Daily market snapshot

• Stocks rise ahead of the holiday – Investors returned to a festive mood, with U.S. and Canadian equities rising ahead of the Christmas holiday tomorrow. Trading was quiet with markets closing early and the tech-heavy Nasdaq added to yesterday's outperformance. Shares of American Airlines pared some of their earlier losses as the company briefly grounded U.S. flights due to a technical issue. U.S. and Canadian government bond yields rose for the second day with the 10-year at 4.6% and 3.3% respectively*. The recent outsized rise in U.S. yields is helping keep the dollar firm against other currencies including the loonie.  Elsewhere, several European markets were closed but France's CAC rose after new prime minister vowed to cut budget gap.
• The U.S. 10-year yield edges near the high of the year - Last week's Fed decision and updated projections were a catalyst for a shift higher in interest rate expectations as policymakers now see fewer cuts in 2025. The economy continues to perform well and there is some uncertainty around how fast inflation will return to target, which is why the Fed is in no rush to cut rates. With days left to end the year, cash has outperformed U.S. and Canadian investment-grade bonds for the third time in the past four years*. However, the Fed and BoC easing cycles will continue in 2025 and cash yields are already below bond yields, which sets up bonds well to outperform cash investments in our view next year. 10-year yields might spend most of 2025 in the 4% to 4.5% range in the U.S. and in the 2.75%-3.25% range in Canada as we believe there are guardrails on both sides. Additional Fed rate cuts and bond purchases should help keep yields from rising meaningfully. On the other hand, resilient growth, widening deficits and uncertainty around inflation could prevent yields from sustainably falling much further.
• Another strong year despite a bumpy end - Despite the December pullback, U.S. stocks remain on track to post more than 20% gains for the second consecutive year and the TSX is up 18% year-to-date*. The Magnificent 7 stocks accounted for more than half of the S&P 500's advance, though market breadth improved in the second half of the year*. We think solid fundamentals will extend the bull market into 2025, but volatility will likely pick up as investor sentiment is heating up. We expect earnings growth to do the heavy lifting for market returns instead of further valuation expansion, implying slower gains but still positive returns. And despite the narrow gains over the past two years, we see scope for market leadership to broaden beyond the mega-cap tech. While we recommend keeping expectations about returns realistic, there are reasons to be optimistic about the investment outlook for the year ahead. Economic growth remains healthy, corporate profits are on the rise and central bank policy is becoming less restrictive.

Angelo Kourkafas, CFA
Investment Strategy

^{Source: *FactSet}

• Stocks start the holiday week higher – The TSX and U.S. equity markets rose on Monday, recouping losses from earlier in the trading session. Sector performance was broad, as communication and technology stocks led markets higher. Canada real GDP grew 0.3% month-over-month in October, above estimates calling for 0.1% and the prior month's reading of 0.2%. In global markets, Asia was up, boosted by the lower-than-expected U.S. personal consumption expenditure (PCE) inflation readings from last week and the prospect of the Honda-Nissan merger potentially stabilizing Nissan, which has experienced declining sales in recent years*. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil traded lower on expectations for a supply surplus and continued U.S. dollar strength*.
• Potential U.S. government shutdown avoided – Congress passed a continuing budget resolution last Friday evening in bipartisan fashion. President Biden signed the funding bill into law on Saturday, capping a chaotic few days of negotiations and ending the possibility of a government shutdown. The stopgap plan will fund the government at current levels for three months and provide additional disaster relief and farm aid. Raising the Treasury debt ceiling, which had been part of an earlier proposal at President-elect Trump's request, was not included due to lack of support*. We believe the spending package is positive for markets as it removes the risks of a government shutdown, including the potential for disrupted services and delays in government-employee paychecks.
• U.S. bond yields rise to their highest since May – The 10-year Government of Canada yield was little changed at 3.29%, while the 10-year U.S. Treasury yield was up at 4.59%, continuing its broader trending higher over the past few months. The U.S. benchmark yield has risen about 95 basis points (0.95%) from the recent low in September as bond markets** and the Federal Reserve's Federal Open Market Committee (FOMC)*** have reduced expectations for cuts to the fed funds rate. Markets are now pricing in just one additional interest rate cut over the next year as disinflation has slowed and labor markets remain resilient.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet ** CME FedWatch *** U.S. Federal Reserve}

