Daily market snapshot

• Stocks finish mixed on Friday: North American equity markets were mixed on Friday, with the TSX posting a decline of 0.6%, while U.S. markets were little changed. On a year-to-date basis, the S&P 500 is up about 27%, while the Nasdaq is up around 33%*. The Canadian TSX, which is less weighted in technology, is up around 21% in 2024. Meanwhile, Treasury yields continue to remain elevated, with the U.S. 10-year yield around 4.40%, well above its September lows of around 3.6%*. In our view, this move higher is a combination of better U.S. economic data and the expectation of a shallower Federal Reserve rate-cutting cycle in 2025.
• A resilient U.S. economy was a key theme for 2024: Since 2020, U.S. economic growth has been impressive, with GDP growth rates well above long-term trends. 2024 has been no exception. The quarterly annualized growth rates this year have averaged 2.5%, and the fourth quarter appears on pace to exceed this. According to the Fed GDP-Now forecast, the fourth-quarter economic growth forecast is near its highest since the quarter began, at around 3.3%*. We know the backbone of the U.S. economy is the consumer, which drives about 70% of GDP. Of course, consumers have faced challenges over the past year in elevated inflation readings and higher interest rates, which have pressured both spending and borrowing. Nonetheless, data continues to point to healthy rates of consumption in the U.S., particularly for services, including leisure, hospitality, travel and dining. Part of this has been driven by positive trends in real wage gains across households, in both the U.S. and Canada. Since 2023, wage growth has outpaced the rate of inflation, which has been supportive of consumer confidence and consumption*. We would expect this trend to continue as we head into 2025 and as inflation, in our view, moderates further and remains contained in the 2% - 3% range.
• Continue to use pullbacks as opportunities – As we head into 2025, the U.S. and Canadian economies will undoubtedly face challenges, and markets will have new "walls of worry" to climb. These could include uncertainty around policy coming out of the new White House. Policy changes to areas like tariffs and immigration could weigh on consumer confidence, inflation, and overall economic growth. Any escalation in trade conflicts could also spark volatility and uncertainty. However, in our view, the most extreme versions of these policy proposals are unlikely to be adopted, and the overall impact to the economy will likely be contained. Given the fundamental backdrop with economies that continue to grow at healthy rates, investors can use market volatility as an opportunity to ensure that their investments are well-positioned for this environment of solid growth amid heightened uncertainty. We recommend remaining overweight in U.S. stocks, particularly large-cap and mid-cap stocks, with a mix of growth and value sectors. While mega-cap technology led the way higher for much of the last couple of years, we believe sector diversification will be a key theme and driver of returns. Within the bond market, we recommend reviewing short-duration bonds and cash-like instruments to ensure that portfolios are not too overweight cash. With yields likely headed lower in the next year, we believe excess cash can be gradually deployed into strategic allocations in stocks and bonds.

Mona Mahajan
Investment Strategy

^{Source: *FactSet}

• Stocks close lower on inflation readings: The TSX and major U.S. equity markets declined on Thursday, with large-cap stocks trailing mid-cap stocks. Sectors were broadly lower, as consumer staples was the only sector higher for the day. In global markets, Europe was down despite the European Central Bank cutting rates 0.25%, as expected*. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil traded lower on a new forecast for ample supply next year**.
• Key producer inflation measures are higher than expected – The U.S. producer price index (PPI) rose 3.0% annualized in November, above estimates calling for wholesale inflation to hold steady at 2.6%. Core PPI, which excludes more volatile food and energy prices, ticked up to 3.4% on a year-over-year basis, compared with forecasts of 3.2%*. These readings are consistent with inflation that continues to moderate, though at a slower pace, and the path will likely be bumpy, in our view. These readings should allow the Fed to continue its interest-rate-cutting cycle, including a 0.25% rate cut next week, though the pace will likely begin to slow as the central bank aims for a soft landing. Yields edged higher, with the 10-year Government of Canada yield at 3.15% and the 10-year U.S. Treasury yield at 4.33%, likely reflecting expectations of slower Fed rate cuts ahead.
• Jobless claims tick higher: U.S. jobless claims rose to 242,000* this past week, above expectations for 220,000. Weekly readings, including jobless claims, are often volatile and not necessarily consistent with broader trends. Weekly jobless claims have averaged about 223,000 over the past month, which is about in line with the weekly average for this year. In addition, continuing claims, which measure the number of people receiving unemployment benefits, stands at about 1.89 million, below estimates for 1.92 million. We believe these readings, combined with other recent data, reflect a resilient labour market that is gradually normalizing from a period of outsized strength. Employers appear to be slowly pulling back on hiring but not turning to significant layoffs. With unemployment of 4.2%, disposable income should be sufficient to support continued consumer spending through the holiday shopping season. A cooling labour market should also lead to slower wage gains ahead, which typically help ease inflation.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **Bloomberg}

