Daily market snapshot

• Equities fall despite encouraging U.S. inflation data – Equity markets traded lower on Thursday, despite a lower-than-expected U.S. inflation reading. Headline producer price index (PPI) was flat in February versus expectations for a 0.3% gain, providing evidence that the trend in inflation remains lower as markets await next steps from Washington on tariffs.* Additionally, U.S. initial jobless claims fell to 220,000 last week, below expectations for 226,000, pointing to healthy labour-market conditions despite the recent uncertainty around federal layoffs.* Despite the constructive economic data, equity markets closed broadly lower, as policy uncertainty and the potential for a U.S. government shutdown weighed on market sentiment. Leadership favoured defensive sectors of the market, with utilities the best performer, while growth sectors such as communication services and consumer discretionary were laggards.* Additionally, bond yields declined, with the 10-year U.S. Treasury yield finishing around 4.27% while the 10-year GoC yield fell to 3.04%.* With the S&P 500 closing down by over 1% today, the index is roughly 10% off the all-time high from mid-February. We'd remind investors that while uncomfortable, pullbacks are common. Since 1928 the S&P 500 has averaged roughly one 10% pullback per calendar year.* We recommend investors maintain a focus on diversification through this pocket of volatility. While U.S. stocks have underperformed of late, overseas stocks and investment-grade bonds have seen positive returns year-to-date, helping well-diversified investors weather the recent volatility. 
   
• U.S. inflation trends lower: Producer price index (PPI) inflation for February was lower than expected, with headline PPI unchanged for the month and rising by 3.2% on an annual basis.* This compares with expectations for a monthly gain of 0.3% and an annual gain of 3.3%.* The 3.2% annual gain in headline PPI was the lowest since April of last year. Today's lower-than-expected inflation report follows a below-expectations consumer price index (CPI) reading yesterday, helping to ease market concerns of slowing economic growth amid higher inflation. With lingering uncertainty around tariffs, we expect the Fed to remain on hold at next week's meeting. However, this week's inflation data supports the view that the trend in inflation remains lower after an uptick in January. We believe policymakers would likely view tariffs as a one-off price increase as opposed to an ongoing source of inflation, and we expect the Fed will continue easing policy this year, potentially bringing its target rate to between 3.5%-4% by year-end. We'll get a read on domestic inflation trends next Tuesday with the release of February CPI.
   
• Looming U.S. government shutdown adds to uncertainty in the U.S. – The potential for a government shutdown is adding to the uncertain policy backdrop in the U.S. On Tuesday, the House of Representatives passed a continuing resolution that would keep the government funded through the end of September. However, Senate Minority Leader Chuck Schumer expressed objections to the Republican-proposed bill, stating that they will not have the 60 votes needed to move the bill through the Senate. Republicans hold 53 Senate seats and would need 60 votes to prevent a filibuster. Congress will need to pass a new spending bill by midnight on Friday to prevent a U.S. government shutdown. While disruptive, government shutdowns have historically had limited impact on markets. In fact, during the last government shutdown from December 21, 2018 – January 25, 2019, the S&P 500 gained over 10%.* Additionally, the S&P 500 has been positive during each of the past five government shutdowns.* While shutdown concerns add to the recent mix of policy uncertainty, history suggests that the impact from a shutdown is short-lived and that markets tend to look through the uncertainty. Additionally, with one day left for negotiations, a continuing resolution remains a real possibility.
   

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet
Government shutdown dates from history.house.gov}

• Equities rebound on inflation data and BoC rate cut – After a rough start to the week, stocks gained back some ground, helped by a cooler-than-expected U.S. inflation reading and another rate cut by the Bank of Canada. The BoC cut rates by 0.25%, the seventh straight cut, lowering its policy rate to 2.75%. Governor Macklem said the bank “will proceed carefully with any further changes” to borrowing costs, and officials would “need to assess both the upward pressures on inflation from higher costs and the downward pressures from weaker demand.” South of the border, the core consumer price index (CPI) increase was the slowest since April 2021, back when inflation first started surging*. The data provide some comfort that the inflation trend is still lower as markets wait for more clarity from on the administration's actions on tariffs. Consistent with today's risk-on move, growth and cyclical sectors outperformed defensives and small-caps are leading, while government bond yields rose. 
   
