- Stocks give back some of Friday's gains - Equity markets finished lower to start the week, pressured by higher interest rates and oil prices, though the TSX outperformed because of the latter. Geopolitical tensions remain high, as investors await Israel's response to the recent Iranian missile strike, pushing WTI oil to $77*. The energy sector was the only one in the green, building on last week's 7% gain in the U.S. and 6% in Canada*. On the other hand, the mega-cap tech stocks and rate-sensitive sectors closed lower today, as the benchmark 10-year Treasury yield topped 4% in the U.S. and 3.25% in Canada. Despite today's risk-off tone, equities are not far off their record high, and the economy remains on solid footing as we navigate the last quarter of the year.
- Yields rise on Fed rethink - The 10-year GoC yield rose to its highest since last July, as investors digest Friday's strong U.S. jobs report*. The report eased concerns about the state of the labour market and demonstrated that the U.S. economy remains on solid ground, consistent with the soft-landing path. Even though the solid job gains and wage growth support consumer spending -- a clear positive for the ongoing expansion -- they also imply a more gradual path of Fed rate cuts. This is consistent with Fed Chair Powell's message from last week that he does not feel the Fed is in a hurry to cut rates quickly. In response, bond markets are now pricing in a 0% chance of another outsized rate cut in November, with policymakers likely moving by the typical quarter-point moves in the two remaining Fed meetings of the year*. The shifting rate expectations are a near-term headwind for bond prices, but we continue to think that the path of least resistance for yields is lower, as the Fed and BoC move their policy toward a more neutral rate (3.0%-3.5% in the U.S. and around 2.5% in Canada) over the next 18 months.
- Focus shifts to inflation, earnings and Canada jobs - The highlight in the economic calendar this week is the U.S. inflation numbers (CPI on Thursday, PPI on Friday) and the Canada employment report. The former is likely to show that September was another month of muted price increases. Expectations are that the headline CPI will rise 0.1% from the month before and 2.3% from a year ago, the slowest pace since early 2021, helped by a drop in energy prices. The core index is holding steady at 3.2% year-over-year*. In Canada, expectations are for a 30,000 job gain and a slightly uptick in the unemployment to 6.7%, as the pace of job additions lags population growth. On the corporate front, the third-quarter earnings season kicks off with the banks on Friday. With valuations elevated, earnings will likely have to carry the heavy load if markets are to build on their now almost two-year rally. Consensus expects earnings for the quarter to grow 4.2%, the fifth consecutive quarter of growth but a slight slowdown from the second quarter. Tech is still expected to lead the growth, followed by health care and communication services. On the flip side, energy and materials are expected to report earnings declines for the quarter*. In our view, solid economic growth should continue to support positive earnings growth for stocks this year and next, helping sustain the bull market. However, the 15% earnings growth analysts have penciled in for the S&P 500 might be a bit optimistic*.
Angelo Kourkafas, CFA
Investment Strategist
Source: *FactSet
- Stocks close higher on strong jobs report: The TSX and major U.S. equity markets closed higher on Friday, with small-cap stocks leading large- and mid-cap stocks. Sector performance was broad, as financial and consumer discretionary stocks led to the upside. In global markets, Asia was mixed, while Europe closed higher. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil was up on risks of supply disruption in the Middle East, and gold traded lower.
- Employment report shows faster job growth – Total U.S. nonfarm payrolls grew by 254,000 in September, well above estimates for 140,000* and the average monthly gain of 203,000 over the past 12 months**. Job gains for July and August were also revised higher by 77,000**. The unemployment rate ticked down to 4.1%. Hourly earnings were up 4.0% annualized, above estimates for a 3.8% rise*, which should be supportive of consumer spending. The East Coast port strike also ended on a tentative deal with shippers and port operators, removing a potential risk to supply chains and the labour market. These readings reflect a resilient labour market that is gradually cooling, which is supportive of economic growth and the soft-landing narrative, in our view.
