Daily market snapshot

• U.S. stocks lower for a second day – U.S. stock markets moved modestly lower on Wednesday, as rising geopolitical tensions in Iran weighed on stock-market sentiment. The technology-heavy Nasdaq underperformed the S&P 500 and the Canadian TSX*. Meanwhile, gold prices continued to edge higher. Gold prices were up about 1% on the day and are up about 7% on the year thus far*. The VIX volatility index, also known as the Wall Street fear gauge, also climbed to around 17, close to its highest level of the year* – although the VIX is still in line with its average levels over the past year*.
   
• Geopolitical tensions weigh on markets – This year thus far has been mired with geopolitical uncertainty. This began with U.S. military action in Venezuela and the assertion that the U.S. would now run Venezuela until a safe and judicious transition of power takes place. In addition, the U.S. is planning to rebuild the oil infrastructure in Venezuela, with potential support from major U.S. energy companies. Investors are now monitoring the growing protests in Iran with some threat of intervention by the U.S. administration. This has weighed on market sentiment and driven a higher VIX volatility index. Perhaps most notably, from a market perspective, tensions in these regions typically manifest in the oil and energy markets. We have seen oil prices rise about 5% this year thus far, outpacing the S&P 500, which is up about 1.2%*. However, keep in mind that oil prices were near multiyear lows when the year began, given that the oil market was likely in an oversupply situation globally*. In our view, despite uncertainty in oil-producing regions like Venezuela and Iran, any reduction in oil supply can likely be supplemented over time by other OPEC members and the U.S. increasing production.
   
• Earnings season kicks off this week – The fourth-quarter earnings season for the S&P 500 kicks off in earnest this week, starting with large U.S. banks. Thus far, underlying results have been solid, with banks noting solid loan demand and trading volumes*. However, given the nice rally in financials over the last several months, the sector has come under some pressure after reporting earnings*. More broadly, fourth-quarter earnings are expected to be higher by about 7.5% year-over-year, driven by strong performance in the technology and materials sectors*. For the full year, earnings expectations have been revised higher to about 14.8%, driven by strong growth across multiple sectors*. In our view, the broadening of earnings growth beyond just technology should continue to drive some broadening in market leadership as well, from both growth and value sectors.

Mona Mahajan;
Investment Strategy

^{Source: *FactSet}

• Stocks slide – U.S. equities moved lower today, with softer-than-expected inflation data failing to lift market sentiment*. Large-cap stocks were the worst performers, with the S&P 500 index down 0.2%, led by a near 2% decline in the financial sector after disappointing JP Morgan results*. Canadian equities were flat over the day*. Short-term U.S. government bond markets rallied following cooler U.S price data, with the 2-year Treasury note yield a touch lower at 3.52%, and the 10-year yield at 4.17%*. The U.S. dollar moved initially lower against a basket of international currencies after the inflation report but subsequently rebounded to finish the session up*. Gold prices edged off their record highs, while oil prices climbed to a two-month high on the back of increasing tensions between the U.S and Iran*.
   
• Signs of encouragement in December CPI data – Economists have struggled to get a read on inflation over recent months, with the October and November CPI data heavily distorted by the government shutdown*. December, therefore, represents the first 'clean' inflation report for some time, and the signals were generally positive, in our view. Headline inflation was firm over the month, in part reflecting another large rise in food prices*. However, core inflation data, which strip out the volatile food and energy prices, were softer than feared at 0.2% month-over-month, helping bring the year-over-year rate down to 2.6%*. This downside surprise was driven by core goods inflation, which was flat in December and is now up by just 0.2% over the past three months in annualized terms*. While part of this slowdown reflects bumpy used car prices*, the Fed will likely be watching these data carefully in coming months to see if the inflationary impulse from higher tariffs is starting to ease. Services inflation was firmer in December, with shelter prices in particular bouncing back after data collection issues in October and November*. However, this component of inflation clearly slowed in 2025*, and we expect a further gradual moderation this year. Overall, the report provides tentative encouragement that we are seeing a gradual easing in underlying U.S. inflation pressures, in our view.
   
• A careful balancing act for the Fed – Today's inflation data will not change the Fed's thinking ahead of its upcoming January meeting, in our view. The central bank has provided a strong hint that it is set to take a pause from its recent run of interest-rate cuts **, and the market is currently pricing nearly no chance of a move*. However, signs of gradually cooling price pressures help support the case for further careful policy easing through 2026, especially with the most recent labor report showing still subdued hiring rates*. Markets are pricing around a one in five chance of a 25 basis point (0.25%) cut in March and April, with the odds of a cut in June, after current Fed Chair Powell's term ends, seen higher at 45%*. The Fed's next move is complicated by news this week that Chair Powell is under investigation by the DoJ, with Powell arguing that this represents part of a political campaign to pressure the central bank to lower interest rates*. Senior Republicans and Democrats have pushed back on this investigation and warned that they will not confirm the president's nominee for the Fed board while the issue is outstanding*. This pushback has seemingly helped ease some of the market concerns around threats to the central-bank independence that surfaced at the start of the week*.

