TORONTO – Canadian and US markets came under pressure again on Thursday after the Federal Reserve’s rate decision a day earlier indicated further rate hikes and economic pain to come.
“The markets continue to absorb the full implications of the Fed’s decision in terms of the outlook for higher and longer interest rates,” said Todd Mattina, chief economist at Mackenzie Investments.
On Wednesday, the US Federal Reserve raised its key interest rate three-quarters of a percentage point to a target of between three and 3.25 percent, and indicated it could rise to about 4.4 percent by the end of the year.
In a press conference following the announcement, Fed Chair Jerome Powell warned that taming inflation could lead to slower growth, higher unemployment and possibly a recession.
“The chances of a soft landing,” Powell said, “will likely decrease.”
The stark warning propelled bond yields sharply higher on Thursday as investors processed the implications of Powell’s comments, Mattina said.
“The Fed really acknowledged yesterday that it was willing to pay the real costs in terms of output and even jobs to get inflation back under control. So we see some of that working through in today’s markets, including stock markets, which have also fallen today.”
The composite S&P/TSX index closed 181.86 points or 0.95 percent lower at 19,002.68.
In New York, the Dow Jones industrial average closed at 107.10 points at 30,076.68. The S&P 500 index fell 31.94 points to 3,757.99, while the Nasdaq composite fell 153.38 points to 11,066.81.
Growth stocks in particular were under pressure, with the information technology index on the TSX falling 2.61 percent, including Shopify Inc. by 6.26 percent, while the cannabis-heavy health care index fell by 2.17 percent.
“It’s really technology and growth stocks that are driving sell-offs today, as opposed to industrial stocks,” Mattina said. “That makes sense because the more growth-sensitive stocks are sensitive to changes in long-term interest rates, especially since their future earnings are expected to be long-term.”
However, the losses were quite broad: the S&P/TSX energy index fell 1.8 percent and financials fell 0.69 percent.