Daily market snapshot

• Stocks finish mixed ahead of tomorrow's U.S. inflation report: Equity markets finished mixed on Tuesday, with markets awaiting tomorrow's U.S. consumer price index (CPI) inflation report. The S&P 500 and Nasdaq both logged modest gains on the day, while the TSX finished lower by roughly 0.3%.* At a sector level, technology, real estate and consumer discretionary were the top performers in the S&P 500, each gaining more than 1%.* The financials sector was a notable laggard, down by about 1%, following cautious commentary from several U.S. financial service companies on the outlook for profits. Energy was another laggard, finishing down by roughly 2%, driven by slumping crude oil prices resulting from sluggish Chinese import growth and downward revisions to OPEC's estimates for global oil demand in 2024 and 2025.* Bond yields finished lower, with the 10-year GoC yield falling to 2.9%, while the 10-year U.S. Treasury yield declined to around the 3.65% mark.* On the macroeconomic front, the U.S. NFIB small business optimism index fell by 2.5 points to 91.2 in August, marking the 32nd consecutive month below the 30-year average of 97.6, signaling that elevated borrowing costs continue to weigh on small businesses.* In addition to key inflation data, politics will be in the spotlight, with the U.S. presidential debate between Vice President Kamala Harris and former President Donald Trump this evening.
   
• U.S. inflation in focus: U.S. inflation data will be front and centre for markets this week, with the release of August CPI inflation tomorrow and producer price index (PPI) inflation on Thursday. Expectations are for headline CPI to rise by 2.6% on a year-over-year basis, while core CPI is expected to rise by 3.2%, unchanged from the prior month.* Headline PPI is expected to rise by 1.8% on a year-over-year basis, while core PPI is expected to rise by 2.5%.* With U.S. inflation moderating in recent months and signs of softness in the labour market, the question has shifted from whether the Fed will cut rates at its meeting on September 18 to how much will the Fed cut rates. Futures markets are pricing in a roughly 73% chance of a 25-basis-point (0.25%) rate cut and a 27% chance of a 50-basis-point (0.5%) rate cut.** We'd align with the view that a 25-basis-point cut at this month's meeting is a more likely outcome given that despite signs of easing labour market conditions, U.S. economic growth has remained steady. Looking ahead, we'll get a read on domestic inflation trends next Tuesday with the release of August CPI data.*
   
• Sector leadership has broadened, with mega-cap tech no longer the only game in town: While 2023 equity-market performance was best characterized as narrowly led, with the technology, communication services and consumer discretionary sectors responsible for a large part of the 26% gain in the S&P 500, 2024 has been a year of broadening leadership. While technology and communication services have seen strong returns year-to-date, utilities and financials are the top-performing sectors of the S&P 500 through yesterday's close, each higher by over 20% this year.* Recently, the rotation away from mega-cap tech has been more pronounced, with technology and communication services each lower by over 6% since the beginning of July.* Contrarily, defensive and interest-rate-sensitive sectors, such as utilities, real estate and consumer staples, have all gained over 9.5%.* In domestic equity markets, we've seen a similar broadening of leadership. After gaining nearly 70% in 2023, the technology sector of the TSX has risen by only 2.4% this year, while the materials and financials sectors have led the way, each higher by roughly 17%.* We continue to see a case for broad participation across sectors in the months ahead. As part of our opportunistic equity sector guidance, we recommend clients overweight utilities and industrials, with offsetting underweights in financials and materials, as appropriate with their long-term goals.*

