The S&P 500 and the Nasdaq closed higher on Thursday, but the TSX ended with losses, as investors focused on hawkish comments from Federal Reserve Chair Jerome Powell that suggested interest rates could go higher still as the central bank grapples with stubbornly high inflation.
Bond yields rose, with Canada’s five-year government bond yield - which heavily influences fixed mortgage rates and income-generating products such as guaranteed investment certificates - reaching its highest level since 2007.
The price of oil tumbled 4.2%, as the threat of higher interest rates globally raised worries about the economy and fuel demand.
Early Thursday morning, the Bank of England raised interest rates by a bigger-than-expected half a percentage point to 5%, the highest since 2008 and its largest rate increase since February, following stubborn inflation and wage growth.
That move echoed what the Bank of Canada did two weeks ago by surprising the market by raising rates a quarter of a percentage point to a 22-year high of 4.75%.
Ellis Phifer, managing director, fixed income capital markets at Raymond James in Memphis, Tennessee, said rate increases by the BOC and BOE caught the market off guard.
“There was only a 40% chance that the Bank of England will do 50 (basis points), and then there was the language, as with Canada, on the persistence of growth and inflation,” Phifer said. “I think the market got a little spooked from these surprises. And Powell running the Fed did not allay those fears.”
Powell, at a hearing before the Senate Banking Committee on Thursday, said the central bank would move interest rates at a “careful pace” from here as policymakers edge toward a stopping point for their historic round of monetary policy tightening.
That came a day after the Fed’s top official, in testimony before the U.S. House of Representatives Financial Services Committee, said further rate increases are “a pretty good guess” of where the central bank is heading if the economy continues in its current direction.
The tech-heavy Nasdaq’s robust gain got a boost from momentum stocks led by Amazon.com and Apple Inc, while the S&P 500′s advance was more tentative.
Industrials and financials dragged the blue-chip Dow to a lower close.
“Investors are playing tug of war, as if they’re pulling petals from a daisy saying ‘bull market, not a bull market,’” said Sam Stovall, chief investment strategist of CFRA Research in New York. “We don’t have much to trade on, second-quarter earnings don’t start in a couple weeks yet.”
“The market believes the Fed will raise rates one more time, not two more times as implied by the post FOMC meeting summary,” Stovall added. “In addition, yesterday and today’s, Powell reiterated that they will be data dependent and Wall Street expects inflation to cool faster, and unemployment will start to creep higher which is what the Fed has intended with its rate increases.”
Financial markets are pricing in a 77% probability of another 25 basis point rate hike at the conclusion of the Fed’s July meeting, according to CME’s FedWatch tool.
On the U.S. economic front, jobless claims held steady at a 20-month high and the Conference Board’s Leading Economic index posted its 14th consecutive monthly decline, suggesting that the Fed’s efforts to dampen the economy are beginning to have their intended effect.
Still, bond yields rose across the curve in both Canada and the U.S., suggesting central banks aren’t through with hiking rates and that the economy has a long way to cool to keep inflation in check. Canada’s five-year bond yield was up 14 basis points by late afternoon to 3.88%, a relatively large move for one day.
Credit markets are now pricing in 70% odds the Bank of Canada will hike interest rates by a further quarter of a percentage point at its next meeting on July 12. They are also pricing in very strong odds that a full 50 basis points of additional BoC tightening will occur by year end.
The Toronto Stock Exchange’s S&P/TSX composite index ended down 125.05 points, or 0.6% at 19,580.90, its fifth straight day of declines. It was lowest closing level for the TSX since May 31.
“We got a surprise from central banks that they continue to be hawkish and we are starting to see more signals that this inflation fight isn’t over,” said Greg Taylor, a portfolio manager at Purpose Investments. “That is causing people to question have we seen peak yields.”
In addition to oil, gold and copper prices also declined.
“With commodities under pressure, the TSX is going to lag,” Taylor said.
The energy sector fell 2.1%, while the materials group, which includes precious and base metals miners and fertilizer companies, lost 0.5%.
Empire Co shares were a bright spot, gaining 4.1% after the food retailer posted a better-than-expected quarterly profit.
The Dow Jones Industrial Average fell 4.81 points, or 0.01%, to 33,946.71, the S&P 500 gained 16.2 points, or 0.37%, to 4,381.89 and the Nasdaq Composite added 128.41 points, or 0.95%, to 13,630.61.
Of the 11 major sectors of the S&P 500, five ended the session higher, with consumer discretionary enjoying the largest percentage advance.
Real estate and energy posted the biggest declines.
Spirit AeroSystems tumbled 9.4% after the aircraft parts supplier announced it would suspend production at its plant in Wichita, Kansas, after workers announced a strike from June 24.
Boeing shares dropped 3.1%.
U.S.-listed shares of Accenture fell 1.9% after the IT consulting firm forecast weaker-than-expected fourth-quarter revenue.
Olive Garden parent Darden Restaurants issued a disappointing annual profit outlook due to ballooning commodities prices. Its shares slid 2.6%.
Declining issues outnumbered advancing ones on the NYSE by a 2.17-to-1 ratio; on Nasdaq, a 1.62-to-1 ratio favored decliners. The S&P 500 posted 16 new 52-week highs and 5 new lows; the Nasdaq Composite recorded 55 new highs and 118 new lows. Volume on U.S. exchanges was 9.60 billion shares, compared with the 11.37 billion average for the full session over the last 20 trading days.
Globe staff, Reuters