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Market Watch: September 23

Sep 23, 2022 | 4:52 PM

Big Picture

Markets Wobble as Fed Raises Rates Another 75 Basis Points

Major U.S. indexes inched up Monday, and bond yields hit their highest level in over a decade as investors awaited the Fed’s latest interest-rate hike on Wednesday. The Dow, S&P 500 and Nasdaq registered solid gains, while the TSX rose 176 points, buoyed by energy, financials and industrials. In U.S. bond markets, 10-year Treasury yields rose to 3.489 per cent, the highest level since 2011, while the two-year note climbed to 3.946 per cent, its highest level since 2007.

U.S. indexes opened Tuesday morning in the red and stayed there throughout the day as the Fed’s impending decision continued to weigh on markets. The Dow dropped 313 points, while the S&P 500 and Nasdaq surrendered 44 and 110, respectively. In Canada, the TSX fell 194 points in a broad-based selloff. Also, on Tuesday, Statistics Canada reported that the country’s annual headline inflation rate slowed to 7 per cent in August, down from 7.6 per cent in July, thanks mainly to lower gasoline prices.

On Wednesday, U.S. stocks fell sharply after the Fed, as expected, announced another 75-basis-point hike. The Fed’s decision will bring its benchmark rate to a range of 3 per cent to 3.25 per cent, its highest level since 2008. U.S. stocks traded higher early in the morning, then dropped shortly after the Fed’s announcement. Although they rallied a bit later, indexes fell during the session’s final hour. By Wednesday’s close, the Dow had plummeted 522 points, the S&P 500 dropped 66, and the Nasdaq was off 205 points. In Canada, the TSX declined 184 points on energy sector weakness.

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North American stock indexes struggled Thursday as worries over higher rates and a possible U.S. recession weighed on performance. By Thursday’s close, all four major North American indexes recorded modest losses, while 10-year U.S. Treasury yields settled at 3.705 per cent, their biggest one-day gain since June.

N.A. Indexes Drift Lower

For the four trading days covered in this report, the Dow lost 745 points to close at 30,077; the S&P 500 dropped 115 points to settle at 3,758, while the tech-heavy Nasdaq sunk 381 points to close at 11,067. In Canada, the TSX lost 383 points to end at 19,003.

Strategy

The U.S. Federal Reserve (the Fed) implemented its third consecutive 75bps rate hike

The Fed announced on Wednesday that it would raise its target rate by three-quarters of a percentage point to restore price stability. The decision was widely expected by markets and took the Fed Funds rate – up by a cumulative 300bps year-to-date – to 3.25 per cent. Along with the decision pertaining to policy rates, the Fed also released its Summary of Economic Projections and the accompanying dot plot chart. The Federal Open Market Committee (FOMC) projects policy rates rising to 4.4 per cent- 4.6 per cent by the end of this year and next, respectively, before falling to 3.9 per cent in 2024 and settling at a neutral level (a level that is neither accommodative nor restrictive) in the long-run. The updated projections are significantly higher than the June forecast of 3.4 per cent-3.8 per cent for 2022 and 2023, respectively, and 3.4 per cent for 2024.

Further, the committee expects growth to be materially lower this year at 0.2 per cent (1.7 per cent forecast in June), 1.2 per cent in 2023 (1.7 per cent previously), and 1.7 per cent in 2024 (1.9 per cent previously). Unemployment is also forecasted to rise to 3.8 per cent this year (3.7 per cent previously forecasted), 4.4 per cent in 2023 and 2024 compared to its current level of 3.7 per cent. With these restrictive policy settings, the Fed expects the personal consumption expenditure (PCE) price measure – its preferred gauge for inflation – to average 5.4 per cent this year before gradually falling to 2.8 per cent, 2.3 per cent, and 2.0 per cent over the next three years. Core PCE inflation, which excludes volatile categories such as food and energy, is expected to be 4.5 per cent this year and 3.1 per cent, 2.3 per cent, and 2.1 per cent over the next three years.

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