Investment update

Weekly insight into the marketplace.

September 16 to 20, 2024

U.S. rate cut sparked market surge

Market performance was moderate in the lead-up to the conclusion of the U.S. Federal Reserve’s (the Fed’s) Federal Open Market Committee meetings on Wednesday. Monday saw the TSX, the Dow and the S&P 500 all eke out small percentage gains, while the Nasdaq snapped a five-day win-streak, declining 0.5%. All four of the major North American benchmarks remained idle on Tuesday, closing in a tight -0.1% to 0.2% range. The Fed’s decision to kick off its rate-cutting cycle with a 50-basis-point reduction on Wednesday caught investors slightly off guard and the major indexes fell from intraday highs to close in negative territory. Thursday’s rally was more than enough to recoup the week’s losses though, as optimism grew that the Fed’s big swing will help deliver a “soft landing” for the U.S. economy. The TSX and the Dow gained 1.2% (the Dow also crossed the 42,000-point milestone for the first time ever), the S&P 500 climbed 1.7% and the Nasdaq jumped 2.5%. Friday’s close was mixed with the TSX and the Dow reaching new record highs, while the S&P 500 and the Nasdaq shed some of the previous session’s gains. All four benchmarks still managed to log gains over 1% for the week.

Canadian CPI hit the central bank’s 2% target

Statistics Canada released its August consumer price index (CPI) report on Tuesday, and for the first time since February 2021, the annual inflation rate was at the Bank of Canada’s 2% target. The August data was down from July’s 2.5% rate, below economist forecasts of 2.1%, and marks a significant step forward in Canada’s turbulent battle against runaway inflation (which peaked at 8.1% during the pandemic). The deceleration in consumer prices was led by declines in the cost of gasoline (down 5.1%) and energy prices (down 4.7%). Food inflation remained level at 2.7% from July to August, while mortgage-interest costs and rent remained the largest contributors to higher inflation at 18.8%. On a monthly basis, the CPI fell 0.2% in August, after a 0.4% increase in July. The Bank of Canada’s preferred measures of core inflation – CPI trim and median – both ticked down to 2.4% and 2.3%, respectively. It’s the sixth month in a row that CPI trim and median have fallen below 3% - an important signifier for the economy. The August report now sets the stage for the Bank of Canada to cut interest rates further in October and increases the odds of a larger 50-basis-point reduction (versus the last three 25-basis- point cuts).

The Fed started its rate-cutting cycle

There was little doubt that the Fed would end its prolonged, and historically high, monetary policy position at the conclusion of its two-day meetings last week. The economic indicators that the Fed relies on to help guide its decision- making have been consistently pointing in the right direction for some time, and upholding interest rates at the current level risked doing more harm than good. What caught markets off guard was the size of the initial cut at 50 basis points to a range of 4.75% to 5.00%. Policymakers in their official statement said: “The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance.” In a press conference following the decision, Fed Chair Jerome Powell was quick to point out that "this is not the new pace.” The central bank is likely to switch to smaller quarter-point cuts in November and beyond but, for now, the rate-cutting cycle is in motion. “Our economy is strong overall," Powell told reporters. “I don't see anything in the economy right now that suggests that the likelihood of a downturn is elevated — you see growth at a solid rate, you see inflation coming down and a labor market that is still at very solid levels. We're certainly not saying mission accomplished or anything like that, but we are encouraged by the progress we have made.”