Cancelo plundered his first league goal of the season in fantastic style, dribbling towards the box with purpose before smashing into the left side of the net from the edge of the area.
His compatriot Ruben Dias had previously put City ahead early on, with Riyad Mahrez and Raheem Sterling adding further gloss to the scoreline after the interval.
The victory ensured City will be top at Christmas, with the side topping the tree at this stage of the season having gone on to win the title in nine of the past 12 seasons.
Cancelo played a key role in City’s fifth-minute opener, stretching to connect with a ball over the top and cushion a volleyed cross on to Dias, who capitalised on a mix-up between Ciaran Clark and Martin Dubravka to head in unmarked.
The full-back doubled City’s advantage in stunning fashion 12 minutes later, jinking past two players before lashing a ferocious shot into the top-left corner that left Dubravka with no chance.
City got lucky as Ederson brought down Ryan Fraser in the box, but no penalty was awarded even after a VAR (video assistant referee) check.
Dubravka kept his side from going 3-0 down with a tremendous reflex save from Gabriel Jesus's close-range header.
The Newcastle goalkeeper could do nothing to prevent Mahrez firing in on the volley, however, after the winger timed his run to perfection to meet Oleksandr Zinchenko's cross, with his 50th goal for City awarded after the VAR overturned the linesman's initial offside call.
Jesus turned provider for Sterling to tuck in late on, with City providing Pep Guardiola with an ideal early Christmas gift.