Brock Weimer, CFA
Associate Analyst

^{Source: *FactSet **CME FedWatch Tool}

• Stocks finish higher: Equity markets closed higher on Monday as stocks rebounded following a risk-off week. The S&P 500 declined by more than 4% and the TSX declined by more than 2% last week, as softer-than-expected labour market data raised economic growth concerns. Markets recovered some of last weeks losses today with the TSX and S&P 500 both finishing higher by more than 1%.* From a leadership standpoint, most sectors of the S&P 500 finished higher with the industrials, financials and consumer discretionary sectors among the top performers.* Overseas, Asian markets were mostly lower overnight while European markets finished the day higher with markets focused on Thursday's European Central Bank interest-rate decision. Bond yields were mixed with the 10-year GoC yield ticking up to around 3.01% while the 10-year U.S. Treasury yield ticked lower to about 3.7%.* In the commodity space, oil prices rebounded, rising to about $69 per barrel after declining by over 7% last week.* Looking ahead, inflation will be in focus for markets with the release of U.S. consumer price index (CPI) inflation on Wednesday.
   
• Softening labour market led to a risk-off move in markets last week – The S&P 500 declined by more than 4% last week, marking the largest weekly decline in more than a year.* Softer-than-expected labour-market data was a primary culprit behind last weeks move lower, with Friday's U.S. nonfarm payrolls report the highlight of the week. Friday's report showed that U.S. nonfarm payrolls rose by 142,000, below expectations for a gain of 160,000 and below the prior twelve-month average of 202,000.* Additionally, nonfarm payroll growth for June and July were both revised lower in Friday's report by a cumulative 86,000 jobs.* The silver lining to Friday's report was that the unemployment rate ticked lower in August to 4.2% versus 4.3% in July.* The domestic labour force survey released last Friday showed that domestic employment conditions continue to ease as well, with employment growing by 22,000 in August versus expectations for 25,000, while the unemployment rate ticked higher to 6.6%.* In our view, last weeks data points to a labour market that is clearly cooling but not collapsing. While perhaps less of a tailwind to consumer spending as in recent months, we believe labour-market conditions remain broadly supportive to household consumption.
   
• September has historically been a weak month for stock performance: While over the long-run, we believe it is the economic backdrop and fundamentals that drive stock performance, not the calendar, it is worth acknowledging that September has historically been a weak month for stock returns. Since 1970 the S&P 500 has declined by about 0.7% on average in September, with returns positive only 50% of the time.** This compares with an average return of roughly 1% for all months with returns positive 64% of the time.** Encouragingly, despite September being a historically weak month for stock performance, the fourth-quarter of the year has been particularly strong, with returns positive roughly 75% of the time since 1970 in both November and December.** While there's no guarantee history will repeat itself this year, entering a period of favourable seasonality combined with a healthy economic backdrop should offer long-term investors confidence in the months ahead. We'd recommend investors use pockets of weakness to add to quality investments in-line with their long-term goals.

Brock Weimer, CFA
Associate Analyst

^{Source: *FactSet **Morningstar Direct, S&P 500 Total Return Index, and Edward Jones}

• Stocks close lower on growth concerns – Nasdaq and the Magnificent 7 stocks led stocks lower on Friday after the mixed jobs report triggered concerns that the Fed is behind the curve in cutting rates*. The Nasdaq is again in correction territory but remains above its low in early August as economic data released since then still point to an ongoing expansion. All sectors were lower on the day, with communication services and consumer discretionary stocks leading to the downside*. In global markets, Asia and Europe also closed lower. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil declined, reaching a new low for the year, and gold also traded lower.
   
• Employment report shows slower job growth – Total nonfarm payrolls grew by 142,000 in August, below estimates for 160,000* and the average monthly gain of 202,000 over the past 12 months**. Job gains for June and July were also revised lower by 86,000**. Despite slower job growth, the unemployment rate ticked down to 4.2%, in line with estimates, following the unexpected increase last month. Hourly earnings were up 3.8% annualized, above expectations for a 3.7% rise*. Canada employment growth of 22,000 also missed estimates for 25,000, driving the unemployment rate higher to 6.6%*. In a positive sign, weekly jobless claims remain low, indicating that employers are primarily pulling back on hiring rather than turning to significant layoffs. As we had been expecting, the labor market and broader economy continue to cool, but recent data don't reflect sudden deterioration that would be consistent with a recession, in our view.
   
