04:24 PM EDT, 08/30/2024 (MT Newswires) -- After starting this week by soaring to a record, the Toronto Stock Exchange ended it Friday with a late rally that saw it finish 118.69 points higher at 23,346.18, just single digits below last Monday's record close, as stock pickers took positive positions ahead of a Labor Day holiday weekend both in Canada and the United States.

Gains today add to the near 100 points won Thursday, and came despite lower commodity prices and some concerns that the Bank of Canada will be more aggressive than most people think with interest-rate cuts.

Among sectors, all but Energy, which lost near 1.3%, were higher. Even Base Metals was up 0.8%, but only Information Technology gained more than 1%.

Of commodities today, West Texas Intermediate crude oil closed sharply lower ahead of the Labor Day holiday weekend that marks the end of the U.S. summer driving season, with the market focused on light demand even as Libya removes supply. WTI crude for October delivery closed down $2.36 to settle at US$73.55 per barrel, while October Brent crude, the global benchmark, closed down U$1.14 to US$78.80.

Also, gold fell off from a record high midafternoon on Friday as the dollar and treasury yields rose as a key U.S. inflation measure matched estimates, firming expectations the Federal Reserve will begin cutting interest rates next month. Gold for December delivery was last seen down US$24.90 to US$2,535.40 per ounce, dropping from Thursday's record close of US$2,560.30.

In looking at the link between recent equity performance and monetary policy in his weekly 'Talking Points' column, Douglas Porter at BMO Economics took inspiration from news of a coming reunion involving UK rock band Oasis.

Porter noted global markets are ending the summer in a very different place than where they were when it began, "for the most part". He said bond yields have been the big story; "even with a modest back-up this week, they spent most of the past few months tumbling lower". He added the change in tone by the Federal Reserve on rate cuts has also knocked the U.S. dollar "off its high horse".

Equities meantime, Porter said, have been "a relative oasis of firmness, albeit with a mid-summer squall." The economic backdrop has played an important role in supporting equities, he added. Porter noted there's even some speculation that the typically cautious Bank of Canada (BoC) could accelerate the pace of rate cuts -- but likely at a later date.

Porter said the biggest factor driving a "potentially more aggressive series of rate cuts" in Canada is the changed outlook for the Fed. He noted that with markets back to pricing in a series of U.S. rate cuts, "frankly egged on by Chair Powell", this has helped firm the Canadian dollar, thus removing one remaining hurdle for the BoC. BMO is maintaining its call of 100 bps of cuts for Canada by January, and then another 50 bps by mid-2025, taking the overnight rate to 3.0% by next June. "But," he added, "the risk is clearly that the Bank moves even sooner, and possibly more. After all, if the jobless rate keeps rising, and the output gap keeps widening, while inflation is better behaved, why would the Bank stop at 3%? That's our Wonder Wall."

Meanwhile, Derek Holt, Vice-President & Head of Capital Markets Economics at Scotiabank, noted on the surface, data from earlier today showed Q2 growth of 2.1% q/q SAAR beat expectations by "a handful of tenths". It was also revised up a tick to 1.8% in Q1.

But for now, Holt said, Canada has "no baked-in momentum" into Q3 GDP. He is tracking at just 0.1% q/q SAAR GDP growth in Q3 based on Q2 and the flash estimate for July, and added the loss of momentum in June and July "harmed the Q3 math". What is at risk, he noted, is the BoC's 2.8% q/q SAAR projection for Q3 GDP given zero momentum to date. He also noted the rail strike and preparations for it may be a mild dampener on August GDP.

Holt said: "The BoC will take this overall report as justification for a widely expected quarter-point cut next Wednesday and ongoing dovish bias that defers to the October decision with its full forecast update. I would think they are likely to revise down their Q3 GDP estimate of 2.8% q/q SAAR from the July MPR in the October MPR, but for now, they will wish to monitor the pent-up demand arguments. Uncertainty toward whether stalled consumption in Q2 after strong Q4 and Q1 gains is an emerging trend, or a temporary one if pent-up demand gets unleashed, should keep them guarded against up-sizing cuts among other reasons for not doing so."

According to Holt, an added inflation caveat for the BoC is that Q2 labor productivity in the business sector is "looking awful" and real wage growth is climbing while productivity is tanking which reinforces inflation risk. Also, he noted, business sector output looked very weak in Q2 alongside a large gain in hours worked.