The S&P 500 and Canada’s TSX ended modestly higher on Wednesday as data showing a moderate increase in U.S. consumer prices in August cemented expectations that the Federal Reserve will leave interest rates unchanged in September. Consumer-related stocks led gains in Canada thanks to strong earnings from two of the country’s retailers.
Data showed consumer prices increased by the most in 14 months in August as gasoline prices surged, but the annual rise in underlying inflation was the smallest in nearly two years.
Stickiness in services inflation has kept alive prospects of a November hike. Interest rate traders now see a 97% chance of the Fed holding rates in September, and a 61% likelihood of a pause in November, according to the CME FedWatch Tool.
“I don’t think the Fed wants to throw a shock and do a 25-basis-point hike when the expectations are that they won’t, but rate hikes are not completely off the table for the rest of the year,” said Victoria Fernandez, chief market strategist at Crossmark Global Investment.
Gasoline prices, which have stoked inflation worries, peaked at $3.984 per gallon in the third week of the month, compared with $3.676 per gallon during the same period in July.
The S&P 500 utilities index gained 1.2%, with the traditionally defensive sector’s rally hinting at investor nervousness ahead of producer price and retail sales data on Thursday, which could influence the Fed’s Sept. 20 policy decision.
“That is somewhat of a red flag, it points to skittishness among equity holders, and that’s not necessarily unexpected,” said Keith Buchanan, a portfolio manager at GLOBALT Investments in Atlanta.
The Fed is unlikely to cut rates before the April-June period next year, a Reuters poll showed.
The Toronto Stock Exchange’s S&P/TSX composite index ended up 55.86 points, or 0.3%, at 20,278.94, adding to its gains on Monday and Tuesday.
The Toronto market’s consumer staples sector rose 1.2% and consumer discretionary was up 0.6%. It was helped by a gain of 5.9% for Dollarama after the discount retailer beat quarterly sales estimates.
Food and general products retailer, North West Company posted strong second-quarter results. Its shares rose 14.7%.
Heavily-weighted financials also gained ground, rising 0.7%. But energy gave back some recent gains, ending down 0.8%, as oil settled 0.4% lower at $88.52 a barrel.
Bonds in both the U.S. and Canada held relatively steady following the CPI data.
The muted reaction to the CPI report reflects the fact that the Treasury market is finally embracing the Fed’s mantra that rates will stay higher for longer, said Kevin Flanagan, head of fixed-income strategy at WisdomTree.
“Even if the Fed is done raising rates, then you know there’s no reason to think rates are going to come down in a visible fashion anytime soon,” he said.
“We not only pushed back the timing for rate cuts, the market has also pushed back the magnitude of rate cuts that was expected.”
The futures market is betting the Fed’s overnight lending rate will hit almost 5.45% in December and will not drop below 5% until late July 2024, with significant rate cuts only starting in the latter half of next year.
In the near term, the Fed will stick to the higher for longer message, but around year-end if the economy enters a recession as Wells Fargo economists anticipate, policymakers will become divided and interest rate volatility will rise, said Mike Schumacher, head of rates strategy at Wells Fargo in New York.
“If the U.S. economy does weaken somewhat visibly, if job losses tick up, if unemployment increases, then it’s more of a challenge for the Fed to say, ‘Oh, we’ll keep the funds rate really high, we’ll keep real yields very high for a long time.’
“It’s probably not a terribly difficult call, but I think it’s going to be a much more contentious debate at the FOMC.”
The two-year U.S. Treasury yield, which reflects interest rate expectations, fell 3.2 basis points Wednesday to 4.973%, while the yield on the benchmark 10-year note was down 2.5 basis points at 4.239%.
In the U.S. equity market, megacap growth stocks Tesla, Meta Platforms, Microsoft and Amazon.com gained over 1% each.
Apple dipped 1.2%, down for a second day after unveiling new iPhones on Tuesday while leaving prices unchanged.
The S&P 500 climbed 0.12% to end the session at 4,467.44 points.
The Nasdaq gained 0.29% to 13,813.59 points, while the Dow Jones Industrial Average declined 0.20% to 34,575.53 points.
The S&P 500 consumer discretionary index climbed 0.9%, lifted as Ford Motor rallied 1.5% on the vehicle maker’s plans to double the production of its hybrid F-150 pickup trucks in 2024.
Citigroup rose 1.7% after CEO Jane Fraser announced a major management re-organization that will result in more job cuts and give her greater direct oversight over the bank as she seeks to simplify its structure.
U.S.-listed shares of Chinese electric-vehicle makers Nio and Xpeng dropped 4.7% and 3.1%, respectively, after the European Commission started an investigation to assess whether their vehicles warrant punitive tariffs.
Sprit Airlines fell over 6% after the low-cost carrier cut its third-quarter revenue outlook to reflect rising fuel prices.
Moderna gained 3.2% after the drugmaker said its flu vaccine mRNA-1010 met the primary goal in a late-stage trial. The firm also announced it was scaling down manufacturing of its COVID-19 vaccine.
Declining stocks outnumbered rising ones within the S&P 500 by a 1.5-to-one ratio.
The S&P 500 posted 10 new highs and 11 new lows; the Nasdaq recorded 20 new highs and 199 new lows.
Reuters, Globe staff