Market Watch: July 15, 2022

The Bank of Canada surprised investors and analysts alike when it increased its benchmark interest rate by 100 basis points on Wednesday, the most aggressive rate hike since 1998. Wednesday’s move was the fourth consecutive interest rate increase since March, raising the overall policy rate to 2.5%.

In related news, headline U.S. consumer inflation rose 9.1% in June, year over year, the fastest pace since November 1981. On a month-to-month basis, core prices rose 0.7% in June, a sign of widespread inflationary pressures. The latest Consumer Price Index (CPI) data could force the Fed to move aggressively at its July policy meeting.

Although North American equity markets turned sharply lower after the release of the CPI data, all four major indexes pared losses throughout the day to close slightly in the red. The Nasdaq and the SPX were finished essentially flat, while the Dow, and TSX recorded minor losses.

U.S. stock indexes fell sharply after Thursday’s open but rallied throughout the day to close mixed. By Thursday’s close, the S&P 500 declined 11 points, the Dow dropped 142 and the Nasdaq finished flat. In Canada, the TSX fell 286 points, weighed down by commodity weakness and fears that the Bank of Canada’s 100-basispoint rate hike will negatively impact mortgage growth at financial institutions.

Losses Continue to Mount for North American Indexes

For the four trading days covered in this report, the Dow lost 708 points to close at 30,630, the S&P 500 dropped 109 points to settle at 3,790, while the tech-heavy Nasdaq fell 384 points to close at 11,251. In Canada, the TSX lost 694 points to end at 18,329.

Strategy

Bank of Canada (BoC) surprised markets by raising interest rates a full percentage point to 2.5%

The Bank of Canada (BoC) surprised markets on Wednesday by raising interest rates by a full percentage point to 2.5%, the most since 1998, as it looks to rein in the fastest inflation in decades. Before the meeting, markets were leaning towards a 75bps move with an outside chance of a smaller 50bps hike similar to previous meetings. In its statement, the Bank cited an economy in excess demand and higher inflation expectations as the primary reasons for front-loading rate hikes. With rates now at the neutral setting, the Bank says they expect to continue hiking to bring inflation back towards target levels. Policymakers iterated that front-loading rate hikes should limit economic damage as the cost of restoring price stability will be higher if inflation becomes entrenched. Indeed, the most recent Bank of Canada consumer and business outlook surveys reflected that both consumers and businesses expect price pressures to persist for longer. Last week’s betterthan-expected labour market report which showed the unemployment rate reaching an all-time low likely contributed to the outsized rate move as well. The Bank also released its quarterly Monetary Policy Report today in which it raised its inflation forecasts to 7.5% by year-end and for CPI to reach the 2% target by the end of 2024. GDP growth forecasts have also been revised lower to 3.5% this year and 1.8% next year from 4.2% and 3.2%, respectively.

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Market Watch: July 15, 2022

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