The S&P 500 index closed slightly higher on Wednesday as investors grappled with mixed messages from Federal Reserve Chair Jerome Powell and U.S. economic data ahead of upcoming labour and inflation reports that are expected to determine the central bank’s future rate hiking path. The TSX also closed with a modest gain, with technology stocks rallying, as investors digested the latest Bank of Canada announcement that kept interest rates unchanged but did little to sway money markets from betting another quarter-point hike is in store for later this year.
In his second day of testimony to Congress on Wednesday, Powell reaffirmed his message from Tuesday, of higher and potentially faster interest rate hikes, but said that debate was still underway with a decision hinging on data to be issued before the U.S. central bank’s policy meeting in two weeks.
Stocks had fallen more than 1% on Tuesday after Powell’s comments led investors to dramatically increase expectations for a 50-basis-point hike in March, with the majority of investors expecting a 25-basis-point hike before Powell spoke.
Data released on Wednesday did little to ease concerns about higher rates as it showed that U.S. private payrolls increased more than expected in February.
Another report showed U.S. job openings fell less than expected in January and data for the prior month was revised higher, pointing to persistently tight labor market conditions fueling concerns that this would keep the Fed on track to raise interest rates for longer.
Friday’s U.S. non-farm payrolls report and next week’s inflation readings for February may be key to whether the next rate hike will be 25 or 50 basis points.
On this side of the border, the Bank of Canada left its benchmark rate at 4.50%, becoming the first major central bank to suspend its monetary tightening campaign in the face of an anticipated easing of high inflation.
The Canadian dollar weakened to a four-month low of 1.3794 per U.S. dollar, or 72.50 U.S. cents, after the announcement, down as much as 0.3% on the day. The Canadian 2-year bond yield, which is particularly sensitive to changes in central bank policies, was virtually unchanged - even as its U.S. counterpart rose by a modest 5 basis points by late day.
In its statement, the BoC reiterated that it was “prepared to increase the policy rate further if needed to return inflation to the 2% target.”
And money markets aren’t doubting it. Interest-rate probabilities derived from swaps trading suggests a greater than 70% chance the bank will hike interest rates by a further 25 basis points by this September.
“The risks are still tilted toward the Bank of Canada not being done and perhaps having to come back off the sidelines depending upon data,” said Derek Holt, vice president of capital markets economics at Scotiabank.
But not all economists share that view. Several believe the recent declines seen in inflation data suggest no further interest rate hikes are on the horizon.
Meanwhile, traders kept increasing bets for a Fed rate hike of 50 basis points later this month, with fed funds futures recently showing a roughly 80% chance for such a hike, up from about 70% on Tuesday and 31% on Monday before Powell’s first testimony, according to CME Group’s FedWatch tool.
The Toronto Stock Exchange’s S&P/TSX composite index rose 70.99 points, or 0.35%, to 20,346.53 after declines on in the first two days of the week.
The Toronto market’s technology sector rose 2.4%, helped by a gain of 3.2% for e-commerce company Shopify Inc.
The materials group was also a bright spot, rising 0.5% as copper prices climbed.
At the end of the session, the Dow Jones Industrial Average had fallen 58.06 points, or 0.18%, to 32,798.4; the S&P 500 closed up 5.64 points, or 0.14%, at 3,992.01; and the Nasdaq Composite added 45.67 points, or 0.4%, to end at 11,576.00.
Among the S&P’s 11 major sectors, seven closed higher. Energy, down 1%, was the biggest loser, as oil prices fell. Leading gains was real estate, which closed up 1.3%.
Technology was the second biggest gainer, up 0.8%, helping Nasdaq outperform the other major indexes.
Tesla Inc slid 3% after the U.S. auto safety regulator said it was opening a preliminary investigation into 120,000 Model Y 2023 vehicles following reports about steering wheels falling off while driving.
Occidental Petroleum Corp gained 2% after Warren Buffett’s Berkshire Hathaway Inc increased its stake in the oil company to about 22.2%.
Declining issues outnumbered advancers on the NYSE by a 1.02-to-1 ratio; on Nasdaq, a 1.14-to-1 ratio favored decliners.
The S&P 500 posted two new 52-week highs and 11 new lows; the Nasdaq Composite recorded 48 new highs and 170 new lows.
On U.S. exchanges 10.3 billion shares changed hands compared with the 10.90 billion average for the last 20 sessions.
Reuters, Globe staff
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