Market Watch: Oct. 21, 2022

North American stock indexes ran out of steam Wednesday as recession fears continue to mount. The S&P 500 declined nearly 1%, the Nasdaq fell 1.2%, and the Dow dropped 0.5%. In bond markets, 10-year U.S. Treasury yields hit their highest level in more than 14 years, while 5- and 10-year Canadian Treasury yields were also rising at a brisk pace.

Statistics Canada reported Thursday that the Consumer Price Index (CPI) for September came in at 6.9% (year over year), slightly higher than economists’ forecasts. Core CPI, which excludes food and energy prices, rose 5.4%. Given the latest numbers, expectations are rising for a 75-basis-point hike at the Bank of Canada’s next policy meeting.

U.S. and Canadian stocks registered moderate losses Thursday as investors continue to assess corporate earnings and the likelihood of recession in 2023. By Thursday’s close, the Dow lost 90 points, while the S&P 500 and Nasdaq dropped 29 and 66 points, respectively. The TSX also drifted lower Thursday, losing 95 points.

Finally, U.K. Prime Minister Liz Truss said Thursday that she would resign, making her the shortest-serving prime minister in British history, after a chaotic six weeks filled with economic and political turmoil caused largely by proposed tax cuts.

Markets Gain Ground as Earnings Season Begins

For the four trading days covered in this report, the Dow gained 698 points to close at 30,333, the S&P 500 rose 82 points to settle at 3,665, while the tech-heavy Nasdaq added 294 points to close at 10,615. In Canada, the TSX climbed 253 points to end at 21,058.

Strategy

Canada’s inflation rate increased by 0.1% MoM in September

Canada’s inflation rate increased by 0.1% MoM in September, stronger than expected. The consensus was a decline of 0.1%. The price increase was unexpected since we’ve seen lower gasoline prices, however, annual inflation slowed for a third month to 6.9%, down from 7% in August, 7.6% in July, and 8.1% in June. Core inflation, which excludes more volatile prices, remained elevated. The average of the Bank of Canada’s three core measures increased to 5.3% from 5.2% in the previous month. While prices at the gas pump dropped, Canadians continued to feel the pressure from higher food prices. Excluding food and energy, prices rose 5.4% YoY, following a gain of 5.3% in the previous month. Prices for food purchased from stores grew 11.4%, which has been increasing for the last 10 consecutive months, the fastest YoY pace since August 1981. According to the report, some of the reasons that contributed to the increase in food and beverages were unfavourable weather, higher prices of fertilizer and natural gas, and geopolitical instability coming from Russia’s invasion of Ukraine. Mortgage interest costs continued to put upward pressure on overall inflation. Mortgages were renewed or initiated at higher interest rates, which are measured in the CPI through the mortgage interest cost index (+8.3% YoY). Meantime, the BoC has already increased borrowing costs by three percentage points since March, bringing the benchmark rate to 3.25%. The stickier prices will likely keep pressuring the Bank of Canada to maintain its aggressive rate-hiking path. Before the report, traders were pricing a 50-basis-point interest rate increase in the next decision meeting, with a possibility of a 75-basis-point hike. Now, they are pricing a full three-quarter point hike.

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by Scotia Wealth Management - The Zukiwsky Group

Market Watch: Oct. 21, 2022

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