Daily market snapshot

• Stocks rise ahead of CPI report – The TSX and U.S. equity markets closed higher on Tuesday, with small- and mid-cap stocks leading to the upside*. Sector performance was mixed, as utility and financial stocks posted the largest gains. Bond yields were mixed, with the 10-year Government of Canada yield up to 3.54%, and the U.S. Treasury yield lower at 4.78%. In global markets, Europe was down lower, led by energy stocks. The U.S. dollar declined versus major currencies. In the commodity space, WTI oil dropped following a new forecast reflecting steady oil demand and rising output for the U.S. over the next two years**.
• Producer price inflation lower than expected – The U.S. producer price index (PPI) rose to 3.3% annualized in December***, below estimates calling for 3.4%*. Year-over-year inflation increased primarily due to lower readings from a year ago rolling out of the figure in what's known as "base effects." Importantly, PPI inflation slowed to 0.2% month-over-month, roughly in line with the average over the past six months, which translates to about 2.5% on an annual basis*. The services component of PPI was flat for the month, which should help reduce consumer services inflation, which remains elevated at about 4.5% year-over-year*.
• Markets turn attention to consumer inflation tomorrow – The consumer price index (CPI) for December will be released on Wednesday, with forecasts calling for inflation to rise to 2.8% annualized, up from 2.7% the prior month*. Core CPI, which excludes more-volatile food and energy prices, is expected to hold steady at 3.3%. While the path will likely be bumpy, we expect inflation to continue to moderate, aided by further shelter-price disinflation and slower wage growth.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet ** U.S. Energy Information Administration *** U.S. Bureau of Labor Statistics}

• Stocks begin the week mixed as bond yields tick higher – Following last Friday's decline in markets, stocks were mixed on Monday. The Canadian TSX index underperformed the U.S. S&P 500. This comes as government bond yields continue their climb higher. The U.S. 10-year Treasury yield climbed to 4.79%, its highest since October 2023. Meanwhile, the Canadian 10-year government bond yield has climbed to 3.5%, its highest since July 2024. In our view, this move higher in yields has been driven by a combination of expectations of stickier inflation, a shallower central-bank rate-cutting environment, elevated deficits, and an economy that continues to perform better than expectations. While higher yields have put downward pressure on stock markets, keep in mind that the S&P 500 is down just about 4% from its recent highs, while the Canadian TSX is down about 5.3%*. In any given year, corrections in the 5%-15% range are the norm, but we would not expect these corrections to morph into severe or prolonged bear markets, particularly given the current solid economic and earnings backdrop.
• All eyes on inflation data this week – After better-than-expected labour market data last week, investor focus will shift to inflation data in the week ahead. On Wednesday, the important consumer price index (CPI) inflation for the month of December will be released, and the expectation is for inflation to tick higher on a headline basis, driven in part by higher energy prices, although core inflation should remain flat. Headline CPI inflation is expected to be 2.9% year-over-year, versus 2.7% last month, while core inflation (excluding food and energy) is expected to 3.3%, in line with last month*. In our view, the recent labour report pointed to wage gains that were moderating, with average hourly earnings falling from 4.0% to 3.9% year-over-year*. This should support an easing in services inflation as well. More broadly, while we see inflation moderating in the months ahead, policy uncertainty remains a question for investors, particularly in areas like tariffs and immigration reform. Nonetheless, while inflation may fluctuate, we see it remaining contained overall, likely in the 2.0% - 3.0% range, with no signals in the economic data of any meaningful reacceleration to the post-pandemic levels of above 4.0%.
• Uncertainty around policy remains an overhang, but economy is in solid shape – With Inauguration Day in the U.S. about one week away, all eyes continue to remain on what policies the new administration will choose to prioritize – and in what order – including tariffs, immigration reform, taxes, and deregulation. Overall, though, the removal of the policy uncertainty alone may be welcomed by the markets, regardless of the initiatives that are highlighted. While there is ongoing uncertainty in the political backdrop, now is a good reminder that financial markets tend not to be driven by politics and headlines, but by fundamentals. We continue to see the economic and market expansion being supported by three key fundamental factors: A solid labour market, which continues to support consumption; positive S&P 500 earnings growth, which will likely reach over 10% in 2025*; and central banks that will still move policy rates lower from here, albeit perhaps more modestly so. After two back-to-back years of solid gains in the U.S. and Canadian markets and low volatility during this period, we would expect to see some moderation in returns and bouts of increased market volatility ahead. However, we continue to believe that investors can use these pullbacks as opportunities to diversify, rebalance, and add quality investments at better prices across both the growth and value parts of the market.