• Markets breathe a sigh of relief on softer-than-expected U.S. inflation - The headline consumer price index (CPI) increased 0.2% in February after rising 0.5% in January. That was below expectations for a 0.3% rise and the slowest monthly pace in four months*. From a year ago, headline CPI ticked down to 2.8% (vs. 3.0% prior), and core CPI, which excludes food and energy, slowed to 3.1% (vs. 3.3% prior). Shelter costs continue to be the biggest contributor to inflation, accounting for half of the monthly advance of the overall measure, but, at 4.2%, February's shelter inflation was the smallest 12-month increase since December 2021*. Categories that experienced price declines were airfares, new car prices, and gasoline prices. More broadly, inflation for services slowed further, resuming its downward trajectory, while inflation for goods stayed largely unchanged. We think today's data pushes back against the stagflation narrative that has developed in recent weeks and may help sentiment improve. However, this report comes before any potential ramp-up in tariffs that will likely push prices for goods higher. In our view, an ongoing improvement in services inflation, which account for about 70% of the core CPI, may outweigh any one-off uptick in goods inflation, keeping overall inflation contained. Nonetheless, uncertainty is elevated, which is why we expect the Fed to keep rates on hold when it meets next week. We still see the bank resuming its rate-cutting cycle in the second half of the year, potentially bringing its policy rate down to 3.5%-4.0%. 
   
• Trade headlines keep uncertainty high - After threatening to double the metal tariffs yesterday on Canada to 50%, which was later reversed, the new administration imposed 25% tariffs on steel and aluminum imports from all countries going into effect overnight. In response, the European Union launched "swift and proportionate countermeasures" on U.S. imports up to €26 billion, while other countries have so far held off on immediate retaliation. Trade-policy uncertainty and signs of an emerging soft patch in the U.S. economy in the first quarter have taken some wind out of the market's sails, with the S&P 500 flirting with its first 10% correction since October of 2023*. However, U.S. stocks are still about 10% higher from a year ago, and other asset classes that make up a well-diversified portfolio have held up better, as investors have rotated into parts of the market that trade at lower valuations*. 
   
• A historical perspective on corrections – Corrections, like the one equity markets are experiencing this month, are uncomfortable, yet common. Since 1971 there have been 19 corrections that did not progress into a bear market, with an average decline of 14% from peak to bottom over an average of 4.3 months*. Historically, these sizable market pullbacks that took place within the confines of a bull market have been good times to add equities, with stocks rising 18% six months after and 23% a year later*. We recommend remaining opportunistic and consider adding quality investments at lower prices, while maintaining realistic expectations for returns and volatility. A focus on balance and diversification can potentially better help weather short-term dips, which, over the long term, are nearly impossible to avoid.

Angelo Kourkafas, CFA
Investment Strategy

^{Source: *FactSet}

• Stocks close lower amid new tariff developments: The TSX and U.S. equity markets were down on Tuesday but closed above the session lows. President Trump raised U.S. tariffs on Canadian steel and aluminum imports by 25%, bringing the total duty to 50%, effective tomorrow. The order was issued in response to Ontario's new 25% surcharge on electricity exports to the U.S. The electricity surcharge was later temporarily suspended after U.S. Commerce Secretary Howard Lutnick agreed to renewed trade talks with Canada. Bond yields rose modestly, with the 10-year Government of Canada yield near 3.0% and the 10-year U.S. Treasury yield at 4.28%. The Bank of Canada is likely to cut its policy rate on Wednesday as it moves to ease monetary policy, with Canada CPI at 1.9%, below the 2% target. In international markets, Asia declined as Japan reported receiving no commitment to be exempted from U.S. tariffs on steel and aluminum products set to take effect on Wednesday, as well as those on autos, which could come in April. Europe also closed lower, led by travel & leisure and health care stocks to the downside. The U.S. dollar extended its decline versus major currencies. In commodity markets, WTI crude oil is traded higher*.
   
