Wednesday, 3/27/2024 p.m.

  • Stocks finish higher: Equity markets closed higher Wednesday, with the TSX gaining about 0.7% and the S&P 500 up roughly 0.9%. Leadership favoured value-style stocks, with the Russell 1000 Value Index gaining over 1% today, while the Russell 1000 Growth Index rose by about 0.2%.* U.S. small-cap and mid-cap stocks showed strong performance today as well, with the Russell 2000 gaining over 1.5% and the Russell mid-cap index rising over 1%.* Treasury yields drifted lower, with the 10-year GoC yield finishing around 3.44% and the U.S. 10-year yield ticking down to 4.19%.* Overseas, European markets closed mostly higher while Asian markets finished mixed overnight, with Japan's Nikkei Index logging a 0.9% gain and Chinese markets mostly lower.* Looking ahead, tomorrow will provide a reading on Canadian GDP by industry, while Friday will bring U.S. personal consumption expenditures (PCE) inflation data.
  • Equity markets have been unphased by higher yields: Markets and central-bank policy moved in tandem for much of 2023. From August to October of last year, stocks pulled back as concerns mounted that central banks might have to keep interest rates higher for longer to lower inflation. During this time, the U.S. 10-year Treasury yield surged from around 4% in early August to nearly 5% in late October, while the 10-year GoC yield surged from around 3.6% to over 4%.* However, in the final two months of 2023, bond yields moved sharply lower and equity markets rallied. The U.S. 10-year Treasury yield declined about 1%, finishing the year around 3.9%, while the TSX gained roughly 10.5% and the S&P 500 gained over 12%.* The move lower in bond yields to close out 2023 was driven by lower U.S. inflation readings and commentary from the Fed that signaled it was likely done raising rates. Turning to 2024, bond yields have risen to begin the year; however, unlike the indigestion we saw in markets in the middle of 2023, stocks have continued to move higher. In our view, equity-market resilience in the face of higher rates has been a product of robust economic growth and strong corporate profits, particularly in U.S. companies. Additionally, at last week's FOMC meeting, Fed projections showed it still sees a case for three 0.25% interest-rate cuts in 2024, despite higher-than-expected U.S. inflation readings in recent months. We believe the economic backdrop should remain supportive for equity markets, particularly as inflation trends lower and central banks potentially pivot to interest-rate cuts around midyear.
  • Markets eye June for first rate cut in the U.S. and Canada: Last week the Fed left its policy rate on hold, as expected, at 5.25 – 5.5%. Similarly, the Bank of Canada (BoC) left its policy rate on hold at 5% at its March 6 meeting. Futures markets are now pricing in roughly three 0.25% Fed interest-rate cuts in 2024, with about a 70% chance the first cut is delivered at the June meeting.** Market expectations are similar in Canada, with expectations for three 0.25% rate cuts in 2024, with the first rate cut delivered at the June meeting.** Unlike the U.S., which has seen hotter-than-expected inflation to start the year, Canadian inflation has been below expectations, with the headline consumer price index (CPI) rising by 2.8% in February versus expectations for a 3.1% gain.* The trend lower in inflation should support the case for BoC rate cuts around midyear. Later this week we'll see an important read on the Fed's preferred measure of inflation, core personal consumption expenditures (PCE), which will be released on Friday. With the Fed currently data-dependent, incoming inflation and economic data over the coming months will play a critical role in future monetary-policy decisions. We believe that inflation should continue to moderate over the coming months, and that the Fed and BoC will likely have a credible case to begin cutting rates at the June meeting.


Brock Weimer, CFA
Associate Analyst 

*FactSet
**Bloomberg.


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