Daily market snapshot

• 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}

• Stocks close lower: North American equity markets closed lower on Tuesday, with the TSX down 0.4% and the S&P 500 declining 0.3%. Leadership was narrow, with the communication services sector of the S&P 500 rising by more than 2% while most other sectors were flat to lower.* Outperformance in communication services was driven by a surge in shares of Alphabet following an announcement the company has developed a chip that will improve its quantum-computing capabilities. In other corporate news, shares of Oracle were under pressure, declining over 6%, following underwhelming earnings results reported after the market close yesterday.* Overseas, European markets traded mostly lower, while Asian markets were mixed overnight. Bond yields were mixed today, with the 10-year GoC yield falling to 3.03%, while the 10-year U.S. Treasury yield ticked higher to 4.23%.*
• Bank of Canada interest-rate decision on the horizon: The Bank of Canada (BoC) will meet for its final time in 2024 tomorrow, with expectations calling for another 0.5% rate cut.** If implemented, a 0.5% cut would bring the BoC target rate to 3.25% compared with a target rate of 5% coming into the year.* At its October meeting, the BoC Monetary Policy report showed officials expected third-quarter CPI inflation of 2.1% and real GDP growth of 1.5%. With real GDP growing by only 1% in the third quarter and headline CPI rising by 2%, we believe the BoC will move forward with another 0.5% cut at tomorrow's meeting. In our view, lower borrowing costs should be supportive to the domestic economy over the coming quarters, leading to improved economic growth.
• U.S. inflation in focus: In addition to tomorrow's BoC interest-rate decision, U.S. inflation and its implications on Federal Reserve policy will be in focus for markets, with consumer price index (CPI) inflation for November out tomorrow. Expectations are for headline CPI to rise by 0.2% for the month and 2.7% on an annual basis.* Core CPI is expected to rise by 0.3% month-over-month and hold steady at 3.3% annually.* More recently, U.S. inflation data has proven stubborn, with the three-month annualized rate of core CPI rising to 3.6%, up from a low of under 2% in July.* In our view, another 0.25% rate cut from the Fed at the December 18 meeting is likely. However, with the U.S. economy on strong footing and inflation above the Fed's 2% target, we expect the Fed will take a more gradual approach to rate cuts in 2025.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **Bloomberg}

Monday, 12/9/2024 p.m.

• Stocks start the week lower – The TSX and major U.S. equity markets closed lower on Monday, with mid-cap stocks trailing large-cap stocks. Most sectors were down, as only health care and real estate stocks posted gains. In global markets, Asia was up on China pledging more stimulus that will include higher government spending and lower interest rates in order to boost growth*. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil and gold traded higher*.
• Markets focus on key inflation readings this week – The U.S. consumer price index (CPI) for November will be released on Wednesday, with forecasts calling for inflation to rise to 2.7% annualized, up from 2.6% the prior month*. Core CPI, which excludes more-volatile food and energy prices, is expected to hold steady at 3.3%. The modest expected increase in headline inflation is due to lower inflation readings from a year ago rolling out of the year-over-year figure, known as base effects. Importantly, CPI is expected to rise 0.2% month-over-month - about in line with the average over the past three months - which translates to 2.5% inflation annualized. We believe the recent trend and estimates for November reflect inflation that is gradually cooling, though the path will likely be bumpy along the way.
• Bond yields edge higher – Bond yields are up, with the 10-year Government of Canada yield at 3.05% and the 10-year U.S. Treasury yield at 4.19%. U.S. bond yields have risen since the recent low in September, as bond markets have reduced expectations for Federal Reserve (Fed) interest-rate cuts. We expect the Fed to continue cutting interest rates, as moderating inflation should allow monetary policy to be less restrictive, though the path is likely to be slower and shallower than previously expected. With the target range for the fed funds rate currently 4.5%-4.75%, a neutral rate is generally about 1% above inflation. Bond markets are currently pricing in expectations for a 0.25% Fed rate cut next week and another two cuts over the next six months**. The Bank of Canada is also expected to cut interest rates 0.5% on Wednesday of this week. Lower interest rates would reduce borrowing costs for consumers and businesses, which is supportive of continued economic growth and the soft-landing narrative, in our view.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **CME FedWatch}

• Stocks hover near records after jobs data – The TSX S&P 500 and the Nasdaq hit yet another record high after the November jobs data pointed to ongoing economic resilience without stocking fresh inflation worries. Jobs gains surprised slightly to the upside, but the unemployment rate ticked higher, keeping the Fed on track to cut rates again in December. Government bond yields fell to a month-and-a-half low, with the Fed-policy-sensitive 2-year rate dropping more than the 10-year. Both small-caps and technology stocks outperformed, while the energy sector led to the downside*. OPEC yesterday delayed its planned output increases from January to April and extended its production cuts until the end of 2026. Despite the delay in adding production, the move highlights the weak supply and demand dynamics, with U.S. producers capturing a bigger share, while China demand remains soft.
• November job gains rebound but unemployment ticks up - Employment jumped 50,500 in Canada, stronger than the 25,000 estimate boosted by a 45,000 rise in public sector jobs. However, because the labour force expanded faster, the unemployment rate rose to 6.8% from 6.5%*. Finally, wage growth slowed sharply to 3.9% from 4.9%, a welcome development for the Bank of Canada, as it looks keep inflation sustainably to target. South of the boarder, the U.S. economy added 227,000 jobs last month, slightly above the 200,000 consensus estimate, while the job gains for the prior two months were revised higher*. This marks a notable rebound from the meager pace of hiring in October, which was impacted by the Boeing strike and the recent hurricanes. Manufacturing employment bounced back, while the health care and leisure & hospitality sectors added the most jobs. Smoothing out the disruptions over the past couple of months, the three-month-average change in payrolls rose to 173,000 from 123,000, pointing to a still healthy labour market*. However, the unemployment rate edged higher to 4.2%, and the labour-force participation rate fell to 62.5%, the lowest since May*. In our view, today's data support the Fed cutting rates in December and following a gradual pace in 2025. The Fed no longer sees the job market as a source of inflation, and today's data are unlikely to change that view. Following the employment data, the odds of December cut rose to 85%, up from 70% prior to this morning's release.
• All eyes on the BoC and U.S. inflation next – Today's stronger-than-expected job gains in Canada lessens the need for an outsized rate cut by the BoC. Yet, the rise in unemployment and slowdown in wage growth still leave an open window for a 0.5% cut when the bank meets next week. We expect the BoC policy rate to decline to a 2.5% - 3% range by the end of next year. In the U.S., consumer and producer prices are the final key datapoints before the Fed's last interest-rate decision for the year on December 18. Expectations are for a 0.3% monthly rise, which would push the year-over-year headline consumer price index (CPI) to 2.7% from 2.6% but keep core CPI (excluding food and energy) stable at 3.3%*. The pace of disinflation has slowed over the past three months, which, in combination with the ongoing economic strength, implies that the Fed has no urgency to accelerate the pace of rate cuts to reach a neutral policy setting. Overall, we expect the trend for inflation rates to remain downward, potentially approaching 2% in 2025. A further moderation in housing costs, as suggested by market-rent measures, and cooling wage growth should help apply downward pressure to price increases. However, the path may be bumpy, and inflation could settle in the 2%–3% range rather than hitting the Fed’s target and staying there.

Angelo Kourkafas, CFA
Investment Strategy

^{Source: *FactSet}