Daily market snapshot

• Stocks finish mostly lower on Wednesday: Equity markets finished mostly lower on Wednesday, on a quiet day from a macroeconomic-headline perspective. The TSX and S&P 500 both fell by roughly 0.2%, while the Dow posted a steeper 0.7% decline.* At a sector level, utilities and technology were the only two sectors of the S&P 500 to close in positive territory. Energy was a laggard, declining by nearly 2% in response to a pullback in oil prices.* Overseas, Asian markets were mostly higher overnight, with Chinese equities building on yesterday's gains in response to new stimulus measures from policymakers, which included lower short-term interest rates and lower downpayment requirements for second-home purchases.* Bond yields ticked higher, with the 10-year GoC yield closing around 3%, while the 10-year U.S. Treasury yield closed around 3.79%.* Looking ahead, market focus will shift to U.S. inflation with personal consumption expenditures (PCE) inflation out on Friday.
   
• U.S. inflation in focus: U.S. inflation data will be centre stage for markets this week with the release of personal consumption expenditures (PCE) inflation on Friday. Expectations are for headline PCE to rise by 2.3% year-over-year, while core PCE is expected to rise by 2.7%.* Inflationary pressures have slowed in recent months, with the three-month annualized change in core PCE falling to 1.7% in July, the lowest reading since December 2023.* Despite declining inflation in recent months, one component of inflation that has proven stubborn over the past year has been shelter. Encouragingly, more timely indicators of rent growth, such as the Zillow Observed Rent Index, have slowed considerably from their peaks, perhaps signaling lower shelter inflation in the months ahead.* In our view, easing shelter inflation along with cooling U.S. labour-market conditions should put continued downward pressure on inflation in the months ahead.
   
• U.S. housing market showing signs of normalization: Despite a brief period of softness from the fall of 2022 through the spring of 2023, U.S. home prices have proven resilient despite elevated mortgage rates compared with recent history. Data out yesterday showed the S&P Case-Shiller National Home Price Index rose to another all-time high in July and has risen roughly 11% since January 2023.* However, the pace of home-price gains has shown signs of slowing, with the July year-over-year gain of 5% the lowest since October 2023.* In our view, the resilience in home prices despite higher borrowing costs has been in part due to a lack of inventory of existing homes for sale. Most mortgages in the U.S. have fixed rates over a 30-year term. Therefore, with many households locking in lower fixed mortgage rates prior to 2022, existing homeowners have likely been reluctant to sell their home and forfeit their existing mortgage rate. With U.S. mortgage rates declining recently, we've seen an increase in supply of existing homes for sale, which rose to the highest level since October 2020 in August.* While it sounds counterintuitive, lower mortgage rates could ease the pace of U.S. home-price appreciation in the months ahead, insofar as the lower rates incentivize additional housing inventory to the market. We'd expect home-price growth to slow but remain positive in the months ahead, perhaps rising more closely in line with U.S. wage growth, which has averaged around 4% in recent months.*

Brock Weimer, CFA
Associate Analyst

^{Source: *FactSet}

• Stocks close higher on Tuesday: Equity markets closed modestly higher across major indexes, as China released a broad package of monetary stimulus measures to help support slowing growth in its economy. The technology-heavy Nasdaq outpaced the S&P 500 and Dow Jones. For the third quarter thus far, the S&P 500 is on pace for a nearly 5% gain, bringing its year-to-date gains close to an impressive 20%*. However, over this past quarter sector leadership has shifted, as interest-rate-sensitive sectors, like utilities and real estate, lead the gains, while technology and communication services, alongside energy, have been laggards. Meanwhile, bond yields continue to diverge, with the 2-year Treasury yield continuing to drift lower as the Fed begins its interest-rate-cutting cycle, while the 10-year yield has stabilized in recent weeks. This has driven the Treasury yield curve (10-year yield minus 2-year yield) to "un-invert" and steepen, reaching its highest level of the year at around 0.19%*. 
   
• China unveils stimulus package: The Chinese central bank, People's Bank of China (PBoC), yesterday released a package of monetary stimulus measures to help support domestic consumption, as the Chinese economy has weakened in recent quarters. The PBoC cut short-term interest rates and announced plans to reduce bank reserve requirements. In addition, the central bank also announced packages to support both its flailing property market and the stock market, providing liquidity and potentially stabilization funds. Chinese markets responded positively to the barrage of policy support, with China's equity markets up over 4% on the day*. Commodity markets also rose on the news, with natural gas prices climbing about 4%*. In our view, while the stimulus measures are a positive and perhaps much-needed step to support the slowing Chinese economy, it remains to be seen if growth can materially improve with monetary stimulus alone. The economy may need fiscal support and government investment to truly turn around economic activity.
   
• Personal consumption expenditure (PCE) inflation on deck: The Fed's preferred measure of inflation, PCE inflation, will be released this Friday for the month of August. Expectations are for headline PCE inflation to fall from 2.5% to 2.3% year-over-year, while core PCE inflation is forecast to tick higher from 2.6% to 2.7%*. Keep in mind that at last week's Federal Reserve meeting, the Fed updated its own projections for PCE inflation, now calling for headline inflation to fall to 2.3% and core inflation to moderate to 2.6%*. In our view, inflation is likely to gradually continue to moderate, driven by the shelter and rent components of the inflation basket moving lower, and services inflation should continue to ease, driven in part by softening wage gains.

Mona Mahajan
Investment Strategy

^{Source: *FactSet}

• Stocks close higher: The TSX and major U.S. equity markets closed higher on Monday, as the TSX and Dow Jones Industrial Average reached new record highs. Sector performance was broad, with energy and consumer discretionary stocks leading to the upside. In global markets, Asia and Europe were mostly higher. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil was down, while gold traded higher.
   
