Daily market snapshot

• Markets higher following latest inflation report: Stock and bond markets have been in wait-and-see mode this week ahead of the important U.S. consumer price index (CPI) report released Wednesday morning. The latest read on inflation produced little in the way of surprises, and as a result, markets spent most of the day fluctuating around the flat line before finding a bit of late-day footing, with the major Canadian and U.S. averages closing in positive territory. Bonds were also up slightly on the day, driving 10-year benchmark interest rates a tick lower. Looking under the hood, sectors traded in a somewhat narrow range, with cyclicals, like financials and energy, among the top gainers, while communication services stocks were the underperformer. Overall, the market's mood continues to improve following the recent pullback, with equities rebounding in recent days, putting the S&P 500's year-to-date gain back above 14%, while the TSX has risen 8% in 2024.*
• Inflation trending in the right direction, but slowly: All eyes were on the latest U.S. inflation data on Wednesday, with the July CPI reading coming in largely in line with expectations (Canada's CPI report will be released on Tuesday, August 20). Headline U.S. CPI increased 0.2% versus the prior month, putting the year-over-year change at 2.9%, the second straight month below 3% and the lowest figure since March 2021. The core-CPI number, which strips out food and energy and provides a more stable measure upon which monetary policy is based, rose by 3.2% versus a year ago, a 40-month low. Here are our key takeaways from the report*:
  • Inflation is on a gradual but favourable path – Broadly, this report confirms that consumer prices remain on a path of moderation, which is a critical trend for the soft-landing expectation that has been priced into the markets. We're not yet back to an overall level of inflation that is sustainable or acceptable, but we think this latest data are consistent with CPI moving toward that outcome.
  • Underlying details are mixed and indicate more work is needed – Goods prices continue to come down, which has been a helpful force in overall inflation. In particular, used vehicle and clothing prices saw particularly sizable month-over-month declines in July. On the other hand, one disappointing area in this report was shelter, with prices accelerating faster than expected in the month. To be fair, this comes after an encouraging figure in the prior month, so there are signs that shelter inflation is poised to moderate more quickly. But that did not materialize last month, and for overall CPI to get back to a more acceptable level, we will need to see more progress on shelter prices.
  • This supports a rate cut next month – In our view, this CPI report is supportive of the Fed commencing rate cuts at its September meeting. That said, with inflation moving only incrementally lower, we don't think this makes the case for the Fed to execute a more aggressive 50 basis-point (0.50%) cut next month, which is a view within the markets that has emerged in recent weeks. We believe the Fed should cut rates by 25 basis points (0.25%) to start, and then evaluate incoming inflation and labour-market data to calibrate further rate cuts in the remaining meetings of 2024.
• From prices to sales, focus turns to consumer spending: The soft-landing narrative, upon which the stock market has built its 2024 rally, is made up of two components: falling inflation and resilient GDP growth (or at a minimum, no recession). The former appears to be on track, with this week's PPI and CPI reports confirming that prices are gradually moderating. The latter will get a fresh look on Thursday with the July U.S. retail-sales report, which will provide the latest take on the health of the consumer. While the most recent jobs report sparked worries of a downturn because labour-market conditions have softened in recent months, the last several retail-sales reports have not corroborated those fears. Following better-than-expected spending growth in June, expectations are for another solid increase in retail sales for July. We'll be particularly interested in the spending figures within the leisure, hospitality, entertainment and food-away-from-home categories, as they can provide a fresh take on discretionary spending and consumer attitudes. All told, we think the pace of consumer spending is poised to slow somewhat as we advance, though this is coming off strong household spending growth last year. We are not in the camp that the consumer is fully tapped out; instead, we think that a moderation in consumer spending will be sufficient to preserve the economic expansion, just not maintain the above-trend pace we've enjoyed for the last several quarters.

