- 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
- 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