• Stocks finish higher following Bank of Canada rate cut: North American equity markets traded higher on Wednesday following the BoC's decision to lower its policy rate by 0.5% for the second consecutive meeting. The TSX posted a gain of 0.6% while the S&P 500 rose by 0.8%.* Leadership favoured growth-oriented sectors of the S&P 500, with technology, consumer discretionary and communication services all higher by 1.5% or more on the day, while most other sectors were flat to lower.* Overseas, markets in Europe finished higher, while Asian markets were mixed overnight.* South of the border, U.S. consumer price index (CPI) inflation was in line with expectations, with headline CPI rising by 2.7% year-over-year.* Bond yields finished the day higher, with the 10-year GoC yield rising to around the 3.1% mark, while the 10-year U.S. Treasury yield rose to 4.27%.* In the commodity space, oil prices finished higher by over 2%, while gold was up over 1%.*
• Bank of Canada delivers another 0.5% rate cut: This morning the Bank of Canada (BoC) delivered a 0.5% cut to its policy rate, bringing the target rate down to 3.25%.* This marks the fifth time the BoC has cut interest rates in 2024 and the second consecutive meeting it's delivered a larger-than-typical 0.5% rate cut.* Domestic economic growth has been relatively lethargic, with real GDP expanding at a modest 1% in the third quarter, while last week's labour-force survey showed the unemployment rate rose to 6.8% in November, the highest since 2021.* The combination of sluggish economic growth and inflation that has moderated toward the BoC's target range has provided justification for the BoC to take a more aggressive approach to easing monetary policy. We expect the BoC to continue lowering rates in 2025, with the target rate perhaps settling between 2.5% - 3% by year-end. In our view, lower interest rates should provide support to domestic economic activity.
• U.S. inflation in line with expectations: U.S. inflation was in focus today with the release of CPI inflation for November. U.S. headline CPI rose by 0.3% for the month, slightly above expectations, while the annual rate of 2.7% was in line with expectations. Core CPI, which excludes food and energy, rose by 0.3% in November and 3.3% annually, both in line with expectations.* Today's reading marks the fourth consecutive month core CPI has risen by 0.3% and brings the three-month annualized change up to 3.7%, the highest since April.* An encouraging aspect of today's report was that the index for shelter, which has proven slow to moderate over the past several years, ticked lower in November, rising by 0.3% after a 0.4% gain in October. On an annual basis, the index for shelter rose by 4.7%, which is the lowest reading since early 2022.* In our view, today's report keeps the Fed on track to deliver another 0.25% rate cut at next week's meeting. However, with the pace of disinflation slowing and the U.S. economy on strong footing, we expect the Fed will take a gradual approach to rate cuts in 2025.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **Bloomberg}

