TORONTO — Canadian and U.S. markets were again under pressure on Thursday after the Federal Reserve’s interest rate decision a day earlier indicated further rate hikes and economic pain to come.
“Markets continue to absorb the full implications of the Fed 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 bring inflation back under control. So we’re seeing some of that work through in today’s markets, including stock markets, which are also falling 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 sales 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.
The uncertainty weighing on the growth outlook has also led to more market volatility, Mattina said.
“Volatility within trading days has increased in recent weeks. We’ve seen a lot more volatility over the course of the day, especially in equities.”
The prospect of rising US interest rates and lower growth is also putting pressure on the loonie. The Canadian dollar traded for 74.18 cents in the US against 74.64 cents in the US on Wednesday.
The Canadian currency is falling in part as inflation fell below expectations, while it surprised positively in the US.
“Inflation trends are starting to diverge between Canada and the US,” Mattina says. “So the outlook for the Bank of Canada’s rate hikes is starting to look a little less aggressive than the Federal Reserve, which is currently dealing with more inflation dynamics.”
The November crude contract was up 55 cents to $83.49 a barrel and the October natural gas contract was up 69 cents to $7.09 per mmBTU.
The December gold contract rose US$5.40 to US$1,681.10 an ounce and the December copper contract held steady at US$3.47 per pound.
This report from The Canadian Press was first published on September 22, 2022.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD=X)