Daily market snapshot

• Stocks closed mixed, as Fed Chair Powell downplays the notion of rate hikes: Stocks were mixed on Wednesday, closing below their highs of the session, after the FOMC kept rates on hold at 5.25% - 5.5%, as expected. Fed Chair Jerome Powell also indicated that is "unlikely that our next move will be a hike." Powell's personal view is that inflation will move lower later in the year, although his confidence in that view is lower after the recent string of upside inflation surprises. Markets nonetheless welcomed this less hawkish view from the Fed chair. In our view, the Fed can still be patient, but it remains on track for the first rate cut this year. Treasury bond yields also moved notably lower after the Fed meeting, with the 2-year Treasury yield down by 0.08% to around 4.95%*. These moves lower were also welcomed by markets, as the recent surge in Treasury yields had sparked volatility in both stocks and bonds.
• The Fed delivers a less hawkish message: Markets breathed a bit of a sigh of relief, as the Federal Reserve delivered a message that seemed less hawkish than expected. The Fed kept rates on hold at 5.25% - 5.5% today, as expected, and Powell's commentary during the press conference appeared less hawkish overall. While he did acknowledge the recent string of upside surprises in inflation during the first quarter has not given the Fed greater confidence that rate cuts are appropriate, Chair Powell noted that "it is unlikely that our next move will be a hike." This provided some relief to investors who were worried that rate hikes were back on the table for the Fed this year. In addition, when the Fed chair was asked if recent inflation data was anything beyond typical bumpiness, he responded with, "not really." This implies that the Fed does not see a material reacceleration in inflation ahead of us. Nonetheless, in our view, the Fed will need to see a string of lower inflation data in the months ahead before signaling a rate cut. We still believe, however, that this may happen by the back half of 2024. The Fed also outlined that it would slow the pace of its quantitative-tightening program by allowing $25 billion per month of Treasury bonds to mature from the central bank's balance sheet, down from the current $60 billion cap*. Slowing this program is also a form of policy-easing, putting less pressure on Treasury and mortgage bond markets.
• U.S. jobs report on Friday: In addition to the Fed meeting this week, investors will also digest the nonfarm-jobs report for the month of April. Expectations call for total jobs added to cool, from 303,000 last month to 240,000 this month*. The unemployment rate is expected to remain steady at a healthy 3.8%, while the important average hourly earnings figure is forecast to tick lower, from 4.1% year-over-year to 4.0%*. In our view, the U.S. labour market has been a critical element of consumer resilience, as the strong labour market has been a key reason that households continue to spend. However, we could see a downshift in the labour market, as leading indicators like job openings and quit rates have started to cool. While we would not expect a meaningful reacceleration in unemployment, some easing in the labour market – driven by increasing supply of labour and cooling demand – could cause wage gains to moderate further. In today's Fed press conference, Chair Powell also noted that a slowing labour market could be a risk to household consumption broadly. This, in our view, could also support some easing in services inflation and put downward pressure on core inflation.

