Market Watch: January 27

As expected, the Bank of Canada (BoC) on Wednesday increased its benchmark interest rate by 25 basis points to 4.5 per cent, the highest level in over 15 years. The Bank of Canada said it would now pause to assess the economic impact from sharply higher borrowing costs, while not ruling out future rate hikes if conditions warrant. It was another mixed day of trading on Wall Street as investors parsed a range of corporate earnings, including key bellwether companies, like Microsoft, Boeing and pharmaceutical giant Abbott Laboratories. By Wednesday’s close, the Dow and S&P 500 were essentially flat, while the Nasdaq dropped 21 points. The TSX fell 30 points, weighed down by the industrials sector and disappointing earnings from Canadian National Railway.

According to U.S. Commerce Department data released Thursday, U.S. GDP for Q4 grew at a higher-than-expected annual rate of 2.9 per cent, down slightly from Q3’s 3.2 per cent. Consumer spending remained solid, although down a bit from Q3. The upside GDP surprise was good news for North American markets. The big winner was the Nasdaq, which added nearly 1.8 per cent, while Dow and S&P 500 rose 0.6 per cent and 1.1 per cent, respectively. In Canada, the TSX rose roughly 0.5 per cent.

Solid Gains for Bay and Wall Streets

For the four trading days covered in this report, the Dow rose 574 points to close at 33,949, the S&P 500 added 88 points to settle at 4,060, while the tech-heavy Nasdaq jumped 372 points to close at 11,512. In Canada, the TSX gained 197 points to end at 20,700.

Strategy

Bank of Canada implements eighth consecutive rate hike while hinting at a pause

Policymakers at the BoC raised interest rates by a quarter point to 4.5 per cent today, in line with consensus estimates, while explicitly signaling a pause. In its statement, the Bank said that “if economic developments evolve broadly in line with the MPR outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases.” The Bank also gave itself flexibility by leaving the door open for additional rate hikes, noting that it is “prepared to increase the policy rate further if needed to return inflation to the two per cent target.”

Regarding inflation, policymakers indicated that while year-over-year measures of core inflation remain elevated, three-month measures have declined, suggesting that core CPI has peaked. They expect “lower energy prices, improvements in global supply conditions, and the effects of higher interest rates on demand” to bring inflation down further. Specifically, policymakers forecast headline CPI to fall to around three per cent in the middle of this year and return to the two per cent target in 2024.

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by Scotia Wealth Management - The Zukiwsky Group

Market Watch: January 27

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