Market Watch: May 5

North American markets finished lower on Wednesday after the U.S. Federal Reserve Board raised interest rates by 25 basis points, the tenth consecutive rate increase. Fed Chair Jerome Powell said that the recent instability in the Financials sector may lead to tighter lending standards that impact hiring and inflation. The Dow lost 270 points by the close, the S&P 500 fell by 29 points, and the Nasdaq declined by 55 points. In Canada, the TSX saw a 53-point fall, with Health Care the strongest performing sector on the day, while Consumer Discretionary was the weakest.

U.S. equity markets ended Thursday’s trading day lower as investors remained cautious about the health of the Financials sector. In Europe, the European Central Bank raised its interest rates by 25 basis points. By the close, the Dow declined by 287 points, the S&P 500 declined by 30 points, and the Nasdaq by 59 points. In Canada, the TSX fell 116 points.

North American Indexes end the week mixed

For the four trading days covered in this report, the Dow declined 970 points to close at 33,128, the S&P 500 fell by 108 points to settle at 4,061, and the tech-heavy Nasdaq fell 260 points to close at 11,966. In Canada, the TSX fell by 398 points to end at 20,238.

Strategy

Fed raised policy rates in line with expectations

The U.S. Federal Reserve (Fed) raised interest rates by 25bps yesterday to an upper limit of 5.25 per cent, broadly in line with consensus expectations. We interpreted the post-meeting statement as dovish due to the removal of the phrase “the committee anticipates that some additional policy firming may be appropriate.” This was replaced with the following clause: “In determining the extent to which additional policy firming may be appropriate to return inflation to two per cent over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” It is common for investors to closely scrutinize the Fed’s post-meeting statements and compare them to prior press releases. As such, the statements are carefully constructed by policymakers.

In our view, the Fed may be signalling that this could be the final rate hike of this cycle while still keeping the door open for further rate increases if the data warrants it. Should 5.25 per cent be this cycle’s terminal rate (i.e., the peak rate), it would align with the median terminal rate forecast outlined in the Fed’s latest Summary of Economic Projections report.

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by Scotia Wealth Management - The Zukiwsky Group

Market Watch: May 5

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