- Stocks close higher on jobless report: The Nasdaq led equity markets higher on Thursday as the TSX, S&P 500 and Dow Jones Industrial Average reached new record highs*. Sector performance was broad, with technology and consumer discretionary stocks leading to the upside, reflecting a risk-on tone. In global markets, Asia and Europe were higher, as Hong Kong's central bank cut its policy rate, while the Bank of England held interest rates steady, as expected*. The U.S. dollar was little changed versus major currencies. In the commodity space, WTI oil and gold traded higher.
- Jobless claims below expectations: U.S. jobless claims declined to 219,000** this past week, below expectations for 230,000*. The reading, which is the lowest in four months, provides another data point that employers are primarily pulling back on hiring rather than turning to significant layoffs. We believe this reflects a resilient labour market that is gradually cooling but not collapsing, which is supportive of the "soft landing" narrative for the U.S. economy. A cooling labour market should also lead to slower wage gains, which typically ease services inflation.
- Bond yields edge higher: Bond yields were up, with the 10-year Government of Canada yield at about 2.93%, and the 10-year U.S. Treasury yield near 3.72%. The Federal Reserve (Fed) began its highly anticipated easing cycle yesterday, cutting its target range for the fed funds rate for the first time in four years to 4.75%-5.0%. Bond markets are currently pricing in expectations for 2.0% of Fed interest-rate cuts over the next 12 months, which would put the fed funds rate below 3.0%***. With the Fed's dual mandates – maximum employment and stable prices – returning to better balance as the labour market gradually cools and inflation moderates, we believe the Fed is on track to continue cutting rates for the next several months. We expect the Bank of Canada to continue cutting rates as well, with the unemployment rate rising to 6.6% and CPI inflation back in line with the 2.0% target. Lower interest rates should help reduce borrowing costs for businesses and consumers, which would be positive for economic growth and corporate profits.
Brian Therien, CFA
Investment Strategy
Source: *FactSet **U.S. Department of Labor ***CME FedWatch
- Stocks give up gains, but cyclicals outperform – Canadian and U.S. equity markets were volatile after the Fed announced a bigger-than-some-expected 0.5% rate cut to kick off a new easing cycle. Stocks reached a new record high after the news, but the gains faded into the close, as some investors were disappointed that Powell signaled no rush to keep up the same pace of easing in the meetings ahead. Nonetheless, the interest-rate relief helped small-cap stocks and cyclical sectors outperform. Government bond yields remain near the year-to-date lows but finished higher today, as the updated rate projections point to a less aggressive rate-cutting cycle than the bond market is pricing in. Elsewhere, oil prices were lower today, and at around $70 a barrel, should translate to lower gasoline prices, a tailwind for the economy and consumer spending in the months ahead.
- Fed kicks off its easing cycle with super-sized rate cut - After the most aggressive tightening cycle in 40 years and the second-longest pause in history with rates in restrictive territory, the Fed cut its policy rate today for the first time in four years. As the bond market had recently started to price in, the Fed cut its policy rate by a larger-than-typical half a percentage point, showcasing, according to Chair Powell, the bank's commitment to not fall behind the curve and help guide the economy toward a soft landing. With additional confidence that inflation in moving sustainably toward the 2% target, Fed officials are now more sensitive to downside risks to employment. We view today's cut as a decisive first step in gradually removing policy restriction over the coming years. With the fed funds target range now at 4.75%-5.0% from 5.25%-5.5%, the updated "dot plot" of rate projections now implies two more quarter-point cuts this year, four additional cuts next years, and two in 2026. This path would take the fed funds rate down to 2.9%, a rate that Fed officials consider as the neutral point. Alongside the rate decision and Chair Powell's press conference, today's meeting brought an updated Summary of Economic Projections, which showed that Fed officials still expect economic growth to stay resilient and inflation to basically move back to target next year. The unemployment-rate forecast was revised slightly up, now projected to peak at 4.4%. Despite today's super-sized cut, the Fed's base expectations continue to suggest a soft landing, justifying, in our view, a measured approach to rate cuts ahead.
- Market implications from the start of rate cuts - The lesson from history is that the market's response to rate cuts depends on the state of the economy. The start of a rate-cutting cycle that coincides with no recession has historically led to strong equity returns 12 months after the first rate cut. On the other hand, rate cuts in response to economic weakness have been accompanied with losses. This time we consider the start of policy-easing as insurance, with the Fed cutting rates because it can, based on the improvement in inflation, rather than because it has to due to economic weakness. Following yesterday's retail-sales and industrial-product data, the Atlanta Fed's GDP estimate for the third quarter increased to 3% from 2.5%, pointing to above-trend economic growth*. Consumer spending is holding up, while the rise in unemployment has been driven by an increase in the supply of labour instead of a jump in layoffs, both suggesting that a soft landing could be within reach. As long as a recession is avoided, we expect the bull market in stocks to continue with some bumps along the way, with cyclical and lower-valuation stocks potentially starting to close the gap with mega-cap tech. In the fixed-income space, the lower path of policy rates has led to consistently positive investment-grade bond returns historically, which is our expectation for this cycle as well. A gradual but steady decline in rates ahead highlights the reinvestment risk of short-term cash investments relative to intermediate- and long-term bonds.