• Stocks rally following key U.S. inflation data: Equity markets finished sharply higher on Friday, reversing losses to begin the day. Markets continued to digest Wednesday's Fed economic projections and contend with the possibility of a U.S. government shutdown. Domestic politics remain in headlines as well, with Prime Minister Justin Trudeau under pressure to resign following finance minister Chrystia Freeland's resignation earlier this week.* Markets looked through the political uncertainty, with the TSX gaining 0.9% and the S&P 500 rising by more than 1% on the day.* Overseas, Asian markets were lower overnight, and European markets traded lower following retail sales data from the U.K. that was softer than expected, while German producer price inflation was higher than expected.* On the economic front, the Fed's preferred measure of inflation, core PCE, rose by 0.1% in November and 2.8% annually, both of which were below expectations.* The lower-than-expected inflation reading surfaced in markets through lower bond yields, with the 10-year Treasury yield ticking down to around the 4.53% mark while the 10-year GoC yield fell to 3.29%.*
• Potential U.S. government shutdown looms: Political uncertainty in the U.S. has been no stranger to markets in 2024 and is back in focus today, as the U.S. faces a possible government shutdown. On Wednesday, President-elect Donald Trump expressed opposition to a bipartisan deal backed by House Speaker Mike Johnson that would have extended government funding until March. On Thursday, a revised solution was proposed that would have extended government funding for three months and would have suspended the debt ceiling for two years. Overnight, this new proposal was rejected in the House; however, as of Friday afternoon, House Speaker Mike Johnson stated that an agreement had been reached on a government funding bill with a vote scheduled for later today. If no bill is passed by 12:01 a.m. tomorrow, the federal government will partially shutdown. Some functions of the government, such as public safety and air traffic control, would continue to function, while many other government workers would be furloughed. Additionally, since Treasury operations are considered essential, the U.S. would continue to make interest payments on Treasury debt. While it speaks to the dysfunction in the political system, from a market perspective we'd expect limited impact from a government shutdown. The last government shutdown, which began in December 2018, lasted 35 days.** However, the S&P 500 returned over 10% during this time.* While we could see short-term volatility due to the uncertainty, we don't expect a potential government shutdown to have a lasting impact on market performance.
• Key U.S. inflation data lower-than-expected: Personal consumption expenditure (PCE) inflation rose by 0.1% in November and 2.4% on an annual basis, both below economist expectations.* Core PCE, which is the Fed's preferred measure of inflation, rose by 0.1% in November, the lowest monthly gain since May, and 2.8% on an annual basis. Both the annual and monthly readings were below economist expectations.* Today's reading was welcome news after a string of recent inflation data that suggested the pace of disinflation is slowing.* Looking into the drivers for November, the services component of the PCE basket rose by just under 0.2%, the lowest since May, while goods prices were roughly flat on the month.* In our view, U.S. inflation should continue to trend lower over the coming months, but likely not without bumps along the way.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **Committee for a Responsible Federal Budget}

