Daily market snapshot

U.S. Thanksgiving Holiday

Wednesday, 11/27/2024 p.m.

• Stocks finish mixed: Major equity markets finished mixed on Wednesday with the TSX closing modestly higher while the S&P 500 fell by roughly 0.4%.* Real estate and health care were the top performing sectors of the S&P 500 while technology was a laggard following mixed earnings results from Dell Technologies after the market close yesterday.* Overseas, European markets traded lower while Asian markets were mixed overnight with Japan's Nikkei logging a modest decline while equity markets in China were higher.* On the economic front, the second preliminary estimate for third-quarter U.S. GDP growth was in-line with expectations and unchanged from the initial estimate of 2.8%.* U.S. inflation data was in focus today as well with personal consumption expenditures (PCE) inflation in-line with expectations for both core and headline PCE. Bond yields finished lower with the 10-year GoC yield falling to 3.22% and the 10-year U.S. Treasury yield ticking down to 4.25%.*
• U.S. inflation data in-line with expectations: U.S. inflation data was back in focus today with the release of October personal consumption expenditures (PCE) inflation. Headline PCE rose by 0.2% in October and 2.3% over the past 12-months, both of which were in-line with expectations. Core PCE rose by 0.3% in October and 2.8% over the past 12-months, which were also both in-line with expectations. Markets are pricing in a 66% probability of another 0.25% rate cut at the Fed's December 18 meeting.*** In our view, another 0.25% cut in December is likely, however with the U.S. economy on strong footing and the potential for inflationary fiscal policy down the road, the Fed will likely take a more gradual approach to rate cuts in 2025.
• The past 12-months have seen strong returns across multiple asset classes: The past 12-months have seen above-average returns across a variety of different asset classes and regions, building on strong performance in 2023. Canadian large-cap stocks have gained roughly 30% over the past 12-months, well above the 20-year annualized growth rate of roughly 8%.** U.S. large-cap stocks have seen impressive returns as well, rising by more than 37% over the same time, while U.S. small- and mid-cap stocks have gained over 38%. Despite underperformance more recently, overseas stocks have managed healthy returns, with overseas developed large-cap stocks higher by roughly 14% and emerging-market stocks up roughly 17%.* Additionally, Canadian investment-grade bonds have posted a gain over 8% in the past 12-months despite a spike in yields more recently. While it will be difficult to replicate the strong performance of the past 12-months, we see broad leadership as a theme that continues to play out in the months ahead, emphasizing the importance of maintaining a well-diversified portfolio aligned to your long-term goals.

Brock Weimer, CFA 
Associate Analyst

^{*FactSet **Morningstar Direct. Total Return in CAD. ***CME FedWatch Tool}

• Stocks rise as tariff rhetoric heats up – The TSX and major U.S. equity markets closed higher on Tuesday, with the S&P 500 and Dow Jones Industrial Average reaching record highs. Social media posts from President-elect Trump call for 25% tariffs on goods from Canada and Mexico, as well as an additional 10% tariff on products from China. The tariffs on the Canada and Mexico are modestly higher than the 10%-20% previously proposed, while the China tariff is lower than up to 60% mentioned during the campaign. Raising tariffs on Canada and Mexico would likely face legal hurdles as trade with these countries is subject to the U.S.-Mexico-Canada Agreement (USMCA), which was negotiated during Trump's first term and entered into in 2020. Tariffs on goods from China may be more likely to be imposed as they benefit from bi-partisan support in Congress. In global markets, Europe was down as markets assessed the global implications of potentially higher U.S. tariffs. The U.S. dollar is advancing versus major currencies. In the commodity space, WTI oil traded lower as Israel and Lebanon reportedly agreed to a ceasefire*.
• Markets focus on key inflation readings this week – The personal consumption expenditure (PCE) index for October will be released on Wednesday, with forecasts calling for inflation to rise to 2.3% annualized, up from 2.1% the prior month*. This estimate is in line with the Federal Reserve's (Fed) full-year projection for 2024. The Fed's preferred inflation measure, core PCE, which excludes food and energy prices, is expected to tick up to 2.8%. We believe these expectations reflect inflation that is gradually cooling, though the path will likely be bumpy along the way. With the target range for the fed funds rate currently 4.5%-4.75%, monetary policy is restrictive, as a neutral rate is generally considered to be about 1% above inflation. We expect the Fed to continue cutting interest rates, though the pace is likely to slow. Bond markets are currently pricing in expectations for 0.75% of Fed rate cuts over the next 12 months**. We believe the Bank of Canada is likely to remain in its rate-cutting cycle as well, with CPI inflation at 2.0% in the middle of the central bank's target range of 1%-3%.
• Rising short-term yields briefly invert yield curve – Short-term Treasury yields have risen in recent months as markets have scaled back Fed interest-rate-cut expectations. The 2-year Treasury yield has risen about 75 basis points (0.75%) in recent months, briefly surpassing 10-year yields on Monday, known as an inverted yield curve. The yield curve is now slightly positive, with the 10-year Treasury yield at 4.30% and 2-year yield at 4.25%. In our view, this bond market signal does not reflect recession concerns but rather is the result of adjusting expectations to a slower pace and shallower path of Fed rate cuts. Bond yields in Canada declined, with the 10-year Government of Canada yield at 3.27%.

