll pass it Michael to finish that one.

Michael Gregory: Sure. Part of our base case for the Canadian dollar is that we don't get a long-term drag on global growth by the next wave of the virus, and therefore, we get some stability in commodity prices, oil prices specifically. And as everyone knows, they've kind of weakened off quite a bit very recently. And the other aspect of it is the Bank of Canada does goes a little bit sooner than the Fed. And both of those we think can push the Canadian dollar stronger to like $1.23 or something like that by the end of the year or stronger. But again, the timing of when the bank goes, Bank of Canada goes and when the Fed goes is going to be critical to that outlook.

Brian Belski: Thank you so much, Michael. I think it's time for my favorite part of the call where we go around and say something optimistic that we're thinking. I've already told you our optimistic view in terms of markets on a big bull market, and we should be much more fundamental and less rhetoric and emotion drive. So we'll start with Margaret. Give us something to be optimistic about.

Margaret Kerins: Sure. I think the reason for optimism in the US in terms of the rates market is that we shouldn't see a spike higher -- massively higher, I should say -- in the long end of the curve. And so that should be still relatively accommodative and good for economic growth. We do think that obviously the front end where consumers, consumer prices are set -- or not consumer prices, consumer borrowing rates -- will see a bit of higher rates, which of course, that's the point to slow demand a bit. But we don't think that this is going to be a massive increase in rates that you'll also still remain historically relatively low in terms of terminal rate and whatnot. And that's a positive backdrop. It's really just trying to slow things down a bit, but keep the economy on its path to recovery.

Brian Belski: Thank you so much. Michael?

Michael Gregory: Well, I think the thing I'd be encouraged about it is that, yes, depending where you are in the world, what state, what province, what country, this is your third, your fourth, your fifth wave of the virus you're going through. And each one, we tend to understand it a little bit better. From an economic perspective, we're able to continue to engage in our daily lives and business operations, regardless of those restrictions, as long as they don't get too onerous. And I think that's the key thing is that we're able to withstand it. We've gotten kind of used to it as consumers and running businesses. So it becomes more of an inconvenience rather than something which shocks your confidence.

So I think there's a sense of resiliency, even if we have a lot of uncertainty about what happens this winter, I think the economy's proven and businesses and consumers have proved that they can be resilient. And I think that's probably a very encouraging thing to keep in the back of your mind as we head into this winter.

Brian Belski: Dr. Whyte, bring us home.

John Whyte: I think we've seen enormous innovation in the biopharmaceutical industry sector. And I think that's going to have lasting implications for other disease states; Alzheimer's, Parkinson's, other conditions. Because what we're going to see going forward is regulatory flexibility by the FDA and other regulators, and I think we're going to see more partnerships. That's what we saw here with monoclonal antibodies and Genentech and Regeneron and Sanofi. So I think that has an impact on finding solutions for our current health conditions where we need more therapeutics. So I'm very encouraged by that.

Brian Belski: Thank you, John. Thank you so much, all of you, for joining us. Please contact your BMO relationship manager and visit the webpage at, or listen to our COVID-19 Insights and podcast for the most current updates. All of our subject matter experts here at BMO have written a tremendous amount of information and publications. So again, reach out to your relationship manager. We have distribution lists for our clients. They can facilitate that. We are here for you. I hope everyone's going to have a wonderful holiday season. Please keep safe and well, and we will be talking to you very soon. Thank you so much for joining us.

Brian Belski Chief Investment Strategist
Michael Gregory, CFA Deputy Chief Economist and Managing Director


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