James McCann;
Investment Strategy

^{Source: *Bloomberg **Federal Reserve} 

• Stocks close higher, shaking off central-bank independence concerns – North American stocks closed higher despite reports that Federal Reserve Chair Jerome Powell is under investigation related to testimony he gave last summer concerning the Federal Reserve’s headquarters renovation project.* Chair Powell released a video yesterday stating that the Fed has made every effort to keep Congress fully informed about the renovation and that he views the investigation as an attempt by the administration to influence monetary policy.
  
  Under the Federal Reserve Act, the president may remove members of the Board of Governors only “for cause,” a term that is not explicitly defined in statute but has historically been interpreted by courts to mean neglect of duty or malfeasance (i.e., wrongdoing or misconduct by a public official).** While an investigation has been opened, Chair Powell has not been formally charged. Moreover, any effort to remove him would likely face significant legal challenges, a process that would take time. In our view, a conviction may be required to establish “cause,” as it would demonstrate that the facts of the case were adjudicated by a court and that Powell was afforded due process under the U.S. Constitution.
  
  From a market perspective, U.S. stocks brushed off these concerns, with the S&P 500 logging a modest gain, supported by strength in the industrials and consumer staples sectors.* Canadian equities finished higher as well, with the TSX posting a 0.8% gain.* In contrast, the U.S. dollar fell while U.S. Treasury yields rose.* Other traditional safe-haven assets such as gold finished higher, with geopolitical uncertainty in Iran likely contributing to the rise as well.* The central concern for markets from these developments is that this episode signals a potential erosion of the Federal Reserve’s ability to conduct monetary policy independent of political influence. With Chair Powell’s term set to expire in May, and a more dovish successor potentially taking his place, we expect this issue to remain a market-relevant headline in the coming months. That said, the Federal Reserve’s institutional design—including a 12-member voting committee for monetary-policy decisions and 14-year staggered terms for Board members—is explicitly intended to insulate monetary policy from political pressure. We expect these structural safeguards to limit the extent of any erosion in the Fed’s independence.
   
• Central-bank independence in focus to start the week – News of a criminal investigation into Federal Reserve Chair Jerome Powell has reignited concerns over central-bank independence. While U.S. equities posted a modest gain, the dollar was weaker, and Treasury yields traded higher.* The primary market concern is that this development could signal a weakening of the Federal Reserve’s ability to conduct monetary policy independent of political influence. Chair Powell’s term as Fed chair is set to expire in May, and he could be replaced by a more dovish successor who may be more inclined to lower interest rates. However, the Fed chair does not unilaterally set monetary policy. Decisions are made by the Federal Open Market Committee (FOMC), which consists of 12 voting members, with each vote carrying equal weight. Importantly, several FOMC participants have recently emphasized the importance of central-bank independence*. As a result, we do not expect a change in Fed leadership to materially erode the Federal Reserve’s ability to set monetary policy independently. From a portfolio perspective, we continue to believe that opportunities are attractive in global equity markets, and we recommend that investors take a globally diversified approach to overweighting stocks versus bonds. To view our full suite of portfolio guidance, check out our Monthly Portfolio Brief.
   
• U.S. inflation on the horizon – Inflation data will be in focus tomorrow with the release of the December U.S. consumer price index (CPI). Consensus expectations call for headline CPI to rise 0.3% month-over-month and 2.6% year-over-year, while core CPI is expected to increase 0.3% on the month and 2.7% on a year‑over‑year basis.* Following a lower‑than‑expected November reading—which was clouded due to limitations in the Bureau of Labor Statistics’ (BLS) ability to collect data during the government shutdown—investors will likely be watching closely to see whether the recent disinflationary momentum can be sustained now that the BLS has resumed normal operations. In recent months, goods prices have risen from relatively low levels, likely reflecting tariff‑related cost pass‑through.* By contrast, services inflation has shown encouraging signs of gradual moderation.* We expect cooling labour‑market conditions to contribute to further easing in services inflation over the course of 2026. Taken together, we believe U.S. inflation is likely to hover in a 2.5%–3.0% range in 2026.

