U.S. and Canadian main indexes closed higher on Friday as investors honed in on the chance of a bigger interest rate cut by the Federal Reserve next week, with rate-sensitive small cap stocks outperforming. The TSX closed at a fresh record high and posted its biggest weekly gain in almost a year.
Bets on the size of the Fed’s cut have been volatile and were roughly even by late Friday.
Expectations for a 50 basis point cut jumped to 49% from 28% on Thursday, CME’s FedWatch Tool showed, compared with a 51% probability for a 25 basis point cut.
Former New York Fed President Bill Dudley said late Thursday there was a strong case for a 50-bps interest rate cut.
Reports in the Wall Street Journal and other media had said early Thursday the Fed faces a difficult decision on how much to ease on Sept. 18.
“There’s just rumblings that have started to bubble up again that the discussion in the Fed is leaving 50 basis points on the table,” Jim Baird, chief investment officer with Plante Moran Financial Advisors, Southfield, Michigan.
In contrast, bets on Thursday that the Fed would opt for a smaller 25-bps cut firmed after news of slightly higher producer prices and Wednesday’s consumer prices data.
While the renewed hopes for a bigger cut were boosting large cap indexes on Friday the optimism seemed most evident in the Russell 2000 small cap index, which rose 2.5% on the day and 4.4% for the week. Smaller companies are more sensitive to rate changes as they depend more on borrowed money and floating rate loans.
Baird argued that stocks appeared to show investor optimism that a 50 basis point cut would not indicate a coming recession.
“If investors were looking at this and saying they have to move quicker because they’re behind the curve you wouldn’t see risk assets like small caps rally,” said Baird. “You’re seeing some of the riskier areas of the equity market advance pretty strongly today.”
Jason Pride, chief of investment strategy and research at Glenmede in Philadelphia, said Friday’s gains likely stemmed from Dudley’s comment about the case for a 50 basis point cut.
Also on Friday, a survey showed U.S. consumer sentiment improved in September as inflation subsided, though Americans remained cautious ahead of the November presidential election.
The Dow Jones Industrial Average rose 297.01 points, or 0.72%, to 41,393.78, the S&P 500 gained 30.26 points, or 0.54%, to 5,626.02 and the Nasdaq Composite gained 114.30 points, or 0.65%, to 17,683.98.
All three major U.S. benchmark indexes ended close to roughly two-week highs and logged solid weekly gains.
For the week the S&P 500 rose 4.02% and the Nasdaq climbed 5.95%, with both marking their biggest weekly percentage gains since early November. The Dow added 2.60% for the week.
The Toronto Stock Exchange’s S&P/TSX composite index ended up 93.51 points, or 0.4%, at 23,568.65, moving past the record closing high it set on Thursday. For the week, the index was up 3.5%, its biggest weekly gain since October.
“This is the everything rally going on. We’ve got equities up, we’ve got bonds working, commodities going,” said Greg Taylor, a portfolio manager at Purpose Investments. “We’re getting a lot of expectations that the Fed next week is going to do a 50 basis-point cut. Markets seem to be cheering that on.”
The Toronto market’s materials group, which includes fertilizer companies and metal mining shares, rose 1.5% as gold and copper prices climbed, notching its highest closing level since April 2022.
Technology added 0.7% and real estate, which could particularly benefit from lower borrowing costs, ended 2.1% higher.
Canada’s 2-year yield fell nearly 6 basis points to 2.945%, its lowest level in more than two years.
In stock news, the Canadian government will not intervene to end a dispute between Air Canada and its pilots and intends instead to pressure both sides to avert a strike, Prime Minister Justin Trudeau said. Air Canada’s shares ended nearly 1% higher.
In U.S. trading, Adobe finished down 8.5% after the Photoshop maker forecast fourth-quarter earnings below estimates.
And Boeing shares sank 3.7% after its U.S. West Coast factory workers walked off the job early on Friday as they overwhelmingly rejected a contract deal.
Chinese e-commerce firm PDD Holdings fell 2.4% after the Biden administration said it was moving to curb low-value shipments entering the U.S. duty-free under the $800 “de minimis” threshold.
Uber shares rallied 6.4% after the ride-hailing platform said it would bring autonomous ride hailing to Austin, Texas, and Atlanta in partnership with Alphabet’s Waymo.
Advancing issues outnumbered decliners by a 5.54-to-1 ratio on the NYSE where there were 653 new highs and 27 new lows.
On the Nasdaq, 3,275 stocks rose and 1,026 fell as advancing issues outnumbered decliners by a 3.19-to-1 ratio. The S&P 500 posted 60 new 52-week highs and one new low while the Nasdaq Composite recorded 116 new highs and 54 new lows.
On U.S. exchanges 10.15 billion shares changed hands compared with the 10.78 billion average for the last 20 sessions.
Reuters, Globe staff