Angelo Kourkafas, CFA
Investment Strategist
Source: *FactSet
- Stocks mostly flat ahead of tomorrow's Fed meeting: Equities were little changed on Tuesday, with markets awaiting the Fed's interest-rate decision tomorrow. The TSX posted a 0.2% loss, while the S&P 500 and Dow finished flat.* It was a busy day on the macroeconomic calendar, with the domestic consumer price index (CPI) rising by 2% year-over-year in August, in line with expectations and the lowest reading since February 2021.* South of the border, U.S. retail sales and industrial production for August both exceeded expectations.* These better-than-expected U.S. economic readings should help to ease worries on U.S. economic-growth concerns that have flared up in recent weeks, stemming from softening labour-market conditions. From a leadership standpoint, energy was the top-performing sector of the S&P 500, supported by a nearly 2% rise in crude oil prices.* U.S. small-cap stocks were another outperformer, with the Russell 2000 Index gaining roughly 0.6% on the day.* Bond yields ticked modestly higher, with the 10-year GoC yield finishing around the 2.9% mark, while the 10-year U.S. Treasury yield ticked up to 3.65%.*
- Inflation falls to its lowest rate since 2021: Domestic headline consumer price index (CPI) inflation rose by 2% year-over-year in August, the slowest pace since February 2021.* Lower gas prices were a contributor to the decline in inflation, with gasoline prices contracting by 5.1% year-over-year in August.* However, the deceleration in inflation was broad-based, with CPI excluding food and energy rising by 2.4% year-over-year in August, down from 2.7% in July.* Looking at core inflation measures closely followed by the Bank of Canada (BoC), CPI-trim rose by 2.4% year-over-year, while CPI-median rose by 2.3%, both the lowest readings since 2021.* Today's inflation reading shows that the trend in domestic inflation remains lower. In our view, the Bank of Canada will continue to lower its policy rate at both the October and December meetings, with the potential for a larger than 0.25% interest-rate cut if economic growth shows signs of meaningful weakness.
- Focus shifts to the Fed: Market focus will now shift to the Fed meeting and interest-rate decision tomorrow afternoon, where the Fed is expected to deliver its first interest-rate cut of this cycle. Futures markets are currently pricing in a 67% chance of a 50-basis-point (0.5%) rate cut and a 33% chance of a 25-basis-point (0.25%) rate cut.** While the size of tomorrow's decision could drive markets in the near term, we believe the main takeaway for long-term investors is that the Fed is likely embarking on a multiyear rate-cutting cycle. In our view, rate cuts, in combination with healthy economic growth, should be supportive to equity markets in the months ahead. In addition to the interest-rate decision, tomorrow will also provide an updated set of the FOMC economic projections. In June, median FOMC projections showed only one 0.25% interest-rate cut by year-end, core PCE inflation of 2.8%, and an unemployment rate of 4%.*** With the unemployment rate registering at 4.2% in August and core PCE rising by 2.6% in the most recent July reading, the Fed has shifted its focus from inflationary pressures to softening labour-market conditions. This combination of moderating inflation and a softening jobs market has paved the way for what will likely be the first Fed interest-rate cut of this cycle tomorrow.
Brock Weimer, CFA
Associate Analyst
Source: *FactSet **CME FedWatch Tool ***FOMC Summary of Economic Projections, June 2024
- Stocks close mixed ahead of Fed meeting this week – Stock markets were mixed on Monday, as investors await the Federal Reserve interest-rate decision, due out on Wednesday. The Canadian TSX and S&P 500 were higher, while the technology-heavy Nasdaq moved lower. Government bond yields continued to hover near their lows for the year. The 2-year U.S. Treasury yield, often considered a proxy for the fed funds rate over the next 24 months, fell to 3.56%, now at its low for 2024. The move lower in yields has been driven by a combination of market expectations of Fed interest-rate cuts and softer inflation and U.S. economic growth. In our view, given the S&P 500 has climbed nearly 18% this year thus far, we would expect bouts of volatility as we head into a seasonally weaker September and October period and toward the U.S. election day on November 5. However, historically, markets tend to recover in the final two months of the year in U.S. election years.
- Market leadership rotates this quarter – Overall for the third quarter thus far, which began on June 30, the S&P 500 is up about 3%*. However, underneath the surface there has been a meaningful sector rotation. The sectors that have gained the most include interest-rate-sensitive parts of the market, like real estate, utilities and financials, as well as some defensive parts of the market, like consumer staples and health care. The lagging sectors this quarter that have negative returns include technology, communication services and energy*. In particular, the tech and communication services sectors, including many of the mega-cap artificial intelligence (AI) giants, are seeing slowing momentum in their stock prices recently. This comes as the Fed is poised to cut interest rates and as earnings growth expands. In our view, one theme over the next year will be an ongoing broadening of market leadership, and investors can look to complement their growth and AI investments with value and cyclical stocks, as well as U.S. mid-cap equities.
- All eyes turn to this week's Federal Reserve meeting – The Federal Reserve meets this week and will provide an interest-rate decision on Wednesday, followed by a press conference by Fed Chair Jerome Powell. In addition, the Fed will deliver a new set of economic projections and an updated "dot plot," which outlines the Fed members' best guess on the path of interest rates. Markets will be watching closely to see how many implied interest-rate cuts there are for this year and 2025, as well as where the Fed expects interest rates to go over the long run. In the June meeting, the Fed had outlined just one rate cut in 2024, followed by four in 2025, and another four in 2026, bringing the fed funds rate to 3.1%*. In our view, the Fed is poised to cut rates on Wednesday, most likely by 0.25% -- although a 0.50% cannot be ruled out -- and will likely cut rates twice more after this in 2024. The Fed has clearly shifted its focus from inflationary pressures, which have eased in recent months, to the slowing U.S. labour market. Powell had noted in August that the Fed "does not seek or welcome further cooling in labor market conditions." To us, the Fed will not risk further downside pressure to the economy and will likely signal to markets that it is poised to undertake a significant easing in monetary policy to ensure that the labour market and economy stabilize from here.
Mona Mahajan
Investment Strategy
Source: *FactSet