Craig Fehr, CFA
Investment Strategy

^{Source: *FactSet}

• Stocks and bonds rally after lower-than-expected U.S. inflation report: Equity markets closed higher on Tuesday in response to a softer-than-expected U.S. producer price index (PPI) inflation report. The TSX posted a 0.9% gain for the day while the S&P 500 rose by over 1.6%.* Leadership was broad, with most sectors of the S&P 500 finishing higher, led by information technology and consumer discretionary.* Overseas, Asian markets were higher overnight, led by Japan's Nikkei Index, which gained nearly 3.5%.* After declining by nearly 20% in the first three trading days of August, Japan's Nikkei has now risen roughly 15% from its August 5 low, recouping most of its prior losses.* Bond yields were lower following the soft U.S. inflation reading, with the 10-year GoC yield ticking down to 3.03% while the 10-year U.S. Treasury yield declined to 3.85%.* On the economic front, the U.S. NFIB Small Business Optimism Index rose to its highest since February 2022, signaling that conditions for small businesses are improving, albeit from low levels.*
• U.S. inflation data softer than expected: U.S. producer price index (PPI) inflation for July was lower than expected, with headline PPI rising by 0.1% in July versus expectations for a 0.2% gain.* PPI excluding the volatile food & energy components was below expectations as well, posting no change in July versus expectations for a 0.2% gain.* Today's inflation reading adds to a string of lower-than-expected U.S. inflation readings over the past several months and further adds to the case for a Fed rate cut at the September meeting. Futures markets are pricing in a roughly 55% chance of a 50 basis-point (0.5%) cut at the September meeting and a total of 100 basis-points (1%) of rate cuts by year-end.* U.S. inflation will remain centre stage for markets with tomorrow's read on the consumer price index (CPI) for July. Consensus expectations are for headline CPI to rise by 3% year-over-year, while core CPI is expected to rise by 3.2% year-over-year.*
• Consumer-spending trends in focus for markets: In addition to key inflation data, markets will also have several key readings on consumer-spending trends. Thursday will bring U.S. retail-sales data for July, where expectations are for sales to rise by 0.3% month-over-month compared with no change in the June reading.* Control-group retail sales, which exclude spending on more volatile components such as autos, gasoline and building materials, are expected to rise by 0.1% in July versus a 0.9% gain in June.* In addition to retail-sales data, home-improvement retailer Home Depot reported second-quarter earnings this morning, posting sales and revenue that exceeded expectations. However, comparable sales were softer than expected, declining by more than 3%, with the company's CEO citing higher interest rates and greater macroeconomic uncertainty as reasons for the weakness.* Retail earnings will remain in focus as the week progresses, with Walmart and Ross Stores set to report on Thursday. In total, U.S. consumer spending has shown signs of moderating from the above-trend rates achieved in the second half of 2023. However, U.S. second-quarter personal consumption rose by a still healthy 2.3%.* In our view, strong household balance sheets, particularly in the U.S., and a healthy albeit easing labour market should help support consumer spending in the months ahead and extend the economic expansion.

Brock Weimer, CFA
Associate Analyst

^{Source: *FactSet}

• Stocks mixed to begin the week: U.S. equity markets were little changed while the TSX moved higher on Monday coming off a volatile prior week. Despite finishing last week roughly flat, the S&P 500 declined by 3% last Monday, the largest daily decline in over a year, before recouping those losses throughout the week.* The TSX fared better, posting a 0.4% gain last week.* In today's trading, the TSX outperformed, gaining 0.4% on the day, aided by strength in the materials and energy sectors.* The S&P 500 finished the day flat, while the technology-heavy Nasdaq eked out a 0.2% gain.* Bond yields finished the day lower, with the 10-year GoC yield declining to 3.09%, while the 10-year U.S. Treasury yield fell to around the 3.9% mark.* In the commodity space, oil prices were higher by nearly 4% due to rising geopolitical tensions in the Middle East.* The economic calendar was light today but will ramp up as the week progresses, with U.S. inflation and retail sales data in focus this week.
• U.S. inflation in focus: Inflation will be centre stage for markets this week, with the producer price index (PPI) out tomorrow and the consumer price index (CPI) out on Wednesday. Expectations are for the PPI to rise by 2.3% year-over-year, down from the prior months reading of 2.6%.* CPI is expected to rise by 3% year-over-year, unchanged from the prior month. Core CPI, which excludes the volatile food and energy components, is expected to rise by 3.2% year-over-year versus the prior reading of 3.3%.* While inflation was higher than expected in the first quarter of this year, subsequent readings have moderated. Lower inflation and signs of easing labour-market conditions will likely pave the way for a Fed rate cut at its September meeting. Futures markets expect the Fed to begin cutting rates in September and a total of 100 basis points (1%) in Fed rate cuts by year-end.*
• Earnings season winds down: Second-quarter earnings season is winding down, with 91% of companies in the S&P 500 having reported. Earnings growth is on pace for a strong 10.4% year-over-year growth rate in the second quarter, which if achieved, would be the strongest growth rate since the fourth quarter of 2021.* At a sector level, technology, utilities and health care have led the way, each on pace for better than 18% earnings growth.* Looking ahead to the full year, expectations are for the S&P 500 to post 2024 earnings growth of just over 10%, with nine of 11 sectors expected to see positive earnings growth.* Domestic corporate profits are on pace to show strong second-quarter growth as well. With just over 80% of companies in the S&P/TSX Composite reporting second-quarter results, earnings are on pace to grow by over 8% year-over-year, the strongest growth rate since the third quarter of 2022, if it holds.* In our view, healthy profit growth across multiple sectors could support broadening leadership in equity markets in the months ahead.