Mona Mahajan
Investment Strategy

^{Source: *FactSet} 

• Stocks drop on higher bond yields – The TSX and U.S. equity markets closed lower on Friday, as bond yields rose in reaction to the strong jobs report, which gives the Fed a reason to pause its rate cuts in the near term. Interest-rate-sensitive small-cap stocks traded sharply lower. Most sectors were down, as real estate and financial stocks posted the biggest declines. Despite today's broad weakness and the uptick in volatility over the past month, the S&P 500 remains 22% higher from a year ago, supported by solid fundamentals, which today's jobs report highlights. In global markets, Asia was down on continued weakening in China's yuan currency. Europe was also lower, impacted by higher bond yields. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil traded higher on the possibility of additional sanctions on Russia and Iran disrupting supply*.
• Employment reports show faster job growth – Canada employment rose by about 91,000 in December, beating expectations for 20,000, driving the unemployment rate down to 6.7%*. Total U.S. nonfarm payrolls grew by 256,000 in December, the strongest pace since March, and above estimates for 153,000*. Job gains were broad-based, with strength in the private services sector**, pushing the unemployment rate down to 4.1%. Hourly earnings were up 3.9% annualized, below estimates for a 4.0% rise*, but still supportive of consumer spending and consistent with the Fed's inflation target given recent productivity trends. The upshot is that a strong labour market is positive for the economy and corporate profits, but argues that there is no urgency for the Fed to cut rates, pressuring yields. Also contributing to today's inflation worries was that consumer sentiment ticked down to 73.2, modestly below forecasts, impacted by near-term inflation expectations that rose to 3.3% from 2.8% the prior month. Long-term consumer inflation expectations also rose to 3.3%, the highest since 2008*.
• Bond yields tick higher on revised Fed expectations – Bond yields were up as markets assessed the implications of a resilient labour market for inflation. The 10-year Government of Canada yield is at 3.45%, and the 10-year U.S. Treasury yield is at 4.76%, its highest since 2023*. Bond markets have dialed back expectations for cuts to the fed funds rate, as disinflation has slowed and the labor market has stabilized. Today's data make the case for a longer pause in rate cuts, with markets now pricing in the next cut to be delivered in September from March that was expected previously. Despite the slower pace of easing, we still expect the Fed to be able to cut interest rates toward a more neutral stance over time as inflation stays contained. The shelter component of PCE inflation remains elevated at 4.8% annualized but should continue to moderate as it catches up to other housing-price measures, such as the S&P CoreLogic Case-Shiller U.S. National Home price index, which is up 3.6% over the past 12 months***. Further shelter-price disinflation and slower wage growth should help bring down overall inflation.

Brian Therien, CFA
Investment Strategy

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

• Stocks rise amid higher bond yields – The TSX and U.S. equity markets rose on Wednesday, with large-cap stocks leading small- and mid-cap stocks. Sector performance was broadly higher, as health care and materials stocks posted the largest gains. In global markets, Asia was mixed as China's yuan currency dropped to a 16-month low versus the U.S. dollar, driven by lower bond yields and tariff concerns. Europe was mostly lower as economic confidence for December missed estimates. The U.S. dollar extended its rise versus major currencies. In the commodity space, WTI oil dropped on higher U.S. fuel inventories*.
• Bond yields mixed – Bond yields rose in Canada with the 10-year Government of Canada yield at 3.31%, while U.S. yields took a pause from their recent trend higher, with the 10-year U.S. Treasury yield at 4.68%. The U.S. benchmark yield briefly reached 4.72% this morning, its highest since 2023 and more than 100 basis points (1.0%) above the recent low in September 2024*. Bond markets have dialed back expectations for cuts to the fed funds rate as disinflation has slowed, with core personal consumption expenditure (PCE) inflation at about 2.8%, above the Fed's target of 2.0%. We expect the Fed to be able to cut interest rates, though at a slower pace, as shelter inflation should continue to moderate gradually throughout 2025.
• New labor market data shows slower job growth, fewer unemployment claims – The ADP employment survey showed that U.S. private sector employment (excluding government workers) grew by 122,000 in December, below estimates for 140,000* and the average monthly gain of about 150,000 over the past 12 months*. Annual pay was up 4.6% year-over-year**. Initial jobless claims dropped to 201,000 this past week, below estimates calling for about 215,000*. Continuing claims, which measure the number of people receiving unemployment benefits, ticked up to 1.87 million, above expectations for 1.85 million, indicating that people are staying on unemployment slightly longer. These readings reflect a resilient labour market that is normalizing, as employers appear to be slowly pulling back on hiring but not turning to significant layoffs, in our view. We believe this is supportive of economic growth and the soft-landing narrative.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet ** ADP}

