Market Watch: Sept. 9, 2022

As expected, the Bank of Canada increased its policy rate by 75 basis points to 3.25% on Wednesday, the highest level since 2008. At this point, all signs indicate that the BoC’s fight against inflation is far from over. Meanwhile the Fed is expected to raise its rate by another 75 basis points at its September 20-21 meeting.

U.S. stocks rose Thursday as investors once again parsed new remarks from Fed Chair Powell, while the European Central Bank took forceful action to tamp down inflation, raising its rate by 75 basis points. By Thursday’s close, the Dow gained 193, while the S&P 500 and Nasdaq rose 26 and 70 points, respectively. In Canada, the TSX jumped 171 points.

N.A. Indexes Bounce Back

For the three trading days covered in this report, the Dow gained 456 points to close at 31,774, the S&P 500 rose 82 points to settle at 4,006, while the tech-heavy Nasdaq added 231 points to close at 11,862. In Canada, the TSX rose 142 points to end at 19,413.

Strategy

The Bank of Canada (BoC) raised policy rates by 75bps to 3.25%

The Bank of Canada (BoC) raised policy rates by 75bps to 3.25% on Wednesday, in line with consensus expectations, as it looks to bring inflation back towards target levels. This marks the fourth consecutive outsized rate increase implemented by the Bank after it hiked interest rates by 50bps in both April and June and a full percentage point in July. Despite the slight reprieve in consumer prices in July when inflation eased to 7.6% from 8.1% on the back of easing gasoline costs, the Bank expressed concern about the further broadening of inflation, particularly in services. Specifically, the core measures of inflation continued to move up, ranging from 5% to 5.5% in July. The BoC acknowledged that the economy grew less than forecasted in 2Q (3.3% QoQ annualized versus the forecast of 4.0%) but said that domestic demand remained strong as consumption and business investment grew 9.5% and 12%, respectively. The Bank also recognized the pullback in the housing market, saying that it was expected following “unsustainable growth during the pandemic.” Finally, the Governing Council signalled that rates will need to rise further alongside ongoing quantitative tightening as it remains resolute in ensuring price stability. Notably, the statement omitted any references to “front-loading” that were present in the previous announcement, suggesting the BoC may opt for smaller adjustments to policy now that rates are well above neutral and in restrictive territory. The next monetary policy meeting is not scheduled until the end of October. Before then, the BoC will have the opportunity to assess CPI and labour market data for August and September, as well as GDP data for July. These data points will play an important role in informing the future path of monetary policy

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Market Watch: Sept. 9, 2022

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