• Stocks gain with U.S. inflation in focus – Equity markets closed higher on Thursday after the April U.S. personal consumption expenditures, or PCE, inflation report came in largely in line with expectations. Additionally, U.S. initial jobless claims remained contained at 215,000 last week, while U.S. first-quarter real GDP was revised lower to 1.6% amid downward revisions to investment and consumer spending. On the corporate front, bank earnings were in focus today with TD Bank, Royal Bank of Canada and CIBC all announcing first-quarter results and exceeding analyst earnings estimates. The TSX logged a 0.3% gain for the day, while the S&P 500 outperformed, gaining 0.6%, supported by strength in the technology sector. Bond yields finished slightly lower, with the 10-year GoC yield falling to 3.43% and the 10-year U.S. Treasury yield at 4.45%. Oil prices ended only modestly higher, at around $89 per barrel, reversing larger gains from earlier in the day following reports that U.S. and Iranian negotiators reached a memorandum of understanding to extend the ceasefire and begin further negotiations on Iran’s nuclear program.
   
• U.S. inflation data in line with expectations – U.S. inflation was in focus on Thursday, with April personal consumption expenditures (PCE) inflation released this morning. Headline PCE rose 0.4% for the month, driven in part by a 5.5% increase in gasoline prices, and was up 3.8% from a year ago. Core PCE, which excludes food and energy, rose 0.24% for the month and 3.3% on an annual basis. The April reading brought the three-month annualized rate of core PCE to 3.8%, underscoring that near-term inflation pressures remain above the Federal Reserve’s 2% target. In our view, today’s data reinforces the likelihood that the Fed will remain on hold in the near term. That said, we believe the bar for rate hikes remains high, especially as labour-market conditions have come into better balance and annual wage growth has slowed from nearly 6% in 2022 to around 3.5% in April. Taken together, these conditions support a patient approach from the Fed, and in our view, policymakers are likely to hold interest rates steady this year.
   
• Tech-led rally has markets back to all-time highs. Where to from here? – After a volatile close to the first quarter, when the S&P 500 fell 9% from its prior all-time high, equities have staged an impressive rebound since April. The S&P 500 has gained more than 18% since March 30, while the technology-heavy Nasdaq has risen 28%. The rally has been even more pronounced in semiconductors, with the PHLX Semiconductor Index up 80% over the same period, supported by continued AI-related capital spending. While we would not characterize markets as cheap, valuations have not expanded meaningfully during this rally. In fact, both the S&P 500 and Nasdaq are trading at forward price-to-earnings multiples below where they began the year, while the PHLX Semiconductor Index’s forward multiple is little changed. This suggests that the recent move higher has been driven by strong corporate profit growth as opposed to expanding valuations. First-quarter S&P 500 earnings per share rose nearly 27% from a year ago, helped by strength in technology and AI-exposed areas of the market. Importantly, earnings growth has not been limited to tech. Cyclical sectors such as financials, industrials and materials also posted earnings growth of more than 20%, pointing to broader strength in corporate fundamentals. After such a sharp move higher, a period of consolidation would not be surprising. However, we believe the broader backdrop for equities remains supportive, underpinned by solid profit growth, steady economic activity and resilient labor-market conditions.

Brock Weimer, CFA;
Investment Strategy

^{Source for all data not cited: FactSet.} 

• Markets close mixed, Dow leads the way - U.S. stocks were modestly higher today, while the Canadian TSX was lower by about 0.7%. The Dow Jones outperformed both the S&P 500 and the technology-heavy Nasdaq. Overall, the S&P 500 is up about 10% this year and closed at another all-time high on Wednesday. Investor sentiment appears to be supported by lower oil prices, with WTI crude oil down about 4.5%, and optimism that tensions in the Middle East could ease, although weakness in some cybersecurity names kept the broader market from moving decisively higher. In the bond market, U.S. Treasury yields were modestly lower, as the 10-year Treasury yield dipped back below 4.5%. The VIX volatility index, also known as the Wall Street fear gauge, is back below 17, near the lows of the year. Overall, the data looks reasonably constructive as solid economic and earnings fundamentals continue to support equities, but after a strong rally in markets, some near-term consolidation would not be surprising to us – however, we continue to view pullbacks as opportunities for long-term investors.
   
