Daily market snapshot

• Stocks move higher to close a winning week – Stock markets in the U.S. and Canada closed higher on Friday to end a winning week. The S&P 500 is up over 4% this week, after falling about 4.2% last week*. This comes as both U.S. consumer price index (CPI) and producer price index (PPI) inflation figures this week came out largely in line with expectations for the month of August. Headline CPI inflation has now eased to 2.5% year-over-year, gradually moving toward the Federal Reserve's 2% inflation target. Meanwhile, bond yields continue to move lower, with the 10-year Treasury yield close to the lows of the year at around 3.66%, well below its April highs of about 4.7%*. The moves lower in yields are driven by cooling economic growth and inflation, as well as markets anticipating the Fed lowering interest rates in the months ahead. In our view, the combination of lower interest rates, easing inflation, and economic growth that is cooling but still positive continues to support the ongoing expansion in stock-market returns.
   
• Market leadership rotates this quarter – Overall for the third quarter thus far, which began on June 30, the S&P 500 is up about 3%*. However, underneath the surface there has been a meaningful sector rotation. The sectors that have gained the most include interest-rate-sensitive parts of the market, like real estate, utilities and financials, as well as some defensive parts of the market, like consumer staples and health care. The lagging sectors this quarter that have negative returns include technology, communication services and energy*. In particular, the tech and communication services sectors, which house many of the mega-cap artificial intelligence (AI) giants, had been the darlings of the market over the last 18 months or so but are seeing slowing momentum recently. This comes as the Fed is poised to cut interest rates and as earnings growth expands. In our view, one theme over the next year will be an ongoing broadening of market leadership, and investors can look to complement their growth and AI investments with value and cyclical stocks, as well as U.S. mid-cap equities. 
   
• All eyes turn to next week's Federal Reserve meeting – The Federal Reserve will meet next week and will release an interest-rate decision on Wednesday, followed by a press conference by Fed Chair Jerome Powell. In addition, the Fed will deliver a new set of economic projections and an updated "dot plot," which outlines the Fed members' best guess on the path of interest rates. Markets will be watching closely to see how many implied interest-rate cuts there are for this year and 2025, as well as where the Fed expects interest rates to go over the long run. In the June meeting, the Fed had outlined just one rate cut in 2024, followed by four in 2025, and another four in 2026, bringing the fed funds rate to 3.1%*. In our view, the Fed is poised to cut rates next week, most likely by 0.25%, and will likely cut rates twice more after this in 2024. It also may set the stage for outsized rate cuts in the months ahead. The Fed has clearly shifted its focus from inflationary pressures, which have eased in recent months, to the slowing U.S. labour market. To us, the Fed will not risk further downside pressure to the economy and will likely signal to markets that it is poised to undertake a significant easing in monetary policy to ensure that the labour market and economy stabilizes from here.

Mona Mahajan
Investment Strategy

^{Source: *FactSet}

• Stocks rise on Thursday, adding to the week's gains - Equity markets closed higher on Thursday, extending Wednesday's turnaround, when stocks reversed a sharp midday sell-off to finish in positive territory. Yesterday's and today's lift was powered by a rebound in the technology sector, as the recent pullback in mega-cap tech names (tech darling NVIDIA was down as much as 18% coming into this week), along with some renewed optimism around the AI theme, has sparked some new buying. The TSX saw an additional boost today, rising by roughly 1%, thanks to big gains in gold and oil prices that helped the resource sectors. Interest rates were little changed, with the benchmark 10-year Government of Canada bond yield holding near 2.9%, having been at 3.2% a month ago. We've seen a return of daily market volatility recently, as markets assess the evolving economic and political landscape. But it's been encouraging (and warranted, in our view) that bouts of weakness have been rather mild and short-lived, with the broader – and still positive – fundamental backdrop supporting rebounds, as reflected in the better-than-17% year-to-date gain in the S&P 500 and 12% rise in the TSX, despite temporary pullbacks in April, August, and the start of September.*
   
• Employment and inflation combo in the spotlight – Markets are taking their cues from the progressing balance between the economy and inflation. Wednesday's U.S. consumer price index (CPI) report was a fresh and important data point in this story, indicating that the rate of inflation remains in an overall downtrend, but at not quite as rapid or consistent a pace as desired. At the same time, signs of a softening labour market in recent months have brought concerns of a weakening economy into the investment conversation. We received fresh data on both fronts Thursday morning, with the release of the latest U.S. initial jobless claims and August producer price index (PPI) reports. Initial claims came in at 230,000, a shade above the previous week, but below the six-week average and the second-lowest since the start of June. This is helpful news, given the growing anxiety within the markets that the consumer was on the ropes amid a weakening employment picture. U.S. PPI also provided some overarching comfort, as input prices appear to remain on a path of gradual moderation, rising 0.2% versus the prior month, which should be sufficient to help keep consumer prices on a favourable path lower.
   
• The Fed is on deck following the latest inflation data – All eyes will now turn to the Fed's upcoming policy meeting on Tuesday and Wednesday of next week. We think it's all but assured that the Fed will announce a rate cut, and we maintain our view that it will be a 25-basis-point (0.25%) reduction. Wednesday's market swing was, in our view, driven in part by a collective realization that, given the lack of an accelerated decline in CPI, any investors hoping for a larger 50-basis-point cut next week are likely to be disappointed. We believe a quarter-point cut would be good news for three reasons:
  1. It marks the start of less restrictive monetary-policy settings, as we believe this will commence an extended (though not methodical) rate-cutting cycle. We don't think this will tip into stimulus territory, but the Fed seeking to get its policy rate back to more of a neutral setting is a broadly positive development;
  2. it signals that the Fed isn't seeing something more concerning in the economy to warrant a more dramatic response at this stage; and
  3. it reflects a level of prudence from the Fed, aimed at limiting the risk of moving too soon or too aggressively that could stoke renewed upward pressure on inflation.

Craig Fehr, CFA
Investment Strategy

^{Source: *FactSet}

• Stocks close higher in volatile trading session – The TSX and major U.S. equity indexes closed higher on Wednesday, reversing losses from earlier in the day, with large-cap stocks leading small- and mid-cap stocks. Sectors were mixed, as technology and consumer discretionary stocks led to the upside, reflecting a risk-on tone. In global markets, Asia was lower, while Europe was mixed. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil was up, breaking a sell-off over the past several days, and gold traded lower.
   
• Key inflation measure edges lower - The U.S. consumer price index (CPI) rose 2.5% on a year-over-year basis in August, below estimates and the lowest reading since February 2021. Core CPI, which excludes more-volatile food and energy prices, held steady at 3.2%, as expected**. Shelter inflation remained persistent, up 5.2% on an annualized basis. Average hourly earnings were up 3.8% annualized, outpacing inflation and in line with estimates*. The headline CPI reading provides additional confirmation that inflation continues to moderate, which should keep the Federal Reserve (Fed) on track to start its rate-cutting cycle next week, in our view. We expect the Bank of Canada to continue cutting interest rates as well.
   
• Bond yields edge higher - Bond yields rose, with the 10-year Government of Canada yield at 2.91% and the 10-year U.S. Treasury yield at about 3.66%. 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 is on track to start a rate-cutting cycle next week that will likely continue for several meetings. Bond markets are currently pricing in expectations for 2.5% of Fed interest-rate cuts over the next 12 months, which would put the fed funds rate below 3%***. 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 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}