Daily market snapshot

• Stocks close lower ahead of Fed rate decision – Major equity markets declined on Tuesday, with small- and mid-cap stocks trailing large-cap stocks. The Dow Jones Industrial Average declined for the ninth consecutive trading day, the longest down streak since 1978. Markets were broadly lower, as just the consumer discretionary sector posted gains. Prime Minister Justin Trudeau has named public-safety minister Dominic LeBlanc as Finance Minister following Chrystia Freeland's resignation on Monday. LeBlanc, who was sworn in earlier this afternoon, has held a number of cabinet positions and has been a member of Parliament since 2000. In global markets, Asia and Europe were down, as investors await decisions from the Federal Reserve (Fed) and Bank of England. Bond yields were mixed, with the 10-year Government of Canada yield down to 3.15% and the 10-year U.S. Treasury yield at 4.40%. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil dropped on demand concerns following China retail sales for November, which were below forecasts*.
• Markets focus on FOMC meeting and Fed's preferred inflation gauge – The Fed's Federal Open Market Committee (FOMC) will conclude its December meeting on Wednesday, with markets expecting a 0.25% interest-rate cut**. If the Fed cuts, it would mark the third rate cut of this cycle, likely bringing the policy-rate target range to 4.25% - 4.5%. In our view, the Fed is likely to cut rates by 0.25% this week, then begin to slow the pace of easing, potentially pausing in January, followed by no meeting scheduled for February. The personal consumption expenditure (PCE) index for November will be released on Friday, with forecasts calling for inflation to rise to 2.6% annualized, up from 2.3% the prior month*. The Fed's preferred inflation measure, core PCE, which excludes food and energy prices, is expected to tick up to 2.9%. Importantly, 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. We believe the recent trend and estimate for November indicate that inflation continues to cool, though at a slowing pace. With the target range for the fed funds rate currently 4.5%-4.75%, monetary policy is restrictive, as a neutral rate is generally about 1% above inflation, which should allow the Fed to ease toward a more neutral stance. Bond markets are currently pricing in expectations for 0.75% of Fed rate cuts over the next 12 months**.
• Key inflation measure rises in line with expectations – Consumer price index (CPI) inflation for Canada ticked down to 1.9% annualized in November, below estimates and the prior month's reading, both of which were 2.0%. Shelter inflation slowed to 4.6% year-over-year, down considerably from 6.5% earlier this year. The Bank of Canada's (BoC) preferred measures of core inflation held steady at 2.6% for CPI-median and 2.7% CPI-trim, both of which were upwardly revised by 0.1% for October***. These readings remain in BoC's 1%-3% target range, which should keep the central bank on its interest-rate-cutting cycle, though the pace is likely to slow. Lower interest rates should reduce borrowing costs for businesses and consumers, which is supportive of the economy.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet ** U.S. Census Bureau}

• U.S. tech leads market higher; Canada, Europe and Asia end lower – Though the TSX and Dow were down for the day, a strong showing from the tech-heavy Nasdaq pushed U.S. stocks higher. Excitement around artificial intelligence continued, with shares of Broadcom rising another 11% following last week's 25% gain.* The key catalyst this week will be the Fed rate decision on Wednesday, when the bank is expected to take another step toward removing some of its restriction while signaling a slower pace ahead. In Canada, government bond yields and the loonie were little changed after Finance Minister Chrystia Freeland resigned. Elsewhere, international markets lagged after China retail sales slowed unexpectedly, suggesting that more stimulus is needed to reverse concerns about the country's economy.
• All eyes on the Fed - Last week several major central banks, including the Bank of Canada and European Central Bank, lowered their policy rates, aiming to reach a neutral rate, a level that’s neither restrictive nor stimulative for the economy. This week the spotlight is on the Fed, as the Committee is expected to cut interest rates by a quarter point to 4.25%-4.5%. The release for the December meeting will also include updated economic and interest-rate projections that may be revised higher to reflect a slower pace of easing in 2025. Unlike Europe and Canada, U.S. growth has been stronger, while progress on inflation has slowed. The Fed may choose to pause in January and cut rates two or three times in 2025, instead of the four that were signaled previously. We expect the fed funds rate to settle around 3.5% - 4% by the end of the year, keeping the 10-year Treasury yield in the 4%-4.5% range.
• Cautious optimism heading into 2025 - Stocks are on track to end the year with strong momentum and above-average returns. The consumer remains supported by a healthy labour market, lending standards are easing, and the manufacturing sector may stage a recovery in 2025. This is all with the backdrop of the Fed looking to gradually remove its restriction on the economy and shift to a neutral stance. Despite solid fundamentals, Year three of this bull market may not be as smooth of a ride. Policy uncertainty around trade, immigration and tariffs is high, as are expectations for pro-growth initiatives. Worries around inflation or growth may trigger pullbacks, which we would view opportunistically, as the longer-term uptrend remains intact. Overall, earnings growth will have to do the heavy lifting for market returns instead of further valuation expansion, implying slower gains but still positive returns.