Brock Weimer, CFA
Associate Analyst

^{Source: *FactSet}

Brock Weimer, CFA
Associate Analyst

^{Source: *FactSet **CME FedWatch Tool ***Morningstar Direct, FactSet and Edward Jones}

• Stocks rise slightly to end a volatile week - Market moves were relatively muted today, and Canadian and U.S. equities posted small gains, as a volatile week comes to an end. Monday's drop in the S&P 500 was the biggest since September of 2022 but was followed by the best session since November 2022 on Thursday as fears of a recession subsided. All and all, markets managed to narrow their losses for the week to end mostly unchanged, but sentiment remains fragile. In Canada, the spotlight today was on the jobs report, which showed a small fall in employment, missing consensus estimates that were calling for a 25,000 gain. However, despite the headline miss in payrolls, which was driven by part-time jobs, the unemployment rate stayed unchanged, and hours worked increased. The ongoing cooling of the labour market suggests the Bank of Canada will continue its easing cycle next month, but elevated wage growth (5.2% in July) remains a concern. Government bond yields declined after the report, with the 10-year GoC yield falling to 3.11%.
• U.S. inflation and retail sales next in focus - With a heightened focus on changes in the U.S. macroeconomic backdrop, all eyes will be on retail sales and the July inflation data next week. Yesterday, the decline in jobless claims helped ease some fears on recession risks, and investors will be looking for more encouraging news on the consumer front. Consensus is looking for a 0.5% monthly increase in headline retail sales and a 0.1% increase in control-group sales following a stronger-than-expected rise in June*. Next week we will also start hearing comments about the health of the consumer from several retailers as they report earnings. Walmart is scheduled to report results on Thursday. On the inflation front, the July PPI (producer price index) is scheduled for Tuesday and the CPI (consumer price index) on Wednesday. Headline CPI likely remained unchanged, while core CPI is expected to tick down to 3.2% from 3.3% in June*. With additional confidence that inflation is moving in the right direction, Fed officials have become more sensitive to downside risks to the labour market, which is why we think they will cut interest rates two or possibly three times this year instead of just the one that they projected back in June.
• Fundamentals haven't shifted despite sentiment swings - Concerns that the Fed may be behind the curve by cutting rates too late, as well as the Japanese yen-trade unwind that triggered technical selling across the globe, have combined to shake confidence. As a result, investor sentiment has turned from complacency to fear in short order. While periodic growth concerns, election-related uncertainty, and heightened geopolitical risks can be catalysts for ongoing volatility, especially as we enter a seasonally weaker part of the year, we think the fundamental backdrop remains favourable. Inflation is moving closer to target, providing breathing room for the Fed to ease; the economy continues to expand, but at a slowing pace; productivity is on the upswing; and corporate earnings are rising. We would use pullbacks as opportunities to rebalance, diversify, and deploy fresh capital.

Angelo Kourkafas, CFA
Investment Strategist

^{Source: *FactSet}