- Bond yields rise: Bond yields were up, with the 10-year Government of Canada yield at 3.2% and the 10-year U.S. Treasury yield at about 3.97%. With the strong U.S. jobs report, bond markets are now pricing in a slightly slower pace of Federal Reserve easing, reflecting expectations for 1.5% of interest-rate cuts over the next 12 months***. With the Fed's dual mandates of maximum employment and stable prices coming into better balance as the labour market gradually cools and inflation moderates, we believe the Fed remains on track to continue cutting rates for the next several months. Outsize cuts are likely off the table, unless the labour market weakens, in our view. We expect the Bank of Canada to continue cutting rates as well, as inflation has moderated toward the middle of the target range. 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 close lower ahead of key jobs data: Equity markets finished lower on Thursday, as geopolitical risks and concerns over striking workers at U.S. ports continue to weigh on market sentiment. At a sector level, energy was the top performer of the S&P 500, gaining over 1% and supported by a sharp rise in crude oil prices, while most other sectors were flat to lower.* The surge in oil prices was driven by ongoing tensions in the Middle East, which drove a more than 5% gain in oil prices today.* Overseas, Asian markets were mixed overnight, with Japan's Nikkei gaining nearly 2%, while the Hang Seng Index (Hong Kong) fell by roughly 1.5%.* The decline in the Hang Seng was the first daily decline in six trading days after the index surged by more than 20% since September 23 on news of economic stimulus from China policymakers.* On the economic front, the U.S. ISM services PMI rose to 54.9, well above expectations and its highest since February 2023.* Bond yields finished the day higher, with the 10-year GoC yield ticking up to 3.1% and the 10-year U.S. Treasury yield closing around 3.85%.* Looking ahead, market focus will shift to tomorrow's U.S. employment situation report, which will provide a read on job growth and the unemployment rate.
- U.S. jobs data points to healthy labour-market conditions: It's been a busy week of U.S. labour-market data, with a handful of readings pointing to healthy labour-market conditions. Tuesday brought the Job Openings and Labor Turnover Survey for August, which showed job openings increased to roughly 8 million for the month, above consensus expectations and the prior month's reading of 7.7 million.* The uptick in job openings brought the job-openings-to-unemployed ratio to 1.1 in August (meaning there was 1.1 U.S. job openings for every person unemployed) which is roughly in line with the 10-year average and well above the 20-year average of 0.74.* In our view, this signals that while demand for labour has moderated, it remains healthy when compared with recent history. Yesterday brought the ADP private-employment survey, which showed private employers added 143,000 jobs in September, above last month's gain of 103,000 and above consensus expectations for a 125,000 gain.* In addition, jobs gains were broad-based, with goods-producing industries, such as construction and natural resource mining, posting strong job growth along with services industries, such as leisure and hospitality.* This morning brought a read on U.S. initial jobless claims, which rose modestly to 225,000, slightly above expectations for 221,000.* For perspective, initial jobless claims averaged roughly 311,000 from 2010 – 2019, signaling that claims remain low compared with recent history.* Tomorrow will bring perhaps the most anticipated labour-market report for the week with the release of the nonfarm-payrolls report for September. Expectations are for nonfarm payrolls to rise by 140,000 and for the unemployment rate to hold steady at 4.2%.* Overall, the data out this week has been consistent with our view that the U.S. labour market is cooling from historically tight levels, but not collapsing.
- Geopolitics and U.S. port strike weigh on market sentiment: Despite strong U.S. labour-market readings, equity markets are modestly lower this week as striking port workers and geopolitical risks in the Middle East have weighed on market sentiment. On Tuesday, Iran fired roughly 200 ballistic missiles at Israel, most of which were intercepted. Israel has vowed to retaliate, which has raised market concerns that a retaliation from Israel could lead to oil-supply disruptions. Oil was higher by roughly 5% today and up roughly 8% this week.* From a market standpoint, the U.S. has been able to become more self-sufficient with regard to energy production in recent years, which could mitigate some of the risk if there is a disruption to oil supply. In addition, the strike at U.S. East and Gulf Coast ports is entering its third day, with roughly 45,000 dockworkers striking on October 1. Recently, the Biden administration has put pressure on the employers to negotiate with workers; however, President Biden has repeatedly stated his administration will not intervene to end the strike. While there could be negative short-term impacts, we expect the strike to be less impactful than the supply-chain disruptions following the pandemic. Additionally, port traffic was elevated earlier this year, which suggests some firms stockpiled inventory in anticipation of potential strikes (negotiations have been at a stalemate since June), and which could help mitigate short-term supply disruptions.
Brock Weimer, CFA
Associate Analyst
Source: *FactSet
- Stocks close modestly higher – Stock markets in the U.S. closed higher on Tuesday, while the Canadian TSX fell modestly. Geopolitical tensions remained in focus, as investors await the response from Israel after an Iranian missile strike. Commodity prices reflected this uncertainty, as WTI crude oil prices continued to move higher, up over 4% in the last two days*. The VIX volatility index, also known as the Wall Street fear gauge, also remained elevated, up over 10% this week, although still relatively contained around 19*. Meanwhile, bond yields stabilized after falling on Monday, as news of the Middle Eastern tensions sparked a flight to safe-haven assets. The 10-year Treasury yield remains around 3.78%, still well below its April high of 4.7%*, reflecting both the start of the Fed rate-cutting cycle and softer inflation and economic growth trends.
