Daily market snapshot

• Stocks mixed on inflation report: The TSX reached a new record high, while major U.S. equity markets traded lower Thursday, with small- and mid-cap stocks trailing large-cap stocks. Sector performance was broadly lower, as energy and materials stocks led to the upside. Bond yields were mixed, with the 10-year Government of Canada yield down at 3.23% and the 10-year U.S. Treasury yield near 4.07%. In global markets, Asia was higher, while Europe was down. The U.S. dollar declined versus major currencies. In the commodity space, WTI oil was up on supply risks in the Middle East, and gold also traded higher*.
   
• Key inflation measures mixed: The U.S. consumer price index (CPI) ticked down to 2.4% annualized in August - above estimates for 2.3% - but the lowest reading since February 2021. Core CPI, which excludes more-volatile food and energy prices, edged higher to 3.3% on a year-over-year basis, also above expectations to hold steady at 3.2%**. Shelter inflation resumed its trend lower but remained elevated at 4.9% annualized, accounting for the majority of core inflation. We believe these readings are consistent with inflation that continues to moderate gradually, though the path lower will likely be bumpy, at times potentially slower than market expectations. This progress should be sufficient to keep the Federal Reserve (Fed) on track to continue its rate-cutting cycle, in our view. Average hourly earnings were up 4.0% annualized as expected, outpacing inflation, which should be supportive of consumer spending.
   
• Jobless claims rise: U.S. jobless claims rose to 258,000*** this past week, above estimates for 229,000*. This reading reflects a labor market that is normalizing from a period of outsized strength, but not collapsing, which we believe is supportive of continued growth and the "soft landing" narrative for the U.S. economy. A cooling labor market should also lead to slower wage gains ahead, which typically ease services inflation.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **U.S. Bureau of Labor Statistics *** U.S. Department of Labor}

• Markets maintain momentum ahead of inflation data: U.S. stocks closed higher on Wednesday, with the S&P 500 hitting a new record high, as investors await the latest read on inflation set to be released on Thursday. The increase added to a solid gain on Tuesday, as markets continue to be buoyed by encouraging economic data and a more friendly policy stance from the Fed. Under the hood, technology and health care were among the best performers today, displaying some balance across defensive and growth areas. Gold and oil prices finished lower, with crude pulling back from a recent surge spurred by uncertainties in the Middle East. Emerging-market equities were a notable mover today, with Chinese stocks falling sharply, as some details around policy stimulus failed to live up to the expectations that have powered the October rally in China's stock market.*
   
• Rates on the rise: The most noteworthy move of late has occurred in the bond market, with interest rates jumping so far in October, as the strong September jobs report has prompted markets to rethink expectations for upcoming Fed rate cuts. Ten-year Treasury yields were higher again today, back above 4% for the first time in more than two months. The rally has been even steeper in short-term rates, with the 2-year Treasury yield also topping 4%, having been at 3.5% just two weeks ago.* It's encouraging to see that equity markets have not panicked in response to higher rates. We view the strength in stocks in the face of higher rates as appropriate, given that the upward move in yields is a reflection of economic resilience and not a jump in inflation. We don't think this signals a Fed that will have to abandon its plans for further rate cuts, but this is consistent with our existing view that the Fed will need to take a more gradual approach to its easing cycle, given the potential for economic strength to limit the pace of moderation in inflation in the coming months.
   
• Big finish to the week: The data calendar has been rather light so far this week, but that's about to change in the days ahead. The most intense focus will be on Thursday's consumer price index (CPI) report, which is expected to show a slight moderation in the headline figure, trending back toward its lowest levels since 2021. Stripping out the food and energy categories, core CPI is anticipated to hold near 3.2%. Categories like vehicle and leisure prices will be worth watching, but the real focus will be on shelter prices, which have been the fly in the ointment for falling inflation. Any signs that pressure from home and rent prices are abating will be encouraging. On the other hand, any indications that the ongoing strength in the economy is disrupting the disinflationary trend would likely be a spark for market volatility, at least temporarily. The spotlight will then swing on Friday toward corporate earnings reports, with the big U.S. banks (JP Morgan, Wells Fargo) kicking off earnings season. While trends in the labor market and inflation are central to the fundamental backdrop, we think the path ahead for corporate earnings growth will be a central driver of market performance as we head into and through 2025. Expectations are for roughly 15% EPS growth for the S&P 500 in 2025.* That is a lofty but achievable figure, in our view. We'd also characterize it as necessary, given the 20% year-to-date rally in the market and elevated valuations that have priced in an optimistic outlook for profits.