• Fed is likely on hold this year: The recent acceleration in the consumer price index (CPI), along with the Fed minutes showing that some officials would consider rate hikes if inflation remains elevated, may bring back uncomfortable memories of 2022. That was the last time the Fed had to respond to high inflation with aggressive rate hikes, a tightening cycle that ultimately contributed to a bear market in stocks. However, we think there are a couple of important differences between today’s inflation backdrop and the one investors faced in 2022. First, monetary policy is not easy. In 2022, the fed funds rate was near zero while headline CPI was moving toward 9%. Today, policy rates are matching inflation, giving the Fed less urgency to respond aggressively to every upside surprise. Second, the labour market is no longer overheated. In 2022, job openings were roughly twice the number of unemployed workers and wage growth was accelerating. Today, unemployment remains low, but hiring has slowed and wage growth is not reaccelerating in a way that would meaningfully push services inflation higher. For these reasons, we think the Fed will remain vigilant but is unlikely to overreact to what may prove to be a temporary, energy-driven inflation spike that is largely outside of the Fed's control. Our base case is that the Fed stays on hold this year. We no longer expect near-term cuts, but we still think the bar for rate hikes is high.
   
• Consumer confidence dips less than expected – The Conference Board's Consumer Confidence Index declined to 93.1 in May, marking its first drop in four months. The drop was smaller than forecasts pointing to a pullback to 91.9. Consumers' assessment of current business and labour-market conditions dropped 3.2 points, partially offset by a modest improvement in the short-term outlook*. Concerns over the economy were driven by inflation, oil and gas prices, and geopolitical risks. Despite the decline, the index remains modestly below its historical average, suggesting that consumer attitudes, while cautious, have not weakened as sharply as some other sentiment measures imply. This contrasts with the University of Michigan Consumer Sentiment Index, which reached a record low in April. Key drivers to the difference include the Conference Board's heavier focus on employment and the labour market, while in the University of Michigan's survey, personal finances carry a more significant weight. Overall, consumer spending has remained resilient despite weak sentiment, supported by a stable labour market and generally healthy household balance sheets.

Mona Mahajan;
Investment Strategy

^{Source for all data not cited: FactSet. Source for data cited: *The Conference Board}

• Markets close mixed as investors monitor U.S.-Iran talks – The TSX was down, while U.S. equity markets closed higher on Tuesday, with the S&P 500 and Nasdaq reaching record highs. Bond yields moved lower, with the 10-year Government of Canada yield at 3.46% and the 10-year U.S. Treasury yield down to 4.49%. International markets were softer, with Asian markets finishing mostly lower overnight and European markets also trading down. In energy markets, WTI oil prices declined, likely reflecting cautious optimism around U.S.-Iran diplomatic talks and the potential for reduced geopolitical risk. Meanwhile, the U.S. dollar was modestly lower against major currencies but has remained largely rangebound recently.
   
• Bond yields pull back as inflation concerns ease – The 10-year Government of Canada yield is down about 20 basis points (0.20%) from its peak last week, returning to our 3.0%-3.5% expected range for this year. The 10-year U.S. Treasury yield is also down about 20 basis points from its recent peak a week ago, moving back to our 4%-4.5% expected range for this year. A key driver of the move has been a moderation in inflation expectations. Market-implied 10-year inflation expectations, as reflected in Treasury Inflation Protected Securities markets, have eased to about 2.35%, helping reduce pressure on long-term yields. This suggests investors may be gaining some confidence that inflation risks are becoming more contained, even if the path back to the Fed’s 2% target remains uneven. At the front end of the yield curve, markets continue to price in the likelihood that the Fed's next move could be a rate hike rather than a cut, potentially sometime early next year. We expect policymakers to remain on hold in the near term, with the Fed's preferred core Personal Consumption Expenditures (PCE) inflation gauge running at 3.2%, still well above the 2% target. At the same time, we think a steady labour market gives policymakers room to remain patient and assess whether inflation pressures are temporary and when they may begin to ease.
   