• Stocks close lower: North American equity markets closed lower on Tuesday, with the TSX down 0.4% and the S&P 500 declining 0.3%. Leadership was narrow, with the communication services sector of the S&P 500 rising by more than 2% while most other sectors were flat to lower.* Outperformance in communication services was driven by a surge in shares of Alphabet following an announcement the company has developed a chip that will improve its quantum-computing capabilities. In other corporate news, shares of Oracle were under pressure, declining over 6%, following underwhelming earnings results reported after the market close yesterday.* Overseas, European markets traded mostly lower, while Asian markets were mixed overnight. Bond yields were mixed today, with the 10-year GoC yield falling to 3.03%, while the 10-year U.S. Treasury yield ticked higher to 4.23%.*
• Bank of Canada interest-rate decision on the horizon: The Bank of Canada (BoC) will meet for its final time in 2024 tomorrow, with expectations calling for another 0.5% rate cut.** If implemented, a 0.5% cut would bring the BoC target rate to 3.25% compared with a target rate of 5% coming into the year.* At its October meeting, the BoC Monetary Policy report showed officials expected third-quarter CPI inflation of 2.1% and real GDP growth of 1.5%. With real GDP growing by only 1% in the third quarter and headline CPI rising by 2%, we believe the BoC will move forward with another 0.5% cut at tomorrow's meeting. In our view, lower borrowing costs should be supportive to the domestic economy over the coming quarters, leading to improved economic growth.
• U.S. inflation in focus: In addition to tomorrow's BoC interest-rate decision, U.S. inflation and its implications on Federal Reserve policy will be in focus for markets, with consumer price index (CPI) inflation for November out tomorrow. Expectations are for headline CPI to rise by 0.2% for the month and 2.7% on an annual basis.* Core CPI is expected to rise by 0.3% month-over-month and hold steady at 3.3% annually.* More recently, U.S. inflation data has proven stubborn, with the three-month annualized rate of core CPI rising to 3.6%, up from a low of under 2% in July.* In our view, another 0.25% rate cut from the Fed at the December 18 meeting is likely. However, with the U.S. economy on strong footing and inflation above the Fed's 2% target, we expect the Fed will take a more gradual approach to rate cuts in 2025.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **Bloomberg}

Monday, 12/9/2024 p.m.

• Stocks start the week lower – The TSX and major U.S. equity markets closed lower on Monday, with mid-cap stocks trailing large-cap stocks. Most sectors were down, as only health care and real estate stocks posted gains. In global markets, Asia was up on China pledging more stimulus that will include higher government spending and lower interest rates in order to boost growth*. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil and gold traded higher*.
• Markets focus on key inflation readings this week – The U.S. consumer price index (CPI) for November will be released on Wednesday, with forecasts calling for inflation to rise to 2.7% annualized, up from 2.6% the prior month*. Core CPI, which excludes more-volatile food and energy prices, is expected to hold steady at 3.3%. The modest expected increase in headline inflation is due to lower inflation readings from a year ago rolling out of the year-over-year figure, known as base effects. Importantly, CPI is expected to rise 0.2% month-over-month - about in line with the average over the past three months - which translates to 2.5% inflation annualized. We believe the recent trend and estimates for November reflect inflation that is gradually cooling, though the path will likely be bumpy along the way.
• Bond yields edge higher – Bond yields are up, with the 10-year Government of Canada yield at 3.05% and the 10-year U.S. Treasury yield at 4.19%. U.S. bond yields have risen since the recent low in September, as bond markets have reduced expectations for Federal Reserve (Fed) interest-rate cuts. We expect the Fed to continue cutting interest rates, as moderating inflation should allow monetary policy to be less restrictive, though the path is likely to be slower and shallower than previously expected. With the target range for the fed funds rate currently 4.5%-4.75%, a neutral rate is generally about 1% above inflation. Bond markets are currently pricing in expectations for a 0.25% Fed rate cut next week and another two cuts over the next six months**. The Bank of Canada is also expected to cut interest rates 0.5% on Wednesday of this week. Lower interest rates would reduce borrowing costs for consumers and businesses, which is supportive of continued economic growth and the soft-landing narrative, in our view.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **CME FedWatch}