Mona Mahajan
Investment Strategy

^FactSet

• Stocks fall as inflation worries remain front and center: Equities closed sharply lower on Tuesday, more than reversing Monday's rise and cutting down last week's rally, which included a decent week for the TSX and the S&P 500's best weekly gain in five months. Global markets were also down, led by European stocks, which were weaker following a slightly hotter-than-expected eurozone core inflation reading. Oil and gold prices declined, with the latter seeing notable pressure, now down roughly 5% from the highs in mid-April. Overall, Tuesday's action was guided by a higher-than-anticipated reading on the first-quarter U.S. employment cost index (ECI), stoking worries of renewed inflation pressures and sapping investor sentiment, as evidenced by underperformance of cyclical investments like small-caps, energy, consumer discretionary and industrials. *
• Yields rise as Fed meeting approaches: Interest rates edged higher today, with 10-year Government of Canada bond yields above 3.8% and the benchmark 10-year U.S. Treasury yield above 4.65%, a shade below last week's 4.7% mark, which was the highest since last November. Rates responded to the release of first-quarter U.S. ECI data, which showed that wage growth edged higher to start the year. While this is helpful for consumer spending, it's less encouraging for the inflation picture, which is squarely in focus this week, as the Fed's latest policy meeting will conclude on Wednesday. We think the outcome of that meeting is a foregone conclusion, with the Fed holding its policy rate steady. Instead, the attention will be on Chair Powell's press conference, as markets scrutinize commentary for any indications around how the Fed is processing recent persistent inflation readings and the implications that has for the potential timing of future rate cuts. Markets have significantly adjusted those expectations in recent weeks, having started 2024 with expectations for as many as six rate cuts, and now pricing in closer one. We anticipate much of the attention will be on the Fed's evaluation of recent hotter-than-expected inflation readings, with the markets hoping that it won't eliminate the possibility of rate cuts later this year. There is also likely to be some interest in what thresholds the Fed is evaluating that would warrant consideration of a rate hike. We suspect Chair Powell will attempt to leave the 2024 rate-cut door open, while also emphasizing the Fed's commitment to bringing down inflation, even if that means exerting a bit more pressure on the economy by keeping rates in restrictive territory for as long as necessary to bring inflation closer to its long-term target.  
• GDP report paints a mixed picture: The latest monthly reading on Canadian GDP showed the economy is hovering between softening and resilient territory. Output rose 0.2% in February, weaker than the initial consensus estimate but an indication that the economy is not sliding into an outright recession. Services were a positive driver, while the goods-producing sector was flat for the month. Decent activity in January, coupled with positive growth in February and early indications of softer activity in March, suggest that first-quarter GDP growth will be fairly solid (presumably in the 2%-3% range on an annualized basis), but the deceleration during the period tells us that the domestic economy may be stalling a bit as we move through 2024. This is in line with our prevailing view that high interest rates and headwinds to the housing market are taking a bite out of consumer spending and overall GDP. The silver lining is that domestic inflation trends have been improving, which we think will allow the Bank of Canada to cut rates in the not-too-distant future.

Craig Fehr, CFA
Investment Strategy

^*FactSet.

• Stocks finish mostly higher: Stock markets closed mostly higher, with the S&P 500 up roughly 0.3%, while the TSX posted a modest 0.1% loss.* Sector leadership was broad, with most sectors of the S&P 500 finishing higher, led by consumer discretionary and utilities. The consumer discretionary sector received a boost from shares of Tesla, which surged over 15% following news the company received tentative approval from Chinese regulators to launch its Full Self-Driving technology.* Overseas, Asian markets finished higher overnight, while European markets were mixed, in response to a softer-than-expected economic-sentiment reading.** Treasury yields were mostly lower, with the 10-year GoC yield ticking down to 3.76% and the 10-year U.S. Treasury yield closing around 4.61%.* In the commodity space, oil declined by over 1%, finishing the day below $83 per barrel. This week will be chock-full of U.S. economic data, headlined by the FOMC meeting on Wednesday and the U.S. nonfarm-payrolls report on Friday.*
• Corporate earnings and monetary policy in focus for the week ahead: Corporate earnings and monetary policy will be in focus for markets this week, with the Fed scheduled to meet on Wednesday. Consensus expectations are for the Fed to hold policy rates steady at Wednesday's meeting**, with market focus likely to center on commentary from Fed Chair Jerome Powell to gain any clues into the timing of future rate cuts. Given the hotter-than-expected inflation readings to start the year, we expect Fed Chair Powell to reiterate the need to see further progress on inflation before cutting rates. However, our view is that inflation should continue to trend lower in the coming months and that the Fed could have a credible case to begin cutting rates later this year. On the earnings front, over 170 companies in the S&P 500 are scheduled to report this week, headlined by technology heavyweights Apple and Amazon. Thus far, roughly 45% of companies in the S&P 500 have reported first-quarter earnings, with 80% of companies exceeding consensus earnings expectations.* For the full year, estimates are calling for over 10% earnings growth for the S&P 500 in 2024. TSX earnings will ramp up over the coming weeks, with only 15% of companies in the index having reported thus far.* Full-year expectations are for earnings of the TSX to grow by 4.6% year-over-year in 2024 after declining by roughly 9% in 2023.* With much of 2023's equity-market rally driven by expanding valuations, we believe healthy corporate profit growth will be a necessary ingredient for stocks to perform well the remainder of the year.  
• Performance check-in: After a strong run that saw the S&P 500 gain over 10% in the first three months of the year, April has been less favourable for performance. Month-to-date, the S&P 500 is lower by roughly 2.9% and is on pace to post its first monthly decline since October 2023.* At a sector level, only communication services, energy and utilities have posted month-to-date gains, with all other sectors lower. The TSX has fared better, posting a decline of roughly 0.7% month-to-date, due to strength in the materials and energy sectors.* Bonds have struggled in April as well, with the Bloomberg Canada Aggregate Bond Index down roughly 2.2%.* The pullback in stocks and bonds has been accompanied by rising yields stemming from hotter-than-expected U.S. inflation, which has caused markets to lower expectations for Fed rate cuts in 2024. Despite weakness in recent weeks, we believe the road ahead for equity markets remains constructive, albeit likely not without some bumps along the way. As for bonds, we believe higher starting yields could support investment-grade bond returns in the years ahead. We recommend investors complement short-term bonds and cash with intermediate and long-term bonds, as appropriate with their risk tolerance and time horizon.

