S&P/TSX composite falls more into correction ahead of expected large U.S. rate hike

Ross Marowits, The Canadian Press
S&P/TSX composite falls more into correction ahead of expected large U.S. rate hike

TORONTO — Canada’s main stock index moved further into correction territory Tuesday amid growing expectations that the U.S. Federal Reserve is on the cusp of announcing its largest interest rate hike in nearly three decades. 

Mackenzie Investments’ chief economist Todd Mattina says markets are almost pricing in a 99 per cent probability of a 75 basis-point increase Wednesday, something that hasn’t been done since November 1994.

There’s even talk of rates increasing by one percentage point, compared with the half a per cent increase that had been expected in the last several weeks. Instead of slowly decreasing, the consumer price index reached a 40-year high of 8.6 per cent in May, prompting talks of the even more aggressive move. 

“I think that all options are on the table for the Fed. I think 100 basis points is the whisper number,” he said in an interview.

Mattina believes the central bank will favour a 75 basis-point increase over 50 basis points given that inflationary pressures have proved “more sticky” than many economists and investors had anticipated.

That will put pressure on the Bank of Canada to follow suit with a similar rate hike at its next meeting on July 13, he said.

“If they were to not follow the lead that could put some downward pressure on the Canadian dollar. So I don’t think the Bank of Canada would want to see that. I think they would benefit from following the Fed’s lead and maintaining a stronger Canadian dollar to control inflationary pressure.”

Markets fear central banks will raise rates too much, too fast and push the global economy into a recession.

Mattina anticipates an economic deceleration to a more sustainable long-term pace of economic growth.

“But the pace of deceleration has been concerning and the track record of central banks trying to control inflation has been very mixed. The tendency is for central banks to overtighten, which can lead to a sharp slowdown, even recession.”

The S&P/TSX composite index closed down for a fifth-straight session, dropping 194.05 points to 19,548.51. The losing streak has seen the Toronto market lose 6.6 per cent of its value in that time. It is also down 12 per cent from its high, with anything over 10 per cent constituting a correction.

In New York, the Dow Jones industrial average was down 151.91 points at 30,364.83. The S&P 500 index was down 14.15 points at 3,735.48, while the Nasdaq composite was up 19.12 points at 10,828.35. Both of these latter markets remained in bear territory by decreasing more than 20 per cent from their highs.

The bond market is also pricing in an aggressive rate hike as the 10-year U.S. Treasury bond yield increased to 3.48 per cent, its highest level in 11 years. The Canadian 10-year government bond yield rose to 3.605 per cent.

More worrying, the five-year U.S. note inverted with the 10-year by climbing to 3.603 per cent.

While that’s not quite the classic inversion whereby the two-year or three-month yields surpass the 10-year, it’s something to watch because it signals a stronger chance of a recession, said Mattina.

Industrials was the lone sector on the TSX to increase on the day. It gained slightly even though Air Canada shares followed moves south of the border to lose 5.0 per cent. Bombardier Inc. was down 18.2 per cent, a day after it completed a 25-for-one share consolidation.

The biggest laggards on the TSX were interest rate sensitive utilities and telecommunications, which each lost more than two per cent.

Energy was down two per cent amid some relief in crude oil prices, which helped push Birchcliff Energy Ltd. down 8.8 per cent.

The July crude oil contract was down $2.00 at US$118.93 per barrel and the July natural gas contract was down US$1.42 at US$7.19 per mmBTU. 

The Canadian dollar traded for 77.28 cents US compared with 77.77 cents US on Monday. 

Technology continued to flounder amid increasing bond yields with shares of Shopify Inc. down 2.5 per cent.

Materials was also lower as metals prices dropped.

The August gold contract was down US$18.30 at US$1,813.50 an ounce and the July copper contract was down 5.5 cents at US$4.16 a pound. 

This report by The Canadian Press was first published June 14, 2022. 

Companies in this story: (TSX:BIR, TSX:BBD.B, TSX:AC, TSX:SHOP, TSX:GSPTSE, TSX_CADUSD=X) 

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