Craig Fehr, CFA
Investment Strategy

^{Source: *FactSet}

• Stocks finish mixed: U.S. equity markets finished higher on Tuesday, with broad participation across sectors. The technology and consumer discretionary sectors were among the top performers of the S&P 500; however, most sectors finished the day higher. Energy and materials were the notable laggards, moving lower on weaker commodity prices stemming from disappointing news overnight from China. Weakness in commodity prices weighed on Canadian equities, with the TSX closing modestly lower on the day. Asian markets were mostly lower overnight, with the Japan's Nikkei declining by roughly 1% and the Hang Seng Index (Hong Kong) finishing lower by more than 9%.* Prior to today, the Hang Seng had rallied roughly 35% since September 11 on hopes that China policymakers would enact fiscal stimulus measures to support the slumping economy.* At a press conference overnight, however, China's national planning agency, the National Development and Reform Commission, announced very little in the form of new stimulus.* The disappointing news out of China weighed on commodity markets as well, with crude oil closing lower by more than 4%.* Bond yields were little changed on the day with the 10-year GoC yield finishing around 3.05% and the 10-year U.S. Treasury yield closing at 4.02%.*
   
• U.S. inflation and domestic labour market in focus: Inflation will be centre stage for markets this week, with the release of U.S. consumer price index (CPI) inflation on Thursday and U.S. producer price index inflation on Friday. Expectations are for headline CPI to rise by 0.1% month-over-month and tick lower to 2.3% on an annual basis.* Core CPI (which excludes food & energy) is expected to rise by 0.2% month-over-month and hold steady at 3.2% on an annual basis.* Expectations for headline PPI are for 1.6% year-over-year growth versus the prior month's reading of 1.7%.* Inflationary pressures have eased after running higher than expected in the first quarter of this year. The three-month annualized rate of change in core CPI rose by a modest 2.1% in August, in line with the Fed's 2% inflation target. Our expectation is for U.S. inflation to continue to move lower in the months ahead; however, we wouldn't rule out bumps along the way, particularly as U.S. economic growth has been healthy and wage growth remains strong. On the domestic front, we'll have to wait until October 15 for the release of Canadian CPI inflation; however, this Friday will bring the September Labour Force Survey. Expectations are for employment to grow by 26,000 in September, up from 22,000 in the prior month, while the unemployment rate is expected to hold steady at 6.6%.*
   
• Stocks have historically wavered in October of U.S. election years before rebounding in the final two months: Over the long-term we believe it's economic conditions and fundamentals such as corporate profits and interest rates that drive market performance - not the calendar or politics. However, it's worth acknowledging that, historically, stocks have wavered in October of U.S. election years before rebounding in the final two months. Since 1952 the S&P 500 has on average declined by 0.8% in the month of October in election years.** Excluding October of 2008, when the S&P 500 declined by over 16% in the midst of the Global Financial Crisis, the S&P 500 averaged a modest 0.1% gain in October. Of the 18 presidential elections over this time, returns were positive only nine times, or 50% of the time.** However, stocks have historically rallied in November and December of election years. In November, returns were positive 61% of the time, with an average monthly gain of 2%.** December has been strong as well, with returns positive 83% of the time, with an average gain of 1.3%.** While market volatility may increase as we approach Election Day, history suggests that stocks can finish the year strong as election related uncertainty subsides.

Brock Weimer, CFA
Associate Analyst

^{Source: *FactSet **Morningstar Direct, Edward Jones and S&P 500 Price Index.}

• 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}