Canadian stocks have been booming this year despite Donald Trump’s trade tariffs. The TSX Composite Index jumped 31% to a new record of $28,283, compared with its low point this year. This article highlights the most important catalysts for this week.
Canada inflation data
On Tuesday, the Canadian consumer price index will provide the first major catalyst for the TSX Composite Index.
The data is expected to reveal that the Consumer Price Index headline rose from 1,7% in July, to 1.8% in august. However, the CPI core remained at 2,6%.
Canadian inflation figures are crucial because they have an impact on both the bond and stock markets. Lower rates lead in most cases to lower interest rates and bond yields.
The data shows the bond yields in Canada have decreased this year. The 10-year yield dropped from a year-to date high of 3.62% to 3.18%, and the 30-year rate also fell to 3.62% from 3.62%.
Bank of Canada Interest Rate Decision
Another notable factor for the TSX composite Index will be the upcoming Bank of Canada rate decision scheduled on Wednesday.
The bank is expected to reduce interest rates as inflation has been below the important 2% mark for the last few months.
Base case: It will reduce rates to 2.50% from the current 2.75%, which is much less than the US borrowing rate (4.50%). Analysts expect the central bank to cut rates again at least once this year.
Federal Reserve interest rate decision
Like other global indices of major importance, the TSX will also react to Federal Reserve’s upcoming interest rate announcement.
The bank is expected to reduce interest rates in the meeting by 0.25 percent. The official borrowing rate will be between 4.00% – 4.25%.
Theoretically, Federal Reserve rate reductions would encourage more investors to take risks, leading to a rise in stock prices. The upcoming interest rate is already priced, so stocks may fall.
Rate cuts would boost the price of gold, and this would have a positive impact on the TSX Index since many gold mining companies are listed there.
The TSX Index has reached a high level of overbought
Source: TradingView
Technicals are the other major catalyst for the TSX Composite, and they point towards a decline this week. In the chart, you can see that Relative Strength Index has risen to 77. This means it’s highly overbought.
The 50-day and the 100-day Exponential moving averages (EMA) are also much higher. It could experience mean reversion over the next few weeks. The next important support level will be $28,000 if this occurs.
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