Brock Weimer, CFA;
Brian Therien, CFA;
Investment Strategy

^{Source: *FactSet **U.S. Federal Reserve}

• A strong start to 2026 – Equity markets delivered strong gains on Friday, capping off a robust first full week of the new year*. The S&P 500 closed 0.7% higher, leaving the index up 1.8% over 2026 so far, while the Canadian S&P/TSX index is now up 2.8% year-to-date*. Shorter-dated U.S. government bonds sold off at the end of the week as December's payrolls report showed few signs of labor-market distress, pushing investors to hedge bets on Fed easing at upcoming meetings*. However, longer-duration bonds rallied, helped by President Trump's directive to Fannie Mae and Freddie Mac to buy $200 billion in mortgage bonds*. In Canada, bond markets were generally firmer, with a rise in reported unemployment in December pushing back on building expectations that the Bank of Canada might hike rates this year*. The U.S. dollar moved higher against a basket of trade-weighted currencies, including the Canadian dollar, and is now up 0.8% year-to-date on this trade-weighted basis*. WTI oil prices jumped 2% as investors contemplate the latest geopolitical headlines out of Iran, and gold prices nudged above $4,500 per ounce*.
   
• Mixed signals from December labour reports – Headline nonfarm payrolls in the U.S. increased by a disappointing 50,000 in December, while gains over the previous two months were revised lower by a cumulative 76,000*. Sluggish hiring continues a trend seen throughout 2025, with payrolls rising just 584,000 over the year, down from the 2 million increase reported in 2024**. Cuts to federal government employees of 277,000 in 2025 explain some, but not all, of this slowdown**. Despite sluggish hiring, the unemployment rate declined in December to 4.4%, providing a more reassuring signal**. Signs of stabilization in the unemployment rate over recent months indicate that we are not seeing a significant deterioration in the labour market, in our view, even if hiring remains stuck in the slow lane. In Canada, there were similarly mixed signals in December*. Encouragingly, we saw a fourth consecutive increase in employment, hinting at signs of labour-market resilience amid trade-policy uncertainty*. However, the unemployment rate ticked higher to 6.8%, even if this remains well below the recent peak*.
   
• Time for a pause? – The Fed has cut interest rates at its each of its past three meetings but indicated that it might be ready to take a pause from this policy easing in January***. Today's labour data seem unlikely to change that assessment, in our view. Moreover, adding to the case for a pause is the unexpectedly strong third-quarter GDP report released late last year, and building expectations for fourth-quarter GDP based on tracking estimates****. However, while the Fed looks set to take a breather in January, we expect it to resume cuts at upcoming meetings. Most FOMC members think interest rates at their current level (3.5%-3.75%) are weighing on economic activity, and they support modest further reductions to ease this drag***. We expect one to two 25 basis point (0.25%) cuts this year, leaving interest rates in the 3%-3.5% range. In Canada, interest rates are seen unchanged at 2.25% through the rest of 2026, with the Bank of Canada seemingly confident that policy is well-positioned to support a recovery in the economy following a slowdown in growth over 2025*.

James McCann
Investment Strategy

^{Source: *Bloomberg, **BLS, ***Federal Reserve, ****Atlanta Fed}

• Markets rise higher on strong productivity growth – The TSX and U.S. equity markets finished higher on Thursday, as a broad range of sectors – led by energy and consumer staples – offset a pullback in technology stocks*. Bond yields rose, with the 10-year Government of Canada yield at 3.40% and the 10-year U.S. Treasury yield at 4.18%*. Internationally, Asia finished lower amid rising geopolitical tensions*. The U.S. dollar strengthened against major currencies*. In commodities, WTI oil rebounded after its pullback in recent days*.
   
• Jobless claims rise modestly – S. initial jobless claims increased to 208,000 this past week — in line with expectations — from 200,000 the prior week*. Continuing claims, which measure the total number of people receiving benefits, edged higher to 1.91 million, slightly above forecasts for a smaller rise to 1.87 million*. The unemployment rate has risen in recent months to 4.6%, and job openings contracted in November to 7.1 million, slightly below unemployment of 7.8 million*. Tomorrow's employment report for December will help provide a deeper look at the labour market, with forecasts calling for 55,000 jobs added and the unemployment rate to tick down to 4.5%*. We expect the current low-hiring, low-firing environment to persist, supporting gradual inflation moderation — though likely at a slower pace.
   
• Strong productivity gains drive unit labor costs lower –S. nonfarm business sector productivity rose 4.9% annualized for the third quarter of 2025, ahead of estimates of 4.6% and marking the strongest reading in two years*. Hourly compensation grew 2.9% year-over-year – slightly above CPI inflation of about 2.7%* – resulting in continued positive real wage gains, on average. Growing disposable income should help support consumer spending and the broader economy, in our view. Unit labour costs, which reflect wage gains adjusted for changes in productivity, fell 1.9% annualized, below expectations for a 0.2% gain*. Lower unit labour costs should help ease inflation pressures, in our view.

Brian Therien, CFA;
Investment Strategy

^{Source: *FactSet}