• Small business index edges lower: The U.S. National Federation of Independent Business (NFIB) Small Business Optimism Index fell for the second consecutive month to 100.7 in February, down from 102.8 the prior month. The measure remains above its long-term average of 98, indicating modestly positive sentiment. The uncertainty component, which has been volatile, rose to 104, the second-highest reading on record. In positive sign for the labor market, 53% of small businesses indicated they are hiring or trying to hire. However, labor quality was cited as the top challenge, resulting in 38% of respondents reporting job openings they could not fill due to lack of qualified applicants**. Overall, we view these readings as still positive, which is important to the labor market, as small businesses represent about 46% of private sector employment***. U.S. job openings for January of 7.74 million modestly exceeded forecasts of 7.7 million, reflecting the resilience of the labor market, in our view.
   
• Investors await key inflation measures this week: The U.S. consumer price index (CPI) for February will be released on Wednesday, with forecasts calling for inflation to tick down to 2.9% annualized, from 3.0% the prior month**. Core CPI, which excludes more-volatile food and energy prices, is expected to decline to 3.2%, from 3.3% in January. Shelter inflation slowed to 4.4% annualized in January, down from 6.1% a year earlier, providing a key driver in moderating inflation. Despite the decline, shelter inflation remains elevated and should continue to cool as it catches up to other measures that show housing costs rising at a slower pace. We believe the recent trend and estimates for February reflect inflation that continues too gradually moderate.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **National Federation of Independent Businesses ***U.S. Small Business Administration}

• Nasdaq leads stocks sharply lower on economic growth concerns: The TSX and U.S. equity markets closed sharply lower on Monday, as weaker consumer sentiment, slower consumer spending, and tariff risks continue to weigh on the growth outlook. The Federal Reserve Bank of Atlanta's GDPNow estimate for first-quarter real GDP growth declined last week to -2.4%, down from 2.3% in late February. A significant driver in the drop was a surge in imports in January and February to get ahead of potential tariffs. However, we expect this trend to be temporary, potentially reversing over the coming months as inventories normalize. Lower consumer spending was another key detractor, as consumer sentiment weakened on concerns over inflation, future income and employment prospects*. While GDP growth could dip temporarily, we don't expect a recession, as pro-growth policies, such as deregulation and tax cuts, and lower interest rates should help drive a reacceleration later this year. Bonds have helped provide support for portfolios, with Canadian investment-grade bonds up 1.3% this year**, as Canadian and U.S. stocks have pulled back. Overseas large-cap stocks are up 10.5% as well this year**, demonstrating the value of diversifying beyond Canadian and U.S. stocks.
   
• Investors await key inflation measures this week: The U.S. consumer price index (CPI) for February will be released on Wednesday, with forecasts calling for inflation to tick down to 2.9% annualized, from 3.0% the prior month**. Core CPI, which excludes more-volatile food and energy prices, is expected to decline to 3.2%, from 3.3% in January. Shelter inflation slowed to 4.4% annualized in January, down from 6.1% a year earlier, providing a key driver in moderating inflation. Despite the decline, shelter inflation remains elevated and should continue to cool as it catches up to other measures that show housing costs rising at a slower pace. We believe the recent trend and estimates for February reflect inflation that continues to gradually moderate.
   
• Bond yields edge lower: Bond yields were down today, with the 10-year Government of Canada yield at 2.98% and the 10-year U.S. Treasury yield near 4.22%, extending their recent trends lower. Bond markets have priced in expectations for more Federal Reserve interest-rate cuts and slower economic growth. Bond markets are reflecting two or three Fed interest-rate cuts this year, backed by slowing inflation***. The Fed's preferred inflation measure, the personal consumption expenditure (PCE) inflation, declined to 2.5% annualized through January. The Federal Reserve Bank of Cleveland's Inflation Nowcasting shows that PCE inflation could decline further to about 2.1% over the next few months, just above the Fed's 2% target. Moderating inflation should allow the Fed to continue removing restriction from monetary policy as it moves toward a more neutral stance. With Canada CPI at 1.9% annualized in January, below the 2% target, the Bank of Canada remains on track to continue cutting its policy rate as well, with the next cut likely coming on Wednesday of this week. Lower rates should reduce borrowing costs for consumers and businesses, which would be supportive of the economy.