• Bond yields edge lower - Bond yields were down, with the 10-year Government of Canada yield at 2.96% and the 10-year U.S. Treasury yield at about 3.72%, driving bond prices higher, helping balanced portfolios offset some of today's equity volatility. With the 2-year U.S. Treasury yield at 3.66%, the term spread versus the 10-year Treasury, also known as the yield curve, has returned to positive territory in recent days, following more than two years of inversion. The Federal Reserve (Fed) has announced its intention to start cutting interest rates later this month. Bond markets are pricing in expectations for 2.5% of Fed rate cuts over the next 12 months, which would bring the Fed Funds rate below 3%***. As inflation has moderated, the Fed's focus is turning to its other mandate - maximum employment – as the labor market cools. We believe the Fed remains on track to start a rate-cutting cycle that will likely continue for several meetings. While a 50 basis point (0.5%) cut later this month is a possibility, a 25 basis point (0.25%) cut still appears more likely, in our view. We expect the Bank of Canada to continue cutting interest rates as well. 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. Bureau of Labor Statistics ***CME FedWatch}

• Stocks struggle to gain traction ahead of key jobs report - Following a two-day pullback to start the holiday-shortened week, North American equity markets attempted to stabilize today but failed to post gains. Mixed readings on the U.S. labour market drove short- and long-term government bond yields to their lowest this year ahead of the highly anticipated U.S. payrolls report*. Given the BoC's third consecutive rate cut yesterday, the Canadian release will likely get less attention. U.S. tech, which has been the source of weakness this week, rebounded with help from the Magnificent 7 group of stocks. Elsewhere, WTI oil prices declined modestly after falling below $70 a barrel yesterday for the first time since December of 2023*.
   
• U.S. labour market shows further signs of cooling, but no sudden deterioration - The state of the labour market is front and center this week with all eyes on the payrolls report on Friday. Ongoing job gains and low unemployment have been critical pillars of support of this expansion, more than offsetting the headwinds of high interest rates and inflation. However, more recently, there have been increasing signs that labor market conditions are softening. Job openings fell in July below eight million, pushing the ratio of job openings to unemployed workers to the lowest in more than three years and slightly below the pre-pandemic level*. Also, today's released private payrolls report by ADP showed that U.S. companies added the fewest jobs since the start of 2021*. However, for now we would describe this cooling as a process of normalization after a period of outsized strength. Weekly jobless claims remain low, indicating that a slowdown in hiring and an increase in supply of workers are the reasons for the rise in unemployment rather than higher layoffs. Corporate profits are on the rise and unit labor costs have declined helped by an uptick in productivity, lessening the need for companies to seek ways to cut costs by adjusting their headcount. Tomorrow's jobs reports will no doubt help shape the narrative around the state of the labour market. Expectations are for the unemployment rate to tick down and the economy to add 165,000 jobs in the U.S.* Canada estimates are calling for a 25,000 gain in August and a tick higher in unemployment from 6.4% to 6.5%*.
   
• Rates cuts ahead, debate now on size and speed - In addition to proving clues for economic growth, tomorrow's U.S. employment report will be a key input in helping Fed officials determine whether a quarter- or half a percentage-point hike is warranted when they announce their rate decision on September 18. With inflation making further progress toward the 2% target and becoming less of a concern, policymakers have become more sensitive to achieving the second part of their dual mandate, which is maximum employment. As a result, more of the debate now is about how fast and how far instead of the direction of travel for Fed policy. While the Fed has a long history of policy mistakes, this time it’s about to embark on a multiyear rate-cutting cycle while growth remains resilient (though slowing), credit conditions are easing, and the labor market is still adding jobs. This suggests to us that a soft landing remains the most likely outcome. Rate cuts are not a panacea, but the gradual easing in borrowing costs should help support consumer and business spending. From a market perspective, the start of a new rate-cutting cycle is typically positive for stocks as long as the economy avoids a recession.

Angelo Kourkafas, CFA
Investment Strategist

^{Source: *FactSet.}