Daily market snapshot

• Stocks close mostly higher with U.S. inflation in focus: The TSX closed modestly lower while U.S. stocks finished mostly higher, as markets digested the most recent batch of U.S. inflation data. The TSX posted a 0.1% decline, while the S&P 500 rose by 0.5%.* U.S. small-cap stocks outperformed today, with the Russell 2000 closing higher by over 1%. U.S. small-caps have gained more than 6% since mid-April, reflecting renewed risk appetite from investors, which has been driven by a pullback in bond yields. On the inflation front, U.S. producer price index (PPI) inflation was higher than expected for April; however, much of the upside surprise was driven by downward revisions to the March data. Accordingly, markets mostly overlooked the upside inflation surprise, with stocks mostly higher and bond yields moving lower. At a sector level, leadership favoured growth sectors of the S&P 500, with information technology and communication services among the top performers.* European markets were mixed following an upbeat reading on German economic sentiment, which rose to its highest since 2022. Inflation will remain center stage for markets with the release of U.S. consumer price index (CPI) inflation tomorrow.
• U.S. inflation higher than expected: Headline PPI for April was higher than expected, rising by 0.5% month-over-month versus consensus expectations for a 0.3% gain.* Core PPI, which excludes the volatile food and energy components, surprised to the upside as well, rising by 0.5% month-over-month versus expectations for a 0.2% gain.* However, the upside surprise in PPI was in large part due to downward revisions to the March data. Both headline and core PPI were revised from a 0.2% month-over-month increase to a -0.1% month-over-month decline for March. On a year-over-year basis, headline PPI rose by 2.2% in April, slightly below expectations, while core PPI gained 2.4%, slightly above expectations. With the upside surprise in the month-over-month change largely driven by prior revisions, we'd view today's inflation reading as better than the headlines suggest. Our view remains that inflation will trend lower in the months ahead, albeit not without bumps along the way. Inflation will remain in focus with the release of U.S. consumer price index (CPI) inflation tomorrow, where expectations are for headline CPI to rise by 3.4% year-over-year.*
• Strong U.S. corporate earnings have supported equity markets: Strong corporate profit growth in the U.S. has played a key role in the strength in equity markets in recent weeks. Over 90% of companies in the S&P 500 have reported first-quarter earnings, and roughly 80% have exceeded expectations, with earnings on pace to grow by over 5% year-over-year.* At a sector level, information technology, consumer discretionary and communication services continue to stand out, with each sector on pace to grow earnings by over 20% in the first quarter.* Defensive sectors, such as utilities and consumer staples, along with financials, have seen strong profit growth as well. Looking ahead to the full year, expectations are for the S&P 500 to grow earnings by nearly 11% year-over-year. On the domestic front, corporate earnings have been less favourable in the first quarter. With roughly 80% of companies in the TSX having reported results, earnings are on pace for a -0.3% year-over-year decline, with just over 50% of companies in the index reporting a positive earnings surprise. For the full year, expectations are for the TSX to grow earnings by roughly 4%.* The earnings underperformance of the TSX relative to the S&P 500 is attributable to weaker Canadian economic growth and the composition of the TSX, which is tilted toward cyclical industries with less exposure to technology. We believe opportunities are more attractive in U.S. equity markets, and we recommend investors underweight Canadian large-cap stocks in favour of U.S. large-cap stocks as appropriate with their financial goals.

Brock Weimer, CFA
Associate Analyst 

^*FactSet

Monday, 5/13/2024 p.m.

• Stocks steady to start the week – After gaining a little shy of 2% last week, the TSX closed modestly lower on Monday while the S&P 500 finished essentially unchanged, the Nasdaq was higher, and the Dow shed 81 points. Global markets were little changed while commodities were mixed, with oil edging higher and gold down. Bond markets were quiet as well, with the 10-year yield just below 3.7%. Technology was the standout leader today, while most other sectors traded in a fairly narrow range amid a lack of major data or headlines. We'd chalk up Monday's muted move to markets being in wait-and-see mode ahead of the pivotal U.S. inflation report due out later this week. * 
• Attention on inflation – The headliner for the week is undoubtedly the April U.S. consumer price index (CPI) report set to be released on Wednesday. Consensus expectations are looking for a 0.3% month-over-month increase in core CPI, following a string of hotter-than-anticipated 0.4% monthly increases to start the year. The moderation in the pace of inflation would be a welcome sign and one that we believe will be necessary to validate the rally in stocks and decline in yields so far in May. We'll be watching services and shelter prices in particular, as moderation in these categories has been stubbornly slow and will be required for a broader move lower in consumer prices as we move through the remainder of the year. We don't expect the downtrend to be steady, but persistent signs of disinflation over the next several months would, in our view, support the case for the Fed to squeeze an initial rate cut in before the year is over. Regardless of the exact timing, we continue to believe the Fed's next move will be a cut, which is a broadly favourable backdrop for the economy and financial markets. Meanwhile, more moderate domestic inflation readings in recent months support our view that the Bank of Canada will have the opportunity to cut rates sooner this year.
• A fresh look at the consumer – It's a quiet week for domestic calendar, but in addition to the consumer price data, a round of additional upcoming reports will provide a fresh read on the state of the U.S. consumer. Persistent inflation in recent months, accompanied by a softer headline first-quarter GDP figure, spurred talk of potential stagflation, a condition in which the economy is weak at the same time that inflation is elevated. We think talk of stagflation is premature at this stage. Importantly, while the U.S. economy is likely to soften a bit from last year's strong pace, consumer spending (the lion's share of GDP) is poised to hold up reasonably well on the back of historically low unemployment and still-strong wage gains. The latest reads on April U.S. retail sales, along with quarterly earnings announcements from Home Depot, Target and Walmart, will offer investors a fresh look at household spending trends that will help round out the outlook for the economy. Announcements from other consumer companies in recent weeks has signaled some consumer fatigue. We think a slowdown in household spending is likely to unfold as we advance, but we think this will take the form of slightly slower growth, not a collapse in spending. This, along with signs of rebounding activity in other areas like manufacturing and capital investment, will, in our view, continue to power positive economic growth this year.