Brian Therien, CFA
Investment Strategy

^{Source: *The Conference Board **FactSet ***CME FedWatch}

• Stocks rise modestly after jobs data - Major equity indexes gained some ground, ending a volatile week that was dominated by trade headlines. While the job market stalled in Canada, impacted by weather, the Canadian government rolled out a C$6.5 billion program to help exporters that are impacted by U.S. tariffs. In the U.S. the employment report pointed to a still healthy pace of hiring but also a moderating trend amidst policy uncertainty. Despite lagging this week, the Nasdaq outperformed today, helped by solid results from Broadcom. The company's shares rallied 8% after the semiconductor supplier provided an upbeat forecast that indicates strong demand for artificial intelligence*. Yields in Canada were lower but rose in the U.S. after Fed Chair Powell said the economy is doing fine, while reiterating that the bank is in no rush to cut rates. Elsewhere, the rally in overseas stocks took a breather today. WTI oil prices rose 1% to $67, though they are down more than 3% for the week after OPEC's plan to hike output in April*.
   
• Labour market remains solid but may be softening ahead – In Canada, employment was virtually unchanged in February, as the economy added just 1100 jobs, below the 20,000 expected. The unemployment rate held steady at 6.6%, but total hours worked fell, impacted by extreme weather in Eastern Canada. Looking ahead, the imposition of tariffs poses a major risk to the labour market, but economic momentum is positive heading into this uncertainty as the BoC's rates are filtering through the economy. South of the border, the U.S. economy added a moderate 151,000 jobs in February, slightly below expectations, and the unemployment rate ticked up to 4.1% from 4%. Health care and financial services saw the biggest gains, while federal government jobs declined by 10,000. However, total government employment still managed to add a net of 11,000 jobs after 21,000 jobs were added at the state and local level. Poor weather across parts of the country likely contributed to a 16,000 loss in leisure and hospitality*. We think that today's U.S. jobs data provide some reassurance that the economy is not rolling over and that there is no sudden weakening in the broader job market, as the private sector continues to hire at a healthy pace. However, we expect some softening in the months ahead, as the bulk of the recent federal government layoffs will likely show up in next month's report. Policy uncertainty and stubborn inflation suggest that the Fed will stay on pause when it meets in a couple of weeks. However, we still expect policymakers to deliver one or two rate cuts in the second half of the year as inflation trends improve and economic growth moderates.
   
• Diversification is key in 2025 - While the S&P 500 and TSX posted their worst weekly decline this year, both overseas developed- and emerging-market equities recorded solid gains*. A key theme this year is the rotation in market leadership across geographies, as well as investment styles and sectors. As U.S. mega-cap tech stocks have turned from leaders to laggards, overseas indexes have benefited from tentative signs of improvement in the European outlook and enthusiasm about artificial intelligence (AI) in China. We aren’t convinced the recent rally in overseas stocks is the start of a new multiyear trend. However, the likely soft patch in the U.S. economy this quarter, together with improving overseas momentum, suggests that the U.S. exceptionalism narrative may take a backseat for a while. Amid a leadership rotation, as well as policy and trade uncertainties, portfolio diversification will be critical, in our view, for investors to navigate this year’s twists and turns. Next week the focus for markets will be on the BoC's rate decision, where the bank is expecting to lower rates again to 2.75%, and the U.S. consumer price index (CPI), which is expected to tick down from 3% to 2.9% from a year ago*.

Angelo Kourkafas, CFA
Investment Strategy

^{Source: *FactSet}