• Consumer confidence dips less than expected – The Conference Board's U.S. Consumer Confidence Index declined to 93.1 in May, marking its first drop in four months. The drop was smaller than forecasts pointing to a pullback to 91.9. Consumers' assessment of current business and labor-market conditions dropped 3.2 points, partially offset by a modest improvement in the short-term outlook*. Concerns over the economy were driven by inflation, oil and gas prices, and geopolitical risks. Despite the decline, the index remains modestly below its historical average, suggesting that consumer attitudes, while cautious, have not weakened as sharply as some other sentiment measures imply. This contrasts with the University of Michigan Consumer Sentiment Index, which reached a record low in April. Key drivers to the difference include the Conference Board's heavier focus on employment and the labour market, while in the University of Michigan's survey, personal finances carry a more significant weight. Overall, consumer spending has remained resilient despite weak sentiment, supported by a stable labour market and generally healthy household balance sheets.

Brian Therien, CFA
Investment Strategy

^{Source for all data not cited: FactSet. 
Source for data cited: *The Conference Board}

There was no snapshot due to the Memorial Day holiday.
 

• Markets finish the week higher as investors monitor U.S.-Iran talks – The TSX and U.S. equity markets closed higher on Friday, pushing the Dow Jones Industrial Average to a record high. On the economic front, Canada retail sales grew 0.9% in March, ahead of estimates for a 0.8% rise. Sales increased in four of the nine sectors, led by gasoline and fuel vendors*. Retail sales were up 2.1% in the first quarter, marking the seventh consecutive quarterly increase. In the U.S., consumer sentiment was revised lower, while leading economic indicators strengthened. Bond yields were mixed, with the 10-year Government of Canada yield down to 3.53% and the 10-year U.S. Treasury yield up to 4.56%. Internationally, Asian markets finished mostly higher overnight, and European markets are also advancing. In energy markets, WTI oil rebounded after its recent pullback, reflecting ongoing uncertainty around the supply outlook. Meanwhile, the U.S. dollar strengthened against major currencies but remained largely rangebound this week.
• Consumer sentiment revised lower – The University of Michigan U.S. consumer sentiment index for May was revised down to 44.8, its lowest reading on record. Cost of living remains a key concern, with a majority of respondents citing high prices as a negative factor for their personal finances**. Lower-income consumers posted particularly sharp declines, as this group is generally more sensitive to increases in the cost of gasoline and other staples. Long-term consumer inflation expectations also moved higher, rising to 3.9%, from 3.4% in the prior month. This suggests that consumers are increasingly concerned that inflation may prove persistent and broaden beyond fuel-related categories. That said, consumer spending has remained resilient despite weak sentiment, supported by a stable labor market and generally healthy household balance sheets.
• Leading economic index strengthens – The Conference Board's U.S. Leading Economic Index (LEI) rose 0.1% in April to 100.5, in line with estimates. The index is designed to provide an early signal of potential turning points in the business cycle and the near-term direction of the economy. April's improvement was driven primarily by stronger equity-market performance, higher building permits and a steeper yield curve***. While the six-month change in the LEI remains negative, the pace of deterioration has moderated and is not currently signaling recession risk. Overall, the data point to a resilient economy, with strength in financial markets, housing and the labor market offsetting pressure from weak consumer expectations and fewer new orders in manufacturing.

Brian Therien, CFA
Investment Strategy

^{Source for data not cited: FactSet. Source for data cited: * Statistics Canada **University of Michigan ***The Conference Board}