• Stocks finish mixed on Thursday: U.S. equity markets were little changed on Thursday while the TSX posted a modest decline following yesterday's Fed-induced sell-off. The TSX finished lower by 0.3%, while the S&P 500 declined by less than 0.1%. On the economic front, U.S. third-quarter real GDP growth was revised up from a 2.8% annualized gain to 3.1%, extending the recent stretch of strong economic growth. Additionally, U.S. initial jobless claims for last week were 220,000, below expectations for 229,000 and well below last week's reading of 242,000. Overseas, Asian markets were lower overnight, while European markets traded lower as well. Longer-term bond yields continue to trend higher, with the 10-year U.S. Treasury yield closing above the 4.5% mark, while the 10-year GoC yield ticked up to 3.34%.*
• Markets digest Fed rate cut and updated economic projections: Yesterday the Fed delivered a quarter-point rate cut for the second consecutive meeting, bringing the fed funds target range to 4.25% - 4.5%.* In addition to the policy-rate decision, yesterday's meeting also provided updated FOMC economic projections. The median FOMC projection for annual core PCE inflation at the end of 2025 was 2.5%, up from an estimate of 2.2% in September.** Additionally, FOMC members now project the fed funds rate will end 2025 at 3.9% versus expectations of 3.4% in September, implying only two quarter-point rate cuts in 2025 from the current range.** Looking further out, FOMC members now see the fed funds rate reaching 3.1% by the end of 2027, up from the September projection of 2.9% and implying that interest-rates could stay high for longer.** After opening the day flat, stocks sold off sharply Wednesday, with the S&P 500 declining by nearly 3% and the TSX shedding 2.2%. Despite yesterday's reaction, we remain optimistic about the prospect for further equity-market gains in 2025 for the following reasons:
  • U.S. economic growth remains healthy: U.S. real GDP expanded at a 3.1% annualized clip in the third quarter, signaling healthy economic growth.* In particular, consumer spending (which is responsible for nearly 70% of U.S. GDP) grew by a robust 3.7%, while nonresidential investment grew by a healthy 4%, signaling that businesses continue to invest despite elevated borrowing costs. Acknowledging this strength, the Fed upgraded its GDP estimate for this year to 2.5% from 2%. Additionally, the NFIB Small Business Optimism Index rose to its highest since 2021 in November, reflecting improved sentiment from small businesses after a period of weakness. While Canadian economic growth has lagged, signs of improvement have emerged, with household consumption growing at a 3.5% annualized clip in the third quarter, the best rate in over a year.* Lower interest rates from the Bank of Canada over the coming months could provide further support to domestic household spending.
  • Labour-market conditions are supportive: A key driver of resilient economic growth over the past two years has been a strong labour market. The U.S. unemployment rate registered at 4.2% in November, well below the 30-year median of 5.1%.* Additionally, the strong U.S. nonfarm-payrolls gain in November brought the 2024 monthly average to 190,000.* While below the 2023 average payroll growth of 251,000, this year's pace of job creation remains above the 10-year average of 160,000.* In Canada, the unemployment rate rose to 6.8% in November, below the 30-year median of 7.1%.*
  • Corporate profits are rising: After roughly flat growth in 2023, S&P 500 earnings per share is expected to grow by 9% in 2024, which would be the strongest annual earnings growth rate since 2021.* Looking ahead to 2025, analysts expect S&P 500 earnings to grow by nearly 15%.* The TSX is expected to see healthy earnings growth as well, with 2024 estimates calling for 4.4% earnings growth and 2025 estimates pointing to nearly 12% growth.* We believe a healthy economy creates a solid foundation for corporate profits to expand in 2025.
• Global central banks in focus: In addition to the Fed, interest-rate decisions from the Bank of England (BoE) and Bank of Japan (BoJ) are in focus this week. The BoE opted to leave its policy rate at 4.75% this morning. Economic growth in the U.K. has been relatively lackluster, with real GDP contracting in both October and September while inflation has been stubborn. The BoJ opted to hold its policy rate steady overnight as well, at 0.25%.* Unlike most other developed-economy central banks, the BoJ is looking to raise interest rates, as Japan's economy looks to overcome sluggish economic growth and deflationary pressures from the past several decades.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **December 2024 FOMC Summary of Economic Projections}

• Stocks drop on Fed outlook for fewer interest-rate cuts ahead – The TSX and major U.S. equity markets closed sharply lower on Wednesday as the Federal Reserve (Fed) cut its policy rate, as expected, but also signaled expectations for fewer rate cuts over the next few years. The Dow Jones Industrial Average declined for the 10th consecutive trading day, the longest down streak in 50 years*. All sectors were down for the day, as consumer discretionary and real estate stocks led markets lower. In global markets, Asia was mixed, as investors assessed Japan's smaller-than-expected trade deficit for November and as markets await the Bank of Japan's rate decision (no change expected). Bond yields rose, with the 10-year Government of Canada yield at 3.21% and the 10-year U.S. Treasury yield at 4.51%. The U.S. dollar advanced versus major currencies on the prospect of higher U.S. interest rates relative to those of international markets. In the commodity space, WTI oil and gold traded lower*.
• Fed cuts policy rate and releases updated economic projections - The Fed's Federal Open Market Committee (FOMC) concluded its December meeting today, cutting the target range for fed funds by 25 basis points (0.25%), as expected**. This action marks the third rate cut of this cycle, bringing the policy-rate target range to 4.25% - 4.5%. The fed funds rate likely remains in restrictive territory at about 1.5% above the Fed's preferred core inflation measure, as a neutral rate is generally about 1% above inflation. We expect the Fed to slow its pace of easing, potentially pausing in January, followed by no meeting scheduled for February. FOMC also updated its economic projections for the next few years, cutting expectations to two rate cuts next year, down from four, while revising up forecasts for growth and inflation***.
• Attention turns to Fed's preferred inflation gauge - The U.S. personal consumption expenditure (PCE) index for November will be released on Friday, with forecasts calling for inflation to rise to 2.5% annualized, up from 2.3% the prior month*. The Fed's preferred inflation measure, core PCE, which excludes more-volatile food and energy prices, is expected to tick up to 2.9%. Looking at more recent trends, core PCE is forecast to rise 0.2% month-over-month -- about in line with the average over the past six months -- which translates to 2.4% inflation annualized. Core PCE remains above the Fed's 2% target, largely due to still-elevated shelter inflation. However, the shelter component continues to moderate, up 5.0% year-over-year in October, compared with over 6.0% earlier in the year. Shelter PCE should continue to slow as it catches up to market-based measures, such as the Case-Shiller U.S. National Home Price Index****, which was up 3.9% in September from a year earlier.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet ** CME FedWatch *** U.S. Federal Reserve ****S&P Dow Jones Indices}