Craig Fehr, CFA
Investment Strategy

^*FactSet

• Stocks finish mixed on a generally positive week – Canadian and U.S. equities closed mixed on Friday, with the TSX trailing due to lower oil prices and some adjustments to the timing of Bank of Canada rate cuts after a strong employment report.  The technology, financial services, consumer staples and health care sectors led the way, signaling an overall upbeat mood, with outperformance balanced across growth and defensive sectors.  Outside of the solid domestic job growth, it was a very light day for data, capping off what was a fairly quiet week. The absence of major headlines or economic releases has allowed equity markets to continue to take cues from positive corporate earnings results and the expectations for eventual easier monetary policy settings.*
• Markets await the U.S. CPI report – Bond markets were in somewhat of a wait-and-see mode today, with 10-year Canadian and U.S. yields moving higher. Domestic rates saw a larger boost after the jobs report revealed the economy may be seeing a bit more strength of late. Next week's U.S. consumer price index (CPI) report will likely set the tone for both stocks and bonds ahead. April's market pullback was driven by worries that persistent inflation has pushed back the U.S. Fed's ability to cut rates this year, but those worries have turned to enthusiasm in recent days, as the Fed's latest meeting indicated that policymakers are still expecting to be able to dial back restrictive policy as inflation resumes its trend of moderation. The upcoming CPI report will be key in confirming if the market's latest bout of optimism is appropriate. More broadly, we think both the Bank of Canada's and the Fed's next moves will be a cut, though we anticipate the BoC to move first given the more moderate inflation backdrop. We could be in for a patch of choppy inflation data, but we think both inflation and longer-term rates can resume their gradual trend lower as we move through the back half of the year.
• Jobs data surprises to the upside – April job growth came in well ahead of expectations, with Canada's economy adding more than 90,000 payrolls last month, compared with a consensus estimate calling for a gain of 18,000. Gains were driven by hiring in the professional services and leisure & hospitality sectors, a positive sign for discretionary spending and a potential signal that the economy is finding some footing after a recent spate of weakness. Also, the moderation in wage growth to 4.8% year-over-year offers some comfort that the jobs market is holding up without necessarily raising consumer price pressures. This strong employment reading may add a bit of uncertainty to the near-term outlook for rate cuts from the Bank of Canada, but we don't think it derails expectations for the BoC to trim rates in the coming months.

Craig Fehr, CFA
Investment Strategy

^*FactSet

• Stock markets close higher and are on pace for a winning week – Stock markets in the U.S. and Canada closed higher on Thursday and remain on pace for a week of gains. This comes as U.S. weekly jobless claims rose to their highest of the year at 231,000*. The higher jobless claims figure is another datapoint indicating some softness in the U.S. labour market. For the Federal Reserve, this may add conviction to its view that rates are sufficiently restrictive, and wage gains could also cool. Treasury yields were lower across the curve, with the 2-year Treasury yield, often considered a proxy for the fed funds rate, moving lower by 0.02%, while the 10-year Treasury yield fell by around 0.03%*. More broadly, yields have come down from recent highs, as markets have once again priced in two Fed rate cuts this year. The move lower in yields over the past couple of weeks has provided support for both equity and bond markets.
• The U.S. labour market shows early signs of softening – On Thursday morning, U.S. weekly jobless claims came in at 231,000, above forecasts of 212,000 and last week's 208,000. This was the highest jobless claims figure of the year and the highest since August 2023*. While this is just one week of data and not yet a trend, the jobless claims data comes after last Friday's nonfarm-jobs report, which also surprised to the downside. Total jobs added in April were 175,000, well below last month's 315,000 and expectations of 240,000. The unemployment rate had also ticked higher from 3.8% to 3.9%*. Overall, while the U.S. labour market has been a source of strength for both the economy and consumer, in our view we may see a bit of cooling ahead. The supply of labour seems to be increasing as workers return to the workforce, while the demand for labour has been softening as job openings have decreased. While we would not expect a substantial rise in the unemployment rate beyond 4.0% - 4.5%, we do see better supply and demand balance and some downward pressure on wage growth, which may be supportive of lower services inflation.
• All eyes turn back to CPI inflation next week – Inflation will be front and center next week, with consumer price index (CPI) inflation for April released on Wednesday. After surprising to the upside for the first three months of the year, expectations are for both headline and core CPI inflation to moderate in April. Forecasts call for core inflation, which excludes food and energy, to cool to a 0.3% monthly gain after three straight months of 0.4% increases, which would be the first step in the right direction*. On an annual basis, core CPI is expected to tick down to 3.6% from 3.8%, and headline CPI is projected to decline to 3.4% from 3.5%*. We expect the "last mile" of inflation to take longer and require some patience, but we see further progress ahead. Supporting factors may include a moderation in shelter and used car prices, as well as a broader cooling in services inflation driven by slower wage growth. In our view, the Fed will likely need to see a series of three or so better inflation readings before signaling a first rate cut. We would expect these conditions to be in place by the last quarter of the year. 

Mona Mahajan
Investment Strategist

^*FactSet