Brian Therien, CFA 
Investment Strategy 

^{Source: *FactSet **CME FedWatch}

• Stocks start the week mixed – The TSX declined modestly, while major U.S. equity markets closed higher on Monday, with the Dow Jones Industrial Average and Russell 2000 small-cap index reaching record highs. The positive market reception to the nomination of hedge fund manager Scott Bessent to be the next U.S. Treasury secretary appears to be supporting strong investor sentiment. Sector performance was broadly higher, as real estate and consumer discretionary stocks led to the upside. In global markets, Asia was mostly higher to start a busy week of economic data, as investors await China industrial output, India third-quarter GDP, and inflation from Australia and Japan. Bond yields declined, with the 10-year Government of Canada yield at 3.31% and the 10-year U.S. Treasury yield near 4.26%. The U.S. yield curve is inverted again, with 2-year yields rising above 10-year yields, as markets have scaled back Federal Reserve (Fed) interest-rate-cut expectations. The U.S. dollar declined versus major currencies. In the commodity space, WTI oil and gold traded lower.
• Markets focus on key inflation readings this week – The personal consumption expenditure (PCE) index for October will be released on Wednesday, with forecasts calling for inflation to rise to 2.3% annualized, up from 2.1% the prior month*. This estimate is in line with the Fed's full-year projection for 2024. The Fed's preferred inflation measure, core PCE, which excludes food and energy prices, is expected to tick up to 2.8%. We believe these expectations reflect inflation that is gradually cooling, though the path will likely be bumpy along the way. We expect the Fed to continue cutting interest rates, though the pace is likely to slow. Bond markets are currently pricing in expectations for 0.75% of Fed rate cuts over the next 12 months**.
• Corporate earnings season winding down – With 95% of S&P 500 companies reporting, third-quarter earnings are on pace for about 5.9% growth year-over-year. Results have been strong relative to expectations, with 75% of companies beating analyst estimates*. Earnings growth has been broad, with seven of the 11 sectors delivering higher earnings*. The sectors forecast to have lower earnings – energy, industrials, materials and utilities – represent about 17% of the market capitalization of the S&P 500*. Broadening earnings have contributed to a rotation in market leadership. Over the past six months, the consumer discretionary, financials, real estate, industrials and utilities sectors have each outperformed the communication services sector, which led markets higher earlier in the year*.

Brian Therien, CFA 
Investment Strategy 

^{Source: *FactSet **CME FedWatch}

• Stocks close higher following domestic retail sales report: Canadian and U.S. stock markets closed higher on Friday. It's been a strong week for equity markets, with the TSX logging a weekly gain of over 2%, while the S&P 500 rose by 1.7%.* On the economic front, domestic retail sales for September matched expectations for a 0.4% gain.* This month's reading brought the three-month annualized change in retail sales up to 7.2%, the best since January 2023.* Additionally, the Statistics Canada advance retail indicator suggests retail sales rose by a healthy 0.7% in October, indicating continued momentum in consumer spending. Overseas, European markets traded higher while Asian markets were mixed overnight, with Japan's Nikkei finishing higher but China stocks sharply lower.* Bond yields were little changed, with the 10-year GoC yield closing around 3.44%, while the 10-year U.S. Treasury yield finished around the 4.4% mark.*
• Focus shifts back to U.S. inflation: U.S. inflation, and its implication on future monetary policy, will be back in focus next week with the release of personal consumption expenditures (PCE) inflation on Wednesday. Market expectations are calling for headline PCE to rise by 2.3% year-over-year, up from the prior months gain of 2.1%.* Core PCE is expected to tick higher as well, with expectations for a 2.8% annual gain, up from 2.7% in the prior month.* U.S. consumer price index (CPI) inflation, which was released earlier this month, suggested the path to the Fed's 2% target could be bumpy. Core CPI rose by 3.3% annually, while the three-month annualized rate of core CPI rose to 3.6%.* Current market expectations are calling for a 60% chance of another 0.25% Fed rate cut at its December 18 meeting.** We'd align with markets that another quarter-point cut at the December meeting is a probable outcome. However, with inflation proving persistent in recent months, the U.S. economy on strong footing, and the potential for inflationary fiscal policy over the coming year, we believe the Fed could take a more cautious approach to rate cuts in 2025.
• PMI data point to weak activity abroad: Preliminary estimates for the November S&P Global Purchasing Manager Index (PMI) point to continued weakness in economic activity abroad. The eurozone composite PMI felt to 48.1 (a reading below 50 signals contraction), the lowest reading since January.* A large driver behind eurozone weakness has been sluggish activity from the region's largest economy, Germany. The German composite PMI fell to 47.3 in today's reading and has been in contraction since June.* Weak manufacturing activity has been a drag on Germany and the broader eurozone. In fact, both the German and eurozone manufacturing PMIs has been in contraction since June 2022.* Eurozone producer price inflation surged in 2022 due to the war between Russia and Ukraine, weighing on profitability for manufacturers. While prices have since started to moderate, headline eurozone PPI is over 30% higher today than at the start of 2021.* Looking around the horn, activity didn't fare much better in the U.K., with the composite PMI falling to 49.9, the first contraction since October 2023, while Japan's manufacturing PMI fell to 49, the fifth consecutive month of contraction.* Contrarily, the U.S. composite PMI rose to 55.3, a 31-month high driven by strength in the services sector.* We continue to favour the relative economic momentum of the U.S. relative to overseas regions. As part of our opportunistic asset-allocation guidance, we recommend investors consider underweighting overseas developed stocks and reallocate toward U.S. stocks.

Brock Weimer, CFA 
Associate Analyst 

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