Market Watch: June 9

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On Wednesday, North American equity markets finished mixed. In Canada, the surprise rate hike by the Bank of Canada (“BoC”) weighed on investors. The BoC believes higher rates are needed to help bring inflation back down to its 2% target. Exports from China tumbled by 7.5% year-over-year in May, its biggest annual decline since January. The Dow gained 92 points by the close, the S&P 500 went down by 16 points, and the Nasdaq declined by 172 points. In Canada, the TSX saw a 72-point decrease, dragged down by the Information Technology sector.

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North American equity markets finished mixed on Thursday. Investors continue to digest the unexpected rate hike by the Bank of Canada and what that might mean for future monetary policy decisions. By the close, the Dow increased by 169 points, the S&P 500 was up by 26 points, and the Nasdaq went up by 134 points. In Canada, the TSX decreased by 41 points, hindered by the weakness in the Health Care sector.

North American Indexes end the week low For the four trading days covered in this report, the Dow increased by 71 points to close at 33,834, the S&P 500 went up 12 points to settle at 4,294, and the tech-heavy Nasdaq lost 2 points to close at 13,239. In Canada, the TSX fell by 82 points to end at 19,943.

Strategy

Persistent inflation and healthy first quarter GDP prompt another rate hike from the BoC

The Bank of Canada (BoC) raised interest rates by 25 bps today after opting to keep policy settings unchanged over the previous two meetings. The move takes the Bank’s target rate to 4.75%. As we have alluded to in recent iterations of this publication, the combination of robust GDP growth, accelerating inflation, and a stabilizing housing market bolstered rate hike expectations.

In its press release, the Bank reiterated its expectation for headline inflation to ease to around 3% in the summer as higher energy prices filter out of the data. However, it cited concerns with the recent pick up in price pressures, particularly three-month annualized measures of core inflation which are running in the 3.5%-4% range. This prompted concern that inflation could get “stuck materially above the 2% target.” The Bank acknowledged that monetary policy was not sufficiently restrictive to bring supply and demand back into balance. They concluded their statement by saying they will continue assessing the evolution of excess demand, inflation expectations, wage growth, and corporate price behavior to restore price stability.

In our view, this is a sign they are forgoing forward guidance in favour of a data-dependant approach. The market has revised its expectations for the July meeting and now fully expects another quarter-point increase in the policy rate.

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