- Geopolitical tensions take center stage – Geopolitical tensions escalated in the Middle East after Iran fired about 200 ballistic missiles at Israel, which were largely intercepted. Israel has vowed to retaliate, and the flaring tensions have increased the odds of further escalation in the Middle East. Markets have started to reflect the growing risk, as oil prices and commodity prices have moved higher. In addition, immediate reactions included a rise in safe-haven assets, such as gold prices and Treasury yields, and a move higher in the VIX volatility index*. However, since Monday, many of these trades have reversed, as news broke that casualties and damage had been contained. We believe that geopolitics remains a tail risk, and the key risk would be a major escalation in the Middle East, which could drive supply of oil and energy lower and prices higher. However, given that the U.S. and other economies have been able to increase oil and energy production in recent years, especially in the post-pandemic era, some of the risk around supply disruption has been mitigated.
- U.S. nonfarm-jobs report out on Friday – Investor attention will shift to the U.S. jobs report for the month of September, which is out on Friday. In the last two months, the jobs report has surprised to the downside, with outsized negative revisions sparking market volatility. This month's report, however, is expected to show some signs of stabilization. The total jobs added are forecast to be a modest 150,000, only slightly higher than last month's 142,000, but below this year's average of 200,000 jobs added*. The unemployment rate is expected to remain steady at 4.2%, while average hourly earnings are expected to tick lower from 0.4% to 0.3% month-over-month*. In our view, the labour market in the U.S. has clearly cooled, but this still appears to be a normalization after outsized strength in the post-pandemic period. While the unemployment rate has moved higher from its lows last year of 3.4%, it remains well below long-term average unemployment rates in the U.S. of 5.5% - 6.0%*. In addition, the increase in unemployment has been driven largely by new entrants coming into the workforce, rather than large increases in job cuts or layoffs. We believe that this cooling but still steady labour market remains supportive of household consumption broadly.
Mona Mahajan
Investment Strategist
Source: *FactSet
- Stocks kick off October on a cautious note - Major global equity indexes finished lower on the first trading day of the month following a strong September, but the TSX was able to outperform. Investors are closely watching the developments in the Middle East and at U.S. ports amidst a historic strike, while digesting Fed Chair Powell's commentary yesterday about a gradual approach to rate cuts. Headlines that Iran fired missiles at Israel following an advance of armed forces into Lebanon triggered a 3% spike in oil prices, though prices remain near a two-year low. The energy sector led the gains, while technology shares lagged*. Elsewhere, European markets also declined, and the U.S. dollar strengthened after inflation in the region slowed below the Europe Central Bank's (ECB) 2% target for the first time since 2021*. This increased hopes that the bank may cut interest rates again in October. In China, stocks are closed for a holiday, but optimism in the region persists after last week's wide-ranging stimulus announcements triggered the biggest outperformance in Chinese equities relative to their emerging-market peers in 25 years*.
- Gauging disruption potential from port strike - A historic strike is underway, as 45,000 dockworkers operating 36 East Coast and Gulf Coast ports went on strike overnight*. This is the first such strike since 1977 and has the potential to affect as much as half of all U.S. trade volumes, triggering an economic disruption and putting upward pressure on prices for goods, if it is prolonged. The situation is fluid, but despite the potential negative short-term implications, we think that the strike could be less impactful than the 2021 post-pandemic port backup and is unlikely to trigger a major economic disruption. Container traffic has risen earlier this year than in the past, as companies have likely stockpiled in anticipation of strikes (the contract talks have been in a stalemate since June). Also, West Coast ports are more important than East Coast ports for holiday goods, and importers can redirect the flow of goods, though at a higher cost. Lastly, if an agreement is not reached, the Biden administration could intervene by imposing an 80-day cooling-off period, forcing workers to return while negotiations continue.
- Focus turns to U.S. jobs, as the third quarter wraps up with big gains - Equity markets turned the page on another strong quarter, the fourth in a row, with the S&P 500 gaining 5.5% and the TSX almost 10% *. While the shift in Fed policy has helped lift stocks broadly, it is a mix of defensive and cyclical sectors that led the charge (real estate, utilities, financials, industrials), rather than the usual suspects (tech, communication services and consumer discretionary). Showcasing the broadening in leadership, the Nasdaq trailed the equal-weighted S&P 500 for the quarter, while value-style investments, along with small- and mid-cap companies, outperformed. With sizable gains already in the books, attention now turns to the labour market, which has been a source of volatility over the past two months. Data on job openings will be released today, followed by private payrolls tomorrow and the September jobs report on Friday. Expectations are for the U.S. economy to add 150,000 jobs, a slight acceleration from the previous month, with the rate of unemployment holding steady at 4.2%*. In our view, the job market is clearly cooling, but that is, so far, driven by more people joining the work force rather than companies increasing the pace of layoffs. We think the combination of a slowing but still growing economy and the proactive Fed rate cuts to remove restriction can help sustain the economic expansion and bull market, with episodes of volatility along the way.
Angelo Kourkafas, CFA
Investment Strategist
Source: *FactSet