Angelo Kourkafas, CFA
Investment Strategist

^{Source: *FactSet}

• Stocks finish mixed on Friday: North American equity markets were mixed on Friday, with the TSX posting a decline of 0.6%, while U.S. markets were little changed. On a year-to-date basis, the S&P 500 is up about 27%, while the Nasdaq is up around 33%*. The Canadian TSX, which is less weighted in technology, is up around 21% in 2024. Meanwhile, Treasury yields continue to remain elevated, with the U.S. 10-year yield around 4.40%, well above its September lows of around 3.6%*. In our view, this move higher is a combination of better U.S. economic data and the expectation of a shallower Federal Reserve rate-cutting cycle in 2025.
• A resilient U.S. economy was a key theme for 2024: Since 2020, U.S. economic growth has been impressive, with GDP growth rates well above long-term trends. 2024 has been no exception. The quarterly annualized growth rates this year have averaged 2.5%, and the fourth quarter appears on pace to exceed this. According to the Fed GDP-Now forecast, the fourth-quarter economic growth forecast is near its highest since the quarter began, at around 3.3%*. We know the backbone of the U.S. economy is the consumer, which drives about 70% of GDP. Of course, consumers have faced challenges over the past year in elevated inflation readings and higher interest rates, which have pressured both spending and borrowing. Nonetheless, data continues to point to healthy rates of consumption in the U.S., particularly for services, including leisure, hospitality, travel and dining. Part of this has been driven by positive trends in real wage gains across households, in both the U.S. and Canada. Since 2023, wage growth has outpaced the rate of inflation, which has been supportive of consumer confidence and consumption*. We would expect this trend to continue as we head into 2025 and as inflation, in our view, moderates further and remains contained in the 2% - 3% range.
• Continue to use pullbacks as opportunities – As we head into 2025, the U.S. and Canadian economies will undoubtedly face challenges, and markets will have new "walls of worry" to climb. These could include uncertainty around policy coming out of the new White House. Policy changes to areas like tariffs and immigration could weigh on consumer confidence, inflation, and overall economic growth. Any escalation in trade conflicts could also spark volatility and uncertainty. However, in our view, the most extreme versions of these policy proposals are unlikely to be adopted, and the overall impact to the economy will likely be contained. Given the fundamental backdrop with economies that continue to grow at healthy rates, investors can use market volatility as an opportunity to ensure that their investments are well-positioned for this environment of solid growth amid heightened uncertainty. We recommend remaining overweight in U.S. stocks, particularly large-cap and mid-cap stocks, with a mix of growth and value sectors. While mega-cap technology led the way higher for much of the last couple of years, we believe sector diversification will be a key theme and driver of returns. Within the bond market, we recommend reviewing short-duration bonds and cash-like instruments to ensure that portfolios are not too overweight cash. With yields likely headed lower in the next year, we believe excess cash can be gradually deployed into strategic allocations in stocks and bonds.

