Market Watch: February 18

It was a mixed session for Wall Street on Wednesday as investors parsed minutes of a recent Fed meeting for further clues on just how aggressively the central bank will raise rates. By Wednesday’s close, all three major U.S. indexes pared losses late in the day and ended essentially flat. In Canada, the TSX dropped 119 points, largely on tech-sector weakness as Shopify shares plunged 17 per cent on guidance for higher capex spend in 2022 to 2024.

In economic news, U.S. retail sales rose 3.8 per cent in January, rebounding from December, when sales fell by a 2.5 per cent. While the numbers seem positive, many analysts pointed out that the gains are mainly a result of rising prices, as the figures are not adjusted for inflation.

Speaking of rising prices, Canada’s annual inflation rate in January hit a 30-year high of 5.1 per cent, as food and housing costs continued to rise. Fears over a possible war in Ukraine re-escalated again on Thursday as U.S. intelligence reports indicated Russia had actually increased its troop levels at the Russia-Ukraine border, once again stoking fears of an imminent invasion. The news sent gold prices to an eight-month high, settling near the $1,900 mark on Thursday. On Wall Street, the three major indexes ended with significant losses. By Thursday’s close, the Dow had dropped 622 points, the S&P 500 declined 95, while the Nasdaq tumbled 407 points. The mounting tension in the Ukraine also weighed on the TSX, which lost 207 points.

Markets Lose Ground For the four trading days covered in this report, the Dow lost 426 points to close at 34,312, the S&P 500 dropped 39 points to settle at 4,380, while the tech-heavy Nasdaq slipped 74 points to close at 13,717. In Canada, the TSX lost 373 points to end at 21,176.

Strategy

Canadian inflation continues to climb, all-but-cementing a rate hike from the BoC in early March

Price gains accelerated in six provinces in January with higher electricity prices contributing to the gains. Canadian consumer prices rose again in January, reaching a new three-decade high and marking the 10th consecutive month of above target gains, adding to pressure on the Bank of Canada (BoC) to begin raising its policy rate at its March 2nd meeting. Headline CPI inflation reach 5.1 per cent on year-over-year basis, topping consensus for a gain of 4.8 per cent, while the average of the BoC’s three core measures rose to 3.20 per cent from 2.93 per cent previously. Excluding gasoline, the CPI rose 4.3 per cent year-over-year in January 2022, the fastest pace since the introduction of the index in 1999. Shelter costs rose 6.2 per cent in January, the fastest pace since February 1990, while prices for food purchased from stores rose 6.5 per cent, the largest yearly increase since May 2009. Indeed, shoppers paid more for groceries, as prices for food purchased from stores rose at a faster pace in January, +6.5 per cent, than in December 2021, +5.7 per cent. This is the largest yearly increase since May 2009. Price gains accelerated in six provinces in January, headlining by Ontario, Manitoba, and Saskatchewan, with higher electricity prices contributing to the gains. Similar to the U.S., Canadian consumers have experienced real wage contraction in recent months, which weighs on purchasing power and could diminish household spending on discretionary items.

Last week, BoC Governor Tiff Macklem spoke before the Canadian Chamber of commerce and indicated the future path of interest rate increases will depend in part on how business investment ramps up after the economy emerges from the pandemic. The speech came on the heels of the bank’s decision to hold the overnight rate at the effective lower bound at the end of January. While the Governor promised the Bank would act deliberately and communicate clearly as borrowing costs begin to rise, it is evident that the evolution of business investment will have a role in determining how smooth the process will be. Importantly, the Bank of Canada won’t be on “autopilot” as it raises interest rates, and policy makers will gauge the appropriateness of policy settings “at each point.” Nonetheless, he indicated that, all else equal, the less business investment there is, the higher interest rates will need to go. Productivity growth is vital to non-inflationary growth and rising standards of living, particularly a time when inflation is already well above target. Markets are fully pricing in a hike at the central bank’s next decision on March 2nd, with as many as six more priced in over the next year.

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Market Watch: February 18

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