Brock Weimer, CFA
Associate Analyst

^{*FactSet.
**CME FedWatch Tool}

• Stocks end the week on a strong note: Stocks in the U.S. and Canada closed sharply higher on Friday, as strong earnings reports from mega-cap technology firms Alphabet (Google) and Microsoft, as well as inflation data in the U.S. that was in line with expectations, supported a rebound in market sentiment. Despite a volatile week, the S&P 500 closed higher by over 2.6% this week and the Canadian TSX was up over 0.7%*. However, after five straight months of gains across the S&P 500 and Nasdaq, the indexes are all on track for a losing month in April. This would also mark the first correction in stocks for the year, as uncertainty around Fed rate cuts and the path of inflation sparked volatility in equity and bond markets. While U.S. Treasury yields moved lower on Friday, they remain on pace for substantial gains for the month. For example, the 2-year Treasury yield, often considered a proxy for the fed funds rate, went from about 4.6% to 5.0% in April, at highs of the year*. The sharp move higher in yields has weighed particularly on interest-rate-sensitive parts of the market, including small-cap stocks, sectors like real estate, and investment-grade bonds.
• Large-cap technology earnings support a rebound in markets: Strong earnings reports and guidance on Thursday from technology heavyweights Google and Microsoft helped drive a bounce-back in markets and sentiment. Both companies highlighted strong returns from their artificial intelligence (AI) businesses, and both expect to continue to spend and grow this business segment in the year ahead. Google also announced its first ever cash dividend, underscoring how large-cap technology firms with robust balance sheets can return value to shareholders, especially in an elevated interest-rate environment. More broadly, about 45% of S&P 500 companies have reported first-quarter earnings already, with 80% of these reporting a positive earnings surprise, well above the 10-year average of 74%*. First-quarter earnings growth is on pace for 2.0% year-over-year, somewhat below the 3.4% growth forecast at the end of March. Nonetheless, for the full-year 2024, expectations remain intact for 10.5% year-over-year earnings growth*, driven by both growth and value sectors, which, in our view, would support a broadening of market leadership in the year ahead.
• U.S. personal consumption expenditure (PCE) inflation in line with expectations: All eyes were on Friday's PCE inflation report, particularly after hotter-than-expected CPI and PPI reports earlier this month. However, PCE inflation for the month of March came in largely in line with expectations, providing some relief to markets. Headline PCE inflation was up 0.3% on a month-over-month basis, in line with expectations, although annual PCE inflation was 2.7%, a tick higher than expectations of 2.6% and last month's 2.5%*. Core PCE inflation, excluding food and energy, was also up 0.3% monthly, in line with expectations. On a year-over-year basis, core PCE inflation was up 2.8%, slightly higher than expectations of 2.7% but in line with last month's 2.8%*. Services inflation was the key driver, up 4%, while goods inflation rose a more modest 0.1% in March*. Overall, inflation data has been hotter than expected in the first quarter of 2024. However, in our view, the drivers of persistent inflation have been areas like energy and commodities, which have cooled in recent weeks, and idiosyncratic pricing in areas like motor vehicles. Given our view that easing shelter and rent pricing should show up in the inflation baskets in the months ahead, and wage gains may also ease, we see services inflation continuing a downward path in the year ahead, albeit perhaps not in a straight line lower. We expect the last mile to around 2.5% inflation or lower to be bumpy, but thus far we don't see any substantial reason that the path of disinflation has gone off-course.

Mona Mahajan
Investment Strategist

^*FactSet.