Back to the grind

Kids are back to school, the weather is getting cooler, bond markets are rallying and market participants are back to the grind. The Bank of Canada (BoC) kicked off the excitement for the week with its interest rate announcement to cut rates by another 25 basis points (bps) bringing—the overnight rate to 4.25%. The decision was widely expected. However, prior to the announcement, the market was looking for clues to see if a 50 bps cut was likely and gauge the temperature from bank officials as to whether they foresee a deteriorating economy. The general sentiment from the BoC was that inflationary pressures continue to cool while unemployment continues to move higher, leaving the path to economic normalization wide open.

The BoC offered a positive view on growth for the reminder of the year—which is at odds with the current economic backdrop. One could conclude that the BoC expects it will be able to continue easing and as a result stimulate consumers once again. The debate however will be how much more the BoC will need to move rates lower before consumers are once again stimulative for the economy. As to whether a 50 bps cut is warranted, Governor Macklem conveyed that the data would dictate that type of policy response. If the unemployment rate accelerates its rise while inflation cools further, it would likely be appropriate to return to neutral at a faster pace. Ultimately the BoC indicated the foundation for further cuts is intact and it will continue on the path to interest rate normalization.

Economic data

The final highlight for the week was jobs numbers for the month of August. Starting with Canada, the economy added 22,100 jobs with the addition coming from 65,700 part-time jobs while full time jobs decreased by 43,600. The main takeaway from these numbers is another increase in the unemployment rate to 6.6% from 6.5%. In the US, the economy added 142,000 jobs against an expected 165,000 with the unemployment rate falling to 4.2% from 4.3%. Given the contrasting lower-than-expected absolute number against a drop in the unemployment rate, the odds of a 50 bps cut by the US Federal Reserve (Fed) at the next meeting on September 18, 2024 were reduced.

Bond market reaction: Rallied this week

Bond markets rallied on the week with 10-year US Treasuries moving lower by almost 20 bps and Canadian government bonds moving in a similar fashion. On the back of the BoC meeting, pricing expectations moved lower with the market priced for the central bank to be lower than 2.5% by the end of 2025. Fed expectations also moved to price in a more aggressive rate cut. The market currently expects a 30% chance that the central bank cuts rates by 50 bps at its next meeting. Corporate issuance was also heathy over the week with Tuesday brining 29 issuers with 43.3 billion of sales.

Stock market reaction: Retreated this week

Equity markets retreated this week leading up to this morning’s important jobs report—which will lay the groundwork for the Fed to cut rates by 25 or 50 bps later this month.?In a risky tight walk for markets, it’s unclear which scenario would appease jittery investors more. The caution ahead is warranted for markets that delivered stellar returns year-to-date. Cyclical sectors such as Energy and Materials as well as sectors with more growth suffered the greatest setback, while the more defensive and interest rate sensitive sectors like Communications, Utilities and Real Estate rose in anticipation of lower interest rates.

Energy was particularly weak with the benchmark West Texas Intermediate oil price dipping below US$70/barrel for the first time this year on anticipated weaker demand for oil in both emerging and developed markets. As a result, OPEC+ is looking to hold off on its planned production increases, and natural supply cutbacks should help buoy further declines.

Banks updated investors this week at a large financial conference with CIBC’s Victor Dodig presenting a very clean and clear strategy, further enhanced by its management shuffle later in the week. The leadership changes clearly demonstrate its deep bench strength and further makes the case for CIBC stock warranting a premium valuation relative to the Canadian Banking group after an extended period of trading at a significant discount.

In US trading, Broadcom suffered a rare setup despite delivering another quarter that exceeded expectations. The negative stock reaction was a result of weak guidance due to cyclicality in other Semis (Wireless, Storage, Broadband), despite ongoing strength in AI related lines of business.

What to watch in markets next week

Next week in the US, the market will have a look at the Consumer Price Index (CPI) for the month of August. Markets are expecting the Year-over-Year reading to reduce to 2.6% from 2.9% in the previous month. In addition to CPI, the Producer Price Index (PPI) for August will also be released which is also weighing on probabilities of a 50 bps cut at the next Fed meeting.

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Authors: Adam Ditkofsky, Pablo Martinez, Sandor Polgar, Steven Lampert, Craig Jerusalim, Rahul Bhambhani and Diana Li

?The views expressed in this document are the views of CIBC Asset Management Inc. and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements.

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