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U.S. and Canadian stocks rallied and the S&P 500 registered its highest close of the year on Friday, starting December on an upbeat note as remarks from Federal Reserve Chair Jerome Powell bolstered the view that key policy rates have peaked. Gold rose to an all-time record, helping to propel Canada’s TSX to a two-and-a-half-month high.

Bond yields in both the U.S. and Canada were down sharply as traders continued to bet central banks will cut interest rates faster and sooner than thought just days ago. Implied probabilities in swaps markets now assign a 61% chance the Bank of Canada will make its first interest rate cut in March. Money markets are now pricing in a full percentage point of interest rate cuts by October, according to Refinitiv Eikon data.

“Santa (Claus) is coming to town and he is rewarding all stock holders,” said Barry Schwartz, portfolio manager at Baskin Financial Services. “Today, Federal Reserve Chairman Powell spoke and I think the markets are thinking that global synchronized rate cuts are coming in 2024.”

On Wall Street, economically sensitive transports and small caps enjoyed the most robust gains.

“Those sectors - the cyclicals - they’re the most hated parts of the market year-to-date, (and they) are the parts that are leading,” said Scott Ladner, chief investment officer at Horizon Investments in Charlotte, North Carolina. “On the first day of December, when everybody’s looking for a Santa Claus rally, it probably carries a little bit of extra weight.”

“If December starts out strong, it’s going to make folks jump on board and chase this rally,” Ladner added.

All three U.S. indexes notched their fifth consecutive weekly percentage gains. On Thursday, they wrapped up a banner month in which the S&P 500 and the Nasdaq registered their biggest one-month percentage gains since July 2022, and the Dow closed at its highest level since January 2022. The TSX notched in November its biggest monthly advance in three years.

In prepared remarks, Powell acknowledged the central bank’s need to “move forward carefully” amid signs of economic softening, as the risks of over- and under-tightening its monetary policy are becoming more balanced.

“Earlier in the week, (Fed Governor Christopher) Waller, one of the Fed’s biggest hawks, said as inflation decreases, we’re going to drop rates,” Ladner said. “The market thought that Powell would push against those remarks, and he didn’t.

“(Powell) is setting the market up for rate cuts next year.”

Data released on Friday showed U.S. manufacturing continues to contract as factories contend with decreasing new orders, falling inventories and labour pressures.

The S&P/TSX composite index ended up 216.58 points, or 1.1%, at 20,452.87, its highest closing level since Sept. 18.

The industrials sector rallied 2.1%, while bond proxies, such as real estate and utilities, which tend to produce predictable cash flows and could particularly benefit from a peak in interest rates, were among the other standout performers. Real estate rose 2.2% and utilities ended 2% higher.

Financials added 0.7% on Friday as National Bank of Canada reported higher fourth-quarter profit. Its shares rose 4.8% while shares of Bank of Montreal also climbed, rising 2%, as the bank forecast more cost savings from its US$16 billion acquisition of U.S. lender Bank of the West.

The banks “are tightening up on lending and could face another challenging year ahead, but we’re not seeing growth falling off a cliff,” said Angelo Kourkafas, a senior investment strategist at Edward Jones.

Meanwhile, domestic data showed the economy adding 24,900 jobs in November, more than analysts expected.

The materials sector rose 1.6% as U.S. gold futures settled 1.6% higher at a record peak of US$2,089.7. Lower U.S. interest rates tends to weaken the U.S. dollar, in turn benefiting the price of dollar-denominated gold. Lower interest rates also reduce the opportunity cost of holding zero-yield gold.

The market is pricing in a greater than 60% chance of a Fed rate cut in March, according to CME’s FedwatchTool, up from about 43% on Thursday.

The yield on the benchmark 10-year U.S. Treasury note fell 9 basis points to 4.261% and is down nearly 23 bps for the week. Canada’s five-year bond yield by late afternoon was down 10 basis points to 3.523%, its lowest in about six months.

Yields have fallen sharply in recent weeks, with the 10-year U.S. Treasury yield closing out November on Thursday with its biggest monthly drop since August 2011.

The Dow Jones Industrial Average rose 294.61 points, or 0.82%, to 36,245.5, the S&P 500 gained 26.83 points, or 0.59%, at 4,594.63 and the Nasdaq Composite added 78.81 points, or 0.55%, at 14,305.03.

Among the 11 major sectors of the S&P 500, real estate was the biggest percentage gainer, while communication services was the sole decliner.

Pfizer slid 5.1% as the drugmaker dropped plans to advance a twice-daily version of oral weight-loss drug danuglipron into late-stage studies, delaying its entry into the lucrative market.

U.S.-listed shares of Alibaba slipped 1.2% following Morgan Stanley’s downgrade of the e-commerce giant’s stock.

Marvell Technology shed 5.3% after the chipmaker’s fourth-quarter revenue forecast fell short of Street estimates.

Ulta Beauty surged 10.8% after the cosmetics retailer raised the lower end of its annual net sales forecast and named Paula Oyibo its new chief financial officer.

Paramount Global jumped 9.8% following a report the media company and Apple have discussed bundling their streaming services at a discount.

Advancing issues outnumbered decliners on the NYSE by a 5.93-to-1 ratio; on Nasdaq, a 3.32-to-1 ratio favored advancers. The S&P 500 posted 59 new 52-week highs and one new low; the Nasdaq Composite recorded 106 new highs and 82 new lows. Volume on U.S. exchanges was 12.34 billion shares, compared with the 10.58 billion average for the full session over the last 20 trading days.

Reuters, Globe staff

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