• Key business-activity measures mixed: The S&P Flash Composite Purchasing Managers' Index (PMI) for the U.S. ticked lower to 54.4 in September, below expectations for 55.1*. The Services component, which represents the majority of the composite index, edged down to 55.4 but beat estimates for 55.0. The manufacturing component dropped to 47.0, below expectations for 48.5. With readings above 50.0 reflecting expanding business activity, the services sector is growing, though at a slower pace, while the manufacturing sector is contracting. We believe these trends are consistent with growth that is slowing but not collapsing, which is supportive of the "soft landing" narrative for the U.S. economy.
   
• Bond yields edge higher: Bond yields were up, with the 10-year Government of Canada yield at 2.94% and the 10-year U.S. Treasury yield at about 3.75%. Bond markets are currently pricing in expectations for 2.0% of Federal Reserve (Fed) interest-rate cuts over the next 12 months, which would put the fed funds rate below 3.0%**. With the Fed's dual mandates – maximum employment and stable prices – coming into better balance as the labor market gradually cools and inflation moderates, we believe the Fed is on track to continue cutting rates for the next several months. We expect the Bank of Canada to continue cutting rates as well, with the unemployment rate rising to 6.6% and CPI inflation back in line with the 2.0% target. Lower interest rates should help reduce borrowing costs for businesses and consumers, which would be positive for economic growth and corporate profits.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **CME FedWatch}

• Stocks take a breather after the week's sprint higher: Equity markets have welcomed the start of the Fed's rate-cutting cycle with open arms. Stocks were little changed on Friday, a move we'd simply characterize as markets catching their breath after the post-Fed surge this week, which included the S&P 500 topping 5,700 on Thursday for the first time ever. Coming into Friday, the S&P 500 had rallied nearly 6% and the TSX was up more than 4% in just the last nine trading days. Beyond the continued focus on the commencement of the Fed's new path for rates, there was not much in the way of headlines or data driving markets today. The utilities and consumer staples sectors led the way on Friday, reflecting a slightly defensive tone, but the bigger performance story this week has been the outperformance of cyclicals and small-caps, which have been boosted by the prospects of economic support coming from this week's decisive Fed rate cut.* 
   
• Domestic retail sales top expectations: The latest read on Canadian retail sales (July) was an encouraging one, signaling that consumers are not exhausted. The better-than-expected increase was driven by a strong jump in vehicle sales, but spending was largely higher across most categories, including a rise in spending on discretionary items. Sales volumes were up a healthy 1% versus the prior month, which indicates that the increase in overall retail sales was not simply driven by higher prices, again, reflecting some resilience among domestic consumers. Admittedly, this data is from July, so while that's well in the rearview mirror, we think it sets a reasonably encouraging stage for the household-consumption outlook this year, particularly given that the Bank of Canada has commenced its easing cycle in the last several months, offering additional support. We still think the Canadian economy faces some headwinds from high consumer debt, which is likely to restrain some spending growth, but that said, the gain in retail sales is a good sign that domestic consumption is holding up.
   
• Looking ahead, more detail on the state of the economy: With the U.S. Fed meeting now in the books, and the next employment and inflation reports a few weeks away, markets will look to incremental incoming data to further refine the probability of a so-called "soft landing" (moderating inflation, continued economic growth), which is the prevailing view that we believe is priced in to the equity and bond markets at present. Next week will bring plenty of data points in this regard, including several manufacturing- and services-activity readouts, the latest data on the housing markets, consumer confidence, and fresh reads on U.S. household income and spending. We doubt each new piece of data will fit neatly into the soft-landing narrative, but we do believe incoming reports will largely reflect an economy that is moderating but poised for sustained expansion.

Craig Fehr, CFA
Investment Strategy

^{Source: *FactSet}

• Stocks close higher on jobless report: The Nasdaq led equity markets higher on Thursday as the TSX, S&P 500 and Dow Jones Industrial Average reached new record highs*. Sector performance was broad, with technology and consumer discretionary stocks leading to the upside, reflecting a risk-on tone. In global markets, Asia and Europe were higher, as Hong Kong's central bank cut its policy rate, while the Bank of England held interest rates steady, as expected*. The U.S. dollar was little changed versus major currencies. In the commodity space, WTI oil and gold traded higher.
   
• Jobless claims below expectations: U.S. jobless claims declined to 219,000** this past week, below expectations for 230,000*. The reading, which is the lowest in four months, provides another data point that employers are primarily pulling back on hiring rather than turning to significant layoffs. We believe this reflects a resilient labour market that is gradually cooling but not collapsing, which is supportive of the "soft landing" narrative for the U.S. economy. A cooling labour market should also lead to slower wage gains, which typically ease services inflation.
   
• Bond yields edge higher: Bond yields were up, with the 10-year Government of Canada yield at about 2.93%, and the 10-year U.S. Treasury yield near 3.72%. The Federal Reserve (Fed) began its highly anticipated easing cycle yesterday, cutting its target range for the fed funds rate for the first time in four years to 4.75%-5.0%. Bond markets are currently pricing in expectations for 2.0% of Fed interest-rate cuts over the next 12 months, which would put the fed funds rate below 3.0%***. With the Fed's dual mandates – maximum employment and stable prices – returning to better balance as the labour market gradually cools and inflation moderates, we believe the Fed is on track to continue cutting rates for the next several months. We expect the Bank of Canada to continue cutting rates as well, with the unemployment rate rising to 6.6% and CPI inflation back in line with the 2.0% target. Lower interest rates should help reduce borrowing costs for businesses and consumers, which would be positive for economic growth and corporate profits.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **U.S. Department of Labor ***CME FedWatch}