TSX runs higher on rate cut expectations

Canadian equities reached record highs, supported by strong bank earnings, even as the nation's Q2 GDP contracted a steeper-than-expected 1.6% annualized, fueling expectations for Bank of Canada rate cuts. In the U.S., the core PCE price index rose 0.3% monthly, aligning with forecasts at 2.9% annually, which helped allay immediate inflation concerns. Meanwhile, gold prices surged on increasing bets for a September Fed rate cut, while crude oil, despite Friday's dip, is set for weekly gains but monthly losses due to OPEC+ production.

Analysis

Canadian equities, specifically the S&P/TSX composite index, reached a record high driven by strong bank earnings, yet this market strength is juxtaposed with deteriorating economic fundamentals. Canada's gross domestic product unexpectedly contracted at a 1.6% annualized rate, significantly missing the forecast of a 0.7% decline and marking the first quarterly contraction since Q4 2022. This has intensified expectations, as noted by CIBC, for the Bank of Canada to initiate rate cuts as early as September. In the U.S., the core Personal Consumption Expenditures (PCE) price index rose 0.3% monthly and 2.9% annually, aligning with expectations and temporarily calming fears that tariffs were fueling excessive inflation. This macroeconomic backdrop is creating divergent trends in commodities. Gold surged, with spot prices rising 1% to $3,449.32 an ounce on increased bets of a Federal Reserve rate cut. Conversely, crude oil prices, while set for a minor weekly gain near 1%, are facing a monthly loss of over 6% due to OPEC production hikes, with Brent trading at $67.44 and WTI at $64.13.

Key Decisions for Investors

• Given Canada's 1.6% GDP contraction, investors should monitor for a dovish pivot from the Bank of Canada, which could benefit interest-rate-sensitive sectors but signal broader economic weakness.
• The in-line U.S. PCE data provides some stability, but the strong rally in gold to over $3,400 per ounce indicates the market is aggressively pricing in a Fed rate cut, a factor that should be central to positioning in U.S. equities and fixed income.
• Note the clear divergence between gold and oil; gold is rallying on monetary policy expectations, while oil is weighed down by supply fundamentals despite geopolitical tensions, suggesting a potential pairs trade for macro-focused portfolios.
• The disconnect between Canada's record-high stock market and its contracting economy warrants caution; investors should scrutinize valuations and exposure to the domestic Canadian economy.