Market Watch: June 23

On Wednesday, North American equity markets fell. Canadian retail sales data and comments by U.S. Federal Reserve Board (Fed) Chair, Jerome Powell, pointed to the potential for more interest-rate hikes by the Bank of Canada (BoC) and the Fed. The Dow lost 102 points by the close, the S&P 500 went down by 23 points, and the Nasdaq decreased by 165 points. The TSX saw a 48-point decrease in Canada, weighed down by the Information Technology sector.

On Thursday, North American equity markets were mixed as investors digested comments by the Fed Chair, Jerome Powell, that interest rates will likely go higher this year. The yield on 10-year government bonds in Canada and the U.S. moved higher on the day. By the close, the Dow decreased by five points, the S&P 500 was up by 16 points, and the Nasdaq went up by 128 points. The TSX fell by 125 points in Canada, dragged by the Real Estate sector.

North American Indexes end the week low

For the four trading days covered in this report, the Dow decreased by 352 points to close at 33,947, the S&P 500 went down 28 points to settle at 4,382, and the tech-heavy Nasdaq lost 59 points to close at 13,631. In Canada, the TSX went down by 394 points, ending at 19,581.

Strategy

The Bank of England (BoE) surprised markets today by raising its policy rate by 50 bps to five per cent

The move was unexpected by the futures market, which placed just a 40 per cent chance of such action prior to the announcement, while most economists anticipated only a quarter-point increase. In hindsight, the move may be warranted, given yesterday’s inflation data which showed headline CPI remained unchanged at 8.7 per cent year-over-year (YoY). Chancellor of the Exchequer, Jeremy Hunt, reiterated that further tightening would be required if inflation remains high, but the Bank has not offered any new guidance. According to the press release, officials will likely focus more on persistent inflationary pressures from now on.

In previous meetings, the tone was more hopeful and the focus broader since policymakers anticipated a substantial decline in prices from their peak in October. However, the latest CPI figures are raising concerns, and the BoE may not consider a pause until they see more material progress on the inflation front. Markets are now pricing a terminal rate of six per cent, which implies more rate hikes ahead. Still, some evidence suggests that reaching such high rates might not be necessary. Producer prices have been easing, and some of the lagged effects of higher energy prices have not fully materialized. These effects may slow inflation in the coming months, albeit at a slower pace than initially expected.

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by Scotia Wealth Management - The Zukiwsky Group

Market Watch: June 23

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