Agree to disagree

A week has passed since the US elections and markets continue to digest the potential impact from a second-term Trump administration. What has become clearer is how murky the path forward will be given the consequences at this stage are purely speculation. That message resonates with the bond market as 10-year US Treasury yields are only moderately higher (2 basis points) then they were at the beginning of the week prior to the election. Looking through the “noise”, it’s evident that recent performance in the bond market is related to the current state of the US economy rather than forecasting the actions of a new administration. The US consumer continues to show resilience and strength challenges the narrative of a US Federal Reserve (Fed) needing to aggressively cut interest rates.

Economic data

The market received a significant data input this week with Consumer Price Index (CPI) numbers for the month of October. Headline CPI came in at 0.2%, unchanged from the previous month and in line with expectations. This brought the Year-over-Year (Y/Y) number to 2.6%, up from 2.4%. Core CPI also matched estimates coming in at 0.3% for the month and unchanged at 3.3% Y/Y. The market was relieved to see numbers as expected as the worry was for a strong inflation print. The debate, however, is whether inflation remains sticky, challenging the path back to the 2% target. 

There was some evidence of stickiness in the numbers, with 3-month annualized figures accelerating. Core services 3-month annualized inflation rose to 4.3% from 3.8% with contributors to inflation also being broadly distributed. 6-month annualized figures perhaps paint a better picture with a continued trend lower, but that didn’t dissuade inflation hawks reviewing recent data as evidence of sticky inflation. Helping offset some of this concern was the revision to jobs numbers. The continued revisions lower indicate a labour market that is not as strong as previously thought. It also gives support to the Fed to further reduce its restrictive monetary policy.

Bond market reaction: Having a volatile week

Bond markets had another volatile week with 10-year US Treasury yields having an intra-week range of up to 20 bps. Government of Canada bonds continue to outperform relative to US treasuries, with 10-year Canada bonds moving another 4 bps richer relative to US treasuries. The interest rate curve measured by the difference between the 2-year bond and 10-year bond moved steeper on the week by 5 bps in the US and the same curve remained relatively unchanged in Canada. Canadian corporate bonds, continue to perform well this week, with credit spreads moving tighter and new issues being well received. US investment grade spreads moved modestly wider on the back of increased supply and uncertainty surrounding the Trump administration’s new policies. However, high yield continues to move tighter with spreads now well below 300 bps.  

Stock market reaction: Soaring to all-time highs

This week marked a significant milestone as the S&P/TSX soared to yet another all-time high, surpassing the 25,000 mark and the S&P 500 encountered resistance at the 6,000-point threshold. The prevailing "animal spirits" driven by a fear of missing out and post-election euphoria are now clashing with frothy valuations—particularly in the US markets. Investors are taking a moment to reassess the underlying fundamentals, which will require validation for the current rally to sustain momentum.

In contrast, Canadian equities appear to be on solid footing, especially when evaluated on a forward Price-to-Earnings basis. This is particularly noteworthy given the anticipated earnings re-acceleration for the broader S&P/TSX. Meanwhile, commodity prices retreated in response to a stronger US dollar, with oil prices remaining below US$70 per barrel following OPEC's downward revision of global demand projections.

Despite the dip in crude prices, many Canadian oil producers continue to thrive—as evident by Suncor's outstanding quarterly results. The company not only exceeded expectations for production and free cash flow, but also achieved its new debt target ahead of schedule which enabled a 100% free cash flow payout and a subsequent 5% dividend increase. However, the standout performer on the S&P/TSX this week was Shopify. The e-commerce powerhouse delivered an exceptional earnings report, significantly exceeding expectations and reinforcing its dominant position in the industry. With projections indicating over 20% growth and free cash flow margins exceeding 20% for the foreseeable future, Shopify is poised for continued success. If it maintains this trajectory for another quarter or two, the long-standing curse of surpassing the Royal Bank's TSX-leading market capitalization (market cap) will once again come into play. Historically, many companies including Nortel, Blackberry, Valeant, and Potash Corporation attempted to eclipse Royal Bank's market cap but have ultimately fallen short.

What to watch in markets next week

Next week is busier in Canada on the economics front, with the market getting a look at CPI for October and retail sales for September. In the US, we’ll see investment flows, housing starts, permits, existing home sales and the leading index.

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Authors: Adam Ditkofsky, Pablo Martinez, Sandor Polgar, Steven Lampert, Craig Jerusalim, Diana Li, Mona Nazir and Mickey Ganguly

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