Seasonal patterns

Seasonal patterns

It seems that in most years around this time world events give reasons for markets to become skittish. Whether it’s hurricane season (with Hurricane Milton hitting Florida this week) or the escalating conflict in the Middle East dominating headlines. And of course, the US election is less than one month away, which at this juncture is pretty much a coin toss according to the polls. To be perfectly accurate, former President Donald Trump has a very modest lead ?of 0.3% according to Real Clear Polling—but that could easily change. Given how different each candidate’s policies are on taxes and tariffs, the implication for markets can be significant.

Following last week’s very strong US jobs report, which came in at an increase of 254,000 and well above the consensus, bond yields moved materially higher. Markets are tempering expectations for near term rate cuts from both the US Federal Reserve (Fed) and the Bank of Canada (BoC). In hindsight, it looks like investors got a little ahead of themselves and priced in too many cuts in the near term. Still, there are a lot of uncertainties lingering that could easily cause both rate and risk asset markets to sharply move in either direction.

Economic Data

One data point worth highlighting is the CITI Economic Surprise Index, which moves higher as aggregate US economic data exceeds expectations and falls as it comes in softer. Since mid-August, this index continues to move higher, further supporting the argument that recession risks are fading. This also implies that should inflation continue to normalize, a soft landing could be in reach. Fortunately, this week we saw US Consumer Price Index (CPI) for September come in at 2.4% Year-over-Year (Y/Y). Although that’s down from 2.5% in August, it is modestly higher than expectations. Still, markets reacted positively to the data. Shelter costs, which represent close to 30% of the CPI basket, were lower than expected. However, both non-housing services and core goods came in higher than anticipated. If this continues it could hinder any further progress in bringing inflation any lower. In our view, it’s reasonable to assume inflation will be sticky at its current level of approximately 2.5% over the near term.

In Canada, we saw the jobs number for September come in much stronger than anticipated, with an increase of 46,700 vs. expectations of 27,000. Looking at the details, this included 112,000 full time jobs and brought the unemployment rate down from 6.6% to 6.5%. Still, importantly the participation rate fell by 0.2% to 64.9%, bringing the total employment rate (representing the proportion of the population aged 15 and older who are employed) to 60.7%. This rate consistently followed a downward trend since reaching a recent peak of 62.4% in January 2023. Also worth highlighting, the hourly wage rate fell from 4.5% to 4.9%. Although this is a lagging indicator, it’s supportive for the cooling inflation narrative.

Bond market reaction: Moved higher this week

Bond yields moved higher on the week, as economic data continued to come in higher than anticipated causing markets to pare back expectations for the number of rate cuts by both the Fed and BoC by the end of the year. This move is significant as markets are now only pricing in a 0.77% probability that the Fed will cut rates at its next meeting in early November. Futures markets are now only pricing in 1.6 cuts by the Fed and 2.6 cuts by the BoC by the end of 2024.

Concurrently, over the week both the US and Canadian yield curves modestly steepened, further fueling the argument of rates staying higher for longer. Despite the weakness in rates, credit markets were strong with credit spreads moving tighter. This week saw issuance from both Royal Bank and Bank of Nova Scotia, which were both well oversubscribed despite limited spread concessions. Overall, it seems there simply isn’t enough supply of credit to meet demand, which should continue to be supportive for the corporate bond market over the near term.?

Stock market reaction: Muted this week

A muted week in global equity markets across most regions with the exception of Asia. Following China’s Golden Week holiday, markets opened with significant volatility as many investors were hoping for more stimulus announcements. Over the past two years, we’ve seen investors move their emerging markets allocation away from China to India. In fact, India is the most crowded market globally with extremely stretched valuations. However, with recent excitement building up in China, we’ve seen capital re-allocation between the two countries.

In North America, hurricane Milton stole headlines with many Property & Casualty insurance investors bracing for impact. Despite its saddening damage, the ‘worst-case scenario’ was avoided. On the home front, TD Bank was fined US$3.1B following money-laundering allegations. There have also been additional restrictions put on the bank’s US operations with an intention to slow down growth rates. TD’s stock was down 6% on the news.

What to watch in markets next week

Next week Canadian markets are closed for Thanksgiving on Monday. Subsequently, we’ll see CPI, existing home sales, housing starts, manufacturing sales and international security transactions. In the US, we’ll see the monthly budget statement, import and export price indices, retail sales, industrial production, business inventories, housing starts and building permits.

CIBC Asset Management is committed to providing market insights and research to help you find the right investment solutions. If you'd like to discuss this market and economic update in more detail or have questions about your investments, please get in touch with your advisor or CIBC representative anytime.

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.

This document is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this article should consult with his or her advisor.

All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change with the exception of bond data, which is as of end of day the previous Thursday, and equity data, which is as of mid-day Friday.

CIBC Asset Management and the CIBC logo are trademarks of Canadian Imperial Bank of Commerce, used under license. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc.

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