Mona Mahajan
Investment Strategy

^{Source: *FactSet}

• Stocks close lower on inflation readings: The TSX and major U.S. equity markets declined on Thursday, with large-cap stocks trailing mid-cap stocks. Sectors were broadly lower, as consumer staples was the only sector higher for the day. In global markets, Europe was down despite the European Central Bank cutting rates 0.25%, as expected*. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil traded lower on a new forecast for ample supply next year**.
• Key producer inflation measures are higher than expected – The U.S. producer price index (PPI) rose 3.0% annualized in November, above estimates calling for wholesale inflation to hold steady at 2.6%. Core PPI, which excludes more volatile food and energy prices, ticked up to 3.4% on a year-over-year basis, compared with forecasts of 3.2%*. These readings are consistent with inflation that continues to moderate, though at a slower pace, and the path will likely be bumpy, in our view. These readings should allow the Fed to continue its interest-rate-cutting cycle, including a 0.25% rate cut next week, though the pace will likely begin to slow as the central bank aims for a soft landing. Yields edged higher, with the 10-year Government of Canada yield at 3.15% and the 10-year U.S. Treasury yield at 4.33%, likely reflecting expectations of slower Fed rate cuts ahead.
• Jobless claims tick higher: U.S. jobless claims rose to 242,000* this past week, above expectations for 220,000. Weekly readings, including jobless claims, are often volatile and not necessarily consistent with broader trends. Weekly jobless claims have averaged about 223,000 over the past month, which is about in line with the weekly average for this year. In addition, continuing claims, which measure the number of people receiving unemployment benefits, stands at about 1.89 million, below estimates for 1.92 million. We believe these readings, combined with other recent data, reflect a resilient labour market that is gradually normalizing from a period of outsized strength. Employers appear to be slowly pulling back on hiring but not turning to significant layoffs. With unemployment of 4.2%, disposable income should be sufficient to support continued consumer spending through the holiday shopping season. A cooling labour market should also lead to slower wage gains ahead, which typically help ease inflation.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **Bloomberg}

• Stocks finish higher following Bank of Canada rate cut: North American equity markets traded higher on Wednesday following the BoC's decision to lower its policy rate by 0.5% for the second consecutive meeting. The TSX posted a gain of 0.6% while the S&P 500 rose by 0.8%.* Leadership favoured growth-oriented sectors of the S&P 500, with technology, consumer discretionary and communication services all higher by 1.5% or more on the day, while most other sectors were flat to lower.* Overseas, markets in Europe finished higher, while Asian markets were mixed overnight.* South of the border, U.S. consumer price index (CPI) inflation was in line with expectations, with headline CPI rising by 2.7% year-over-year.* Bond yields finished the day higher, with the 10-year GoC yield rising to around the 3.1% mark, while the 10-year U.S. Treasury yield rose to 4.27%.* In the commodity space, oil prices finished higher by over 2%, while gold was up over 1%.*
• Bank of Canada delivers another 0.5% rate cut: This morning the Bank of Canada (BoC) delivered a 0.5% cut to its policy rate, bringing the target rate down to 3.25%.* This marks the fifth time the BoC has cut interest rates in 2024 and the second consecutive meeting it's delivered a larger-than-typical 0.5% rate cut.* Domestic economic growth has been relatively lethargic, with real GDP expanding at a modest 1% in the third quarter, while last week's labour-force survey showed the unemployment rate rose to 6.8% in November, the highest since 2021.* The combination of sluggish economic growth and inflation that has moderated toward the BoC's target range has provided justification for the BoC to take a more aggressive approach to easing monetary policy. We expect the BoC to continue lowering rates in 2025, with the target rate perhaps settling between 2.5% - 3% by year-end. In our view, lower interest rates should provide support to domestic economic activity.
• U.S. inflation in line with expectations: U.S. inflation was in focus today with the release of CPI inflation for November. U.S. headline CPI rose by 0.3% for the month, slightly above expectations, while the annual rate of 2.7% was in line with expectations. Core CPI, which excludes food and energy, rose by 0.3% in November and 3.3% annually, both in line with expectations.* Today's reading marks the fourth consecutive month core CPI has risen by 0.3% and brings the three-month annualized change up to 3.7%, the highest since April.* An encouraging aspect of today's report was that the index for shelter, which has proven slow to moderate over the past several years, ticked lower in November, rising by 0.3% after a 0.4% gain in October. On an annual basis, the index for shelter rose by 4.7%, which is the lowest reading since early 2022.* In our view, today's report keeps the Fed on track to deliver another 0.25% rate cut at next week's meeting. However, with the pace of disinflation slowing and the U.S. economy on strong footing, we expect the Fed will take a gradual approach to rate cuts in 2025.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **Bloomberg}