• Stocks waver on strong U.S. economic data: Equity markets finished lower on Tuesday, reversing gains at the open, following a batch of strong U.S. economic data that sent bond yields higher. The U.S. ISM services PMI for December was 54.1, better than expectations of 53 and signaling ongoing strength in the services sector of the U.S. economy.* The fly in the ointment from today's report was that the prices subindex rose to a near two-year high of 64.4, raising concerns on the future path of U.S. inflation. JOLTS job openings also exceeded expectations, with job openings for November rising to 8.1 million versus expectations for 7.7 million, signaling that demand for labour remains strong.* In response, bond yields surged higher, with the 10-year Treasury yield climbing to nearly 4.7%, while the 10-year GoC yield rose to 3.3%.* Stocks declined, with the S&P 500 lower by roughly 1.1% while the tech-heavy Nasdaq closed down by 1.9%.* The TSX fared better, declining by roughly 0.5% and was supported by strength in the energy sector.* On the political front, there has been little development following Justin Trudeau's announcement of his intent to resign as prime minister yesterday. Early reports suggest that former Minister of Finance Chrystia Freeland and former Bank of Canada Governor Mark Carney are considered top contenders to replace Trudeau.*
• Jobs data in focus: A busy week of labour-market data began this morning with the release of JOLTS job openings for November. Job openings for November were 8.1 million, above expectations for 7.7 million and above the October reading of 7.8 million.* While well below the peak of 12 million job openings in March of 2022, 8.1 million job openings are still above pre-pandemic numbers.* Additionally, U.S. job openings exceed the number of unemployed (7.1 million), which, in our view, suggests that while labour-market conditions have moderated from historically strong levels, they remain healthy.* Perhaps the most anticipated data will come on Friday with the release of the domestic labour-force survey, U.S. nonfarm payrolls, and the unemployment rate for December. The Canadian economy is expected to have added 23,000 jobs in December, while the unemployment rate is expected to hold steady at 6.8%.* In the U.S., expectations are for nonfarm payrolls to rise by 160,000 in December, while the unemployment rate is expected to hold steady at 4.2%.* Healthy labour-market conditions have been a source of strength for the U.S. and Canadian economies over the past two years. In our view, labour-market conditions will remain broadly supportive in 2025, supporting healthy economic growth.
• We expect balanced performance between growth and value stocks in 2025: Growth-style stocks outperformed value stocks for the second consecutive year in 2024, with the Russell 1000 Growth Index rising by 33% including dividends, versus 14% for the Russell 1000 Value Index.* Robust earnings growth and enthusiasm around the potential of artificial intelligence has driven the outperformance in growth stocks in recent years. While we acknowledge reason for optimism in growth stocks, we believe opportunities are emerging that could lead to more balanced performance between growth- and value-style stocks in 2025. Specifically, profit growth is expected to not only be strong in mega-cap tech stocks (which comprise a large portion of the Russell 1000 Growth Index), but also in value-style stocks. Analyst expectations are for earnings in the Russell 1000 Value Index to grow by roughly 12% in 2025, which, if achieved, would be the strongest earnings growth since 2021.* Additionally, value stocks tend to generate a higher share of their revenue from the U.S. compared with growth stocks.* This could make value stocks less sensitive to trade-policy uncertainty over the coming months. In our view, this should lead to balanced performance between growth- and value-style stocks over the coming year.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet 
Growth stocks represented by the Russell 1000 Growth Index. 
Value stocks represented by the Russell 1000 Value Index. 
Sector references are GICS sectors of the S&P 500.}