Market Watch: February 10

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U.S. stocks fell Wednesday, with all of the major S&P 500 sectors lower on the day. Communication services fell 4 per cent, while tech and utilities dropped 1.3 per cent and 1.7 per cent, respectively. By Wednesday’s close, the Dow fell 208 points, while the S&P 500 and Nasdaq surrendered 45 and 203 points, respectively. The TSX also retreated slightly, falling 45 points.

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While U.S. indexes spent the morning in the green, there were red numbers all around by Thursday’s close as investors continued to parse the latest earnings (largely mixed) while looking for further signs from the Fed on interest rates. By the end of trading, the Dow lost 249 points, while the S&P 500 and Nasdaq fell 36 and 121 points, respectively. In Canada, the TSX dropped 82 points, as momentum dwindled after morning trading.

North American Indexes Lose Ground

For the four trading days covered in this report, the Dow lost 226 points to close at 33,700, the S&P 500 dropped 54 points to settle at 4,082, while the tech-heavy Nasdaq sunk 218 points to close at 11,789. In Canada, the TSX lost 160 points to end at 20,598.

Strategy

Central banks in focus: Fed’s Powell and BoC’s Macklem discussed monetary policy

U.S. Federal Reserve Chairman Jerome Powell offered clues yesterday about the future path of monetary policy. Investors were keen on hearing from the Fed Chair after government data released last week showed employers added 517,000 new jobs in January. Furthermore, the unemployment rate fell to 3.4 per cent, the lowest in over 50 years.

In his remarks, Mr. Powell floated the idea of a higher peak rate than the ~5.1 per cent being priced in by market participants, especially if labour markets remain hot. While the Chairman signaled that the economy is entering the early stages of a disinflation cycle, getting inflation back to target will require more work. Lower prices can already be seen in the goods sector, while housing is expected to soften in the months ahead.

However, the core services (ex. housing) category has yet to show signs of moderating. This category, which makes up ~56 per cent of the core inflation basket, is influenced by wages and developments in the labour markets. As such, a tight job market may bias the terminal rate higher and could keep borrowing costs elevated for longer. At the time of this writing, the futures market is pricing in a quarter-point hike for the March and May meetings, which would take the Fed Funds rate to 5.25 per cent, in line with the median consensus estimate in the Fed’s latest forecast. Markets are also pricing in a >35 per cent chance of another 25 bps hike at the June meeting.

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